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

                                   FORM 10-K

<Table>
<C>          <S>
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001



                                   OR




    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE TRANSITION PERIOD FROM           TO           .
</Table>

                         COMMISSION FILE NUMBER 0-21054
                           SYNAGRO TECHNOLOGIES, INC.
             (Exact name of Registrant as Specified in its Charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      76-0511324
         (State or other jurisdiction                         (I.R.S. employer
      of incorporation or organization)                     identification no.)




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

              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (713) 369-1700

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         Common Stock, $.002 par value
                        Preferred Stock Purchase Rights
                             (Title of each class)

     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 such
filing requirements for the past 90 days.  Yes [X]     No [ ].

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

     The number of shares outstanding of the Registrant's Common Stock as of
March 19, 2002, was 19,476,781. The aggregate market value of the 14,955,502
shares of the registrant's Common Stock held by non-affiliates of the
Registrant, based on the market price of the Common Stock of $2.34 per share as
of March 19, 2002, was approximately $34,995,876.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Proxy Statement for the 2002 Annual Meeting of Stockholders of the
Registrant (Sections entitled "Synagro Common Stock Beneficially Owned by
Directors, Officers and Five Percent Shareholders", "Compensation Tables",
"Executive Officers" and "Proposal 1 -- Election of Directors", and Subsections
entitled "Section 16(a) Beneficial Ownership Reporting Compliance" and "Certain
Transactions") is incorporated by reference in Part III of this Report.
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                                     PART I

ITEM 1.  BUSINESS

BUSINESS OVERVIEW

     We are a national wastewater residuals management company serving more than
1,000 municipal and industrial wastewater treatment plants and have operations
in 35 states and the District of Columbia. We offer many services that focus on
the beneficial reuse of organic non-hazardous residuals resulting from the
wastewater treatment process. We believe that the services we offer are
compelling to our customers because they allow our customers to avoid the
significant capital and operating costs that they would have to incur if they
internally managed their wastewater residuals.

     We provide a broad range of services, including facility operations,
facility cleanout services, regulatory compliance, dewatering, collection and
transportation, composting, drying and pelletization, product marketing,
incineration, alkaline stabilization, and land application. We currently operate
four heat-drying facilities, four composting facilities, three incineration
facilities, one manure-to-energy facility, 27 permanent and 22 mobile dewatering
units, and more than 250 small wastewater treatment plants (ranging from 500
gallons per day to 500,000 gallons per day).

     Approximately 80% of our 2001 revenue was generated through more than 450
contracts that range from one to twenty-five years in length. These contracts
have a backlog of approximately $1.8 billion, which represents more than seven
times our 2001 revenue. In general, our contracts contain provisions for
inflation related annual price increases, renewal provisions, and broad force
majeure clauses. Our top ten customers have an average of 11.3 years remaining
on their current contracts, including renewal options. In 2001, we experienced a
contract retention rate (both renewals and rebids) of approximately 90%.

     We benefit from significant customer diversification, with our single
largest customer accounting for 14% of our 2001 annual revenues, and our top ten
customers accounting for approximately 34% of our 2001 annual revenues. For the
year ended December 31, 2001, our municipal and industrial customers accounted
for 84% and 11%, respectively, of our revenues.

INDUSTRY OVERVIEW

  HISTORY

     Most residential, commercial, and industrial wastewater is collected
through an extensive network of sewers and transported to wastewater treatment
plants, which are known as publicly owned treatment works ("POTWs"). When
wastewater is treated at POTWs or at industrial wastewater pre-treatment
facilities, the process separates the liquid portion of the wastewater from the
solids (or wastewater residuals) portion. The water is treated for ultimate
discharge, typically into a river or other surface water. Prior to the
promulgation of the 40 CFR Part 503 Regulations by the Environmental Protection
Agency ("EPA") pursuant to the Clean Water Act ("Part 503 Regulations") in 1993,
most POTWs simply disposed of untreated wastewater residuals through surface
water dumping, incineration, and landfilling. The Part 503 Regulations began a
phase-out of surface water dumping of wastewater residuals and, after one of the
EPA's most thorough risk assessments, encouraged their beneficial reuse. This
created significant growth for the wastewater residuals management industry. To
establish beneficial reuse as an option for wastewater generators, the EPA
established a classification methodology for the wastewater residuals that is
based on how the wastewater residuals are processed. Now, in most cases, the
POTW further processes the wastewater residuals and produces a semisolid,
nutrient-rich byproduct known as biosolids. We use the term "wastewater
residuals" to include both solids that have been treated pursuant to the Part
503 Regulations and those that have not. Biosolids, as a subset of wastewater
residuals, is intended to refer to wastewater solids that meet either the Class
A or Class B standard as defined in the Part 503 Regulations.

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  CLASSES OF BIOSOLIDS

     When treated and processed according to the Part 503 Regulations, biosolids
can be beneficially reused and applied to crop land to improve soil quality and
productivity due to the nutrients and organic matter that they contain.
Biosolids applied to agricultural land, forest, public contact sites, or
reclamation sites must meet either Class A or Class B pathogen and vector
attraction reduction requirements contained in the Part 503 Regulations. This
classification is determined by the level of processing the biosolids have
undergone. Pursuant to the Part 503 Regulations, there are specific methods
available to achieve Class A standards and other specific methods available to
achieve Class B standards, otherwise the biosolids are considered Sub-Class B.
Each alternative for Class A requires that the resulting biosolids be
essentially pathogen free. In general, Class A biosolids are generated by more
capital intensive processes, such as composting, heat drying, heat treatment,
high temperature digestion and alkaline stabilization. Class A biosolids have
the highest market value, are sold as fertilizer, and can be applied to any type
of land or crop.

     Class B biosolids are treated to a lesser degree by processes such as
digestion or alkaline stabilization. These biosolids are typically land applied
on farmland by professional farmers or agronomists and are monitored to comply
with associated federal and state reporting requirements. The Part 503
Regulations, however, regulate the type of agricultural crops for which Class B
biosolids may be used.

     Finally, in some cases, the POTW does not treat its wastewater residuals to
either Class A or Class B standards and such residuals are considered Sub-Class
B. These residuals can either be processed to Class A standards or Class B
standards by an outside service provider or disposed of through incineration or
landfilling.

  MARKET SIZE/FRAGMENTATION

     According to the EPA's 1999 study entitled Biosolids Generation, Use, and
Disposal in the United States, the quantity of municipal biosolids produced in
the United States was projected to be approximately 7.1 million dry tons in
2000, processed through approximately 16,000 POTWs. It is estimated that 8.2
million dry tons of biosolids will be generated in 2010, and that an additional
3,000 POTWs will be built by 2012. It is also estimated that 63% of these
biosolids volumes are currently beneficially reused, growing to 70% in 2010. An
independent study by the Water Infrastructure Network, entitled Clean & Safe
Water for the 21st Century, estimates that municipalities spend more than $22
billion per year on the operations and maintenance of wastewater treatment
plants. We estimate, based on conversations with consulting engineers, that up
to 40% of those annual costs, or $8.8 billion, are associated with the
management of municipal wastewater residuals.

     Industry sources estimate that industrial generators of wastewater (such as
food and beverage processors and pulp and paper manufacturers) spend
approximately $7 billion per year on operations and maintenance. Assuming that,
as is the case with POTWs, 40% of these expenditures are associated with the
management of residuals, annual related costs represent approximately $2.8
billion. Therefore, we estimate the total size of the combined municipal and
industrial wastewater residuals market to be $11.6 billion.

     An emerging component of the industrial market with significant potential
that we are monitoring closely involves the residuals generated by large
Concentrated Animal Feeding Operations ("CAFOs"). According to the EPA,
agriculture is a contributor to the pollution found in rivers, streams, and
lakes in the United States. The EPA estimates that 376,000 livestock operations
confine animals and generate approximately 64 million tons of manure annually.
Under proposed federal regulations, the largest CAFOs will be required to apply
waste management practices similar to those currently used by municipal and
industrial wastewater generators. We believe that our wastewater residuals
management capabilities will provide us with significant growth opportunities as
this market develops.

     We believe that the management of wastewater residuals is a highly
fragmented industry and that we are the only dedicated provider of a full range
of services on a national scale. Historically, POTWs performed the necessary
wastewater residuals management services, but this function is increasingly
being performed by private contractors in an effort to lower cost, increase
efficiency and comply with stricter regulations.

                                        2
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  MARKET GROWTH

     We estimate the $11.6 billion wastewater residuals industry will grow at 4
to 5% annually over the next decade. The growth in the underlying volumes of
wastewater residuals generated by the municipal and industrial markets is driven
by a number of factors. These factors include:

          Population Growth and Population Served.  As the population grows, the
     amount of biosolids produced by municipal POTWs is expected to increase
     proportionately. In addition to population growth, the amount of residuals
     available for reuse should also grow as more of the population is served by
     municipal sewer networks. As urban sprawl continues and cities' desires to
     annex surrounding areas increases, POTWs will treat more wastewater. It is
     expected that the amount of wastewater managed on a daily basis by
     municipal wastewater treatment plants will increase more than 40% by 2012,
     which should significantly increase the amount of municipal residuals
     generated.

          Pressures To Better Manage Wastewater.  There is tremendous pressure
     from many stakeholders, including environmentalists, land owners, and
     politicians, being applied to municipal and industrial wastewater
     generators to better manage the wastewater treatment process. The costs
     (such as regulatory penalties and litigation exposure) of not applying the
     best available technology to properly manage waste streams have now grown
     to material levels. This trend should continue to drive the growth of more
     wastewater treatment facilities with better separation technologies, which
     increase the amount of residuals ultimately produced.

          Stricter Regulations.  If the trend continues and laws and regulations
     that govern the quality of the effluent from wastewater treatment plants
     become stricter, POTWs and industrial wastewater treatment facilities will
     be forced to remove more and more residuals from the wastewater, thereby
     increasing the amount of residuals needing to be properly managed. With
     respect to industrial generators in the agricultural sector, such as
     livestock growers and processors, the pending CAFO regulations being
     promulgated by the EPA will have a material impact on how these operations
     manage their large production of wastewater. Under proposed federal
     regulations, the largest CAFOs will be required to apply waste management
     practices similar to those currently used by municipal and other industrial
     wastewater generators, thereby significantly increasing the size of the
     industrial residuals market.

          Advances in Technology.  The total amount of residuals produced
     annually continues to increase due to advancements in municipal and
     industrial wastewater treatment technology. In addition to improvements in
     secondary and tertiary treatment methods, which can increase the quantity
     of residuals produced at a wastewater treatment plant, segregation
     technologies, such as microfiltration, also result in more residuals being
     separated from the wastewater.

  MARKET TRENDS

     In addition to the growth of the underlying volumes of wastewater
residuals, there is a trend of municipalities converting from Sub-Class B and
Class B processes to Class A processes. There are numerous reasons for this
trend, including:

          Decaying Infrastructure.  Many municipal POTWs operate aging and
     decaying wastewater infrastructure. According to the Water Infrastructure
     Network's recent study, municipalities will need to spend more than $900
     billion over the next 20 years to upgrade these systems. As this effort is
     rolled out and POTWs undergo design changes and new construction,
     opportunities will exist to also upgrade wastewater residuals treatment
     processes. We expect that the trend toward more facility-based approaches,
     such as drying and pelletization, will increase with this infrastructure
     spending. In addition, the need to provide capital for these expenditures
     should create pressures for more outsourcing opportunities.

          Shrinking Agricultural Base and Urbanization.  As population density
     increases, the availability of nearby farmland for land application of
     Class B biosolids becomes diminished. Under these circumstances, the
     transportation costs associated with a Class B program may increase to such
     an extent that

                                        3
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     the higher upfront processing costs of Class A programs may become
     attractive to generators. Production of Class A pellets offer significant
     volume reduction, greatly reduced transportation costs, and the enhanced
     value of pellets allows, in many cases, revenue realization from product
     sales.

          Public Sentiment.  While the Part 503 Regulations provide equal levels
     of public safety in the distribution of Class A and Class B biosolids, the
     public sometimes perceives a greater risk from the application of Class B
     biosolids. This is particularly true in heavily populated areas.
     Municipalities are responding to these public and political pressures by
     upgrading their programs to the Class A level. Certain municipalities and
     wastewater agencies have industry leadership mindsets where they endeavor
     to provide their constituents with the highest level, most advanced
     treatment technologies available. These agencies will typically fulfill at
     least a portion of their residuals management needs with Class A
     technologies.

          Regulatory Stringency.  With the promulgation of the Part 503
     Regulations, the EPA and, subsequently, state regulatory agencies have made
     the distribution of Class A biosolids products largely unrestricted.
     Utilization requirements for Class B biosolids are significantly more
     onerous. Based on this, municipalities are moving to Class A programs to
     avoid the governmental permitting, public hearings, compliance and
     enforcement bureaucracy associated with Class B programs. This regulatory
     support to reduce and recycle residuals, and to increase the quality of the
     biosolids, works in our favor.

COMPETITIVE STRENGTHS

     We believe that we benefit from the following competitive strengths:

  BROAD SERVICE OFFERING

     We provide our customers with complete, vertically-integrated services and
capabilities, including facility operations, facility cleanout services,
regulatory compliance, dewatering, collection and transportation, composting,
drying and pelletization, product marketing, incineration, alkaline
stabilization, and land application. Advantages to our customers include:

          Significant Land Base.  We have a large land base available for the
     land application of wastewater residuals. We currently maintain permits and
     registration or licensing agreements on more than 950,000 acres of land in
     29 states. We feel that this land base provides us with an important
     advantage when bidding new work and retaining existing business.

          Large Range of Processing Capabilities and Product Marketing
     Experience.  We are one of the most experienced firms in treating
     wastewater residuals to meet the EPA's Class A standards. We have numerous
     capabilities to achieve Class A standards, and we currently operate four
     heat-drying facilities and four composting facilities. In addition, we are
     the leader in marketing Class A biosolids either generated by us or by
     others. In 2001, we marketed approximately 64% of the heat dried pellets
     produced in the United States, produced either by us or by municipally
     owned facilities.

          Regulatory Compliance and Reporting.  An important element for the
     long-term success of a wastewater residuals management program is the
     certainty of compliance with local, state and federal regulations. Accurate
     and timely documentation of regulatory compliance is mandatory. We provide
     this service, as part of our turn-key operations, through a proprietary
     integrated data management system (the Residuals Management System) that
     has been designed to store, manage and report information about our
     clients' wastewater residuals programs. We believe that our regulatory
     compliance and reporting capabilities provide us with an important
     competitive advantage when presented to the municipal and industrial
     wastewater generators.

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  LARGEST IN SCALE

     We are the only national company focused exclusively on wastewater
residuals management services. We believe that our leading market position
provides us with more operating leverage and a unique competitive advantage in
attracting and retaining customers and employees as compared to our regional and
local competitors. We believe the advantages of scale include:

          Knowledgeable Sales Force.  We have a large sales force dedicated to
     the wastewater residuals market. We market our services via a multi-tiered
     sales force, utilizing a combination of more than 60 experienced business
     developers, engineering support staff, and seasoned operations directors.
     This group of individuals is responsible for maintaining our existing
     business and identifying new wastewater residuals management opportunities.
     On average, these individuals have in excess of 10 years of industry
     experience. We believe that their unique knowledge and longstanding
     customer relationships gives us a competitive advantage in identifying and
     successfully securing new business.

          Bonding Capacity.  Commercial, federal, state and municipal projects
     often require operators to post performance and, in some cases, payment
     bonds at the execution of a contract. The amount of bonding capacity
     offered by sureties is a function of financial health of the company
     requesting the bonding. Operators without adequate bonding may be
     ineligible to bid or negotiate on many projects. We have strong bonding
     relationships with large national sureties. As of March 13, 2002, we had a
     bonding capacity of approximately $140 million with approximately $115
     million utilized as of that date. We believe the existing capacity is
     sufficient to meet bonding needs for the foreseeable future. To date, no
     payments have been made by any bonding company for bonds issued on our
     behalf.

          Financial Stability.  With assets of $446 million and total
     capitalization of $391 million as of December 31, 2001, we believe we have
     a degree of financial stability greater than our local and regional
     competitors, which makes us an attractive long-term partner for municipal
     and industrial customers.

BUSINESS STRATEGY

     Our goals are to strengthen our position as the only national company
exclusively focused on wastewater residuals management and to continuously
improve our margins. Components of our strategy to achieve these goals include:

  INTERNAL GROWTH BASED ON OUTSOURCING

     We believe that we have the opportunity to expand our business by providing
services for new customers who currently perform their own wastewater residuals
management, and by increasing the range of services that our existing customers
outsource to us.

          Developing New Customers.  We estimate that a majority of the
     wastewater treatment facilities located in the United States perform their
     own wastewater residuals management services. In many cases, we believe
     that we can provide the customer with better service at a cost that is
     lower than what it costs to provide the service internally. We take a
     collaborative approach with potential customers where our sales force
     consults with potential customers and positions us as a solution provider.
     For example, at a customer's plant in Illinois we recently took over
     responsibility for managing 15,000 dry tons per year of lime residuals. By
     saving the customer costs by land applying materials as opposed to
     landfilling, the customer has now asked us to offer solutions for their
     residuals management needs at three other facilities. In addition, because
     we do not manufacture equipment we are able to provide unbiased solutions
     to our clients' needs.

          Expanding Services to Existing Customers.  We have the opportunity to
     provide many of our existing customers with additional services as part of
     a complete residuals management program. We endeavor to educate these
     existing customers about the benefits of a complete residuals management
     solution and offer other services where the value is compelling. These
     opportunities may provide us with long-term contracts, increased barriers
     to entry, and better relationships with our customers. For example, we have
     made a concerted effort to provide in-plant dewatering services to our
     customers, because we

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     believe we can typically provide this necessary service below the
     customer's internal operating costs. As a result, we now operate more than
     22 mobile and 27 permanent dewatering facilities throughout the United
     States.

  IMPROVE MARGINS

     We actively work to improve our margins by increasing revenues while
leveraging our operating infrastructure in the field and our corporate overhead.
This strategy encompasses increasing revenues by providing additional services
to our existing customer base, targeting new work in specific market segments
that have historically generated the highest returns for us, and prospective
marketing initiatives with both industrial and municipal clients to
strategically position us for success in securing new business. By executing
this strategy, we have improved our Adjusted EBITDA margins from 18.3% in 1999
to 23.3% in 2001.

  SELECTIVELY SEEK COMPLEMENTARY ACQUISITIONS

     We selectively seek strategic opportunities to acquire businesses that
profitably expand our service offerings, increase our geographic coverage, or
increase our customer base. We believe that strategic acquisitions can enable us
to gain efficiencies in our existing operations.

SERVICES AND OPERATIONS

     Today, generators of municipal and industrial residuals must provide sound
environmental management practices with limited economic resources. For help
with these challenges, municipal and industrial generators throughout the United
States have turned to us for solutions.

     We partner with our clients to develop cost-effective, environmentally
sound solutions to their residuals processing and beneficial use requirements.
We provide the flexibility and comprehensive services that generators need, with
negotiated pricing, regulatory compliance, and operational performance. We work
with our clients to find new and better solutions to their wastewater residuals
management challenges. In addition, because we do not manufacture equipment, we
are able to provide unbiased solutions to our customers' needs. We provide our
customers with complete, vertically-integrated services and capabilities,
including design/build services, facility operations, facility cleanout
services, regulatory compliance, dewatering, collection and transportation,
composting, drying and pelletization, product marketing, incineration, alkaline
stabilization, and land application.

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                                    (GRAPH)

     1.  Design and Build Services.  We designed, built, and operate four heat
drying and pelletization facilities and four composting facilities. We currently
have a new drying facility under construction, which we will operate when it is
completed. We operate three incineration facilities, two of which we have
significantly upgraded and one of which we built. Lastly we designed, built, and
operate over twenty biosolids dewatering facilities. All of our facility design,
construction and operating experience is with biosolids projects.

     2.  Facility Operations.  Our facility operations and maintenance group
provides contract operations to customers that desire to out-source the overall
management of their wastewater treatment facilities. Our operations and
maintenance personnel are experienced in many different types of treatment
processes. Our staff members have operated wastewater treatment plants ranging
in size from 127 million gallons per day down to facilities that serve
individual homes. They have managed processes including activated sludge,
rotating biological contactors, membrane separation, biological nutrient removal
and chemical precipitation. Our maintenance staff provides maintenance and
repair services to municipal and industrial wastewater treatment systems,
including automated instrumentation and controls. Our certified laboratories
provide analytical data that our customers need for regulatory compliance
monitoring. We currently operate over 250 small wastewater treatment plants
(ranging from 500 gallons per day to over 500,000 gallons per day).

     3.  Facility Cleanout Services.  Our facility cleanout services focus on
the cleaning and maintenance of the digesters at municipal and industrial
wastewater facilities. Digester cleaning involves complex operational and safety
considerations. Our self-contained pumping systems and agitation equipment
remove a high percentage of biosolids without the addition of large quantities
of dilution water. This method provides our customers a low bottom-line cost per
dry ton of solids removed. Solids removed from the digesters can either be
recycled through our ongoing agricultural land application programs or
landfilled.

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     4.  Regulatory Compliance.  An important element for the long-term success
of a wastewater residuals management program is the certainty of compliance with
local, state and federal regulations. Accurate and timely documentation of
regulatory compliance is mandatory. We provide this service through our
proprietary Residuals Management System (RMS).

     RMS is an integrated data management system that has been designed to
store, manage and report information about our clients' wastewater residuals
programs. Every time our professional operations or technical staff perform
activities relating to a particular project, RMS is updated to record the
characteristics of the material, how much material was moved, when it was moved,
who moved it and where it went. In addition to basic operational information,
laboratory analyses are input in order to monitor both annual and cumulative
loading rates for metals and nutrients. This loading information is coupled with
field identification to provide current information for agronomic application
rate computations.

     This information is used in two ways. First and foremost, it provides a
database for regulatory reporting and provides the information required for
monthly and annual technical reports that are sent to the EPA and state
regulatory agencies. Second, information entered into RMS is used as an
important part of the invoicing process. This check and balance system provides
a link between our operational, technical and accounting departments to ensure
correct accounting and regulatory compliance.

     RMS is a tool that gives our clients timely access to information regarding
their wastewater residuals management program. We continue to dedicate resources
to the continuous improvement of RMS. We believe that our regulatory compliance
and reporting capabilities provide us with a competitive advantage when
presented to the municipal and industrial wastewater generators.

     5.  Dewatering.  We provide residuals dewatering services for wastewater
treatment facilities on either a permanent, temporary or emergency basis. These
services include design, procurement, and operations. We provide the staffing to
operate and maintain these facilities to ensure satisfactory operation and
regulatory compliance of the residuals management program. We currently operate
27 permanent and 22 mobile dewatering facilities.

     6.  Collection and Transportation.  For our liquid residuals operations, a
combination of mixers, dredges and/or pumps are used to load our tanker
trailers. These tankers transport the residuals to either a land application
site or one of our residuals processing facilities. For our dewatered residuals
operations, the dewatered residuals are loaded into trailers by either front end
loaders or conveyors. These trailers are then transported to either land
application sites or to one of our residuals processing facilities.

     7.  Composting.  For composting projects, we provide a comprehensive range
of technologies, operations services and end product marketing through our
various divisions and regional offices. All of our composting alternatives
provide high-quality Class A products that we market to landscapers, nurseries,
farms and fertilizer companies through our Organic Product Marketing Group
described below. In some cases, fertilizer companies package the product and
resell it for home consumer use. We utilize three different types of composting
methodologies: aerated static pile, in-vessel, and open windrow. Aerated static
pile composting offers economic advantages when a totally enclosed facility is
not required. In-vessel composting uses an automated, enclosed system that
mechanically agitates and aerates blended organic materials in concrete bays. We
also offer the windrow method of composting to clients with favorable climatic
conditions. In areas with a hot, dry climate, the windrow method lends itself to
the efficient evaporation of excess water from dewatered residuals. This makes
it possible to minimize or eliminate any need for bulking agents other than
recycled compost. We currently operate four composting facilities and one
manure-to-energy facility.

     8.  Drying and Pelletizing.  The heat drying process utilizes a
recirculating system to evaporate water from wastewater residuals and create
pea-sized pellets. A critical aspect of any drying technology is its ability to
produce a consistent and high quality Class A end product that is marketable to
identified end-users. This requires the system to manufacture pellets that meet
certain criteria with respect to size, dryness, dust elimination,
microbiological cleanliness, and durability. We market heat dried biosolids
products to the agricultural and fertilizer industries through our Organic
Product Marketing Group described below.

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     We built and currently operate four drying and pelletization facilities
with municipalities including Baltimore, Maryland; Hagerstown, Maryland; and New
York, New York. We are currently in the construction phase of a drying and
pelletization facility for Pinellas County, Florida, which we will operate when
it is completed.

     9.  Product Marketing.  In 1992, we formed the Organic Product Marketing
Group (OPMG) to market composted and pelletized biosolids from our own
facilities as well as municipally owned facilities. OPMG currently markets in
excess of 500,000 yards of compost and 155,000 tons of pelletized biosolids
annually. OPMG markets a majority of its biosolids products under the trade
names Granulite(TM) and AllGro(TM). Based on our experience, OPMG is capable of
marketing biosolids products to the highest paying markets. We are the leader in
marketing end use wastewater residuals products, such as compost and heat dried
pellets used for fertilizers, and in 2001 we marketed approximately 64% of the
heat dried pellets produced in the United States.

     10.  Incineration.  In the Northeast, we economically and effectively
process wastewater residuals through the utilization of the proven thermal
processing technologies of multiple-hearth and fluid bed incineration. In
multiple-hearth processing, residuals are fed into the top of the incinerator
and then mechanically passed down to the hearths below. The heat from the
burning residuals in the middle of the incinerator dries the residuals coming
down from the top until they begin to burn. Since residuals have approximately
the same British thermal unit value as wood chips, very little additional fuel
is needed to make the residuals start to burn. The resulting ash by-product is
non-toxic and inert, and can be beneficially used as alternative daily cover for
landfills. In fluid bed processing, residuals are pumped directly into a boiling
mass of super heated sand and air (the fluid bed) that vaporizes the residuals
on contact. The top of the fluid bed burns off any remaining compounds resulting
in very low air emissions and very little ash by-product. Computerized control
of the entire process makes this modern technology fuel efficient, easy to
operate, and an environmentally friendly disposal method. We currently operate
three incineration facilities.

     11.  Alkaline Stabilization.  We provide alkaline stabilization services by
using lime to treat Sub-Class B biosolids to Class-B standards. Lime chemically
reacts with the residuals and creates a Class B product. We offer this treatment
process through our BIO*FIX process. Due to its very low capital cost, BIO*FIX
is used in interim and emergency applications as well as long-term programs. The
BIO*FIX process is designed to effectively inactivate pathogenic microorganisms
and to prevent vector attraction and odor. The BIO*FIX process combines specific
high-alkalinity materials with residuals at minimal cost. During the past
several years, our engineers have developed and improved the BIO*FIX chemical
formulations, material handling and instrumentation and control systems in
concert with clients, federal and state regulators, consulting engineers and
academic researchers.

     12.  Land Application.  The beneficial reuse of municipal and industrial
biosolids through land application has been successfully performed in the United
States for more than 100 years. Direct agricultural land application has the
proven benefits of fertilization and organic matter addition to the soil.
Agricultural communities throughout the country are well acquainted with the
practice of land application of biosolids and have first hand experience with
the associated agricultural and environmental benefits. Currently, we recycle
Class B biosolids through agricultural land application programs in 29 states.
Our revenues from land application services are the highest among our service
offerings.

CONTRACTS

     Approximately 80% of our annual revenue is generated through more than 450
contracts with original terms that range from one to twenty-five years in
length. These contracts have a backlog of approximately $1.8 billion, of which
we estimate approximately $200 million will be realized in 2002. Our December
31, 2001 backlog represents more than seven times our 2001 revenue. In general,
our contracts contain provisions for inflation related annual price increases,
renewal provisions, and broad force majeure clauses. Our top ten customers have
an average of 11.3 years remaining on their current contracts, including renewal
options. In addition, we have experienced a historical contract renewal rate
greater than 90%.

                                        9
<PAGE>

     Although we have a standard form of agreement, terms may vary depending
upon the customer's service requirements and the volume of residuals generated
and, in some situations, requirements imposed by statute or regulation.
Contracts associated with our land application business are typically two to
four year exclusive arrangements excluding renewal options. Contracts associated
with drying and pelletizing, incineration or composting are typically longer
term contracts, from five to 20 years, excluding renewal options, and typically
include provisions such as put-or-pay arrangements and estimated changes in the
consumer price index for contracts that contain price indexing. Other services
such as cleanout and dewatering typically may or may not be under long-term
contract depending on the circumstances.

     The majority of our contracts are with municipal entities. Typically a
municipality will advertise a request for proposal, and numerous entities will
bid to perform the services requested. Often the municipality will choose the
best qualified bid, weighing multiple factors including range of services
provided, experience, financial capability and lowest cost. The successful
bidder then enters into contract negotiations with the municipality.

     Contracts typically include provisions relating to the allocation of risk,
insurance, certification of the material, force majeure conditions, change of
law situations, frequency of collection, pricing, form and extent of treatment,
and documentation for tracking purposes. Many of our agreements with
municipalities and water districts provide options for extension without the
necessity of going to bid. In addition, many contracts have termination
provisions that the customer can exercise; however, in most cases, such
terminations create obligations to our customers to compensate us for lost
profits.

BACKLOG

     At December 31, 2001, our estimated remaining contract value, which we call
backlog, was $1.8 billion. In determining backlog, we calculate the expected
payments remaining under the current terms of our contracts, assuming the
renewal of contracts in accordance with their renewal provisions, no increase in
the level of services during the remaining term, and estimated adjustments for
changes in the consumer price index for contracts that contain price indexing.
However, on the same basis, except assuming the renewal provisions are not
exercised, we estimate our backlog at December 31, 2001 would have been $1.2
billion. These estimates are based on our operating experience, and we believe
them to be reasonable. However, there can be no assurance that our backlog will
be realized as contract revenue or earnings.

SALES AND MARKETING

     We have a sales and marketing group which has developed and is implementing
a comprehensive internal growth strategy which is to expand our business by
providing services for new customers who currently perform their own wastewater
residuals management, and by increasing the range of services that our existing
customers outsource to us.

     In addition, to maintain our existing market base, we endeavor to achieve a
100% renewal rate on expiring service contracts. For 2001, we achieved
approximately a 90% renewal rate. We believe that the ability to renew existing
contracts is a direct indication of the level of customer satisfaction with our
operations. Although we value our current customer base, our focus is to
increase revenues that generate long-term, stable income at acceptable margins
rather than simply increasing market share.

     Our sales and marketing group also works with our operations staff which
typically respond to requests to proposals for routine work that is awarded to
the lowest cost bidder. This allows our sales and marketing group to focus on
prospective rather than reactive marketing activities. Our sales and marketing
group is focused on developing new business from specific market segments that
have historically netted the highest returns. These are segments where we
believe we should have an enhanced competitive advantage due to the complexity
of the job, the proximity of the work to our existing business, or a unique
technology or facility that we are able to offer. We seek to maximize profit
potential by focusing on negotiated versus low-bid procurements, long versus
short-term contracts and projects with multiple services. In addition, we are
focusing on the rapidly growing Class A market. Our sales incentive program is
designed to reward the sales force for success in these target markets.
                                        10
<PAGE>

     We proactively approach municipal market segments, as well as new
industrial segments, through professional services contracts. We are in a unique
industry position to successfully market through professional services
contracts, because we are an operations company that is solution and technology
neutral as we offer virtually every type of proven service category marketed in
the industry today. This means we can customize a wastewater residuals
management program for a client with no technology or service category bias.

ACQUISITIONS HISTORY

     Historically, acquisitions have been an important part of our growth
strategy. We completed a total of 16 acquisitions from 1998 through 2000,
highlighted by our last acquisition in August 2000 of Waste Management's Bio Gro
Division. Bio Gro had been the one of the largest providers of wastewater
residuals management services in the United States, with 1999 annual revenues of
$118 million and EBITDA of $27 million. Bio Gro provided wastewater residuals
management services in 24 states and was the market leader in thermal drying and
pelletization. Other acquisitions from 1998 to the present include the
following:

<Table>
<Caption>
COMPANY                                      DATE ACQUIRED   MARKET SERVED   CAPABILITIES ACQUIRED
-------                                      -------------   -------------   ---------------------
<S>                                          <C>             <C>             <C>
A&J Cartage, Inc. .........................  June 1998       Midwest         Land Application
Recyc, Inc. ...............................  July 1998       West            Composting
Environmental Waste Recycling, Inc. .......  November 1998   Southeast       Land Application
National Resource Recovery, Inc. ..........  March 1999      Midwest         Land Application
Anti-Pollution Associates..................  April 1999      Florida Keys    Facility Operations
D&D Pumping, Inc. .........................  April 1999      Florida Keys    Land Application
Vital Cycle, Inc. .........................  April 1999      Southwest       Product Marketing
AMSCO, Inc. ...............................  May 1999        Southeast       Land Application
Residual Technologies, LP..................  January 2000    Northeast       Incineration
Davis Water Analysis, Inc. ................  February 2000   Florida Keys    Facility Operations
AKH Water Management, Inc. ................  February 2000   Florida Keys    Facility Operations
Ecosystematics, Inc. ......................  February 2000   Florida Keys    Facility Operations
Rehbein, Inc. .............................  March 2000      Midwest         Land Application
Whiteford Construction Company.............  March 2000      Mid-Atlantic    Cleanouts
Environmental Protection & Improvement       March 2000      Mid-Atlantic    Rail Transportation
  Co.......................................
</Table>

With the Bio Gro acquisition in August 2000, we substantially grew our service
offerings and geographic coverage. As a result, we have shifted our focus to
internal growth. We will continue to selectively seek acquisitions if
strategically and economically attractive.

COMPETITION

     We provide a variety of services relating to the transportation and
treatment of wastewater residuals. We are not aware of another company focused
exclusively on the management of wastewater residuals from a national
perspective. We have several types of direct competitors. These include small
local companies, regional residuals management companies and national and
international water and wastewater operations/ privatization companies.

     We compete with these competitors through several mechanisms including
providing quality services at competitive prices, partnering with technology
providers to offer proprietary processing systems, and utilizing strategic land
application sites. Municipalities often structure bids for large projects based
on the best qualified bid, weighing multiple factors, including experience,
financial capability and lowest cost. We also believe that the full range of
wastewater residuals management services we offer provide a competitive
advantage over other entities offering a lesser complement of services.

                                        11
<PAGE>

     In many cases, municipalities and industries choose not to outsource their
residuals management needs. In the municipal market, we estimate that up to 60%
of the POTW plants are not privatized. We are actively reaching out to this
segment to persuade them to explore the benefits of outsourcing these services
to us. For these generators we can offer increased value through numerous areas,
including lower cost, ease of management, technical expertise, liability
assumption/risk management, access to capital or technology and performance
guarantees.

FEDERAL, STATE AND LOCAL GOVERNMENT REGULATION

     Federal and state environmental authorities regulate the activities of the
municipal and industrial wastewater generators and enforce standards for the
discharge from wastewater treatment plants (effluent wastewater) with permits
issued under the authority of the Clean Water Act, as amended, and state water
quality control acts. The treatment of wastewater produces an effluent and
wastewater solids. The treatment of these solids produces biosolids. To the
extent demand for our residuals treatment methods is created by the need to
comply with the environmental laws and regulations, any modification of the
standards created by such laws and regulations may reduce the demand for our
residuals treatment methods. Changes in these laws or regulations, or in their
enforcement, may also adversely affect our operations by imposing additional
regulatory compliance costs on us, requiring the modification of and/or
adversely affecting the market for our wastewater residuals management services.

     The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") generally imposes strict joint and several liability for cleanup
costs upon: (1) present owners and operators of facilities at which hazardous
substances were disposed; (2) past owners and operators at the time of disposal;
(3) generators of hazardous substances that were disposed at such facilities;
and (4) parties who arranged for the disposal of hazardous substances at such
facilities. CERCLA Section 107 liability extends to cleanup costs necessitated
by a release or threat of release of a hazardous substance. However, the
definition of "release" under CERCLA excludes the "normal application of
fertilizer." The EPA regulations regard biosolids applied to land as a
fertilizer substitute or soil conditioner. The EPA has indicated in a published
document that it considers biosolids applied to land in compliance with the
applicable regulations not to constitute a "release." However, the land
application of biosolids that do not comply with Part 503 Regulations could be
considered a release and lead to CERCLA liability. Monitoring as required under
Part 503 Regulations is thus very important. Although the biosolids and alkaline
waste products may contain limited quantities or concentrations of hazardous
substances (as defined under CERCLA), we have developed plans to manage the risk
of CERCLA liability, including training of operators, regular testing of the
biosolids and the alkaline admixtures to be used in treatment methods and
reviewing incineration and other permits held by the entities from which
alkaline admixtures are obtained.

PERMITTING PROCESS

     We operate in a highly regulated environment and the wastewater treatment
plants and other plants at which our biosolids management services may be
provided are usually required to have permits, registrations and/or approvals
from federal, state and/or local governments for the operation of such
facilities.

     Many states, municipalities and counties have regulations, guidelines or
ordinances covering the land application of Class B biosolids, many of which set
either a maximum allowable concentration or maximum pollutant-loading rate for
at least one pollutant. The Part 503 Regulations also require monitoring Class B
biosolids to ensure that certain pollutants or pathogens are below thresholds.
The EPA has considered increasing these thresholds or adding new thresholds for
different substances, which could increase our compliance costs. In addition,
some states have established management practices for land application of Class
B biosolids. In some jurisdictions, state and/or local authorities have imposed
permit requirements for, or have prohibited, the land application or
agricultural use of Class B biosolids. 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 Class B biosolids
products will not be successful.

                                        12
<PAGE>

     Any of the permits, registrations or approvals noted above, or applications
therefore may be subject to denial, revocation or modification under various
circumstances. In addition, if new environmental legislation or regulations are
enacted or existing legislation or regulations are amended or are enforced
differently, we may be required to obtain additional, or modify existing,
operating permits, registrations or approvals. The process of obtaining or
renewing a required permit, registration or approval can be lengthy and
expensive and the issuance of such permit or the obtaining of such approval may
be subject to public opposition or challenge. Much of this public opposition or
challenge, as well as related complaints, relates to odor issues, even when we
are in compliance with odor requirements and even though we have worked hard to
minimize odor from our operations. There can be no assurances that we will be
able to meet applicable regulatory requirements or that further attempts by
state or local authorities to prohibit, or public opposition or challenge to,
the land application, agricultural use of biosolids, thermal processing or
biosolids composting will not be successful.

PATENTS AND PROPRIETARY RIGHTS

     We have several patents and licenses relating to the treatment and
processing of biosolids. We believe that our patents are important to our
prospects for future success. However, we cannot be certain that future patent
applications will issue as patents or that any issued patents will give us a
competitive advantage. It is also possible that our patents could be
successfully challenged or circumvented by competition or other parties. In
addition, we cannot assure that our treatment processes do not infringe patents
or other proprietary rights of other parties.

     In addition, we make use of our trade secrets or "know-how" developed in
the course of our experience in the marketing of our services. To the extent
that we rely upon trade secrets, unpatented know-how and the development of
improvements in establishing and maintaining a competitive advantage in the
market for our services, we can provide no assurances that such proprietary
technology will remain a trade secret or that others will not develop
substantially equivalent or superior technologies to compete with our services.

EMPLOYEES

     As of March 13, 2002, we had approximately 906 full-time employees. These
employees include: eight executive officers, 15 non-executive officers, 116
operations managers, 57 environmental specialists, 64 maintenance personnel, 179
drivers and transportation personnel, 99 land application specialists, 101
general operation specialists, 29 sales employees and 86 financial and
administrative employees. Additionally, we use contract labor for various
operating functions, including hauling and spreading services, when it is
economically advantageous.

     Although we have 39 union employees, our employees are generally not
represented by a labor union or covered by a collective bargaining agreement. We
believe we have good relations with our employees. We provide our employees with
certain benefits, including health, life, dental, and accidental death and
disability insurance and 401(k) benefits.

POTENTIAL LIABILITY AND INSURANCE

     The wastewater residuals management industry involves potential liability
risks of statutory, contractual, tort, environmental and common law liability
claims. Potential liability claims could involve, for example:

     - personal injury;

     - damage to the environment;

     - violations of environmental permits;

     - transportation matters;

     - employee matters;

     - contractual matters;

                                        13
<PAGE>

     - property damage; or

     - alleged negligence or professional errors or omissions in the planning or
       performance of work.

     We could also be subject to fines or penalties in connection with
violations of regulatory requirements.

     We carry $51 million of liability insurance (including umbrella coverage),
and under a separate policy, $10 million of aggregate pollution and legal
liability insurance ($10 million each loss) subject to retroactive dates, which
we consider sufficient to meet regulatory and customer requirements and to
protect our employees, assets and operations. There can be no assurance that we
will not face claims under CERCLA or similar state laws resulting in substantial
liability for which we are uninsured and which could have a material adverse
effect on our business.

     Our insurance programs utilize large deductible/self-insured retention
plans offered by a commercial insurance company. Large deductible/self-insured
retention plans allow us the benefits of cost-effective risk financing while
protecting us from catastrophic risk with specific stop loss insurance limiting
the amount of self-funded exposure for any one loss and aggregate stop loss
insurance limiting the self-funding exposure for any one year.

ITEM 2.  PROPERTIES

     We currently lease approximately 11,300 square feet of office space at our
principal place of business located in Houston, Texas. We also lease regional
operational facilities in: Houston, Texas; Corona, California; Advance, North
Carolina; Millersville, Maryland; Baltimore, Maryland; and Miamisburg, Ohio, and
have 11 district offices throughout the United States.

     We own and operate four drying and pelletization facilities; one located in
New York, New York, two in Baltimore, Maryland and one in Hagerstown, Maryland.
We also operate three incineration facilities located in Woonsocket, Rhode
Island; Waterbury, Connecticut; and New Haven, Connecticut. Additionally, we own
property in Salome, Arizona, Maysville, Arkansas, Lancaster, California, King
George, Virginia, and Wicomico County, Maryland. These properties are utilized
for composting, storage or land application.

     We maintain permits, registrations or licensing agreements on more than
950,000 acres of land in 29 states for applications of biosolids.

ITEM 3.  LEGAL PROCEEDINGS

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

  MARSHALL CASE

     In January 2002, we settled a lawsuit that was filed in Rockingham County
Superior Court, New Hampshire in November 1998. The plaintiff claimed that the
death of an individual was allegedly caused by exposure to certain biosolids
land applied by one of our wholly owned subsidiaries. The plaintiff in the
settlement represented that there was no scientific support to the allegations
as previously alleged.

  RIVERSIDE COUNTY

     We operate a composting facility in Riverside County, California, under a
conditional use permit ("CUP") that expires January 1, 2010. The CUP allows for
a reduction in material intake and CUP term in

                                        14
<PAGE>

the event of noncompliance with the CUP's terms and conditions. In response to
alleged noncompliance due to excessive odor, on or about June 22, 1999, the
Riverside County Board of Supervisors attempted to reduce our intake of
biosolids from 500 tons per day to 250 tons per day. We believe that this was
not an authorized action for the Board of Supervisors. On September 15, 1999, we
were granted a preliminary injunction restraining and enjoining the County of
Riverside ("County") from restricting our intake of biosolids at our Riverside
composting facility.

     In the lawsuit that we filed in the Superior Court of California, County of
Riverside, we have also complained that the County's treatment of us is in
violation of our civil rights under U.S.C. Section 1983 and that our due process
rights were being affected because the County was improperly administering the
odor protocol in the CUP. The County alleges that the odor "violations," as well
as our actions in not reducing intake, could reduce the term of the CUP to
January 2002. We disagree and are challenging the County's position in the
lawsuit.

     No trial date has been set at this time. The case is currently subject to
an agreed stay and we continue to operate under the existing CUP while the
parties explore settlement. The parties have executed a Memorandum of
Understanding signed by the Board of Supervisors of the County which provides
for a plan to relocate the compost facility to a piece of land owned by the
County.

     Whether or not the parties reach settlement based on the terms of the
Memorandum of Understanding, the site may be closed, we may incur additional
costs related to contractual agreements, relocation and site closure, as well as
the need to obtain new permits (including some from the County) at a new site.
If the Company is unsuccessful in its efforts, goodwill and certain assets may
be impaired. Total goodwill associated with the operations is approximately
$13,843,000 at December 31, 2001. The financial impact associated with a site
closure cannot be reasonably estimated at this time. Although we feel that our
case is meritorious, the ultimate outcome cannot be determined at this time.

  RELIANCE INSURANCE

     For the 24 months ended October 31, 2000 (the "Reliance Coverage Period"),
we insured certain risks, including automobile, general liability, and worker's
compensation, with Reliance National Indemnity Company ("Reliance") through
policies totaling $26 million in annual coverage. On May 29, 2001, the
Commonwealth Court of Pennsylvania entered an order appointing the Pennsylvania
Insurance Commissioner as Rehabilitator and directing the Rehabilitator to take
immediate possession of Reliance's assets and business. On June 11, 2001,
Reliance's ultimate parent, Reliance Group Holdings, Inc., filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code of 1978, as amended. On
October 3, 2001, the Pennsylvania Insurance Commissioner removed Reliance from
rehabilitation and placed it into liquidation.

     On January 21, 2000, several plaintiffs filed suit in the District Court of
Jackson County, Texas (the "Lopez Suit") against our wholly owned subsidiary,
Synagro of Texas-CDR, Inc. The Lopez Suit was later amended to name us as an
additional defendant. The suit arises out of an automobile accident involving a
vehicle operated by Synagro of Texas-CDR, Inc., in which one person was killed
and two others were injured. The Lopez Suit was set for trial in November 2001;
however, on October 16, 2001, as a result of the Texas Insurance Commissioner's
finding that Reliance was impaired, a notice of an automatic 180-day stay was
filed in the Lopez Suit. The stay will expire April 5, 2002, and the Lopez Suit
is set for trial on May 13, 2002, with a backup trial setting of June 17, 2002.
The Lopez plaintiffs are seeking unspecified damages from us and our affiliates.
On November 13, 2001, we filed a petition for intervention in the Pennsylvania
Court requesting that the Court approve and order Reliance to fund an $11.9
million settlement that Reliance had proposed regarding the Lopez Suit (the
"Intervention Action").

     We are vigorously defending ourselves against this lawsuit. In addition,
other third parties have asserted claims and/or brought suit against us and our
affiliates related to alleged acts or omissions occurring during the Reliance
Coverage Period. It is possible, depending on the outcome of the AON Suit
(discussed below) and the Intervention Action, and possible claims made with the
Texas Property and Casualty Insurance Guaranty Association, that we will have no
(or insufficient) insurance funds available to pay any potential losses. There
are uncertainties relating to: (1) our ultimate liability, if any, for damages
in the Lopez Suit or

                                        15
<PAGE>

the other cases arising during the covered period; (2) the availability of the
insurance coverage; (3) the potential for recovery from the AON Suit; (4) the
Intervention Action; and (5) possible recovery from the Texas Property and
Casualty Insurance Guaranty Association.

     Based upon information available as of March 13, 2002, we have estimated
that our net probable exposure for unpaid insurance claims and other costs for
which coverage may not be available due to the pending liquidation of Reliance
is $1.9 million and, accordingly, have recorded a special charge of $2.2 million
in our December 31, 2001, financial statements to record the estimated exposure
for this matter and related legal expenses. Although we believe $1.9 million of
the charge represents our current probable exposure related to the Reliance
matter, the final resolution could be substantially different from the amount
recorded.

  AON

     On October 4, 2001, we filed suit in the 24th Judicial District Court of
Jackson County, Texas, against our insurance broker, AON Risk Services of Texas,
Inc. ("AON"), and the several insurance companies that reinsured the policies
issued by Reliance (the "Reinsurers") (the "AON Suit"). In the AON Suit, we are
seeking a judgment against AON for any and all sums that we may become liable
for as a result of any settlement of, or the entry of any judgment in, the Lopez
Suit, and any and all costs associated with defense thereof, as a result of our
assertion of negligence by AON in placing the entirety of our insurance coverage
with Reliance and AON's failure to obtain "cut through endorsements" to the
Reliance policies which would enable us to proceed directly against the
Reinsurers. We are also seeking a declaratory judgment against the Reinsurers
declaring that the Reinsurers owe us a duty of defense and indemnity in the
Lopez Suit as a result of the Reinsurers' participation in the investigation,
evaluation, and handling of the Lopez Suit, as a result of any "cut through
endorsements" that may have been obtained by AON, and by virtue of a "fronting
arrangement" whereby most or all of certain Reliance policies were reinsured.
The AON Suit is at an early stage, and the ultimate outcome of this litigation,
including amounts, if any, that may be recovered by us, cannot be determined at
this time.

  OTHER

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

                                        16
<PAGE>

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

COMMON STOCK PRICE RANGE

     The Company's Common Stock is listed on the Nasdaq SmallCap Market
("Nasdaq"), and trades under the symbol "SYGR." The following table presents the
high and low closing prices for the Company's Common Stock for each fiscal
quarter of the Company's fiscal years ended 2001 and 2000, as reported by the
Nasdaq.

<Table>
<Caption>
                                                              HIGH     LOW
                                                              -----   -----
<S>                                                           <C>     <C>
FISCAL YEAR 2001
First Quarter...............................................  $2.31   $1.56
Second Quarter..............................................   2.70    1.70
Third Quarter...............................................   2.44    1.75
Fourth Quarter..............................................   2.28    1.70


FISCAL YEAR 2000
First Quarter...............................................  $6.00   $3.69
Second Quarter..............................................   4.63    3.00
Third Quarter...............................................   3.50    2.44
Fourth Quarter..............................................   3.56    1.63
</Table>

     As of March 19, 2002, the Company had 19,476,781 shares of Common Stock
issued and outstanding. On that date, there were 254 holders of record of the
Company's Common Stock.

DIVIDEND POLICY

     Historically, the Company has reinvested earnings available for
distribution to holders of Common Stock, and accordingly, the Company has not
paid any cash dividends on its Common Stock. Although the Company intends to
continue to invest future earnings in its business, it may determine at some
future date that payment of cash dividends on Common Stock would be desirable.
The payment of any such dividends would depend, among other things, upon the
earnings and financial condition of the Company. Further, the Company has bank
and preferred stock covenants restricting dividend payments.

                                        17
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following table summarizes selected consolidated financial data of the
Company for each fiscal year of the five-year period ended December 31, 2001.
The following selected consolidated financial data has been restated for the
acquisition of National Resource Recovery, Inc. in 1999, which was accounted for
as a pooling-of-interests and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements, including the notes thereto, included
elsewhere herein.

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                             -------------------------------------------------
                                               2001       2000      1999      1998      1997
                                             --------   --------   -------   -------   -------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIO)
<S>                                          <C>        <C>        <C>       <C>       <C>
Sales......................................  $260,196   $163,098   $56,463   $33,565   $28,036
Gross profit...............................    67,277     43,198    13,992     5,449     4,797
Selling, general and administrative
  expenses.................................    20,786     14,337     6,876     4,181     3,576
Amortization of goodwill...................     4,489      3,516     1,527       629       229
Special charges (credit), net..............    (4,982)        --     1,500       (64)     (721)
Interest expense, net......................    26,969     18,908     3,236     1,558     1,007
Net income (loss) before preferred stock
  dividends and noncash beneficial
  conversion charge........................    19,664      6,551     1,148      (537)    1,116
Cumulative effect of change in accounting
  for derivatives..........................    (1,861)        --        --        --        --
Preferred stock dividends..................     7,248      3,939        --       420        --
Noncash beneficial conversion charge.......        --     37,045        --     3,515        --
Net income (loss) applicable to common
  stock....................................  $ 10,555   $(34,433)  $ 1,148   $(4,472)  $ 1,116
Basic and diluted earnings (loss) per
  share:
  Net income (loss) before cumulative
     effect of change in accounting for
     derivatives, preferred stock dividends
     and noncash beneficial conversion
     charge................................  $   1.01   $   0.34   $  0.07   $ (0.05)  $  0.13
  Cumulative effect of change in accounting
     for derivatives.......................     (0.10)        --        --        --        --
  Preferred stock dividends................  $  (0.37)  $  (0.20)  $    --   $ (0.04)  $    --
                                             --------   --------   -------   -------   -------
          Subtotal.........................  $   0.54   $   0.14   $  0.07   $ (0.09)  $  0.13
  Noncash beneficial conversion charge.....        --   $  (1.92)  $    --   $ (0.31)  $    --
                                             --------   --------   -------   -------   -------
  Net income (loss) per common share,
     basic.................................  $   0.54   $  (1.78)  $  0.07   $ (0.40)  $  0.13
                                             ========   ========   =======   =======   =======
  Net income (loss) per common share,
     diluted...............................  $   0.54   $  (1.78)  $  0.07   $  0.40   $  0.13
                                             ========   ========   =======   =======   =======
Working capital (deficit)..................  $  7,315   $ 17,734   $ 3,982   $ 5,692   $  (796)
Total assets...............................   446,168    443,821    99,172    66,622    19,945
Total long-term debt, net of current
  maturities...............................   243,235    273,557    42,182    28,330     5,495
Stockholders' equity.......................    61,891     53,564    45,314    34,249     7,478
</Table>

                                        18
<PAGE>

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

OVERVIEW

     The following is a discussion of our results of operations and financial
position for the periods described below. This discussion should be read in
conjunction with the consolidated financial statements included herein. Our
discussion of our results of operations and financial condition includes various
forward-looking statements about our markets, the demand for our products and
services and our future results. These statements are based on certain
assumptions that we consider reasonable. Our actual results may differ
materially from these indicated forward-looking statements. For information
about these assumptions and other risks and exposures relating to our business
and our company, you should refer to the section entitled "Risks Relating to
Forward-Looking Statements."

RECENT DEVELOPMENTS

     On March 22, 2002, we announced that we intend to sell up to $150,000,000
in principal amount of Senior Subordinated Notes due 2009. We plan to use the
net proceeds from the sale of the notes, along with approximately $71 million we
plan to borrow under a proposed $150 million senior credit facility, to pay off
approximately $162 million of outstanding indebtedness under our existing credit
facility and approximately $53 million of our 12% subordinated debt.

BACKGROUND

     We generate substantially all of our revenue by providing wastewater
residuals management services to municipal and industrial customers. We provide
our customers with complete, vertically-integrated services and capabilities,
including facility operations, facility cleanout services, regulatory
compliance, dewatering, collection and transportation, composting, drying and
pelletization, product marketing, incineration, alkaline stabilization, and land
application. We currently serve more than 1,000 customers in 35 states and the
District of Columbia. Our contracts typically have inflation price adjustments,
renewal clauses and broad force majeure provisions. In 2001, we experienced a
contract retention rate (both renewals and rebids) of approximately 90%.

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

     Our costs relating to service contracts include processing, transportation,
spreading and disposal costs, and depreciation of operating assets. Our costs
relating to construction contracts primarily include subcontractor costs related
to design, permit and general construction. Our selling, general and
administrative expenses are comprised of accounting, information systems,
marketing, legal, human resources, regulatory compliance, and regional and
executive management costs. Historically, we have included amortization of
goodwill resulting from acquisitions as a separate line item in our income
statement. Beginning January 1, 2002, goodwill will no longer be amortized in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."

                                        19
<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth certain items included in the Selected
Financial Data as a percentage of revenue for the periods indicated:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999     2000     2001
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
STATEMENT OF OPERATIONS DATA:
Revenue.....................................................  100.0%   100.0%   100.0%
Gross profit................................................   24.8     26.5     25.9
Selling, general and administrative expenses................   12.2      8.8      8.0
Amortization of goodwill....................................    2.7      2.2      1.7
Special (credits) charges, net..............................    2.7       --     (1.9)
Income from operations......................................    7.2     15.5     18.1
Interest expense, net.......................................    5.7     11.6     10.4
Income before provision for income taxes....................    2.0      4.0      7.8
Net income before cumulative effect of change in accounting
  for derivatives, preferred stock dividends and noncash
  beneficial conversion charge..............................    2.0      4.0      7.6
</Table>

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

     For the year ended December 31, 2001, revenue was approximately
$260,196,000 compared to approximately $163,098,000 for the same period in 2000,
an increase of approximately $97,098,000, or 59.5%. The increase primarily
relates to the full year effect on revenues from our acquisitions in 2000 and
internal growth.

     Cost of services and gross profit for the year ended December 31, 2001,
were approximately $192,919,000 and $67,277,000, respectively, compared to
approximately $119,900,000 and $43,198,000, respectively, for the year ended
2000, resulting in a decrease in gross profit as a percentage of revenue from
26.5% in 2000 to 25.9% in 2001. The decrease in gross profit as a percentage of
revenue is primarily attributable to pass through construction revenue on a
$4,500,000 contract to design and build a manure-to-energy anaerobic digester
facility for the Inland Empire Utilities Agency and lower margins on another
contract that is incurring startup expenses.

     Selling, general and administrative expenses were approximately $20,786,000
for the year ended December 31, 2001, compared to approximately $14,337,000 for
2000, an increase of approximately $6,449,000 or 45.0%. The increase relates
primarily to personnel added as a result of our acquisitions in 2000. Selling,
general and administrative expenses decreased from 8.8% of revenue in 2000 to
8.0% of revenue in 2001. The decrease relates to leverage of certain fixed
administrative costs and cost savings resulting from the integration of our
acquisitions in 2000.

     Amortization of goodwill increased from approximately $3,516,000 in 2000 to
approximately $4,489,000 in 2001 due to full year amortization on our
acquisitions in 2000.

     Special (credits) charges, net totaling approximately $4,982,000 in 2001
included an approximately $6,043,000 nonrecurring gain from a litigation
settlement related to claims between us and Azurix Corp. arising from financing
and merger discussions between the companies that were terminated in October
1999 and settled in September 2001, an approximately $1,100,000 gain resulting
from the settlement of other litigation, partially offset by a $2,161,000 charge
for our estimated net exposure for unpaid insurance claims and other costs
related to our 1998 and 1999 policy periods with our previous underwriter,
Reliance Insurance Company, which is in insolvency proceedings. There were no
special charges or credits in 2000.

     As a result of the foregoing, income from operations for the year ended
December 31, 2001, was approximately $46,984,000 compared to approximately
$25,345,000 for the same period in 2000, an increase

                                        20
<PAGE>

of approximately $21,639,000 or 85.4%. Income from operations, excluding the
special (credit) charges, net, as a percentage of revenue increased from 15.5%
in 2000 to 16.2% in 2001.

     Interest expense for the year ended December 31, 2001, was approximately
$26,969,000 compared to approximately $18,908,000 for the same period in 2000.
Interest expense as a percent of revenue decreased from 11.6% in 2000 to 10.4%
in 2001. The increase in interest expense is related to the additional debt
incurred to finance our acquisitions in 2000 partially offset by interest
savings due to approximately $27,000,000 of principle payments made in 2001 from
cash generated from operations and lower market interest rates on our floating
rate debt.

     Other income for the year ended December 31, 2001, was approximately
$221,000 compared to approximately $114,000 for the same period in 2000. The
increase relates primarily to gains on sale of assets.

     For the year ended December 31, 2001, we recorded a provision for income
taxes of approximately $573,000 as the prior year valuation allowance related to
certain deferred tax assets no longer offset deferred tax provision
requirements. See Note 7 in the accompanying notes to consolidated financial
statements.

     As a result of the foregoing, net income before cumulative effect of change
in accounting for derivatives, preferred stock dividends, and noncash beneficial
conversion charges of approximately $19,664,000 was reported for the year ended
December 31, 2001, compared to approximately $6,551,000 for the same period in
2000.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

     For the year ended December 31, 2000, revenue was approximately
$163,098,000 compared to approximately $56,463,000 for the same period in 1999,
an increase of approximately $106,635,000, or 188.9%. The increase relates
primarily to additional revenue from our acquisitions in 2000 and 1999.

     Cost of operations and gross profit for the year ended December 31, 2000,
were approximately $119,900,000 and $43,198,000, respectively, compared to
approximately $42,471,000 and $13,992,000, respectively, for the year ended
1999, resulting in an increase in gross profit as a percentage of revenue to
26.5% in 2000 from 24.8% in 1999. The increase in gross profit as a percentage
of revenue is primarily attributable to the addition of higher margin drying and
pelletization, and incineration services resulting from certain acquisitions
completed in 2000.

     Selling, general and administrative expenses were approximately $14,337,000
for the year ended December 31, 2000, compared to approximately $6,876,000 for
1999, an increase of approximately $7,461,000 or 108.5%. The increase relates
primarily to increased corporate staffing and expense to implement and manage
our acquisitions and additional selling, general and administrative costs
associated with the businesses acquired. Selling, general and administrative
expenses decreased from 12.2% of revenue in 1999 to 8.8% of revenue in 2000 due
to cost savings resulting from integration of acquired operations and leverage
of certain fixed administrative costs on significantly higher revenue.

     Amortization of goodwill increased from approximately $1,527,000 in 1999 to
approximately $3,516,000 in 2000 due to our acquisitions in 2000 and 1999.

     Special (credits) charges, net, were approximately $1,500,000 in 1999. The
charges related to approximately $1,500,000 in charges for legal, accounting and
financing costs related to the proposed preferred stock and merger discussions
with Azurix, both of which were terminated in October 1999, and several other
legal matters. There were no special charges or credits in 2000.

     As a result of the foregoing, income from operations for the year ended
December 31, 2000 was approximately $25,345,000 compared to approximately
$4,090,000 for the same period in 1999, an increase of approximately $21,255,000
or 519.7%. Income from operations, excluding the special (credit) charges, net,
as a percentage of revenue increased from 9.9% in 1999 to 15.5% in 2000.

                                        21
<PAGE>

     Interest expense for the year ended December 31, 2000, was approximately
$18,908,000 compared to approximately $3,236,000 for the same period in 1999.
The increase in interest expense is related to the additional debt incurred to
finance acquisitions.

     Other income for the year ended December 31, 2000, was approximately
$114,000 compared to approximately $294,000 for the same period in 1999. The
decrease relates primarily to a reduction of gains on sale of assets.

     As a result of the foregoing, net income before preferred stock dividends
and noncash beneficial conversion charges of approximately $6,551,000 was
reported for the year ended December 31, 2000, compared to approximately
$1,148,000 for the same period in 1999.

     During the twelve months ended December 31, 2000, we issued approximately
$65,100,000 of preferred stock in connection with refinancing our debt and
completing eight acquisitions. This preferred stock is convertible into common
stock at $2.50 per share, which was below the market price of our stock at the
time of issuance. Financial accounting rules require that we record a noncash
beneficial conversion charge for the difference between the market price and the
conversion price at the date of issuance of this preferred stock. Accordingly,
we recorded a noncash beneficial conversion charge of approximately $37,045,000
in fiscal 2000. There were no noncash beneficial conversion charges in 1999.

LIQUIDITY AND CAPITAL RESOURCES

  OVERVIEW

     During the past three years, our principal sources of funds were cash
generated from our operating activities and long-term borrowings. We use cash
mainly for capital expenditures, working capital and debt service. In the
future, we expect that we will use cash principally to fund working capital, our
debt service and repayment obligations and capital expenditures. In addition, we
may use cash to pay dividends on our preferred stock and potential earnout
payments resulting from prior acquisitions. We have historically financed our
acquisitions principally through the issuance of equity and debt securities, our
credit facility, and funds provided by operating activities.

  HISTORICAL CASH FLOWS

     Cash Flows from Operating Activities.  For the year ended December 31,
2001, cash flows from operating activities were approximately $38,208,000
compared to approximately $19,620,000 for the same period in 2000, an increase
of approximately $18,588,000, or 94.7%. The increase primarily relates to the
full year effect on cash flows from operating activities of our acquisitions in
2000, and internal growth and decreases from changes in working capital between
periods.

     Cash Flows from Investing Activities.  For the year ended December 31,
2001, cash flows used for investing activities were approximately $14,049,000
compared to approximately $250,946,000 for the same period in 2000, a decrease
of approximately $236,897,000. The decrease primarily relates to a decrease in
cash paid for acquisitions from approximately $245,386,000 in 2000 to
approximately $1,709,000 in 2001.

     Cash Flows from Financing Activities.  For the year ended December 31,
2001, cash flows used for financing activities were approximately $28,505,000
compared to cash flows generated by financing activities of approximately
$235,743,000 for the same period in 2000, a decrease of approximately
$264,248,000. The decrease primarily relates to net debt borrowings and
preferred stock issuances to fund the cash paid for acquisitions in 2000 and
cash used to repay debt in 2001.

  CAPITAL EXPENDITURE REQUIREMENTS

     Capital expenditures for the year ended December 31, 2001, totaled
approximately $13,313,000 compared to approximately $5,805,000 in 2000. Our
ongoing capital expenditure program consists of expenditures for replacement
equipment, betterments, and growth. We expect our capital expenditures for 2002
to be approximately $14,300,000.

                                        22
<PAGE>

  DEBT SERVICE REQUIREMENTS

     On January 27, 2000, we entered into a $110,000,000 senior credit facility
to fund working capital for acquisitions, to refinance existing debt, to provide
working capital for operations, to fund capital expenditures and for other
general corporate purposes. On February 25, 2002, the existing credit facility
was amended to, among other things, increase the revolving loan from $30,000,000
to approximately $51,330,000, increase sublimits for letters of credit from
$20,000,000 to $50,000,000, provide limitations for restricted payments and
investments, and increase the permitted amounts of nonrecourse financing and
operating lease obligations. The senior credit agreement contains standard
covenants including compliance with laws, limitations on capital expenditures,
restrictions on dividend payments, limitations on mergers and compliance with
certain financial covenants.

     Our new credit facility is anticipated to be a senior credit facility
providing for loans of up to $150,000,000, consisting of a $80,000,000 revolving
loan and a $70,000,000 term loan. This new credit facility will be secured by
substantially all of our assets and those of our subsidiaries (other than assets
securing nonrecourse debt) and will include covenants restricting the incurrence
of additional indebtedness, liens, certain payments, and sale of assets.

     At December 31, 2001, we had working capital of approximately $7,315,000.
Accounts receivable and prepaid expenses and other current assets increased by
approximately $1,097,000 during fiscal 2001. We evaluate the collectibility of
these receivables on a specific account-by-account review. We had allowances of
approximately $2,165,000 and $1,701,000 at December 31, 2001 and 2000,
respectively, and write-offs of approximately $-0- and $45,000 in 2001 and 2000,
respectively. Accounts payable and accrued expenses increased by approximately
$4,637,000 during fiscal 2001 primarily as a result of additional trade
payables.

     In 1996, the Maryland Energy Financing Administration issued non-recourse
tax-exempt project revenue bonds (the "Nonrecourse Project Revenue Bonds") in
the aggregate amount of $58,550,000. The Administration loaned the proceeds of
the Nonrecourse Project Revenue Bonds to Wheelabrator Water Technologies
Baltimore L.L.C., now our wholly owned subsidiary and known as
Synagro - Baltimore, L.L.C., pursuant to a June 1996 loan agreement, and the
terms of the loan mirror the terms of the Nonrecourse Project Revenue Bonds. The
loan financed a portion of the costs of constructing thermal facilities located
in Baltimore County, Maryland, at the site of its Back River Wastewater
Treatment Plant, and in the City of Baltimore, Maryland, at the site of its
Patapsco Wastewater Treatment Plant. We assumed all obligations associated with
the Nonrecourse Project Revenue Bonds in connection with our acquisition of Bio
Gro in 2000. Nonrecourse Project Revenue Bonds in the aggregate amount of
$9,885,000 have already been paid, and the remaining Nonrecourse Project Revenue
Bonds bear interest at annual rates between 5.45% and 6.45% and mature on dates
between December 1, 2002 and December 1, 2016.

     At December 31, 2001, future minimum principal payments of long-term debt
and Nonrecourse Project Revenue Bonds are as follows:

<Table>
<Caption>
                                                             NONRECOURSE
                                              LONG-TERM        PROJECT
YEAR ENDING DECEMBER 31,                         DEBT       REVENUE BONDS      TOTAL
------------------------                     ------------   -------------   ------------
<S>                                          <C>            <C>             <C>
2002.......................................  $ 12,880,693    $ 2,300,000    $ 15,180,693
2003.......................................    11,267,073      2,430,000      13,697,073
2004.......................................    14,272,541      2,570,000      16,842,541
2005.......................................    38,761,075      2,710,000      41,471,075
2006.......................................    84,787,584             --      84,787,584
2007-2010..................................    53,562,250     16,295,000      69,857,250
2011-2016..................................            --     16,579,848      16,579,848
                                             ------------    -----------    ------------
     Total.................................  $215,531,216    $42,884,848    $258,416,064
                                             ============    ===========    ============
</Table>

                                        23
<PAGE>

     We lease certain facilities and equipment under noncancelable, long-term
lease agreements. Minimum annual rental commitments under these leases are as
follows:

<Table>
<Caption>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                            <C>
2002........................................................   $ 4,768,418
2003........................................................     4,384,249
2004........................................................     4,254,919
2005........................................................     3,687,492
2006........................................................     3,035,267
Thereafter..................................................    18,366,326
                                                               -----------
                                                               $38,496,671
                                                               ===========
</Table>

     In January 2000, we entered into an agreement with GTCR Capital Partners,
L.P. which agreed to provide up to $125 million in subordinated debt financing
to fund acquisitions and for certain other uses, in each case as approved by our
Board of Directors and the Board of Directors of GTCR Capital Partners, L.P.
GTCR Capital Partners, L.P. is an affiliate of GTCR Golder Rauner, LLC
("GTCR;"), our majority stockholder. The agreement was amended in August 2000,
allowing, among other things, for GTCR Capital Partners, L.P. to syndicate a
portion of the commitment. The loans bear interest at an annual rate of 12% paid
quarterly and provided warrants that were convertible into preferred stock at
$.01 per share. The unpaid principal plus unpaid and accrued interest must be
paid in full by January 27, 2008. The agreement contains general and financial
covenants. As of December 31, 2001, we have borrowed approximately $52,760,000
of indebtedness under the terms of the agreement, which was used to partially
fund our acquisitions in 2000.

     We believe we will have sufficient cash generated by our operations and
available through our existing credit facility to provide for future working
capital and capital expenditure requirements that will be adequate to meet our
liquidity needs for the foreseeable future, payment of interest on our existing
credit facility and payments on the Nonrecourse Project Revenue Bonds. We cannot
assure you, however, that our business will generate sufficient cash flow from
operations, that any cost savings and any operating improvements will be
realized or that future borrowings will be available to us under our existing
credit facility in an amount sufficient to enable us to pay our indebtedness or
to fund our other liquidity needs. We may need to refinance all or a portion of
our indebtedness on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness, including our existing credit
facility, on commercially reasonable terms or at all.

  SERIES D REDEEMABLE PREFERRED STOCK

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

  SERIES E REDEEMABLE PREFERRED STOCK

     We have authorized 55,000 shares of Series E Preferred Stock, par value
$.002 per share. GTCR Fund VII, L.P. and its affiliates own 37,504.229 shares of
Series E Preferred Stock and certain affiliates of The

                                        24
<PAGE>

TCW Group, Inc. own 7,024.58 shares. The Series E Preferred Stock is convertible
by the holders into a number of shares of our common stock computed by dividing
(i) the sum of (a) the number of shares to be converted multiplied by the
liquidation value and (b) the amount of accrued and unpaid dividends by (ii) the
conversion price then in effect. The initial conversion price is $2.50 per
share, provided that in order to prevent dilution, the conversion price may be
adjusted. The Series E Preferred Stock is senior to our common stock or any
other of our equity securities. The liquidation value of each share of Series E
Preferred Stock is $1,000 per share. Dividends on each share of Series E
Preferred Stock accrue daily at the rate of eight percent per annum on the
aggregate liquidation value and may be paid in cash or in kind, at our option.
The Series E Preferred Stock is entitled to one vote per share. Shares of Series
E Preferred Stock are subject to mandatory redemption by us on January 26, 2010,
at a price per share equal to the liquidation value plus accrued and unpaid
dividends. If the Series E Preferred Stock were converted, they would represent
17,903,475 shares of common stock.

     The Series D and Series E Preferred Stock may result in noncash beneficial
conversions valued in future periods recognized as preferred stock dividends if
the market value is higher than the conversion price. See Note 8 in the
accompanying Notes to the Consolidated Financial Statements.

  RECENT ACCOUNTING PRONOUNCEMENTS

     Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 138, "Accounting for Certain Derivative
Instruments and Hedging Activities," which requires that we recognize all
derivative instruments as assets or liabilities in our balance sheet and measure
them at their fair value. Changes in the fair value of a derivative are recorded
in income or directly to equity, depending on the instrument's designed use. For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income and reclassified into income when
the hedged transaction affects income, while the ineffective portion of the gain
or loss on the derivative instrument is recognized currently in earnings. For
derivative instruments that are designated and qualify as a fair value hedge,
the gain or loss on the derivative instrument as well as the offsetting loss or
gain on the hedged item attributable to the hedged risk are recognized in
current income during the period of the change in fair values. The noncash
transition adjustment related to the adoption of this statement has been
reflected as a "cumulative effect of change in accounting for derivatives" of
approximately $1,861,000 charged to net income and approximately $2,058,000
charged to other comprehensive income included in stockholders' equity as of
January 1, 2001. See Note (5) to the consolidated financial statements for
discussion of our current derivative contracts and hedging activities.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 requires all business combinations initiated after June 30,
2001, to be accounted for using the purchase method. Under SFAS 142, goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will be amortized over their useful lives. Management has completed the
initial impairment test required by the provisions of SFAS 142 as of January 1,
2002, and determined that there has not been an impairment of our goodwill.
Beginning January 1, 2002, we will no longer amortize goodwill. During 2001, we
recorded goodwill amortization of approximately $4.5 million.

     In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 covers all legally enforceable obligations associated
with the retirement of tangible long-lived assets and provides the accounting
and reporting requirements for such obligations. SFAS No. 143 is effective for
us beginning January 1, 2003. Management has yet to determine the impact that
the adoption of SFAS No. 143 will have on our consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 144 establishes a single accounting method for long-

                                        25
<PAGE>

lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and extends the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 also requires that an
impairment loss be recognized for assets held-for-use when the carrying amount
of an asset (group) is not recoverable. The carrying amount of an asset (group)
is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset (group), excluding
interest charges. Estimates of future cash flows used to test the recoverability
of a long-lived asset (group) must incorporate the entity's own assumptions
about its use of the asset (group) and must factor in all available evidence.
SFAS No. 144 is effective for us for the quarter ending March 31, 2002.
Management believes the impact of the adoption of SFAS No. 144 is not material
to our results of operations and financial position.

  CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

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

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

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

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

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

     Legal and Contingency Accruals -- We estimate and accrue the amount of
probable exposure we may have with respect to litigation, claims and
assessments.

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

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

  OTHER

     We also maintain two leases with James A. Jalovec, a stockholder of the
Company, or one of his affiliates. The first lease has an initial term through
July 31, 2004 with an option to renew for an additional five-year period. Rental
payments made under this lease in 2001 totaled approximately $97,000. The second
lease has an initial term through December 31, 2013. Rental payments made under
the second lease in 2001 totaled approximately $110,000.

     As of December 31, 2001, we had generated net operating loss ("NOL")
carryforwards of approximately $67,209,000 available to reduce future income
taxes. These carryforwards begin to expire in 2008. A change in ownership, as
defined by federal income tax regulations, could significantly limit our ability
to utilize its carryforwards. Accordingly, our ability to utilize our NOLs to
reduce future taxable income and tax liabilities may be limited. Additionally,
because federal tax laws limit the time during which these carryforwards may be
applied against future taxes, we may not be able to take full advantage of these
attributes for federal income tax purposes. As we have incurred losses in recent
years and the utilization of these carryforwards could be limited as discussed
above, a valuation allowance has been established to partially offset the
deferred tax asset at December 31, 2001 and 2000. We estimate that our effective
tax rate in 2002 will approximate 38% of

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<PAGE>

pretax income. Substantially all of our tax provision over the next several
years is expected to be deferred in nature due to significant tax deductions in
excess of book deductions for goodwill and depreciation.

RISKS RELATING TO FORWARD-LOOKING STATEMENTS

     We are including the following cautionary statements to secure the
protection of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for all forward-looking statements made by us in this Annual
Report on Form 10-K. Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future results,
performance, or trends, and may contain the words "believe," "anticipate,"
"expect," "estimate," "project," "will be," "will continue," "will likely
result," or words or phrases of similar meaning. In addition, from time to time,
we (or our representatives) may make forward-looking statements of this nature
in its annual report to shareholders, proxy statement, quarterly reports on Form
10-Q, current reports on Form 8-K, press releases or in oral or written
presentations to shareholders, securities analysts, members of the financial
press or others. All such forward-looking statements, whether written or oral,
and whether made by or on our behalf, are expressly qualified by these
cautionary statements and any other cautionary statements which may accompany
the forward-looking statements. In addition, the forward-looking statements
speak only of the Company's views as of the date the statement was made, and we
disclaim any obligation to update any forward-looking statements to reflect
events or circumstances after the date thereof.

     Forward-looking statements involve risks and uncertainties which could
cause actual results, performance or trends to differ materially from those
expressed in the forward-looking statements. We believe that all forward-looking
statements made by us have a reasonable basis, but there can be no assurance
that management's expectations, beliefs or projections as expressed in the
forward-looking statements will actually occur or prove to be correct. Factors
that could cause actual results to differ materially from those discussed in the
forward-looking statements include, but are not limited to, the factors
discussed below.

  FEDERAL WASTEWATER TREATMENT AND BIOSOLID REGULATIONS MAY RESTRICT OUR
  OPERATIONS OR INCREASE OUR COSTS OF OPERATIONS.

     Federal wastewater treatment and biosolid laws and regulations impose
substantial costs on us and affect our business in many ways. If we are not able
to comply with the governmental regulations and requirements that apply to our
operations, we could be subject to fines and penalties, and we may be required
to spend large amounts to bring operations into compliance or to temporarily or
permanently stop operations that are not permitted under the law. Those costs or
actions could have a material adverse effect on our business, financial
condition and results of operations.

     Federal environmental authorities regulate the activities of the municipal
and industrial wastewater generators and enforce standards for the discharge
from wastewater treatment plants (effluent wastewater) with permits issued under
the authority of the Clean Water Act, as amended. The treatment of wastewater
produces an effluent and wastewater solids. The treatment of these solids
produces biosolids. The Part 503 Regulations regulate the use and disposal of
biosolids and wastewater residuals and establish use and disposal standards for
biosolids and wastewater residuals that are applicable to publicly and privately
owned wastewater treatment plants in the United States. Biosolids may be surface
disposed in landfills, incinerated, or applied to land for beneficial use in
accordance with the requirements established by the regulations. To the extent
demand for our residuals treatment methods is created by the need to comply with
the environmental laws and regulations, any modification of the standards
created by such laws and regulations, or in their enforcement, may reduce the
demand for our residuals treatment methods. Changes in these laws or regulations
and/or changes in the enforcement of these laws or regulations may also
adversely affect our operations by imposing additional regulatory compliance
costs on us, and requiring the modification of and/or adversely affecting the
market for our wastewater residuals management services.

                                        27
<PAGE>

  WE ARE SUBJECT TO EXTENSIVE FEDERAL, STATE AND LOCAL ENVIRONMENTAL REGULATION
AND PERMITTING.

     Our operations are subject to increasingly strict environmental laws and
regulations, including laws and regulations governing the emission, discharge,
disposal and transportation of certain substances and related odor. Wastewater
treatment plants and other plants at which our biosolids management services may
be implemented are usually required to have permits, registrations and/or
approvals from state and/or local governments for the operation of such
facilities. Some of our facilities require air, wastewater, storm water,
composting, use or siting permits, registrations or approvals. We may not be
able to maintain or renew our current permits, registrations or licensing
agreements or to obtain new permits, registrations or licensing agreements,
including for the land application of biosolids when necessary. The process of
obtaining a required permit, registration or license agreements can be lengthy
and expensive. Furthermore, there can be no assurances that we will be able to
meet applicable regulatory or permit requirements. We may therefore be subject
to related legal or judicial proceedings.

     Many states, municipalities and counties have regulations, guidelines or
ordinances covering the land application of biosolids, many of which set either
a maximum allowable concentration or maximum pollutant-loading rate for at least
one pollutant. The Part 503 Regulations also require certain monitoring to
ensure that certain pollutants or pathogens are below thresholds. The EPA has
considered increasing these thresholds or adding new thresholds for different
substances, which could increase our compliance costs. In addition, some states
have established management practices for land application of biosolids. Some
members of Congress, some state or local authorities, and some private parties,
have sought to prohibit or limit the land application, agricultural use, thermal
processing or composting of biosolids. There can be no assurance that further
such prohibition or limitation efforts will not be successful and have a
material adverse effect on our business, financial condition and results of
operations. In addition, many states enforce landfill restrictions for
nonhazardous biosolids and some states have site restrictions or other
management practices governing lands. These regulations typically require a
permit to use biosolid products (including incineration ash) as landfill daily
cover material or for disposal in the landfill. There can be no assurance that
landfill operators will be able to obtain or maintain such required permits.

     Any of the permits, registrations or approvals noted above, or related
applications may be subject to denial, revocation or modification, or challenge
by a third party, under various circumstances. In addition, if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended or are enforced differently, we may be required to obtain
additional, or modify existing, operating permits, registrations or approvals.

     Maintaining, modifying or renewing our current permits, registrations or
licensing agreements or obtaining new permits, registrations or licensing
agreements after new environmental legislation or regulations are enacted or
existing legislation or regulations are amended or enforced differently may be
subject to public opposition or challenge. Much of this public opposition and
challenge, as well as related complaints, relates to odor issues, even when we
are in compliance with odor requirements and even though we have worked hard to
minimize odor from our operations. Public misperceptions about our business and
any related odor could influence the governmental process for issuing such
permits, registrations and licensing agreements or for responding to any such
public opposition or challenge. Community groups could pressure local
municipalities or state governments to implement laws and regulations which
could increase our costs of our operations.

  OUR ABILITY TO GROW MAY BE LIMITED BY COMPETITION.

     We provide a variety of services relating to the transportation and
treatment of wastewater residuals. We are in direct and indirect competition
with other businesses that provide some or all of the same services including
small local companies, regional residuals management companies and national and
international water and wastewater operations/privatization companies,
technology suppliers, municipal solid waste companies, farming operations and,
most significantly, municipalities and industries who choose not to outsource
their residuals management needs. Some of these competitors are larger, more
firmly established and have greater capital resources than we do.

                                        28
<PAGE>

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

  OUR CUSTOMER CONTRACTS MAY BE TERMINATED PRIOR TO THE EXPIRATION OF THEIR
  TERM.

     A substantial portion of our revenue is derived from services provided
under contracts and written agreements with our customers. Some of these
contracts, especially those contracts with large municipalities (including our
largest contract and at least four of our other top 10 contracts), provide for
termination of the contract by the customer after giving relatively short notice
(in some cases as little as 10 days). In addition, some of these contracts
contain liquidated damages clauses which may or may not be enforceable in the
case of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and we are not able to
replace revenues from the terminated contracts or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on our business, financial condition and results of
operations.

  A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF CUSTOMERS
  AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR
  MORE OF THEM AS CUSTOMERS.

     Our business depends on provision of our services to a limited number of
customers. For the year ended December 31, 2001, our single largest customer
accounted for 14% of our revenues and our top ten customers accounted for
approximately 34% of our revenues. One or more of these customers may stop
buying services from us or may substantially reduce the amount of services we
provide them. Any cancellation, deferral or significant reduction in the
services we provide these principal customers or a significant number of smaller
customers could seriously harm our business, financial condition and results of
operations.

  WE MAY NOT BE ABLE TO OBTAIN REQUIRED BONDING.

     Consistent with industry practice, we are required to post performance
bonds in connection with certain contracts on which we bid. In addition, we are
often required to post both performance and payment bonds at the time of
execution of contracts for commercial, federal, state and municipal projects. As
of March 13, 2002, we had a bonding capacity of approximately $140 million with
approximately $115 million utilized as of that date. The amount of bonding
capacity offered by sureties is a function of the financial health of the entity
requesting the bonding. Although we could issue letters of credit under our
credit facility for bonding purposes, if we are unable to obtain bonding in
sufficient amounts we may be ineligible to bid or negotiate on projects.

  WE ALWAYS FACE THE RISK OF LIABILITY AND INSUFFICIENT INSURANCE.

     We carry $51 million of liability insurance (including umbrella coverage),
and under a separate policy, $10 million of aggregate pollution and legal
liability insurance ($10 million each loss) subject to retroactive dates, which
we consider sufficient to meet regulatory and customer requirements and to
protect our employees, assets and operations. There can be no assurance that we
will be able to maintain such insurance coverage in the future. Further, there
can be no assurance that we will not face personal injury, third-party or
environmental claims or other damages resulting in substantial liability for
which we are uninsured and which could have a material adverse effect on our
business financial condition and results of operations.

  WE ARE DEPENDENT ON SUBCONTRACTORS FOR OUR DESIGN AND BUILD OPERATIONS.

     We participate in design and build construction operations usually as a
general contractor. Virtually all design and construction work is performed by
unaffiliated third-party subcontractors. As a consequence, we are dependent upon
the continued availability of and satisfactory performance by these
subcontractors for the

                                        29
<PAGE>

design and construction of our facilities. There is no assurance that there will
be sufficient availability of and satisfactory performance by these unaffiliated
third-party subcontractors. In addition, inadequate subcontractor resources and
unsatisfactory performance by these subcontractors could have a material adverse
effect on our business, financial condition and results of operations. Further,
as the general contractor, we are legally responsible for the performance of our
contracts and if such contracts are underperformed or non-performed by our
subcontractors we could be financially responsible. Although our contracts with
our subcontractors provide for indemnification if our subcontractors do not
satisfactorily perform their contract, there can be no assurance that such
indemnification would cover our financial losses in attempting to fulfill the
contractual obligations.

  WE ARE AFFECTED BY UNUSUALLY ADVERSE WEATHER AND WINTER CONDITIONS.

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

  FLUCTUATIONS IN FUEL COSTS COULD AFFECT OUR OPERATING EXPENSES AND RESULTS.

     The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including geopolitical developments, supply and
demand for oil and gas, actions by OPEC and other oil and gas producers, war and
unrest in oil producing countries, regional production patterns and
environmental concerns. Because fuel is needed to run the fleet of trucks that
service our customers, our incinerators, our dryers and other facilities, price
escalations or reductions in the supply of fuel could increase our operating
expenses and have a negative impact on net income. In the past, we have
implemented a fuel surcharge to off-set fuel increase costs. However, we are not
always able to pass through all or part of the increased fuel costs due to the
terms of certain customers' contracts and the inability to negotiate such pass
through costs in a timely manner.

  WE ARE NOT ABLE TO GUARANTEE THAT OUR ESTIMATED REMAINING CONTRACT VALUE,
  WHICH WE CALL BACKLOG, WILL RESULT IN ACTUAL REVENUES IN ANY PARTICULAR FISCAL
  PERIOD.

     There can be no assurance that any contracts included in our backlog, or
estimated remaining contract value, presented herein will result in actual
revenues in any particular period or that the actual revenues from such
contracts will equal our backlog. In determining backlog, we calculate the
expected payments remaining under the current terms of our contracts, assuming
the renewal of contracts in accordance with their renewal provisions, no
increase in the level of services during the remaining term, and estimated
adjustments for changes in the consumer price index for contracts that contain
price indexing. However, there can be no assurance that all of our backlog will
be recognized as revenue or earnings.

  IF WE LOSE THE PENDING LAWSUITS WE ARE CURRENTLY INVOLVED IN, WE COULD BE
  LIABLE FOR SIGNIFICANT DAMAGES AND LEGAL EXPENSES.

     In the ordinary course of business, we may become involved in various legal
and administrative proceedings, including some related to our permits, to land
use or to environmental laws and regulations. We are currently subject to
several lawsuits relating to our business. If we lose these or future lawsuits,
we could be subject to injunctions, court orders, loss of revenues and defaults
under our credit and other agreements and be liable for significant damages and
legal expenses. Two of these lawsuits are described below.

     - Riverside County.  We operate a composting facility in Riverside County,
       California, under a conditional use permit ("CUP") that expires January
       1, 2010. The CUP allows for a reduction in material intake and CUP term
       in the event of noncompliance with the CUP's terms and conditions. On
       September 15, 1999, we were granted a preliminary injunction restraining
       and enjoining the County of Riverside ("County") from restricting our
       intake of biosolids at our Riverside composting facility

                                        30
<PAGE>

       based upon a June 22, 1999 order of the Board of Supervisors of the
       County to reduce our intake of biosolids.

       We have complained that the County's treatment of us is in violation of
       our civil rights under U.S.C. Section 1983 and that our due process
       rights were being affected because the County was improperly
       administering the odor protocol in the CUP. The County alleges that the
       odor "violations," as well as our actions in not reducing intake, could
       reduce the term of the CUP to January 2002. The case is currently subject
       to an agreed stay and we continue to operate under the existing CUP while
       the parties explore settlement. The parties have executed a Memorandum of
       Understanding signed by the Board of Supervisors of the County which
       provides for the relocation of the composting facility. Whether or not
       the parties reach settlement based on the terms of the Memorandum of
       Understanding, the site may be closed, we may incur additional costs
       related to contractual agreements, relocation and site closure, as well
       as the need to obtain new permits (including some from the County) at a
       new site. If we are unsuccessful in our efforts, goodwill and certain
       assets may be impaired.

     - Reliance Insurance.  For the 24 months ended October 31, 2000 (the
       "Reliance Coverage Period"), we insured certain risks, including
       automobile, general liability, and worker's compensation, with Reliance
       National Indemnity Company ("Reliance") through policies totaling $26
       million in annual coverage. On June 11, 2001, Reliance's ultimate parent,
       Reliance Group Holdings, Inc., filed for bankruptcy under Chapter 11 of
       the United States Bankruptcy Code of 1978, as amended. On October 3,
       2001, the Pennsylvania Insurance Commissioner removed Reliance from
       rehabilitation and placed it into liquidation. We are a named defendant
       in a suit arising out of an automobile accident involving a vehicle
       operated by one of our wholly owned subsidiaries, in which one person was
       killed and two others were injured (the "Lopez Suit"). As a result of the
       Texas Insurance Commissioner's finding that Reliance was impaired, a
       notice of an automatic 180-day stay was filed in the Lopez Suit on
       October 16, 2001. The stay will expire April 5, 2002, and the Lopez Suit
       is set for trial on May 13, 2002, with a backup trial setting of June 17,
       2002. The Lopez plaintiffs are seeking unspecified damages from us and
       our affiliates. On November 13, 2001, we filed a petition for
       intervention in the Pennsylvania Court requesting that the Court approve
       and order Reliance to fund an $11.9 million settlement that Reliance had
       proposed regarding the Lopez Suit (the "Intervention Action").

       It is possible, depending on the outcome of the AON Suit (see Item 3.
       "Legal Proceedings -- AON") and the Intervention Action, and possible
       claims made with the Texas Property and Casualty Insurance Guaranty
       Association, that we will have no (or insufficient) insurance funds
       available to pay any potential losses.

       Based upon information available as of March 13, 2002, we have estimated
       that our net probable exposure for unpaid insurance claims and other
       costs for which coverage may not be available due to the pending
       liquidation of Reliance is $1.9 million and, accordingly, have recorded a
       special charge of $2.2 million in our December 31, 2001, financial
       statements to record the estimated exposure for this matter and related
       legal expenses. Although we believe $1.9 million of the charge represents
       our current probable exposure related to the Reliance matter, the final
       resolution could be substantially different from the amount recorded and
       there can be no assurance that the special charge will be adequate.

     Our defense of these claims or any other claims against us may not be
successful. If we lose either of these cases, we may have to pay significant
damages and legal expenses and be subject to injunctions, court orders, loss of
revenues and defaults under our credit and other agreements. For a further
description of these lawsuits, see Item 3. "Legal Proceedings."

     In addition, we may be subject to future lawsuits or legal proceedings.
These claims, even if they are without merit, could be expensive and time
consuming to defend and if we were to lose any future cases we could be subject
to injunctions and damages that could have a material adverse effect on our
business, financial condition and results of operations.

                                        31
<PAGE>

  WE COULD FACE CONSIDERABLE BUSINESS AND FINANCIAL RISK IN IMPLEMENTING OUR
ACQUISITION STRATEGY.

     As part of our growth strategy, we intend to consider acquiring
complementary businesses. Although we regularly engage in discussions with
respect to possible acquisitions, we do not currently have any understandings,
commitments or agreements relating to any material acquisitions. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, which could have
a material adverse effect upon our business, financial condition and results of
operations. Risks we could face with respect to acquisitions include:

     - difficulties in the integration of the operations, technologies, products
       and personnel of the acquired company;

     - potential loss of employees;

     - diversion of management's attention away from other business concerns;

     - expenses of any undisclosed or potential legal liabilities of the
       acquired company; and

     - risks of entering markets in which we have no or limited prior
       experience.

     The risks associated with acquisitions could have a material adverse effect
upon our business, financial condition and results of operations. We cannot
assure that we will be successful in consummating future acquisitions on
favorable terms or at all.

  WE ARE DEPENDENT ON THE MEMBERS OF OUR SENIOR MANAGEMENT TEAM.

     We are highly dependent on the services of our senior management team, the
loss of any of whom may have a material adverse effect on our business,
financial condition and results of operations. In addition, our future success
depends on our continuing ability to identify, hire, train, motivate and retain
highly trained personnel. The inability to hire experienced personnel could have
a material adverse effect on our business, financial condition and results of
operations.

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

 EFFORTS BY LABOR UNIONS TO ORGANIZE OUR EMPLOYEES COULD DIVERT MANAGEMENT
 ATTENTION AND INCREASE OUR OPERATING EXPENSES.

     In the past, labor unions have made attempts to organize our employees, and
these efforts may continue in the future. Certain groups of our employees have
chosen to be represented by unions, and we have negotiated collective bargaining
agreements with some of the groups. We cannot predict which, if any, groups of
employees may seek union representation in the future or the outcome of
collective bargaining. The negotiation of these agreements could divert
management attention and result in increased operating expenses and lower net
income. If we are unable to negotiate acceptable collective bargaining
agreements, we might have to wait through "cooling off" periods, which are often
followed by union-initiated work stoppages, including strikes. Depending on the
type and duration of such work stoppage, our operating expenses could increase
significantly.

 WE MAY BECOME SUBJECT TO CERCLA.

     CERCLA generally imposes strict joint and several liability for cleanup
costs upon: (1) present owners and operators of facilities at which hazardous
substances were disposed; (2) past owners and operators at the

                                        32
<PAGE>

time of disposal; (3) generators of hazardous substances that were disposed at
such facilities; and (4) parties who arranged for the disposal of hazardous
substances at such facilities. CERCLA Section 107 liability extends to cleanup
costs necessitated by a release or threat of release of a hazardous substance.
The definition of "release" under CERCLA excludes the "normal application of
fertilizer." The EPA regards the land application of biosolids that meet the
Part 503 Regulations as a "normal application of fertilizer," and thus not
subject to CERCLA. However, if we were to transport or handle biosolids that
contain hazardous substances in violation of the Part 503 Regulations we could
be liable under CERCLA.

     From time to time, we generate hazardous substances which we dispose at
landfills or we transport soils or other materials which may contain hazardous
substances to landfills. We also send residuals and ash from our incinerators to
landfills for use as daily cover. Liability under CERCLA, or comparable state
statutes, can be founded on the disposal, or arrangement for disposal, of
hazardous substances at sites such as landfills and for the transporting of such
substances to landfills. Under CERCLA, or comparable state statutes, we may be
liable for the remediation of a disposal site that was never owned or operated
by us if the site contains hazardous substances that we generated or transported
to such site. We could also be responsible for hazardous substances during
actual transportation and may be liable for environmental response measures
arising out of disposal at a third party site with whom we had contracted. The
costs of a CERCLA cleanup can be very expensive. Given the difficulty of
obtaining insurance for environmental impairment liability, such liability could
have a material impact on our business and financial condition.

     In addition, under CERCLA, or comparable state statutes, we could be
required to clean any of our current or former properties if hazardous
substances are released or are otherwise found to be present. We are currently
monitoring the remediation of soil and groundwater at one of our properties in
cooperation with the applicable state regulatory authority, but do not believe
any additional material expenditures will be required. However, there can be no
assurance that currently unknown contamination would not be found on this or
other properties.

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

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

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

     We also rely on unpatented proprietary technology. It is possible that
others will independently develop the same or similar technology or otherwise
obtain access to our unpatented technology. To protect our trade secrets and
other proprietary information, we require employees, consultants, advisors and
collaborators to enter into confidentiality agreements. We cannot assure you
that these agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. If we are unable to maintain the proprietary nature of
our technologies, we could be materially adversely affected.

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<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We utilize financial instruments, which inherently have some degree of
market risk due to interest rate fluctuations. Management is actively involved
in monitoring exposure to market risk and continues to develop and utilize
appropriate risk management techniques. We are not exposed to any other
significant market risks, including commodity price risk, foreign currency
exchange risk or interest rate risks from the use of derivative financial
instruments. Management does not currently use derivative financial instruments
for trading or to speculate on changes in interest rates or commodity prices.

  DERIVATIVES AND HEDGING ACTIVITIES

     Prior to June 25, 2001, our derivative contracts consisted of interest rate
swap agreements and option agreements related to hedging requirements under our
existing credit facility. The option agreements did not qualify for hedge
accounting under SFAS 133. Changes in the fair value of these derivatives were
recognized in earnings. Our interest rate swap agreements qualified for hedge
accounting as cash flow hedges of our exposure to changes in variable interest
rates.

     On June 25, 2001, we entered into a reverse swap on our subordinated debt,
and terminated the previously existing interest rate swap and option agreements
noted above. The balance included in accumulated other comprehensive loss
included in stockholders' equity is being recognized in future periods' income
over the remaining term of the original swap agreement. We have designated the
reverse swap agreement on our subordinated debt as a fair value hedge of changes
in the value of the underlying debt as a result of changes in the benchmark
interest rate. The liability related to the reverse swap agreement totaling
approximately $5,151,000 is reflected in other long-term liabilities at December
31, 2001; additionally, a fair value adjustment on our subordinated debt of
approximately $802,000 is reflected in long-term debt at December 31, 2001. The
amount of the ineffectiveness of the reverse swap agreement credited to interest
expense, net for the twelve months ended December 31, 2001, totaled
approximately $267,000.

     On July 3, 2001, we entered into an interest rate cap agreement
establishing a maximum fixed LIBOR rate on $125,000,000 of our floating rate
debt at an interest rate of 6.50% in order to meet the hedging requirements of
our existing credit facility. Changes in the fair value of the agreement charged
to interest expense, net and totaled $66,000 during 2001.

  INTEREST RATE RISK

     Total debt at December 31, 2001, included approximately $161,936,000 in
floating rate debt attributed to borrowings under our existing credit facility
at a weighted average interest rate of 5.72%. As a result, our annual interest
cost in 2002 will fluctuate based on short-term interest rates. We have entered
into an interest rate cap agreement at July 3, 2001, establishing a maximum
fixed LIBOR rate on $125,000,000 of our floating rate debt at an interest rate
of 6.50% and entered into a reverse swap agreement at June 25, 2001, on our
subordinated debt in order to manage risk and reduce exposure to interest rate
fluctuations as required under our bank credit facility. We have designated the
reverse swap agreement as a fair value hedge. The impact on annual cash flow of
a 10% change in the floating rate would be approximately $483,000 after taking
into consideration the hedge agreements.

                                        34
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
  Report of Independent Public Accountants..................   36
  Consolidated Balance Sheets as of December 31, 2001 and
     2000...................................................   37
  Consolidated Statements of Operations for the Years Ended
     December 31, 2001, 2000 and 1999.......................   38
  Consolidated Statements of Stockholders' Equity for the
     Years Ended December 31, 2001, 2000 and 1999...........   39
  Consolidated Statements of Cash Flows for the Years Ended
     December 31, 2001, 2000 and 1999.......................   40
  Notes to Consolidated Financial Statements................   42
</Table>

                                        35
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Synagro Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Synagro
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 Synagro
Technologies, Inc., and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 1, the Company changed its method of accounting for
derivatives on January 1, 2001.

ARTHUR ANDERSEN LLP

Houston, Texas
March 13, 2002

                                        36
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Current Assets:
  Cash and cash equivalents.................................  $    251,821   $  4,597,420
  Restricted cash...........................................     3,281,045      2,085,039
  Accounts receivable, net..................................    49,531,654     50,073,651
  Note receivable, current portion..........................       201,000        188,903
  Prepaid expenses and other current assets.................    10,181,030      8,553,695
                                                              ------------   ------------
          Total current assets..............................    63,446,550     65,498,708
Property, machinery & equipment, net........................   206,114,267    198,466,357
Other Assets:
  Goodwill, net of accumulated amortization of $11,126,235
     and $6,667,566, respectively...........................   163,739,059    166,698,921
  Other, net................................................    12,867,901     13,156,606
                                                              ------------   ------------
          Total assets......................................  $446,167,777   $443,820,592
                                                              ============   ============

                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Current portion of long-term debt.........................  $ 12,880,693   $  9,265,380
  Current portion of nonrecourse project revenue bonds......     2,300,000      2,185,000
  Accounts payable and accrued expenses.....................    40,951,059     36,313,941
                                                              ------------   ------------
          Total current liabilities.........................    56,131,752     47,764,321
Long-term Liabilities:
  Long-term debt obligations, net...........................   202,650,523    230,358,453
  Nonrecourse project revenue bonds, net....................    40,584,848     43,123,771
  Fair value of interest rate swap..........................     5,150,502             --
  Other long-term liabilities...............................     9,328,065      5,642,737
                                                              ------------   ------------
          Total long-term liabilities.......................   257,713,938    279,124,961

Commitments and Contingencies

Redeemable Preferred Stock, 69,792.29 shares issued and
  outstanding, redeemable at $1,000 per share...............    70,431,063     63,367,178
Stockholders' Equity:
  Preferred stock, $.002 par value, 10,000,000 shares
     authorized, none issued or outstanding.................            --             --
  Common stock, $.002 par value, 100,000,000 shares
     authorized, 19,476,781, shares and 19,435,781 issued
     and outstanding, respectively..........................        38,954         38,872
  Additional paid in capital................................   109,167,460    109,085,542
  Accumulated deficit.......................................   (45,004,998)   (55,560,282)
  Accumulated other comprehensive loss......................    (2,310,392)            --
                                                              ------------   ------------
          Total stockholders' equity........................    61,891,024     53,564,132
                                                              ------------   ------------
Total liabilities and stockholders' equity..................  $446,167,777   $443,820,592
                                                              ============   ============
</Table>

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

                                        37
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE YEARS ENDED DECEMBER 31,

<Table>
<Caption>
                                                          2001           2000          1999
                                                      ------------   ------------   -----------
<S>                                                   <C>            <C>            <C>
Revenue.............................................  $260,195,667   $163,097,783   $56,462,757
Cost of services....................................   192,918,525    119,899,924    42,470,937
                                                      ------------   ------------   -----------
Gross profit........................................    67,277,142     43,197,859    13,991,820
Selling, general and administrative expenses........    20,785,734     14,336,948     6,875,928
Special (credits) charges, net......................    (4,981,584)            --     1,499,501
Amortization of goodwill............................     4,488,667      3,515,931     1,526,717
                                                      ------------   ------------   -----------
  Income from operations............................    46,984,325     25,344,980     4,089,674
                                                      ------------   ------------   -----------
Other (income) expense:
  Other income, net.................................      (221,383)      (114,024)     (294,438)
  Interest expense, net.............................    26,968,733     18,907,891     3,236,099
                                                      ------------   ------------   -----------
     Total other expense, net.......................    26,747,350     18,793,867     2,941,661
                                                      ------------   ------------   -----------
Income before provision for income taxes............    20,236,975      6,551,113     1,148,013
  Provision for income taxes........................       573,247             --            --
                                                      ------------   ------------   -----------
Net income before cumulative effect of change in
  accounting for derivatives, preferred stock
  dividends, and noncash beneficial conversion
  charge............................................  $ 19,663,728   $  6,551,113   $ 1,148,013
Cumulative effect of change in accounting for
  derivatives.......................................     1,860,685             --            --
                                                      ------------   ------------   -----------
Net income before preferred stock dividends and
  noncash beneficial conversion charge..............  $ 17,803,043   $  6,551,113   $ 1,148,013
                                                      ------------   ------------   -----------
Preferred stock dividends...........................     7,247,759      3,938,499            --
Noncash beneficial conversion charge................            --     37,045,268            --
Net income (loss) applicable to common stock........  $ 10,555,284   $(34,432,654)  $ 1,148,013
                                                      ============   ============   ===========
Earnings per share:
  Net income before cumulative effect of change in
     accounting for derivatives, preferred stock
     dividends, and noncash beneficial conversion
     charge.........................................  $       1.01   $       0.34   $      0.07
  Cumulative effect of change in accounting for
     derivatives....................................  $      (0.10)  $         --   $        --
  Preferred stock dividends.........................  $      (0.37)  $      (0.20)  $        --
                                                      ------------   ------------   -----------
     Subtotal.......................................  $       0.54   $       0.14   $      0.07
  Noncash beneficial conversion charge..............  $         --   $      (1.92)  $        --
  Net income (loss) per common share, basic.........  $       0.54   $      (1.78)  $      0.07
                                                      ============   ============   ===========
  Net income (loss) per common share, diluted.......  $       0.36   $      (1.78)  $      0.07
                                                      ============   ============   ===========
Weighted average shares outstanding, basic..........    19,457,389     19,289,720    16,481,399
Weighted average shares outstanding, diluted........    49,648,094     19,289,720    17,479,376
</Table>

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

                                        38
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                                                      ACCUMULATED
                                    COMMON STOCK        ADDITIONAL                       OTHER
                                --------------------     PAID-IN      ACCUMULATED    COMPREHENSIVE                 COMPREHENSIVE
                                  SHARES     AMOUNT      CAPITAL        DEFICIT          LOSS           TOTAL          LOSS
                                ----------   -------   ------------   ------------   -------------   -----------   -------------
<S>                             <C>          <C>       <C>            <C>            <C>             <C>           <C>
BALANCE, December 31, 1998....  14,251,706   $28,503   $ 56,495,873   $(22,275,641)   $        --    $34,248,735    $        --
  Shares issued in
    acquisitions..............   3,044,784     6,090      9,018,123             --             --      9,024,213             --
  Exercise of options and
    warrants..................     396,999       795        892,735             --             --        893,530             --
  Net income..................          --        --             --      1,148,013             --      1,148,013      1,148,013
                                ----------   -------   ------------   ------------    -----------    -----------    -----------
BALANCE, December 31, 1999....  17,693,489    35,388     66,406,731    (21,127,628)            --     45,314,491      1,148,013
                                ----------   -------   ------------   ------------    -----------    -----------    ===========
  Shares issued in
    acquisition...............   1,325,000     2,650      5,468,010             --             --      5,470,660             --
  Preferred stock dividends...          --        --             --     (3,938,499)            --     (3,938,499)    (3,938,499)
  Noncash beneficial
    conversion charge.........          --        --     37,045,268    (37,045,268)            --             --    (37,045,268)
    Exercise of options and
      warrants................     417,292       834        165,533             --             --        166,367             --
  Net income before preferred
    stock dividends and
    noncash beneficial
    conversion charge.........          --        --             --      6,551,113             --      6,551,113      6,551,113
                                ----------   -------   ------------   ------------    -----------    -----------    -----------
BALANCE, December 31, 2000....  19,435,781    38,872    109,085,542    (55,560,282)            --     53,564,132    (34,432,654)
                                ----------   -------   ------------   ------------    -----------    -----------    ===========
  Change in other
    comprehensive loss........          --        --             --             --     (2,310,392)    (2,310,392)    (2,310,392)
  Preferred stock dividends...          --        --             --     (7,247,759)            --     (7,247,759)    (7,247,759)
  Exercise of options and
    warrants..................      41,000        82         81,918             --             --         82,000             --
  Net income before preferred
    stock dividends...........          --        --             --     17,803,043             --     17,803,043     17,803,043
                                ----------   -------   ------------   ------------    -----------    -----------    -----------
BALANCE, December 31, 2001....  19,476,781   $38,954   $109,167,460   $(45,004,998)   $(2,310,392)   $61,891,024    $ 8,244,892
                                ==========   =======   ============   ============    ===========    ===========    ===========
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        39
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                           2001           2000            1999
                                                       ------------   -------------   ------------
<S>                                                    <C>            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income before preferred stock dividends and
     noncash beneficial conversion charge............  $ 17,803,043   $   6,551,113   $  1,148,013
     Adjustments to reconcile to net cash provided by
       operating activities:
       Depreciation..................................    13,578,618       7,557,599      2,913,260
       Amortization..................................     6,454,110       4,694,710      1,748,982
       Gain on sale of property, machinery and
          equipment..................................      (221,239)        (30,192)      (151,426)
       Cumulative effect of change in accounting for
          derivatives................................     1,860,685              --             --
     Increase in the following, excluding the effects
       of acquisitions:
       Accounts receivable...........................      (405,573)       (768,558)    (3,674,251)
       Prepaid expenses and other assets.............    (3,211,420)     (2,351,607)    (3,234,281)
       Accounts payable, accrued expenses, and other
          liabilities................................     2,350,103       3,967,204      3,339,810
                                                       ------------   -------------   ------------
     Net cash provided by operating activities.......    38,208,327      19,620,269      2,090,107
                                                       ------------   -------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of businesses including contingent
     consideration, net of cash acquired.............    (1,708,757)   (245,385,665)   (13,802,090)
  Purchases of property, machinery and equipment.....   (13,312,534)     (5,805,151)    (4,043,026)
  Proceeds from sale of property, machinery and
     equipment.......................................       967,628         176,723      1,103,463
  Proceeds from notes receivable.....................         4,430          68,097        425,627
                                                       ------------   -------------   ------------
     Net cash used in investing activities...........   (14,049,233)   (250,945,996)   (16,316,026)
                                                       ------------   -------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from debt.................................            --     285,456,070     19,274,802
  Payments on debt...................................   (27,079,475)   (100,722,093)    (5,964,907)
  Debt issuance costs................................       (72,289)    (10,406,439)      (892,241)
  (Increase) decrease in restricted cash.............    (1,434,929)      1,819,930        680,656
  Issuance of preferred stock, net of offering
     costs...........................................            --      59,428,679             --
  Exercise of options and warrants...................        82,000         166,367        893,530
                                                       ------------   -------------   ------------
     Net cash provided by (used in) financing
       activities....................................   (28,504,693)    235,742,514     13,991,840
                                                       ------------   -------------   ------------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS...................................    (4,345,599)      4,416,787       (234,079)
CASH AND CASH EQUIVALENTS, beginning of year.........     4,597,420         180,633        414,712
                                                       ------------   -------------   ------------
CASH AND CASH EQUIVALENTS, end of year...............  $    251,821   $   4,597,420   $    180,633
                                                       ============   =============   ============
SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid......................................  $ 25,576,646   $  15,913,071   $  3,293,798
  Taxes paid.........................................  $    276,426   $     419,218   $      9,898
</Table>

                                        40
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

              CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

NONCASH INVESTING AND FINANCING ACTIVITIES

     On July 9, 1999, the Company entered into a capital lease agreement to
purchase ten trucks with a purchase price of approximately $660,000.

     During 2000, the Company issued an aggregate of 57,746.93 shares of Series
C, Series D, and Series E Preferred Stock ("Preferred Stock) with an eight
percent dividend and beneficial conversion feature. The Company recognized the
value of the beneficial conversion feature of approximately $37,045,000 as a
noncash beneficial conversion charge. Dividends totaled approximately $3,938,000
in 2000, of which approximately $3,419,000 represents the eight percent dividend
on the Company's preferred stock that was paid with additional shares of
preferred stock, and approximately $519,000 represents accretion and
amortization of issuance costs.

     During 2000, the Company issued an aggregate of 220,898 shares relating to
cashless exercises of certain warrants and options pursuant to an exemption from
registration under Rule 144 of the Securities Act.

     During 2001, dividends totaled approximately $7,248,000, of which
approximately $6,097,000 represents the eight percent dividend on the Company's
Preferred Stock that was paid with additional shares of preferred stock, and
approximately $1,151,000 represents accretion and amortization of issuance
costs.

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

                                        41
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  BUSINESS AND ORGANIZATION

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

  PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Synagro and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated. As discussed further in Note 2, the Company acquired National
Resource Recovery, Inc., on March 1, 1999, in a transaction accounted for as a
pooling-of-interests. The historical consolidated financial statements of the
Company have been presented for the effect of the pooling-of-interests
transaction.

  CASH EQUIVALENTS

     The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents.

  PROPERTY, MACHINERY AND EQUIPMENT

     Property, machinery and equipment are stated at cost. Depreciation is being
provided using the straight-line method over estimated useful lives of three to
twenty-five years, net of estimated salvage values. Leasehold improvements are
capitalized and amortized over the lesser of the life of the lease or the
estimated useful life of the asset.

     Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property, machinery and equipment, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in the statements of operations.

  GOODWILL

     Goodwill represents the aggregate purchase price paid by the Company in
acquisitions accounted for as a purchase over the fair value of the net assets
acquired. Goodwill is amortized on a straight-line basis over the estimated
period of benefit ranging from 20 to 40 years.

     In the event that facts and circumstances indicate that goodwill may be
impaired, an evaluation of recoverability would be performed. If an evaluation
was required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value was necessary. The
Company believes the goodwill remaining as of December 31, 2001, is fully
realizable.

     Through December 31, 2001, goodwill of approximately $2,196,000 has been
amortized over a 20-year life. The Company's remaining goodwill has been
amortized over a 40-year life. Goodwill amortization expense was approximately
$4,489,000, $3,516,000 and $1,527,000 for 2001, 2000 and 1999, respectively. In

                                        42
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
amortization of goodwill will cease on January 1, 2002. See discussion of New
Accounting Pronouncements below.

  NONCOMPETE AGREEMENTS

     Included in other assets are noncompete agreements. These agreements are
valued at fair value and amortized on a straight-line basis over the term of the
agreement, which is generally for two to ten years. Noncompete agreements, net
of accumulated amortization at December 31, 2001 and 2000, totaled approximately
$421,000 and $544,000, respectively. Amortization expense was approximately
$124,000 in 2001, $72,000 in 2000, and $76,000 in 1999.

  DEFERRED FINANCING COSTS

     Deferred financing costs, net of accumulated amortization at December 31,
2001 and 2000, totaled approximately $7,012,000 and $9,450,000, respectively,
and are included in other assets. Deferred financing costs are amortized over
the life of the underlying instruments.

  REVENUE RECOGNITION

     Revenues under facilities operations and maintenance contracts are
recognized either when wastewater residuals enter the facilities or when the
residuals have been processed, depending on the contract terms. All other
revenues under service contracts are recognized when the service is performed.

     The Company provides for losses in connection with long-term contracts
where an obligation exists to perform services and when it becomes evident the
projected contract costs exceed the related revenues.

  RECLASSIFICATIONS

     Certain reclassifications have been made to the prior years' financial
statements to conform to the 2001 presentation.

  USE OF ESTIMATES

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

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

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

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

                                        43
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

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

  CONCENTRATION OF CREDIT RISK

     The Company provides services to a broad range of geographical regions. The
Company's credit risk primarily consists of receivables from a variety of
customers including state and local agencies, municipalities and private
industries. The Company had one customer that accounted for approximately 14%
and 11% of total revenue for the years ended December 31, 2001 and 2000,
respectively. No other customers accounted for more than 10% of revenues. The
Company reviews its accounts receivable and provides allowances as deemed
necessary.

  INCOME TAXES

     The Company accounts for income taxes in accordance with issued SFAS No.
109, "Accounting for Income Taxes." This standard provides the method for
determining the appropriate asset and liability for deferred income taxes, which
are computed by applying applicable tax rates to temporary differences.
Therefore, expenses recorded for financial statement purposes before they are
deducted for income tax purposes create temporary differences, which give rise
to deferred income tax assets. Expenses deductible for income tax purposes
before they are recognized in the financial statements create temporary
differences which give rise to deferred income tax liabilities.

  NEW ACCOUNTING PRONOUNCEMENTS

     Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
which requires that the Company recognize all derivative instruments as assets
or liabilities in its balance sheet and measure them at their fair value.
Changes in the fair value of a derivative are recorded in income or directly to
equity, depending on the instrument's designated use. For derivative instruments
that are designated and qualify as a cash flow hedge, the effective portion of
the gain or loss on the derivative instrument is reported as a component of
other comprehensive income and reclassified into income when the hedged
transaction affects income, while the ineffective portion of the gain or loss on
the derivative instrument is recognized currently in earnings. For derivative
instruments that are designated and qualify as a fair value hedge, the gain or
loss on the derivative instrument as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in current income
during the period of the change in fair values. The noncash transition
adjustment related to the adoption of this statement has been reflected as a
"cumulative effect of change in accounting for derivatives" of approximately
$1,861,000 charged to net income and approximately $2,058,000 charged to other
comprehensive income included in stockholders' equity as of January 1, 2001. See
Note (5) for discussion of the Company's current derivative contracts and
hedging activities.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 requires all business combinations initiated after June 30,
2001, to be accounted for using the purchase method. Under SFAS 142,

                                        44
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will be amortized over their useful lives. Management has completed the
initial impairment test required by the provisions of SFAS 142 as of January 1,
2002, and determined that there has not been an impairment of the Company's
goodwill. Beginning January 1, 2002, the Company will no longer amortize
goodwill. During 2001, the Company recorded goodwill amortization of
approximately $4.5 million.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 covers all legally enforceable obligations
associated with the retirement of tangible long-lived assets and provides the
accounting and reporting requirements for such obligations. SFAS No. 143 is
effective for the Company beginning January 1, 2003. Management has yet to
determine the impact that the adoption of SFAS No. 143 will have on the
Company's consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 144 establishes a single accounting method for long-
lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and extends the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 also requires that an
impairment loss be recognized for assets held-for-use when the carrying amount
of an asset (group) is not recoverable. The carrying amount of an asset (group)
is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset (group), excluding
interest charges. Estimates of future cash flows used to test the recoverability
of a long-lived asset (group) must incorporate the entity's own assumptions
about its use of the asset (group) and must factor in all available evidence.
SFAS No. 144 is effective for the Company for the quarter ending March 31, 2002.
Management has yet to determine the impact that the adoption of SFAS No. 144
will have on the Company's consolidated financial statements, but does not
expect the effect of adopting this standard to be material to the Company's
results of operations and financial position.

(2)  ACQUISITIONS

  2000 ACQUISITIONS

     During 2000, the Company purchased Residual Technologies, Limited
Partnership and its affiliates (collectively "RESTEC"), Ecosystematics, Inc.,
Davis Water Analysis, Inc., AKH Water Management, Inc., Rehbein, Inc, certain
assets and contracts of Whiteford Construction Company, Environmental Protection
& Improvement Company, Inc. ("EPIC"), and the Bio Gro Division of Waste
Management, Inc. ("Bio Gro") (collectively, the "2000 Acquisitions"). In
connection with the purchase of RESTEC, the former owners are entitled to
receive up to an additional $12.0 million over the eight years following the
acquisition if certain performance targets are met. In connection with the
purchase of Rehbein, Inc., the former owners are entitled to receive up to an
additional $2.0 million over the three years following the acquisition if
certain performance targets are met. In connection with the purchase of EPIC,
the former owners are entitled to receive up to an additional $5.4 million over
the three years following the acquisition if certain performance targets are
met. Additionally, the Company assumed approximately $13.4 million, net of
restricted cash reserves of approximately $3,076,000, of municipal bonds in
connection with the acquisition of RESTEC. The bonds contained a provision
whereby RESTEC could defease the bonds and be released from all future
obligations by placing an equivalent amount of U.S. Securities with the bonds
trustee. On July 21, 2000, the Company defeased the bonds utilizing the $13.5
million available under its amended Senior Credit Agreement reserved for
defeasance. The 2000 Acquisitions were accounted for using the purchase method
of accounting. The allocation of the purchase prices resulted in approximately
$107,632,000 of goodwill that has been amortized

                                        45
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

over 40 years. The assets acquired and liabilities assumed relating to the 2000
Acquisitions are summarized as follows:

<Table>
<S>                                                            <C>
Common stock shares issued..................................      1,325,000
                                                               ============
Fair value of common stock issued...........................   $  5,471,000
Cash paid including transaction costs, net of cash
  acquired..................................................    247,092,000
Less: Fair value of net tangible assets acquired............    139,460,000
                                                               ------------
Goodwill....................................................   $107,632,000
                                                               ============
</Table>

  1999 ACQUISITIONS

     In 1999, the Company purchased Anti-Pollution Associates, Inc., D&D
Pumping, Inc., Vital Cycle, Inc. and AMSCO, Inc. (collectively, the "1999
Acquisitions"). The 1999 Acquisitions were recorded using the purchase method of
accounting. The 1999 Acquisitions resulted in approximately $19,790,000 of
goodwill that has been amortized over 40 years. The assets acquired and
liabilities assumed relating to the 1999 Acquisitions are summarized as follows:

<Table>
<S>                                                            <C>
Common stock shares issued..................................     3,044,784
                                                               ===========
Fair value of common stock issued...........................   $ 9,024,000
Cash paid including transaction costs, net of cash
  acquired..................................................    13,802,000
Less: Fair value of net tangible assets acquired............     3,036,000
                                                               -----------
Goodwill....................................................   $19,790,000
                                                               ===========
</Table>

  ACQUISITION OF NATIONAL RESOURCE RECOVERY, INC.

     In March 1999, Synagro Technologies completed the acquisition of all the
common stock of National Resource Recovery, Inc. ("NRR"), in a business
combination accounted for as a "pooling-of-interests" transaction. NRR,
headquartered in Michigan, provides biosolids management services. Synagro
issued 1,000,001 shares of common stock in exchange for all of the common stock
of NRR. There were no transactions between Synagro and NRR during the periods
prior to the business combination.

     The following unaudited pro forma information for the periods 2000 and 1999
set forth below gives effect to the 2000 Acquisitions and the 1999 Acquisitions
as if they had occurred at the beginning of 1999. The unaudited pro forma
information is presented for information purposes only and is not necessarily
indicative of actual results, which might have occurred if the acquisitions had
been made at the beginning of the periods presented.

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                           ---------------------------
                                                               2000           1999
                                                           ------------   ------------
                                                                   (UNAUDITED)
<S>                                                        <C>            <C>
Revenue..................................................  $248,700,000   $235,783,000
Net income before preferred stock dividends..............    10,635,000      4,858,000
Net income (loss) applicable to common stock.............     3,541,000     (1,221,000)
Net earnings (loss) per share
  Basic..................................................  $        .18   $       (.06)
  Diluted................................................  $        .18   $       (.06)
</Table>

                                        46
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3)  PROPERTY, MACHINERY AND EQUIPMENT

     Property, machinery and equipment consist of the following:

<Table>
<Caption>
                                                                      DECEMBER 31,
                                            ESTIMATED USEFUL   ---------------------------
                                             LIFE-IN YEARS         2001           2000
                                            ----------------   ------------   ------------
<S>                                         <C>                <C>            <C>
Land......................................         N/A         $  3,546,730   $  3,276,806
Buildings and improvements................        7-25           32,071,873     31,297,999
Machinery and equipment...................        3-25          193,752,690    174,900,163
Office furniture and equipment............        3-10            2,437,223      1,671,660
Construction in process...................          --            3,571,510      3,346,001
                                                               ------------   ------------
                                                                235,380,026    214,492,629
Less -- Accumulated depreciation..........                       29,265,759     16,026,272
                                                               ------------   ------------
                                                               $206,114,267   $198,466,357
                                                               ============   ============
</Table>

(4)  DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

     Activity of the Company's allowance for doubtful accounts consists of the
following:

<Table>
<Caption>
                                                               DECEMBER 31,
                                                    ----------------------------------
                                                       2001         2000        1999
                                                    ----------   ----------   --------
<S>                                                 <C>          <C>          <C>
Balance at beginning of year......................  $1,701,475   $  522,896   $196,770
Uncollectible receivables written off.............          --      (45,000)    (2,874)
Allowance for doubtful accounts established
  through purchase accounting and charged through
  expense.........................................     463,391    1,223,579    329,000
                                                    ----------   ----------   --------
Balance at end of year............................  $2,164,866   $1,701,475   $522,896
                                                    ==========   ==========   ========
</Table>

     Accounts payable and accrued expenses consist of the following:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Accounts payable...........................................  $25,447,341   $23,213,781
Accrued legal and other claims costs.......................    2,238,540     1,906,194
Accrued interest...........................................    2,711,473     2,139,110
Accrued salaries and benefits..............................    3,618,286     1,991,814
Accrued taxes..............................................      274,694       673,674
Other accrued expenses.....................................    6,660,725     6,389,368
                                                             -----------   -----------
Total......................................................  $40,951,059   $36,313,941
                                                             ===========   ===========
</Table>

                                        47
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5)  LONG-TERM DEBT OBLIGATIONS

     Long-term debt obligations consist of the following:

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               2001           2000
                                                           ------------   ------------
<S>                                                        <C>            <C>
Credit facility -- revolving loan........................  $         --   $         --
Credit facility -- acquisition and term loans............   161,936,292    185,499,999
Subordinated debt........................................    52,760,393     52,760,393
Fair value adjustment related to subordinated debt.......       801,857             --
Capital lease obligations................................            --        626,819
Other notes payable......................................        32,674        736,622
                                                           ------------   ------------
          Total debt.....................................  $215,531,216   $239,623,833
Less:
Current maturities.......................................   (12,880,693)    (9,265,380)
                                                           ------------   ------------
          Long-term debt, net of current maturities......  $202,650,523   $230,358,453
                                                           ============   ============
</Table>

  CREDIT FACILITY

     On January 27, 2000, the Company entered into a $110 million amended and
restated Senior Credit Agreement (the "Senior Credit Agreement") by and among
the Company, Bank of America, N.A., and certain other lenders to fund working
capital for acquisitions, to refinance existing debt, to provide working capital
for operations, to fund capital expenditures and other general corporate
purposes. The Senior Credit Agreement bears interest at LIBOR or prime plus a
margin based on a pricing schedule as set out in the Senior Credit Agreement.
The Senior Credit Agreement was subsequently syndicated on March 15, 2000, to
lenders, and the capacity was increased to $120 million. The Senior Credit
Agreement was amended and resyndicated on August 14, 2000, to lenders, and the
capacity was increased to $230 million. On February 25, 2002, the Senior Credit
Agreement was amended to, among other items, increase the revolving loan from
$30 million to approximately $51.3 million, increase sublimits for letters of
credit from $20 million to $50 million, provide limitations for restricted
payments and investments, and increase the permitted amounts of nonrecourse
financing and operating lease obligations.

     As of February 25, 2002, the loan commitments under the Senior Credit
Agreement, as amended, are as follows:

          (i) Revolving Loan up to $51,330,000 outstanding at any one time;

          (ii) Term A Loans (which, once repaid, may not be reborrowed) of
     $50,000,000;

          (iii) Term B Loans (which, once repaid, may not be reborrowed) of
     $100,000,000;

          (iv) Acquisition Term Loans up to $50,000,000 outstanding at any one
     time available on a revolving basis prior to February 14, 2002, provided
     that certain approvals are obtained and certain financial ratios are met;
     and

          (v) Letters of credit issuable by the Company up to $50,000,000 as a
     subset of the Revolving Loan. At December 31, 2001, the Company had
     approximately $10,250,000 of letters of credit outstanding.

                                        48
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                 REVOLVING   TERM A   TERM B   ACQUISITION
PERIOD ENDING DECEMBER 31,                         LOANS     LOANS    LOANS       LOANS
--------------------------                       ---------   ------   ------   -----------
<S>                                              <C>         <C>      <C>      <C>
2000...........................................       --       5.00%     .50%         0%
2001...........................................       --      15.00%    1.00%         0%
2002...........................................       --      22.50%    1.00%      5.00%
2003...........................................       --      17.50%    1.00%      6.67%
2004...........................................       --      20.00%    1.00%     11.67%
2005...........................................   100.00%     20.00%    1.00%     76.66%
2006...........................................       --         --    94.50%        --
                                                  ------     ------   ------     ------
                                                  100.00%    100.00%  100.00%    100.00%
                                                  ======     ======   ======     ======
</Table>

     The Senior Credit Agreement includes mandatory repayment provisions related
to excess cash flows, proceeds from certain asset sales, debt issuances and
equity issuances, all as defined in the Senior Credit Agreement. These mandatory
repayment provisions may also reduce the available commitment for Revolving
Loans and Acquisition Loans. The Senior Credit Agreement contains standard
covenants including compliance with laws, limitations on capital expenditures,
restrictions on dividend payments, limitations on mergers and compliance with
certain financial covenants. The Company believes that it is in compliance with
those covenants as of December 31, 2001. The Senior Credit Agreement is secured
by all the assets of the Company and expires on July 27, 2006. As of December
31, 2001, the Company has borrowed approximately $161,936,000 ($35,886,000 of
Term A Loans, $88,370,000 of Term B Loans, and $37,680,000 of Acquisition
Loans), which was primarily used to refinance existing debt and to partially
fund the 2000 and 1999 Acquisitions. As of December 31, 2001, the Company has
approximately $32,069,000 of unused borrowings under the Senior Credit
Agreement. The Company's Senior Credit Agreement contains various financial
covenants, including a senior debt-to-cash flow ratio, as defined, determined at
the end of each quarter. As of December 31, 2001, the maximum senior debt that
could have been outstanding while remaining in compliance with the covenant
ratios was approximately $194,006,000. As of March 13, 2002, the Company has
borrowed approximately $167,936,000 ($35,886,000 of Term A Loans, $88,370,000 of
Term B Loans, $37,680,000 of Acquisition Loans, and $6,000,000 of Revolving
Loans) with approximately $29,072,000 of unused borrowings remaining under the
Senior Credit Agreement.

  SUBORDINATED DEBT

     On January 27, 2000, the Company entered into an agreement with GTCR
Capital providing up to $125 million in subordinated debt financing to fund
acquisitions and for certain other uses, in each case as approved by the Board
of Directors of the Company and GTCR Capital. The agreement was amended on
August 14, 2000, allowing, among other things, for the syndication of 50% of the
commitment. The loans bear interest at an annual rate of 12% paid quarterly and
provide warrants that are convertible into Preferred Stock at $.01 per warrant.
The unpaid principal plus unpaid and accrued interest must be paid in full by
January 27, 2008. The agreement contains general and financial covenants. As of
December 31, 2001, the Company has borrowed approximately $52,760,000 of
indebtedness under the terms of the agreement, which was used to partially fund
the 2000 Acquisitions. Warrants to acquire 9,225.839 shares of Series C, D, and
E Preferred Stock were issued in connection with these borrowings. These
warrants were immediately exercised (See Note 10).

                                        49
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  DERIVATIVES AND HEDGING ACTIVITIES

     Prior to June 25, 2001, the Company's derivative contracts consisted of
interest rate swap agreements and option agreements related to hedging
requirements under the Company's Senior Credit Agreement. The option agreements
did not qualify for hedge accounting under SFAS 133. Changes in the fair value
of these derivatives were recognized in earnings as interest expense of
$226,000. The Company's interest rate swap agreements qualified for hedge
accounting as cash flow hedges of the Company's exposure to changes in variable
interest rates.

     On June 25, 2001, the Company entered into a reverse swap on its
subordinated debt, and terminated the previously existing interest rate swap and
option agreements noted above. The balance included in accumulated other
comprehensive loss included in stockholders' equity is being recognized in
future periods' income over the remaining term of the original swap agreement.
The amount to be recognized into income over the next twelve months is
approximately $813,000. The Company has designated the reverse swap agreement on
its subordinated debt as a fair value hedge of changes in the value of the
underlying debt as a result of changes in the benchmark interest rate. The
liability related to the reverse swap agreement totaling approximately
$5,151,000 is reflected in other long-term liabilities at December 31, 2001;
additionally, a fair value adjustment on the Company's subordinated debt of
approximately $802,000 is reflected in long-term debt at December 31, 2001. The
amount of the ineffectiveness of the reverse swap agreement credited to interest
expense, net for the twelve months ended December 31, 2001, totaled
approximately $267,000.

     On July 3, 2001, the Company entered into an interest rate cap agreement
establishing a maximum fixed LIBOR rate on $125,000,000 of its floating rate
debt at an interest rate of 6.50% in order to meet the hedging requirements of
its Senior Credit Agreement. Changes in the fair value of the agreement charged
to interest expense, net and totaled $66,000 during 2001.

  FUTURE PAYMENTS

     At December 31, 2001, future minimum principal payments of long-term debt
and Nonrecourse Project Revenue Bonds (see Note 6) are as follows:

<Table>
<Caption>
                                                             NONRECOURSE
                                              LONG-TERM        PROJECT
YEAR ENDING DECEMBER 31,                         DEBT       REVENUE BONDS      TOTAL
------------------------                     ------------   -------------   ------------
<S>                                          <C>            <C>             <C>
2002.......................................  $ 12,880,693    $ 2,300,000    $ 15,180,693
2003.......................................    11,267,073      2,430,000      13,697,073
2004.......................................    14,272,541      2,570,000      16,842,541
2005.......................................    38,761,075      2,710,000      41,471,075
2006.......................................    84,787,584             --      84,787,584
2007-2010..................................    53,562,250     16,295,000      69,857,250
2011-2016..................................            --     16,579,848      16,579,848
                                             ------------    -----------    ------------
Total......................................  $215,531,216    $42,884,848    $258,416,064
                                             ============    ===========    ============
</Table>

     The Company had total debt of approximately $258,416,000 at December 31,
2001, including total long-term debt of approximately $215,531,000 and
Nonrecourse Project Revenue Bonds of approximately $42,885,000 net of restricted
cash of approximately $5,780,000. The Company had current maturities on long-
term debt of approximately $12,881,000 and current maturities of approximately
$2,300,000 on Nonrecourse Project Revenue Bonds at December 31, 2001. The
Company estimates the fair value of long-term debt as of December 31, 2001 and
2000, to be approximately the same as the recorded value.

                                        50
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6)  NONRECOURSE PROJECT REVENUE BONDS

<Table>
<Caption>
                                                             DECEMBER 31,   DECEMBER 31,
                                                                 2001           2000
                                                             ------------   ------------
<S>                                                          <C>            <C>
Maryland Energy Financing Administration Limited Obligation
  Solid Waste Disposal Revenue Bonds, 1996 series --
     Revenue bonds due 2001 to 2005 at stated interest
       rates of 5.45% to 5.85%.............................  $10,010,000    $12,195,000
     Term revenue bond due 2010 at stated interest rate of
       6.30%...............................................   16,295,000     16,295,000
     Term revenue bond due 2016 at stated interest rate of
       6.45%...............................................   22,360,000     22,360,000
     Less: Restricted cash.................................   (5,780,152)    (5,541,229)
                                                             -----------    -----------
                                                              42,884,848     45,308,771
     Less: Current maturities..............................   (2,300,000)    (2,185,000)
                                                             -----------    -----------
     Nonrecourse project revenue bonds, net of current
       maturities..........................................  $40,584,848    $43,123,771
                                                             ===========    ===========
</Table>

     In 1996, the Maryland Energy Financing Administration (the
"Administration") issued nonrecourse tax-exempt project revenue bonds (the
"Nonrecourse Project Revenue Bonds") in the aggregate amount of $58,550,000. The
Administration loaned the proceeds of the Nonrecourse Project Revenue Bonds to
Wheelabrator Water Technologies Baltimore L.L.C., now Synagro's wholly owned
subsidiary and known as Synagro-Baltimore, L.L.C., pursuant to a June 1996 loan
agreement, and the terms of the loan mirror the terms of the Nonrecourse Project
Revenue Bonds. The loan financed a portion of the costs of constructing thermal
facilities located in Baltimore County, Maryland, at the site of its Back River
Wastewater Treatment Plant, and in the City of Baltimore, Maryland, at the site
of its Patapsco Wastewater Treatment Plant. The Company assumed all obligations
associated with the Nonrecourse Project Revenue Bonds in connection with its
acquisition of Bio Gro in 2000.

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

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

     Synagro-Baltimore, L.L.C., one of our wholly owned subsidiaries, guarantees
the performance of services under the underlying service agreements with the
City of Baltimore. Under the terms of the Bio Gro acquisition purchase
agreement, Waste Management, Inc. also guarantees the performance of services
under those service agreements. We have agreed to pay Waste Management $500,000
per year beginning in 2007 until the Nonrecourse Project Revenue Bonds are paid
or its guarantee is removed. Neither Synagro-Baltimore, L.L.C nor Waste
Management has guaranteed payment of the Nonrecourse Project Revenue Bonds or
the loan funded by the Nonrecourse Project Revenue Bonds.

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

                                        51
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At December 31, 2001, the Nonrecourse Project Revenue Bonds were secured by
property, machinery and equipment with a net book value of approximately
$60,083,000 and restricted cash of approximately $8,557,000, of which
approximately $5,780,000 was netted against long-term debt and the difference
was shown as restricted cash.

     These Nonrecourse Project Revenue Bonds, totaling $42,900,000 of debt (net
of restricted cash) as of December 31, 2001, and $3,100,000 of related interest
expense paid in 2001, are excluded from the financial covenant calculations
required by our Senior Credit Facility.

  CAPITAL LEASES

     The Company operated under lease agreements at December 31, 2000, which
were accounted for as capital leases and were repaid during 2001. As of December
31, 2000, the capitalized costs and accumulated depreciation of equipment under
capital leases were as follows:

<Table>
<S>                                                            <C>
Equipment...................................................   $1,054,825
  Less: Accumulated depreciation............................      274,388
                                                               ----------
                                                               $  780,437
                                                               ==========
</Table>

(7)  INCOME TAXES

     Federal and state income tax provisions are as follows:

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2001       2000        1999
                                                     --------   ---------   ---------
<S>                                                  <C>        <C>         <C>
Federal:
  Current..........................................  $     --   $      --   $      --
  Deferred.........................................   390,000    (350,000)   (200,000)
State:
  Current..........................................   175,000     350,000     200,000
  Deferred.........................................     8,000          --          --
                                                     --------   ---------   ---------
                                                     $573,000   $      --   $      --
                                                     ========   =========   =========
</Table>

     Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35% to income before
provision for income taxes as follows:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                            2001      2000      1999
                                                            -----     -----     -----
<S>                                                         <C>       <C>       <C>
Provision (benefit) at the statutory rate.................   35.0%     35.0%     35.0%
Increase (decrease) resulting from:
  Goodwill, net...........................................    0.0%     (5.0)%    42.0%
  State income taxes, net of benefit for federal
     deduction............................................    0.6%      5.0%      9.0%
  Other items, net........................................  (11.4)%     0.0%     (3.0)%
  Change in accounting for derivatives....................   (3.2)%      --%       --%
  Special credits, net....................................   (9.8)%     0.0%      0.0%
  Change in valuation allowance...........................   (8.4)%   (35.0)%   (83.0)%
                                                            -----     -----     -----
                                                              2.8%      0.0%      0.0%
                                                            =====     =====     =====
</Table>

                                        52
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Significant components of the Company's deferred tax assets and liabilities
for federal income taxes consist of the following:

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Deferred tax assets --
  Net operating loss carryforwards.........................  $25,540,000   $12,140,000
  Alternative minimum tax credit...........................       40,000        40,000
  Accrual not currently deductible for tax purposes........    6,025,000     3,614,000
  Allowance for bad debts..................................      744,000       558,000
  Other....................................................    1,783,000       417,000
                                                             -----------   -----------
     Total deferred tax assets.............................   34,132,000    16,769,000
Valuation allowance for deferred tax assets................   (1,297,000)   (2,993,000)
Deferred tax liability --
  Differences between book and tax bases of fixed assets...  (26,577,000)  (10,921,000)
  Differences between book and tax bases of goodwill.......   (4,681,000)   (2,305,000)
                                                             -----------   -----------
     Total deferred tax liabilities........................  (31,258,000)  (13,226,000)
                                                             -----------   -----------
     Net deferred tax asset................................  $ 1,577,000   $   550,000
                                                             ===========   ===========
</Table>

     As of December 31, 2001, the Company generated net operating loss ("NOL")
carryforwards of approximately $67,209,000 available to reduce future income
taxes. These carryforwards begin to expire in 2008. A change in ownership, as
defined by federal income tax regulations, could significantly limit the
Company's ability to utilize its carryforwards. Accordingly, the Company's
ability to utilize its NOLs to reduce future taxable income and tax liabilities
may be limited. Additionally, because federal tax laws limit the time during
which these carryforwards may be applied against future taxes, the Company may
not be able to take full advantage of these attributes for federal income tax
purposes. As the Company has incurred losses in recent years and the utilization
of these carryforwards could be limited as discussed above, a valuation
allowance has been established to partially offset the net deferred tax asset at
December 31, 2001 and 2000. The valuation allowance decreased by $1,696,000 for
the year ended December 31, 2001, due to basis differences in fixed assets and
goodwill reduced by deferred tax assets related to increases in tax NOL
carryforwards. The valuation allowance decreased by $333,000 for the year ended
December 31, 2000, due to basis differences in fixed assets and goodwill reduced
by net deferred tax assets related to increases in tax NOL carryforwards.

(8)  COMMITMENTS AND CONTINGENCIES

  LEASES

     The Company leases certain facilities and equipment for its corporate and
operations offices under noncancelable long-term lease agreements. Rental
expense was approximately $4,794,000, $3,861,000 and

                                        53
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$1,368,000 for 2001, 2000 and 1999, respectively. Minimum annual rental
commitments under these leases are as follows:

<Table>
<Caption>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                            <C>
2002........................................................   $ 4,768,418
2003........................................................     4,384,249
2004........................................................     4,254,919
2005........................................................     3,687,492
2006........................................................     3,035,267
Thereafter..................................................    18,366,326
                                                               -----------
                                                               $38,496,671
                                                               ===========
</Table>

  CUSTOMER CONTRACTS

     A substantial portion of the Company's revenue is derived from services
provided under contracts and written agreements with the Company's customers.
Some of these contracts, especially those contracts with large municipalities
(including our largest contract and at least four of the Company's other top 10
contracts), provide for termination of the contract by the customer after giving
relatively short notice (in some cases as little as 10 days). In addition, these
contracts contain liquidated damages clauses which may or may not be enforceable
in the case of early termination of the contracts. If one or more of these
contracts are terminated prior to the expiration of its term, and the Company is
not able to replace revenues from the terminated contracts or receive liquidated
damages pursuant to the terms of the contract, the lost revenue could have a
material and adverse effect the Company's business, financial condition and
results of operations.

  LITIGATION

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

  Marshall Case

     In January 2002, the Company settled a lawsuit that was filed in Rockingham
County Superior Court, New Hampshire, in November 1998. The plaintiff claimed
that the death of an individual was allegedly caused by exposure to certain
biosolids disposed of by one of the Company's wholly owned subsidiaries. The
plaintiff in the settlement represented that there was no scientific support to
the allegations as previously alleged. See Note 12.

  Riverside County

     The Company leases and operates a composting facility in Riverside County,
California, under a conditional use permit ("CUP") that expires January 1, 2010.
The CUP allows for a reduction in material intake and CUP term in the event of
noncompliance with the CUP's terms and conditions. In response to alleged
noncompliance due to excessive odor, on or about June 22, 1999, the Riverside
County Board of

                                        54
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Supervisors attempted to reduce the Company's intake of biosolids from 500 tons
per day to 250 tons per day. The Company believes that this was not an
authorized action by the Board of Supervisors. On September 15, 1999, the
Company was granted a preliminary injunction restraining and enjoining the
County of Riverside ("County") from restricting the Company's intake of
biosolids at its Riverside composting facility.

     In the lawsuit that the Company filed in the Superior Court of California,
County of Riverside, the Company has also complained that the County's treatment
of the Company is in violation of our civil rights under U.S.C. Section 1983 and
that its due process rights were being affected because the County was
improperly administering the odor protocol in the CUP. The County alleges that
the odor "violations," as well as the Company's actions in not reducing intake,
could reduce the term of the CUP to January 2002. The Company disagrees and has
challenged the County's position in the lawsuit.

     No trial date has been set at this time. The case is currently subject to
an agreed stay and we continue to operate under the existing CUP while the
parties explore settlement. The parties have executed a Memorandum of
Understanding signed by the Board of Supervisors of the County which provides
for a plan to relocate the compost facility to a piece of land owned by the
County.

     Whether or not the parties reach settlement based on the terms of the
Memorandum of Understanding, the site may be closed, we may incur additional
costs related to contractual agreements, relocation and site closure, as well as
the need to obtain new permits (including some from the County) at a new site.
If the Company is unsuccessful in its efforts, goodwill and certain assets may
be impaired. Total goodwill associated with the operations is approximately
$13,843,000 at December 31, 2001. The financial impact associated with a site
closure cannot be reasonably estimated at this time. Although we feel that our
case is meritorious, the ultimate outcome cannot be determined at this time.

  Reliance Insurance

     For the 24 months ended October 31, 2000 (the "Reliance Coverage Period"),
the Company insured certain risks, including automobile, general liability, and
worker's compensation, with Reliance National Indemnity Company ("Reliance")
through policies totaling $26 million in annual coverage. On May 29, 2001, the
Commonwealth Court of Pennsylvania entered an order appointing the Pennsylvania
Insurance Commissioner as Rehabilitator and directing the Rehabilitator to take
immediate possession of Reliance's assets and business. On June 11, 2001,
Reliance's ultimate parent, Reliance Group Holdings, Inc., filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code of 1978, as amended. On
October 3, 2001, the Pennsylvania Insurance Commissioner removed Reliance from
rehabilitation and placed it into liquidation.

     On January 21, 2000, several plaintiffs filed suit in the District Court of
Jackson County, Texas, (the "Lopez Suit") against a wholly owned subsidiary of
the Company, Synagro of Texas-CDR, Inc. The Lopez Suit was later amended to name
the Company as an additional defendant. The suit arises out of an automobile
accident involving a vehicle operated by Synagro of Texas-CDR, Inc., in which
one person was killed and two others were injured. The Lopez Suit was set for
trial in November 2001; however, on October 16, 2001, as a result of the Texas
Insurance Commissioner's finding that Reliance was impaired, a notice of an
automatic 180-day stay was filed in the Lopez Suit. The stay will expire April
5, 2002, and the Lopez Suit is set for trial on May 13, 2002, with a backup
trial setting of June 17, 2002. The Lopez plaintiffs are seeking unspecified
damages from the Company and its affiliates. On November 13, 2001, the Company
filed a petition for intervention in the Pennsylvania Court requesting that the
Court approve and order Reliance to fund an $11.9 million settlement that
Reliance had proposed regarding the Lopez Suit (the "Intervention Action").

     The Company is vigorously defending itself against this lawsuit. In
addition, other third parties have asserted claims and/or brought suit against
the Company and its affiliates related to alleged acts or omissions occurring
during the Reliance Coverage Period. It is possible, depending on the outcome of
the AON Suit (discussed below) and the Intervention Action, and possible claims
made with the Texas Property and

                                        55
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Casualty Insurance Guaranty Association, that the Company will have no, or
insufficient, insurance funds available to pay any potential losses. There are
uncertainties relating to (1) the Company's ultimate liability, if any, for
damages in the Lopez Suit or the other cases arising during the covered period;
(2) the availability of the insurance coverage; (3) the potential for recovery
from the AON Suit; (4) the Intervention Action; and (5) possible recovery from
the Texas Property and Casualty Insurance Guaranty Association. Based upon
information currently available, the Company has estimated that its net probable
exposure for unpaid insurance claims and other costs for which coverage may not
be available due to the pending liquidation of Reliance is $1.9 million and,
accordingly, have recorded a special charge of $2.2 million in its December 31,
2001, financial statements to record the estimated exposure for this matter and
related legal expenses. Although the Company believes $1.9 million of the charge
represents its current probable exposure related to the Reliance matter, the
final resolution could be substantially different from the amount recorded.

  AON

     On October 4, 2001, the Company filed suit in the 24th Judicial District
Court of Jackson County, Texas, against its insurance broker, AON Risk Services
of Texas, Inc. ("AON"), and the several insurance companies that reinsured the
policies issued by Reliance (the "Reinsurers") (the "AON Suit"). In the AON
Suit, the Company is seeking a judgment against AON for any and all sums that
the Company may become liable for as a result of any settlement of, or the entry
of any judgment in, the Lopez Suit, and any and all costs associated with
defense thereof, as a result of the Company's assertion of negligence by AON in
placing the entirety of the Company's insurance coverage with Reliance and AON's
failure to obtain "cut through endorsements" to the Reliance policies which
would enable the Company to proceed directly against the Reinsurers. The Company
is also seeking a declaratory judgment against the Reinsurers declaring that the
Reinsurers owe the Company a duty of defense and indemnity in the Lopez Suit as
a result of the Reinsurers' participation in the investigation, evaluation, and
handling of the Lopez Suit, as a result of any "cut through endorsements" that
may have been obtained by AON, and by virtue of a "fronting arrangement" whereby
most or all of certain Reliance policies were reinsured. The AON Suit is at an
early stage, and the ultimate outcome of this litigation, including amounts, if
any, that may be recovered by the Company, cannot be determined at this time.

  Other

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

     As of March 13, 2002, Synagro has issued performance bonds of approximately
$115,000,000 and other guarantees. Such financial instruments are given in the
ordinary course of business. Synagro insures the majority of its contractual
obligations through performance bonds.

                                        56
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9)  OTHER COMPREHENSIVE LOSS

     The Company's accumulated comprehensive loss for the twelve months ended
December 31, 2001 is summarized as follows:

<Table>
<S>                                                               <C>
  Cumulative effect of change in accounting for
     derivatives............................................      $(2,058,208)
  Change in fair value of derivatives.......................       (2,200,696)
  Reclassification adjustment to earnings...................          532,466
  Tax benefit of changes in fair value......................        1,416,046
                                                                  -----------
                                                                  $(2,310,392)
                                                                  ===========
</Table>

     There is no difference between net income (loss) and comprehensive income
(loss) for 2000 and 1999.

(10)  STOCKHOLDERS' EQUITY

  COMMON STOCK AND WARRANTS

     On October 7, 1998, the Company issued warrants to purchase 170,000 shares
of Common Stock, in connection with the Senior Credit Agreement (see Note 5).
The warrants are exercisable at $6.00 and expire October 2002. The Company
estimated the fair value of the warrants to be approximately $200,000, which was
recorded as deferred financing costs and additional paid-in capital. These
deferred loan costs are being amortized over the term of the Senior Credit
Agreement.

  PREFERRED STOCK

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

  SERIES C REDEEMABLE PREFERRED STOCK

     On January 26, 2000, the Company authorized 30,000 shares of Series C
Preferred Stock, par value $.002 per share. Upon approval by a majority of the
Company's shareholders and certain other conditions in March 2000, the Series C
Preferred Stock became convertible into Series D Preferred Stock at a rate of
1:1. The Series C Preferred Stock is senior to the Common Stock or any other
equity securities of the Company. The liquidation value of each share of Series
C Preferred Stock is $1,000 per share ("Liquidation Value") plus accrued and
unpaid dividends. Dividends on each share of Series C Preferred Stock shall
accrue on a daily basis at the rate of eight percent per annum on aggregate
Liquidation Value plus accrued and unpaid dividends. The Series C Preferred
Stock has no voting rights. Shares of Series C Preferred Stock are subject to
mandatory redemption by the Company on January 26, 2010, at a price per share
equal to the Liquidation Value plus accrued and unpaid dividends.

     On January 27, 2000, the Company issued 17,358.824 shares of Series C
Preferred Stock, par value $.002 per share, to GTCR Fund VII, L.P. and its
affiliates for $17,358,824. On February 4, 2000, the Company issued 419.400
shares of Series C Preferred Stock to GTCR Fund VII, L.P. and its affiliates for
$419,400. On March 24, 2000, the Company issued 225.000 shares of Series C
Preferred Stock to GTCR Fund VII, L.P. and its affiliates for $225,000. On March
27, 2000, the Company issued 1,260.000 shares of Series C Preferred Stock to
GTCR Fund VII, L.P. and its affiliates for $1,260,000. The proceeds were used
primarily to fund the 2000 Acquisitions. The Company also issued warrants to
GTCR Fund VII, L.P. for a nominal price in connection with the issuance of
subordinated debt, which were immediately converted into
                                        57
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

272.058 shares of Series C Preferred Stock. During April 2000, all Series C
Preferred Stock was converted to Series D Preferred Stock.

  SERIES D REDEEMABLE PREFERRED STOCK

     On January 26, 2000, the Company authorized 32,000 shares of Series D
Preferred Stock, par value $.002 per share. The Series D Preferred Stock is
convertible by the holders into a number of shares of Common Stock computed by
(i) the sum of (a) the number of shares to be converted multiplied by the
Liquidation Value and (b) the amount of accrued and unpaid dividends by (ii) the
conversion price then in effect. The initial conversion price is $2.50 per
share, provided that in order to prevent dilution, the conversion price may be
adjusted. The Series D Preferred Stock is senior to the Common Stock or any
other equity securities of the Company. The liquidation value of each share of
Series D Preferred Stock is $1,000 per share ("Liquidation Value") plus accrued
and unpaid dividends and may be paid in cash or in kind, at the option of the
Company. Dividends on each share of Series D Preferred Stock shall accrue on a
daily basis at the rate of eight percent per annum on the aggregate Liquidation
Value. The Series D Preferred Stock is entitled to one vote per share. Shares of
Series D Preferred Stock are subject to mandatory redemption by the Company on
January 26, 2010, at a price per share equal to the Liquidation Value plus
accrued and unpaid dividends.

     On January 27, 2000, the Company issued 2,641.176 shares of Series D
Preferred Stock to GTCR Fund VII, L.P. and its affiliates for $2,641,176. The
proceeds were used primarily to fund the 2000 Acquisitions. The Company also
issued warrants to GTCR Fund VII, L.P. for a nominal price in connection with
the issuance of subordinated debt, which warrants were immediately converted
into 2,857.143 shares of Series D Preferred Stock.

  SERIES E REDEEMABLE PREFERRED STOCK

     On June 14, 2000, the Company authorized 55,000 shares of Series E
Preferred Stock, par value $.002 per share. The Series E Preferred Stock is
convertible by the holders into a number of shares of Common Stock computed by
(i) the sum of (a) the number of shares to be converted multiplied by the
Liquidation Value and (b) the amount of accrued and unpaid dividends by (ii) the
conversion price then in effect. The initial conversion price is $2.50 per
share, provided that in order to prevent dilution, the conversion price may be
adjusted. The Series E Preferred Stock is senior to the Common Stock or any
other equity securities of the Company. The liquidation value of each share of
Series E Preferred Stock is $1,000 per share ("Liquidation Value") plus accrued
and unpaid dividends and may be paid in cash or in kind, at the option of the
Company. Dividends on each share of Series E Preferred Stock shall accrue on a
daily basis at the rate of eight percent per annum on the aggregate Liquidation
Value. The Series E Preferred Stock is entitled to one vote per share. Shares of
Series E Preferred Stock are subject to mandatory redemption by the Company on
January 26, 2010, at a price per share equal to the Liquidation Value plus
accrued and unpaid dividends.

     On June 15, 2000, the Company issued 6,840 shares of Series E Preferred
Stock to GTCR Fund VII, L.P. and its affiliates for $6,840,000. The proceeds
were used primarily to fund the acquisition of EPIC. The Company also issued
warrants to GTCR for a nominal price in connection with the issuance of
subordinated debt, which warrants were immediately converted into 1,400.00
shares of Series E Preferred Stock.

     On August 14, 2000, the Company issued 25,768.744 shares of Series E
Preferred Stock to GTCR Fund VII, L.P. and its affiliates, and 3,233.788 shares
to TCW/Crescent Lenders. Additionally, the Company issued 2,589.635 and 229.88
warrants to GTCR Fund VII, L.P. and Affiliates, and TCW/Crescent Lenders,
respectively, in connection with the issuance of the preferred stock; these were
immediately converted into Series E Preferred Stock. The proceeds of
approximately $29,003,000 were used to partially fund the Bio Gro acquisition.

                                        58
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  NONCASH BENEFICIAL CONVERSION

     The Series D and Series E Preferred Stock, including Series C Preferred
Stock that were converted into Series D Preferred Stock (see above), the
warrants issued in connection with the subordinated debt (see Note 5) and
warrants issued in connection with the issuance of Preferred Stock, which were
converted into Series C Preferred Stock, Series D Preferred Stock, and Series E
Preferred Stock, are convertible into shares of the Company's common stock at
$2.50 per share. This conversion feature was below the market price at the dates
of issuance. During 2000, the Company recognized the value of this beneficial
conversion feature of approximately $37,045,000 as a noncash beneficial
conversion charge at the dates of issuance. The value of such preferred stock
dividend has no impact on the Company's cash flows, but reduces basic and
diluted earnings applicable to holders of Common Stock. Additionally, future
issuances of Series C, D and E Preferred Stock and warrants related to
subordinated debt may result in future noncash beneficial conversion charges.

  EARNINGS PER SHARE

     Basic earnings per share (EPS) exclude dilution and are computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed by dividing net income before preferred
stock dividends by the total of the weighted average number of common shares
outstanding for the period, the weighted average number of shares of common
stock that would be issued assuming conversion of the Company's preferred stock,
and other common stock equivalents for options and warrants outstanding
determined using the treasury stock method. The difference between basic and
diluted shares for the year ended December 31, 1999, relates to stock options.
Additionally, the Company had 600,824 options that were excluded from the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the Company's common stock.

     Basic and diluted EPS are the same for the year ended December 31, 2000,
because diluted earnings per share was less dilutive than basic earning per
share ("antidilutive"); however, the adjusted number of shares that would be
increased was 17,849,145, of which 17,432,617 related to preferred stock and
approximately 416,528 related to stock options and warrants. The adjusted number
of shares for diluted EPS for the year ended December 31, 2001, includes
30,190,705 shares, of which 30,180,610 related to preferred stock and 10,095
related to stock options and warrants.

                                        59
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes the net income and weighted average shares
to reconcile basic EPS and diluted EPS for the fiscal years 2001, 2000 and 1999:

<Table>
<Caption>
                                                       YEAR ENDED DECEMBER 31,
                                               ----------------------------------------
                                                  2001           2000          1999
                                               -----------   ------------   -----------
<S>                                            <C>           <C>            <C>
NET INCOME:
  Net income (loss) applicable to common
     stock...................................  $10,555,284   $(34,432,654)  $ 1,148,013
  Preferred stock dividends..................    7,247,759             --            --
                                               -----------   ------------   -----------
  Net income (loss) for basic and diluted
     earnings per share......................   17,803,043    (34,432,654)    1,148,013
                                               ===========   ============   ===========
WEIGHTED AVERAGE SHARES:
  Weighted average shares outstanding for
     basic earnings per share................   19,457,389     19,289,720    16,481,399
  Effect of dilutive stock options...........       10,095             --       997,977
  Effect of convertible preferred stock under
     the "if converted" method...............   30,180,610             --            --
                                               -----------   ------------   -----------
  Weighted average shares outstanding for
     diluted earnings per share..............   49,648,094     19,289,720    17,479,376
</Table>

  STOCKHOLDERS' RIGHTS PLAN

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

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

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

     In connection with the issuance of the Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock to GTCR Funds VII, L.P. and its
affiliates, and TCW/Crescent Lenders, the Board of Directors waived the
application of the Rights Plan.

                                        60
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) STOCK OPTION PLANS

     At December 31, 2001, the Company had outstanding stock options granted
under the 2000 Stock Option Plan ("The 2000 Plan") and the Amended and Restated
1993 Stock Option Plan ("the Plan") for officers, directors and key employees of
the Company (collectively, the "Option Plans").

     At December 31, 2001, there were $3,087,000 options for shares of common
stock reserved under the 2000 Plan for future grants. Effective with the
approval of the 2000 Plan, no further grants will be made under the 1993 Plan.
The exercise price of options granted shall be at least 100% (110% for 10% or
greater stockholders) of the fair value of Common Stock on the date of grant.
Options must be granted within ten years from the date of the Plan and become
exercisable at such times as determined by the Plan committee. Options are
exercisable for no longer than five years for certain 10% or greater
stockholders and for no longer than 10 years for others.

     A summary of the Company's stock option plans as of December 31, 2001,
2000, and 1999, and changes during those years is presented below:

  2000 Plan

<Table>
<Caption>
                                                                                  WEIGHTED
                                                                                  AVERAGE
                                                     SHARES UNDER    EXERCISE     EXERCISE
                                                        OPTION      PRICE RANGE    PRICE
                                                     ------------   -----------   --------
<S>                                                  <C>            <C>           <C>
Options outstanding at December 31, 1999...........          --     $       --     $  --
  Granted..........................................     925,000           2.50      2.50
                                                      ---------     ----------     -----
Options outstanding at December 31, 2000...........     925,000           2.50      2.50
  Granted..........................................   4,239,489      2.50-6.31      2.79
  Canceled.........................................    (666,500)          2.50      2.50
                                                      ---------     ----------     -----
Options outstanding at December 31, 2001...........   4,497,989      2.50-6.31      2.77
  Exercisable at December 31, 2001.................     185,000     $     2.50     $2.50
                                                      =========     ==========     =====
</Table>

                                        61
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  1993 Plan

<Table>
<Caption>
                                                                                  WEIGHTED
                                                                                  AVERAGE
                                                     SHARES UNDER    EXERCISE     EXERCISE
                                                        OPTION      PRICE RANGE    PRICE
                                                     ------------   -----------   --------
<S>                                                  <C>            <C>           <C>
Options outstanding at December 31, 1998...........   1,082,773      2.00-8.25      2.86
  Granted..........................................     279,000      3.13-6.31      4.40
  Canceled/expired.................................     (66,778)     2.00-6.94      2.68
  Exercised........................................    (150,333)     2.00-6.31      2.20
                                                      ---------     ----------     -----
Options outstanding at December 31, 1999...........   1,144,662      2.00-8.25      3.33
  Granted..........................................     240,000      2.75-4.50      3.68
  Canceled/expired.................................     (12,600)     3.00-3.25      3.20
  Exercised........................................     (61,789)     2.00-3.00      2.69
                                                      ---------     ----------     -----
Options outstanding at December 31, 2000...........   1,310,273      2.00-8.25      3.34
  Canceled/expired.................................    (173,600)     2.75-8.25      3.48
  Exercised........................................     (41,000)          2.00      2.00
                                                      ---------     ----------     -----
Options outstanding at December 31, 2001...........   1,095,673      2.00-6.31      3.47
Exercisable at December 31, 2001...................   1,042,392     $2.00-6.31     $3.42
                                                      =========     ==========     =====
</Table>

  OTHER OPTIONS

     In addition to options issuable under the above plans, the Company has
other options outstanding to employees and directors of the Company. The options
were issued at exercise prices equal to the fair market value at the grant date
of the options.

     The following summarizes the stock option transactions of the "other"
options:

<Table>
<Caption>
                                                                      WEIGHTED
                                                                      AVERAGE
                                                     SHARES UNDER     EXERCISE     EXERCISE
                                                        OPTION      PRICE RANGE     PRICE
                                                     ------------   ------------   --------
<S>                                                  <C>            <C>            <C>
Options outstanding at December 31, 1998...........   2,692,887     $2.00 - 6.94    $4.08
  Granted..........................................     351,728      3.13 - 6.31     5.62
  Exercised........................................    (141,666)     2.00 - 6.31     2.51
  Canceled.........................................    (178,668)            6.94     6.94
                                                      ---------     ------------    -----
Options outstanding at December 31, 1999...........   2,724,281      2.00 - 6.31     4.18
  Granted..........................................       1,332             4.50     4.50
  Exercised........................................    (200,000)            2.00     2.00
                                                      ---------     ------------    -----
Options outstanding at December 31, 2000...........   2,525,613      2.00 - 6.31     4.35
  Canceled.........................................    (488,659)     2.75 - 6.31     5.01
                                                      ---------     ------------    -----
Options outstanding at December 31, 2001...........   2,036,954      2.00 - 6.31     4.19
  Exercisable at December 31, 2001.................   2,036,954     $2.00 - 6.31    $4.19
                                                      =========     ============    =====
</Table>

     During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, which is effective for fiscal years beginning after
December 15, 1995, establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
SFAS No. 123

                                        62
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

requires, among other things, that compensation cost be calculated for fixed
stock options at the grant date by determining fair value using an
option-pricing model. The Company has the option of recognizing the compensation
cost over the vesting period as an expense in the income statement or making pro
forma disclosures in the notes to the financial statements for employee
stock-based compensation.

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

<Table>
<Caption>
                                                  2001           2000          1999
                                               -----------   ------------   -----------
<S>                                            <C>           <C>            <C>
Net income (loss)
  As reported................................  $10,555,284   $(34,432,654)  $ 1,148,013
Pro forma for SFAS No. 123...................  $ 6,432,514   $(38,297,625)  $(1,979,002)
Diluted earnings (loss) per share-
  As reported................................  $      0.36   $      (1.78)  $       .07
Pro forma for SFAS No. 123...................  $      0.13   $      (1.99)  $      (.11)
</Table>

     The following ranges of options were outstanding as of December 31, 2001:

<Table>
<Caption>
                                                                    WEIGHTED AVERAGE
OUTSTANDING SHARES              EXERCISE PRICE   WEIGHTED AVERAGE   CONTRACTUAL LIFE
UNDER OPTION                        RANGE         EXERCISE PRICE       (IN YEARS)      EXERCISABLE
------------------              --------------   ----------------   ----------------   -----------
<S>                             <C>              <C>                <C>                <C>
5,213,970.....................   $2.00 - 2.99         $2.49               8.29          1,231,636
1,568,326.....................    3.00 - 3.99          3.23               6.66          1,561,666
 251,988......................    4.00 - 5.99          4.55               8.41            149,712
 596,332......................    6.00 - 6.94          6.54               8.28            321,332
</Table>

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model resulting in a weighted average fair
value of $1.49, $2.29 and $4.57 for grants made during the years ended December
31, 2001, 2000 and 1999, respectively. The following assumptions were used for
option grants in 2001, 2000 and 1999, respectively: expected volatility of 82%,
88% and 86%; risk-free interest rates of 4.97%, 6.42% and 5.88%; expected lives
of up to ten years and no expected dividends to be paid. The compensation
expense included in the above pro forma net income data, may not be indicative
of amounts to be included in future periods as the fair value of options granted
prior to 1995 was not determined and the Company expects future grants.

(12)  SPECIAL CHARGES (CREDITS), NET TO OPERATIONS

     In 1999, the Company incurred approximately $1.5 million of charges for
legal, accounting, and financing costs related to the proposed preferred stock
investment and the merger discussion with Azurix, both of which were terminated
by Azurix in October 1999, and several other legal matters related to events
occurring in prior years.

     In 2001, the Company recognized $5.0 million of net special credits, which
includes the $6.1 million nonrecurring special credit from litigation settlement
related to claims between the Company and Azurix Corp. arising from financing
and merger discussions between the companies that were terminated in October
1999 and settled in September 2001, partially offset by the $1.1 million of net
special charges recognized in December 2001. The $1.1 million of net special
charges includes a $2.2 million charge for the Company's estimated net exposure
for unpaid insurance claims and other costs related to the Company's 1998 and
1999 policy periods for which coverage may not be available due to the pending
liquidation status of the Company's previous insurance underwriter, Reliance
Insurance Company, partially offset by a $1.1 million special credit

                                        63
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

resulting from the settlement of the Marshall litigation as such matter was
settled in an amount favorable to prior estimates. See Note 8.

(13)  EMPLOYEE BENEFIT PLANS

     Certain of the Company's subsidiaries sponsor various defined contribution
retirement plans for full-time and some part-time employees. The plans cover
employees at all of the Company's operating locations. The defined contribution
plans provide for contributions ranging from one percent to 15% of covered
employees' salaries or wages. The Company may make a matching contribution as a
percentage set at the end of each plan year. For 2001, 2000 and 1999, the
matching contributions totaled approximately $1,033,000, $223,000 and $34,000,
respectively.

(14)  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     Quarterly financial information for the years ended December 31, 2001 and
2000, is summarized as follows (in thousands, except per share data).

<Table>
<Caption>
                                                      QUARTER ENDED                                 QUARTER ENDED
                                       -------------------------------------------   -------------------------------------------
                                       MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                         2001        2001       2001        2001       2000        2000       2000        2000
                                       ---------   --------   ---------   --------   ---------   --------   ---------   --------
<S>                                    <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
Revenues.............................   $58,795    $65,800     $70,067    $65,534     $18,666    $27,768     $53,513    $63,150
Gross profit.........................    13,219     18,460      18,847     16,751       3,574      8,258      14,734     16,632
Operating income.....................     6,984     12,333      18,218      9,449         472      4,905       9,612     10,356
Net income (loss) applicable to
  common stock.......................    (3,973)     3,443      10,151        934     (24,112)    (2,138)     (8,977)       795
Earnings per share
  Basic..............................     (0.21)      0.18        0.52       0.05       (1.28)     (0.11)      (0.46)      0.04
  Diluted............................     (0.21)      0.11        0.24       0.05       (1.28)     (0.11)      (0.46)      0.04
</Table>

     The sum of the individual quarterly earnings per share amounts do not agree
with year-to-date earnings per share as each quarter's computation is based on
the weighted average number of shares outstanding during the quarter, the
weighted average stock price during the quarter, and the dilutive effects of the
redeemable preferred stock and stock options, if applicable, in each quarter.

                                        64
<PAGE>

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

     None.

                                    PART III

     In accordance with paragraph (3) of General Instruction G to Form 10-K,
Part III of this Report is omitted because the Company has filed with the
Securities and Exchange Commission, not later than 120 days after December 31,
2001, a definitive proxy statement pursuant to Regulation 14A involving the
election of directors. Reference is made to the sections of such proxy statement
entitled "Other Information -- Principal Stockholders", "Other
Information -- Executive Compensation", "Election of Directors -- Management
Stockholdings", and "Other Information -- Certain Transactions", which sections
and subsections of such proxy statement are incorporated herein.

                                        65
<PAGE>

                                    PART IV

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

     (a) Financial Statements and Exhibits:

          1. Financial Statements:

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Certified Public Accountants..........   36
Consolidated balance sheets at December 31, 2001 and 2000...   37
Consolidated statements of earnings for each of the three
  years in the period ended December 31, 2001...............   38
Consolidated statements of cash flows for each of the three
  years in the period ended December 31, 2001...............   39
Consolidated statement of stockholders' equity for each of
  the three years in the period ended December 31, 2001.....   40
Notes to consolidated financial statements..................   42
</Table>

          2. Financial Schedules:

     All financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
financial statements or the notes thereto.

          3. Exhibits:

<Table>
<C>      <C>  <S>
 3.1*     --  Restated Certificate of Incorporation of Synagro
              Technologies, Inc. (the "Company") dated August 16, 1996
              (Incorporated by reference to Exhibit 3.1 to the Company's
              Post-Effective Amendment No. 1 to Registration Statement No.
              33-95028, dated October 25, 1996).
 3.2      --  Amended and Restated Bylaws of the Company dated effective
              January 27, 2000.
 4.1*     --  Specimen Common Stock Certificate of the Company
              (Incorporated by reference to Exhibit 4.1 to the Company's
              Registration Statement on Form 10, dated December 29, 1992).
 4.2*     --  Specimen Warrant Certificate of the Company (Incorporated by
              reference to Exhibit 4.2 to the Company's Registration
              Statement on Form S-1 (No. 33-95028), dated July 27, 1995,
              and as amended).
 4.3*     --  Rights Agreement, dated as of December 20, 1996, between the
              Company and Intercontinental Registrar & Transfer Agency,
              Inc., as Rights Agent, which includes as Exhibit A thereto
              the Synagro Technologies, Inc. Statement of Designations,
              Preferences, Limitations and Relative Rights of its Series A
              Junior Participating Preferred Stock, and as Exhibit C
              thereto the Form of Rights Certificate (Incorporated by
              reference to Exhibit No. 4.1 to Registrant's Registration
              Statement on Form 8-A dated December 27, 1996).
 4.4*     --  Certificate of Designation, Preferences, Rights and
              Limitations of Series B Preferred Stock of Synagro
              Technologies, Inc. (Incorporated by reference to Exhibit 4.4
              to the Company's Annual Report on Form 10-K for the year
              ended 1997).
 4.5*     --  Registration Rights Agreement dated as of March 31, 1998,
              among the Company, Environmental Opportunities Fund, L.P.,
              Environmental Fund (Cayman), L.P. and other purchasers of
              the Company's Series B Preferred Stock as listed on Exhibit
              A thereto (Incorporated by reference to Exhibit 4.5 to the
              Company's Annual Report on Form 10-K for the year ended
              1997).
 4.6*     --  Specimen Series B Preferred Stock Certificate (Incorporated
              by reference to Exhibit 4.6 to the Company's Annual Report
              on Form 10-K for the year ended 1997).
 4.7*     --  Certificate of Designations, Preferences and Rights of
              Series C Convertible Preferred Stock of Synagro
              Technologies, Inc. (Incorporated by reference to Exhibit 2.4
              to the Company's Current Report on Form 8-K, dated February
              17, 2000).
</Table>

                                        66
<PAGE>
<Table>
<C>      <C>  <S>
 4.8*     --  Certificate of Designations, Preferences and Rights of
              Series D Convertible Preferred Stock of Synagro
              Technologies, Inc. (Incorporated by reference to Exhibit 2.5
              to the Company's Current Report on Form 8-K, dated February
              17, 2000).
 4.9*     --  Certificate of Designations, Preferences and Rights of
              Series E Convertible Preferred Stock of Synagro
              Technologies, Inc. (Incorporated by reference to Exhibit 2.3
              to the Company's Current Report on Form 8-K, dated June 30,
              2000).
 4.10*    --  Amended and Restated Warrant Agreement, dated August 14,
              2000, by and between Synagro Technologies, Inc. and GTCR
              Capital Partners, L.P. (Incorporated by reference to Exhibit
              2.6 to the Company's Current Report on Form 8-K, dated
              August 28, 2000).
 4.11*    --  TCW/Crescent Warrant Agreement dated August 14, 2000, by and
              among Synagro Technologies, Inc. and TCW/Crescent Mezzanine
              partners II, L.P., TCW/Crescent Mezzanine Trust II, TCW
              Leveraged Income Trust, L.P., TCW Leveraged Income Trust II,
              L.P., and TCW Leveraged Income Trust IV, L.P. (Incorporated
              by reference to Exhibit 2.5 to the Company's Current Report
              on Form 8-K, dated August 28, 2000).
 4.12*    --  Form of Stock Purchase Warrant (Incorporated by reference to
              Exhibit 2.7 to the Company's Current Report on Form 8-K,
              dated August 28, 2000).
 4.13*    --  Amended and Restated Registration Agreement dated August 14,
              2000, by and between Synagro Technologies, Inc., GTCR Fund
              VII. L.P., GTCR Co-Invest, L.P., GTCR Capital Partners,
              L.P., TCW/Crescent Mezzanine Partners II, L.P., TCW/Crescent
              Mezzanine Trust II, TCW Leveraged Income Trust, L.P., TCW
              Leveraged Income Trust II, L.P., and TCW Leverage Income
              Trust IV, L.P. (Incorporated by reference to Exhibit 2.8 to
              the Company's Current Report on Form 8-K, dated August 28,
              2000).
 4.14*    --  Stockholders Agreement dated August 14, 2000, by and between
              Synagro Technologies Inc., GTCR Fund VII, L.P., GTCR
              Co-Invest, L.P., GTCR Capital Partners, L.P., TCW/Crescent
              Mezzanine Partners II, L.P., TCW/Crescent Mezzanine Trust
              II, TCW Leveraged Income Trust, L.P., TCW Leveraged Income
              Trust II, L.P., and TCW Leveraged Income Trust IV, L.P.
              (Incorporated by reference to Exhibit 2.9 to the Company's
              Current Report on Form 8-K, dated August 28, 2000).
 4.15*    --  Form of TCW/Crescent Warrant (Incorporated by reference to
              Exhibit 2.10 to the Company's Current Report on Form 8-K,
              dated August 28, 2000).
 4.16*    --  Form of GTCR Warrant (Incorporated by reference to Exhibit
              2.11 to the Company's Current Report on Form 8-K, dated
              August 28, 2000).
10.1*     --  Synagro Technologies, Inc. Subscription Agreement, dated as
              of March 31, 1998, among the Company, Environmental
              Opportunities Fund, L.P., Environment Opportunities Fund
              (Cayman), L.P. and other purchasers of the Company's Series
              B Preferred Stock as listed on Exhibit A thereto
              (Incorporated by reference to Exhibit 10.1 to the Company's
              Annual Report on Form 10-K for the year ended 1997).
10.2*     --  Form of Indemnification Agreement (Incorporated by reference
              to Appendix F to the Company's Proxy Statement on Schedule
              14A for Annual Meeting of Stockholders, dated May 9, 1996).
10.3*     --  Amended and Restated 1993 Stock Option Plan dated August 5,
              1996 (Incorporated by reference to Exhibit 4.1 to the
              Company's Registration Statement on Form S-8 (No.
              333-64999), dated September 30, 1998).
10.4*     --  Second Amended and Restated Credit Agreement dated August
              14, 2000, by and among Synagro Technologies, Inc., Bank of
              America, N.A., Suntrust Bank, Key Corporate Capital, Inc.,
              and various other financial institutions (Incorporated by
              reference to Exhibit 2.4 to the Company's Current Report on
              Form 8-K, dated August 28, 2000).
10.5      --  First Amendment dated February 25, 2002 to the Second
              Amended and Restated Credit Agreement dated August 14, 2000,
              by and among Synagro Technologies, Inc., Bank of America,
              N.A., Suntrust Bank, Key Corporate Capital, Inc., and
              various other financial institutions.
</Table>

                                        67
<PAGE>
<Table>
<C>      <C>  <S>
10.6*     --  Agreement and Plan of Merger dated October 20, 1999, by and
              among Synagro Technologies, Inc., RESTEC Acquisition Corp.,
              New England Treatment Company Inc., Paul A. Toretta, Frances
              A. Guerrera, Frances A. Guerrera, as executrix of the Estate
              of Richard J. Guerrera, and Frances A. Guerrera and Robert
              Dionne, as Co-Trustee of the Richard J. Guerrera Revocable
              Trust under Agreement dated November 2, 1998, as amended by
              that certain Letter Amendment dated January 7, 2000, and
              that certain Second Amendment to Agreement and Plan of
              Merger dated January 26, 2000 (Incorporated by reference to
              Exhibit 2.1, 2.3 and 2.4 to the Company's Current Report on
              Form 8-K, dated February 11, 2000).
10.7*     --  Purchase and Sale Agreement dated October 20, 1999, by and
              among Synagro Technologies, Inc., Paul A. Toretta, Eileen
              Toretta, as Trustee of the Paul A. Toretta 1998 Grant,
              Frances A. Guerrera, Frances A. Guerrera, as executrix of
              the Estate of Richard J. Guerrera, and Frances A. Guerrera
              and Robert Dionne, as Co-Trustees of the Richard J. Guerrera
              Revocable Trust under Agreement dated November 2, 1998, as
              amended by that certain Letter Amendment dated January 7,
              2000, and that certain Second Amendment to Purchase and Sale
              Agreement and dated January 26, 2000 (Incorporated by
              reference to Exhibit 2.2, 2.3 and 2.5 to the Company's
              Current Report on Form 8-K, dated February 11, 2000).
10.8*     --  Asset Purchase Agreement dated October 26, 1999, by and
              between Synagro Technologies, Inc. and Whiteford
              Construction Co., Inc. (Incorporated by reference to Exhibit
              2.1 to the Company's Current Report on Form 8-K, dated April
              10, 2000).
10.9*     --  Amendment No. 1 to the Asset Purchase Agreement dated March
              24, 2000, by and between Synagro Technologies, Inc. and
              Whiteford Construction Co., Inc. (Incorporated by reference
              to Exhibit 2.2 to the Company's Current Report on Form 8-K,
              dated April 10, 2000).
10.10*    --  Stock Purchase Agreement dated October 26, 1999, by and
              among Synagro Technologies, Inc., Gerald L. Rehbein and
              Gordon W. Rehbein (Incorporated by reference to Exhibit 2.3
              to the Company's Current Report on Form 8-K, dated April 10,
              2000).
10.11*    --  Amendment No. 2 to the Stock Purchase Agreement dated March
              27, 2000, by and among Synagro Technologies, Inc., Gerald L.
              Rehbein and Gordon W. Rehbein (Incorporated by reference to
              Exhibit 2.5 to the Company's Current Report on Form 8-K,
              dated April 10, 2000).
10.12*    --  Earn Out Agreement dated March 27, 2000, by and among
              Synagro Technologies, Inc., Gerald L. Rehbein and Gordon W.
              Rehbein (Incorporated by reference to Exhibit 2.6 to the
              Company's Current Report on Form 8-K, dated April 10, 2000).
10.13*    --  Stock Purchase Agreement dated March 31, 2000, by and
              between Synagro Technologies, Inc. and Compost America
              Holding Company, Inc. (Incorporated by reference to Exhibit
              2.1 to the Company's Current Report on Form 8-K, dated June
              30, 2000).
10.14*    --  Earn Out Agreement dated June 15, 2000, by and among Synagro
              Technologies, Inc. and Compost America Holding Company, Inc.
              (Incorporated by reference to Exhibit 2.2 to the Company's
              Current Report on Form 8-K, dated June 30, 2000).
10.15*    --  Purchase Agreement dated January 27, 2000, by and between
              Synagro Technologies, Inc. and GTCR Fund VII, L.P.
              (Incorporated by reference to Exhibit 2.1 to the Company's
              Current Report on Form 8-K, dated February 17, 2000).
10.16*    --  Professional Services Agreement, dated January 27, 2000, by
              and between Synagro Technologies, Inc. and GTCR Fund VII,
              L.P. (Incorporated by reference to Exhibit 2.7 to the
              Company's Current Report on Form 8-K, dated February 17,
              2000).
10.17*    --  Amended and Restated Senior Subordinated Loan Agreement,
              dated August 14, 2000, by and among Synagro Technologies,
              Inc., certain subsidiary guarantors, GTCR Capital Partners,
              L.P. and TCW/Crescent Mezzanine Partners II, L.P.,
              TCW/Crescent Mezzanine Trust II, TCW Leveraged Income Trust,
              L.P., TCW Leveraged Income Trust II, L.P., and TCW Leveraged
              Income Trust IV, L.P. (Incorporated by reference to Exhibit
              2.2 to the Company's Current Report on Form 8-K, dated
              February 17, 2000).
10.18*    --  Stock Purchase Agreement dated April 28, 2000, by and among
              Synagro Technologies, Inc., Resco Holdings, Inc., Waste
              Management Holdings, Inc., and Waste Management, Inc.
              (Incorporated by reference to Exhibit 2.1 to the Company's
              Current Report on Form 8-K, dated August 28, 2000).
</Table>

                                        68
<PAGE>
<Table>
<C>      <C>  <S>
10.19*    --  First Amendment to Amended and Restated Credit Agreement
              dated March 6, 2000, by and among Synagro Technologies,
              Inc., Bank of America, N.A., Canadian Imperial Bank of
              Commerce, and various financial institutions (Incorporated
              by reference to Exhibit 10.22 to the Company's Current
              Report on Form 10-K, dated March 30, 2000).
10.20*    --  Amended and Restated Monitoring Agreement dated August 14,
              2000, by and between Synagro Technologies, Inc., GTCR Golder
              Rauner, L.L.C., and TCW/Crescent Mezzanine Partners II,
              L.P., TCW/Crescent Mezzanine Trust II, TCW Leveraged Income
              Trust, L.P., TCW Leveraged Income Trust II, L.P., and TCW
              Leveraged Income Trust IV, L.P. (Incorporated by reference
              to Exhibit 2.12 to the Company's Current Report on Form 8-K,
              dated August 28, 2000).
10.21*    --  Employment Agreement dated February 19, 1999, by and between
              Synagro Technologies, Inc. and Ross M. Patten (Incorporated
              by reference to Exhibit 10.20 to the Company's Current
              Report on Form 10-K/A, dated April 30, 2001); Agreement
              Concerning Employment Rights dated January 27, 2000, by and
              between Synagro Technologies, Inc. and Ross M. Patten
              (Incorporated by reference to Exhibit 2.8 to the Company's
              Current Report on Form 8-K, dated February 17, 2000).(1)
10.22*    --  Employment Agreement dated February 19, 1999, by and between
              Synagro Technologies, Inc. and Mark A. Rome (Incorporated by
              reference to Exhibit 10.21 to the Company's Current Report
              on Form 10-K/A, dated April 30, 2001); Agreement Concerning
              Employment Rights dated January 27, 2000, by and between
              Synagro Technologies, Inc. and Mark A. Rome (Incorporated by
              reference to Exhibit 2.9 to the Company's Current Report on
              Form 8-K, dated February 17, 2000).(1)
10.23*    --  Employment Agreement dated February 19, 1999, by and between
              Synagro Technologies, Inc. and Alvin L. Thomas II
              (Incorporated by reference to Exhibit 10.22 to the Company's
              Current Report on Form 10-K/A, dated April 30, 2001);
              Agreement Concerning Employment Rights dated January 27,
              2000, by and between Synagro Technologies, Inc. and Alvin L.
              Thomas, II (Incorporated by reference to Exhibit 2.10 to the
              Company's Current Report on Form 8-K, dated February 17,
              2000).(1)
10.24*    --  Employment Agreement dated May 10, 1999, by and between
              Synagro Technologies, Inc. and J. Paul Withrow (Incorporated
              by reference to Exhibit 2.11 to the Company's Current Report
              on Form 8-K, dated February 17, 2000); Agreement Concerning
              Employment Rights dated January 27, 2000, by and between
              Synagro Technologies, Inc. and J. Paul Withrow (Incorporated
              by reference to Exhibit 2.12 to the Company's Current Report
              on Form 8-K, dated February 17, 2000).(1)
10.25*    --  Employment Agreement dated January 1, 2000, by and between
              Synagro Technologies, Inc. and Randall S. Tuttle
              (Incorporated by reference to Exhibit 10.24 to the Company's
              Current Report on Form 10-Q, dated November 14, 2001).(1)
10.26     --  Amendment No. 2 to Agreement Concerning Employment Rights
              dated March 1, 2001, by and between Synagro Technologies,
              Inc. and Ross M. Patten.(1)
10.27     --  Amendment No. 2 to Agreement Concerning Employment Rights
              dated March 1, 2001, by and between Synagro Technologies,
              Inc. and Mark A. Rome.(1)
10.28     --  Amendment No. 2 to Agreement Concerning Employment Rights
              dated March 1, 2001, by and between Synagro Technologies,
              Inc. and Alvin L. Thomas, II.(1)
10.29     --  Amendment No. 2 to Agreement Concerning Employment Rights
              dated March 1, 2001, by and between Synagro Technologies,
              Inc. and J. Paul Withrow.(1)
10.30*    --  2000 Stock Option Plan dated October 31, 2000 (Incorporated
              by reference to Exhibit A to the Company's Proxy Statement
              on Schedule 14A for Annual Meeting of Stockholders, dated
              September 28, 2000).(1)
10.31*    --  Employment Agreement dated September 1, 2001, by and between
              Synagro Technologies, Inc. and James P. Carmichael
              (Incorporated by reference to Exhibit 10.30 to the Company's
              Current Report on Form 10-Q, dated November 14, 2001).(1)
10.32     --  Employment Agreement dated March 1, 2002, by and between
              Synagro Technologies, Inc. and Robert Boucher.(1)
</Table>

                                        69
<PAGE>
<Table>
<C>      <C>  <S>
10.33     --  Amendment No. 1 to Employment Agreement dated effective
              February 1, 2002, by and between Synagro Technologies, Inc.
              and Randall S. Tuttle.(1)
21.1      --  Subsidiaries of Synagro Technologies, Inc.
23.1      --  Consent of Arthur Andersen LLP
</Table>

---------------

 *  Incorporated by reference.

(1) Management contract or compensatory plan or agreement.

     (b) Reports on Form 8-K:

     None.

                                        70
<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 report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          SYNAGRO TECHNOLOGIES, INC.
                                          (Registrant)

                                          By:      /s/ ROSS M. PATTEN
                                            ------------------------------------
                                                      Ross M. Patten
                                                Chairman of the Board and
                                                 Chief Executive Officer

Date: March 22, 2002

     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 dates indicated.

<Table>
<Caption>
                    SIGNATURE                                      TITLE                       DATE
                    ---------                                      -----                       ----
<S>     <C>                                          <C>                                  <C>

                /s/ ROSS M. PATTEN                    Chairman of the Board and Chief     March 22, 2002
 ------------------------------------------------      Executive Officer and Director
                  Ross M. Patten                       (Principal Executive Officer)


               /s/ J. PAUL WITHROW                   Chief Financial Officer (Principal   March 22, 2002
 ------------------------------------------------           Accounting Officer)
                 J. Paul Withrow


                /s/ GENE MEREDITH                                 Director                March 22, 2002
 ------------------------------------------------
                  Gene Meredith


           /s/ KENNETH CHUAN-KAI LEUNG                            Director                March 22, 2002
 ------------------------------------------------
             Kenneth Chuan-kai Leung


              /s/ ALFRED TYLER, 2ND                               Director                March 22, 2002
 ------------------------------------------------
                Alfred Tyler, 2nd


               /s/ DAVID A. DONNINI                               Director                March 22, 2002
 ------------------------------------------------
                 David A. Donnini


              /s/ VINCENT J. HEMMER                               Director                March 22, 2002
 ------------------------------------------------
                Vincent J. Hemmer
</Table>

                                        71
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<C>       <C>  <S>
  3.1*     --  Restated Certificate of Incorporation of Synagro
               Technologies, Inc. (the "Company") dated August 16, 1996
               (Incorporated by reference to Exhibit 3.1 to the Company's
               Post-Effective Amendment No. 1 to Registration Statement No.
               33-95028, dated October 25, 1996).
  3.2      --  Amended and Restated Bylaws of the Company dated effective
               January 27, 2000.
  4.1*     --  Specimen Common Stock Certificate of the Company
               (Incorporated by reference to Exhibit 4.1 to the Company's
               Registration Statement on Form 10, dated December 29, 1992).
  4.2*     --  Specimen Warrant Certificate of the Company (Incorporated by
               reference to Exhibit 4.2 to the Company's Registration
               Statement on Form S-1 (No. 33-95028), dated July 27, 1995,
               and as amended).
  4.3*     --  Rights Agreement, dated as of December 20, 1996, between the
               Company and Intercontinental Registrar & Transfer Agency,
               Inc., as Rights Agent, which includes as Exhibit A thereto
               the Synagro Technologies, Inc. Statement of Designations,
               Preferences, Limitations and Relative Rights of its Series A
               Junior Participating Preferred Stock, and as Exhibit C
               thereto the Form of Rights Certificate (Incorporated by
               reference to Exhibit No. 4.1 to Registrant's Registration
               Statement on Form 8-A dated December 27, 1996).
  4.4*     --  Certificate of Designation, Preferences, Rights and
               Limitations of Series B Preferred Stock of Synagro
               Technologies, Inc. (Incorporated by reference to Exhibit 4.4
               to the Company's Annual Report on Form 10-K for the year
               ended 1997).
  4.5*     --  Registration Rights Agreement dated as of March 31, 1998,
               among the Company, Environmental Opportunities Fund, L.P.,
               Environmental Fund (Cayman), L.P. and other purchasers of
               the Company's Series B Preferred Stock as listed on Exhibit
               A thereto (Incorporated by reference to Exhibit 4.5 to the
               Company's Annual Report on Form 10-K for the year ended
               1997).
  4.6*     --  Specimen Series B Preferred Stock Certificate (Incorporated
               by reference to Exhibit 4.6 to the Company's Annual Report
               on Form 10-K for the year ended 1997).
  4.7*     --  Certificate of Designations, Preferences and Rights of
               Series C Convertible Preferred Stock of Synagro
               Technologies, Inc. (Incorporated by reference to Exhibit 2.4
               to the Company's Current Report on Form 8-K, dated February
               17, 2000).
  4.8*     --  Certificate of Designations, Preferences and Rights of
               Series D Convertible Preferred Stock of Synagro
               Technologies, Inc. (Incorporated by reference to Exhibit 2.5
               to the Company's Current Report on Form 8-K, dated February
               17, 2000).
  4.9*     --  Certificate of Designations, Preferences and Rights of
               Series E Convertible Preferred Stock of Synagro
               Technologies, Inc. (Incorporated by reference to Exhibit 2.3
               to the Company's Current Report on Form 8-K, dated June 30,
               2000).
  4.10*    --  Amended and Restated Warrant Agreement, dated August 14,
               2000, by and between Synagro Technologies, Inc. and GTCR
               Capital Partners, L.P. (Incorporated by reference to Exhibit
               2.6 to the Company's Current Report on Form 8-K, dated
               August 28, 2000).
  4.11*    --  TCW/Crescent Warrant Agreement dated August 14, 2000, by and
               among Synagro Technologies, Inc. and TCW/Crescent Mezzanine
               partners II, L.P., TCW/Crescent Mezzanine Trust II, TCW
               Leveraged Income Trust, L.P., TCW Leveraged Income Trust II,
               L.P., and TCW Leveraged Income Trust IV, L.P. (Incorporated
               by reference to Exhibit 2.5 to the Company's Current Report
               on Form 8-K, dated August 28, 2000).
  4.12*    --  Form of Stock Purchase Warrant (Incorporated by reference to
               Exhibit 2.7 to the Company's Current Report on Form 8-K,
               dated August 28, 2000).
  4.13*    --  Amended and Restated Registration Agreement dated August 14,
               2000, by and between Synagro Technologies, Inc., GTCR Fund
               VII. L.P., GTCR Co-Invest, L.P., GTCR Capital Partners,
               L.P., TCW/Crescent Mezzanine Partners II, L.P., TCW/Crescent
               Mezzanine Trust II, TCW Leveraged Income Trust, L.P., TCW
               Leveraged Income Trust II, L.P., and TCW Leverage Income
               Trust IV, L.P. (Incorporated by reference to Exhibit 2.8 to
               the Company's Current Report on Form 8-K, dated August 28,
               2000).
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<C>       <C>  <S>
  4.14*    --  Stockholders Agreement dated August 14, 2000, by and between
               Synagro Technologies Inc., GTCR Fund VII, L.P., GTCR
               Co-Invest, L.P., GTCR Capital Partners, L.P., TCW/Crescent
               Mezzanine Partners II, L.P., TCW/Crescent Mezzanine Trust
               II, TCW Leveraged Income Trust, L.P., TCW Leveraged Income
               Trust II, L.P., and TCW Leveraged Income Trust IV, L.P.
               (Incorporated by reference to Exhibit 2.9 to the Company's
               Current Report on Form 8-K, dated August 28, 2000).
  4.15*    --  Form of TCW/Crescent Warrant (Incorporated by reference to
               Exhibit 2.10 to the Company's Current Report on Form 8-K,
               dated August 28, 2000).
  4.16*    --  Form of GTCR Warrant (Incorporated by reference to Exhibit
               2.11 to the Company's Current Report on Form 8-K, dated
               August 28, 2000).
 10.1*     --  Synagro Technologies, Inc. Subscription Agreement, dated as
               of March 31, 1998, among the Company, Environmental
               Opportunities Fund, L.P., Environment Opportunities Fund
               (Cayman), L.P. and other purchasers of the Company's Series
               B Preferred Stock as listed on Exhibit A thereto
               (Incorporated by reference to Exhibit 10.1 to the Company's
               Annual Report on Form 10-K for the year ended 1997).
 10.2*     --  Form of Indemnification Agreement (Incorporated by reference
               to Appendix F to the Company's Proxy Statement on Schedule
               14A for Annual Meeting of Stockholders, dated May 9, 1996).
 10.3*     --  Amended and Restated 1993 Stock Option Plan dated August 5,
               1996 (Incorporated by reference to Exhibit 4.1 to the
               Company's Registration Statement on Form S-8 (No.
               333-64999), dated September 30, 1998).
 10.4*     --  Second Amended and Restated Credit Agreement dated August
               14, 2000, by and among Synagro Technologies, Inc., Bank of
               America, N.A., Suntrust Bank, Key Corporate Capital, Inc.,
               and various other financial institutions (Incorporated by
               reference to Exhibit 2.4 to the Company's Current Report on
               Form 8-K, dated August 28, 2000).
 10.5      --  First Amendment dated February 25, 2002 to the Second
               Amended and Restated Credit Agreement dated August 14, 2000,
               by and among Synagro Technologies, Inc., Bank of America,
               N.A., Suntrust Bank, Key Corporate Capital, Inc., and
               various other financial institutions.
 10.6*     --  Agreement and Plan of Merger dated October 20, 1999, by and
               among Synagro Technologies, Inc., RESTEC Acquisition Corp.,
               New England Treatment Company Inc., Paul A. Toretta, Frances
               A. Guerrera, Frances A. Guerrera, as executrix of the Estate
               of Richard J. Guerrera, and Frances A. Guerrera and Robert
               Dionne, as Co-Trustee of the Richard J. Guerrera Revocable
               Trust under Agreement dated November 2, 1998, as amended by
               that certain Letter Amendment dated January 7, 2000, and
               that certain Second Amendment to Agreement and Plan of
               Merger dated January 26, 2000 (Incorporated by reference to
               Exhibit 2.1, 2.3 and 2.4 to the Company's Current Report on
               Form 8-K, dated February 11, 2000).
 10.7*     --  Purchase and Sale Agreement dated October 20, 1999, by and
               among Synagro Technologies, Inc., Paul A. Toretta, Eileen
               Toretta, as Trustee of the Paul A. Toretta 1998 Grant,
               Frances A. Guerrera, Frances A. Guerrera, as executrix of
               the Estate of Richard J. Guerrera, and Frances A. Guerrera
               and Robert Dionne, as Co-Trustees of the Richard J. Guerrera
               Revocable Trust under Agreement dated November 2, 1998, as
               amended by that certain Letter Amendment dated January 7,
               2000, and that certain Second Amendment to Purchase and Sale
               Agreement and dated January 26, 2000 (Incorporated by
               reference to Exhibit 2.2, 2.3 and 2.5 to the Company's
               Current Report on Form 8-K, dated February 11, 2000).
 10.8*     --  Asset Purchase Agreement dated October 26, 1999, by and
               between Synagro Technologies, Inc. and Whiteford
               Construction Co., Inc. (Incorporated by reference to Exhibit
               2.1 to the Company's Current Report on Form 8-K, dated April
               10, 2000).
 10.9*     --  Amendment No. 1 to the Asset Purchase Agreement dated March
               24, 2000, by and between Synagro Technologies, Inc. and
               Whiteford Construction Co., Inc. (Incorporated by reference
               to Exhibit 2.2 to the Company's Current Report on Form 8-K,
               dated April 10, 2000).
 10.10*    --  Stock Purchase Agreement dated October 26, 1999, by and
               among Synagro Technologies, Inc., Gerald L. Rehbein and
               Gordon W. Rehbein (Incorporated by reference to Exhibit 2.3
               to the Company's Current Report on Form 8-K, dated April 10,
               2000).
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<C>       <C>  <S>
 10.11*    --  Amendment No. 2 to the Stock Purchase Agreement dated March
               27, 2000, by and among Synagro Technologies, Inc., Gerald L.
               Rehbein and Gordon W. Rehbein (Incorporated by reference to
               Exhibit 2.5 to the Company's Current Report on Form 8-K,
               dated April 10, 2000).
 10.12*    --  Earn Out Agreement dated March 27, 2000, by and among
               Synagro Technologies, Inc., Gerald L. Rehbein and Gordon W.
               Rehbein (Incorporated by reference to Exhibit 2.6 to the
               Company's Current Report on Form 8-K, dated April 10, 2000).
 10.13*    --  Stock Purchase Agreement dated March 31, 2000, by and
               between Synagro Technologies, Inc. and Compost America
               Holding Company, Inc. (Incorporated by reference to Exhibit
               2.1 to the Company's Current Report on Form 8-K, dated June
               30, 2000).
 10.14*    --  Earn Out Agreement dated June 15, 2000, by and among Synagro
               Technologies, Inc. and Compost America Holding Company, Inc.
               (Incorporated by reference to Exhibit 2.2 to the Company's
               Current Report on Form 8-K, dated June 30, 2000).
 10.15*    --  Purchase Agreement dated January 27, 2000, by and between
               Synagro Technologies, Inc. and GTCR Fund VII, L.P.
               (Incorporated by reference to Exhibit 2.1 to the Company's
               Current Report on Form 8-K, dated February 17, 2000).
 10.16*    --  Professional Services Agreement, dated January 27, 2000, by
               and between Synagro Technologies, Inc. and GTCR Fund VII,
               L.P. (Incorporated by reference to Exhibit 2.7 to the
               Company's Current Report on Form 8-K, dated February 17,
               2000).
 10.17*    --  Amended and Restated Senior Subordinated Loan Agreement,
               dated August 14, 2000, by and among Synagro Technologies,
               Inc., certain subsidiary guarantors, GTCR Capital Partners,
               L.P. and TCW/Crescent Mezzanine Partners II, L.P.,
               TCW/Crescent Mezzanine Trust II, TCW Leveraged Income Trust,
               L.P., TCW Leveraged Income Trust II, L.P., and TCW Leveraged
               Income Trust IV, L.P. (Incorporated by reference to Exhibit
               2.2 to the Company's Current Report on Form 8-K, dated
               February 17, 2000).
 10.18*    --  Stock Purchase Agreement dated April 28, 2000, by and among
               Synagro Technologies, Inc., Resco Holdings, Inc., Waste
               Management Holdings, Inc., and Waste Management, Inc.
               (Incorporated by reference to Exhibit 2.1 to the Company's
               Current Report on Form 8-K, dated August 28, 2000).
 10.19*    --  First Amendment to Amended and Restated Credit Agreement
               dated March 6, 2000, by and among Synagro Technologies,
               Inc., Bank of America, N.A., Canadian Imperial Bank of
               Commerce, and various financial institutions (Incorporated
               by reference to Exhibit 10.22 to the Company's Current
               Report on Form 10-K, dated March 30, 2000).
 10.20*    --  Amended and Restated Monitoring Agreement dated August 14,
               2000, by and between Synagro Technologies, Inc., GTCR Golder
               Rauner, L.L.C., and TCW/Crescent Mezzanine Partners II,
               L.P., TCW/Crescent Mezzanine Trust II, TCW Leveraged Income
               Trust, L.P., TCW Leveraged Income Trust II, L.P., and TCW
               Leveraged Income Trust IV, L.P. (Incorporated by reference
               to Exhibit 2.12 to the Company's Current Report on Form 8-K,
               dated August 28, 2000).
 10.21*    --  Employment Agreement dated February 19, 1999, by and between
               Synagro Technologies, Inc. and Ross M. Patten (Incorporated
               by reference to Exhibit 10.20 to the Company's Current
               Report on Form 10-K/A, dated April 30, 2001); Agreement
               Concerning Employment Rights dated January 27, 2000, by and
               between Synagro Technologies, Inc. and Ross M. Patten
               (Incorporated by reference to Exhibit 2.8 to the Company's
               Current Report on Form 8-K, dated February 17, 2000).(1)
 10.22*    --  Employment Agreement dated February 19, 1999, by and between
               Synagro Technologies, Inc. and Mark A. Rome (Incorporated by
               reference to Exhibit 10.21 to the Company's Current Report
               on Form 10-K/A, dated April 30, 2001); Agreement Concerning
               Employment Rights dated January 27, 2000, by and between
               Synagro Technologies, Inc. and Mark A. Rome (Incorporated by
               reference to Exhibit 2.9 to the Company's Current Report on
               Form 8-K, dated February 17, 2000).(1)
 10.23*    --  Employment Agreement dated February 19, 1999, by and between
               Synagro Technologies, Inc. and Alvin L. Thomas II
               (Incorporated by reference to Exhibit 10.22 to the Company's
               Current Report on Form 10-K/A, dated April 30, 2001);
               Agreement Concerning Employment Rights dated January 27,
               2000, by and between Synagro Technologies, Inc. and Alvin L.
               Thomas, II (Incorporated by reference to Exhibit 2.10 to the
               Company's Current Report on Form 8-K, dated February 17,
               2000).(1)
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                                 DESCRIPTION
-------                                -----------
<C>       <C>  <S>
 10.24*    --  Employment Agreement dated May 10, 1999, by and between
               Synagro Technologies, Inc. and J. Paul Withrow (Incorporated
               by reference to Exhibit 2.11 to the Company's Current Report
               on Form 8-K, dated February 17, 2000); Agreement Concerning
               Employment Rights dated January 27, 2000, by and between
               Synagro Technologies, Inc. and J. Paul Withrow (Incorporated
               by reference to Exhibit 2.12 to the Company's Current Report
               on Form 8-K, dated February 17, 2000).(1)
 10.25*    --  Employment Agreement dated January 1, 2000, by and between
               Synagro Technologies, Inc. and Randall S. Tuttle
               (Incorporated by reference to Exhibit 10.24 to the Company's
               Current Report on Form 10-Q, dated November 14, 2001).(1)
 10.26     --  Amendment No. 2 to Agreement Concerning Employment Rights
               dated March 1, 2001, by and between Synagro Technologies,
               Inc. and Ross M. Patten.(1)
 10.27     --  Amendment No. 2 to Agreement Concerning Employment Rights
               dated March 1, 2001, by and between Synagro Technologies,
               Inc. and Mark A. Rome.(1)
 10.28     --  Amendment No. 2 to Agreement Concerning Employment Rights
               dated March 1, 2001, by and between Synagro Technologies,
               Inc. and Alvin L. Thomas, II.(1)
 10.29     --  Amendment No. 2 to Agreement Concerning Employment Rights
               dated March 1, 2001, by and between Synagro Technologies,
               Inc. and J. Paul Withrow.(1)
 10.30*    --  2000 Stock Option Plan dated October 31, 2000. Incorporated
               by reference to Exhibit A to the Company's Proxy Statement
               on Schedule 14A for Annual Meeting of Stockholders, dated
               September 28, 2000.(1)
 10.31*    --  Employment Agreement dated September 1, 2001, by and between
               Synagro Technologies, Inc. and James P. Carmichael
               (Incorporated by reference to Exhibit 10.30 to the Company's
               Current Report on Form 10-Q, dated November 14, 2001).(1)
 10.32     --  Employment Agreement dated March 1, 2002, by and between
               Synagro Technologies, Inc. and Robert Boucher.(1)
 10.33     --  Amendment No. 1 to Employment Agreement dated effective
               February 1, 2002, by and between Synagro Technologies, Inc.
               and Randall S. Tuttle.(1)
 21.1      --  Subsidiaries of Synagro Technologies, Inc.
 23.1      --  Consent of Arthur Andersen LLP
</Table>

---------------

 *  Incorporated by reference.

(1) Management contract or compensatory plan or agreement.