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

                                    FORM 10-K

|X|                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

                       FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                       OR

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

                   FOR THE TRANSITION PERIOD FROM           TO         .

                         COMMISSION FILE NUMBER 0-21054

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

                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)

  Internet Website -- www.synagro.com

               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. | |

      Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Securities Exchange Act of 1934 Rule 12b-2).Yes | | No |X|.

      The number of shares outstanding of the Registrant's Common Stock as of
June 28, 2002, was 19,476,781. The aggregate market value of the 14,995,502
shares of Registrant's Common Stock held by nonaffiliates of the Registrant,
based on the market price of the Common Stock of $3.20 per share as of June 28,
2002, was approximately $47,985,606.

      The number of shares outstanding of the Registrant's Common Stock as of
March 6, 2003, was 19,775,821. The aggregate market value of the 18,440,140
shares of the Registrant's Common Stock held by nonaffiliates of the Registrant,
based on the market price of the Common Stock of $2.25 per share as of March 6,
2003, was approximately $41,490,315.

                       DOCUMENTS INCORPORATED BY REFERENCE

      The Proxy Statement for the 2003 Annual Meeting of Stockholders of the
Registrant (Sections entitled "Election of Directors," "Management
Stockholdings," "Principal Stockholders," "Executive Compensation," "Option
Exercises and Year End Values," "Employment Agreements," "Equity Compensation
Plans," "Compensation Committee Report," "Common Stock Performance Graph" 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 water and 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 nonhazardous 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 24 mobile dewatering
units, and over 200 small wastewater treatment plants (ranging from 500 gallons
per day to 500,000 gallons per day).

      Approximately 95 percent of our 2002 revenue was generated through more
than 210 contracts that range from one to twenty-five years in length. These
contracts have an estimated remaining contract value, which we call backlog, of
approximately $2 billion, which represents more than seven times our 2002
revenue (see "-- Backlog" for a more detailed discussion). 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 ten years remaining on their current contracts, including renewal
options. In 2002, we experienced a contract retention rate (both renewals and
rebids) of approximately 87 percent.

      We benefit from significant customer diversification, with our single
largest customer accounting for 15 percent of our 2002 annual revenues, and our
top ten customers accounting for approximately 35 percent of our 2002 revenues.
For the year ended December 31, 2002, our municipal and industrial customers
accounted for approximately 88 percent and 6 percent, 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 by-product 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.

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 bacteria, or pathogen
and insect and rodent attraction, or vector attraction reduction requirements
contained in the Part 503 Regulations. This classification is determined by the


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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 percent of these
biosolids volumes are currently beneficially reused, growing to 70 percent by
2010. An independent 2000 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 that, based on conversations with consulting
engineers, up to 40 percent 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 percent of these expenditures are associated with
the management of residuals, related annual 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.

MARKET GROWTH

      We believe the estimated $11.6 billion wastewater residuals industry will
grow at four to five percent 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 the
      desire of cities to annex surrounding areas increases, POTWs will treat
      more wastewater. It is expected that the amount of wastewater managed on a
      daily


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      basis by municipal wastewater treatment plants will increase more than 40
      percent 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 2000 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 the higher upfront processing costs of Class A
      programs may become attractive to generators. Production of Class A
      pellets offers 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
      municipalities and 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.


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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 2002, we marketed approximately 61 percent 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.

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 ten 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 6, 2003, we had a
      bonding capacity of approximately $182 million with approximately $127
      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 $488 million and total
      capitalization of $417 million as of December 31, 2002, 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:


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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.

            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 believe we can typically provide this necessary
      service below the customer's internal operating costs. As a result, we now
      operate more than 24 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.

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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      1. Design and Build Services. We designed, built, and operate four heat
drying and pelletization facilities and four composting facilities. We currently
have three new drying facilities under permit and construction that we will
operate when they are completed. We operate three incineration facilities, two
of which we significantly upgraded and one that we built. Lastly, we have
designed, built, and operate over 20 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 outsource 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 200 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 performs
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 24 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
("OPMG") 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. When
a totally enclosed facility is not required, aerated static pile composting
offers economic advantages. 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.

      We built and currently operate three drying and pelletization facilities
with municipalities, including two in Baltimore, Maryland, and one in New York,
New York. In addition, we operate one pelletizing plant in Hagerstown, Maryland.
We are currently in the permitting and construction phases of three drying and
pelletization facilities for Pinellas County, Florida; Honolulu, Hawaii; and
Sacramento, California, which we will operate when the facilities are completed.

      9. Product Marketing. In 1992, we formed the OPMG to market composted and
pelletized biosolids from our own facilities as well as municipally owned
facilities. OPMG currently markets in excess of 1,000,000 cubic yards of compost
and 158,000 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


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marketing end-use wastewater residuals products, such as compost and heat-dried
pellets used for fertilizers, and in 2002 we marketed approximately 61 percent
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
nontoxic 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, and the 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 95 percent of our 2002 revenue was generated through more
than 210 contracts with original terms that range from one to twenty-five years
in length. These contracts have a backlog of approximately $2 billion, of which
we estimate approximately $205 million will be realized in 2003. Our December
31, 2002, backlog represents more than seven times our 2002 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 ten years remaining on their current contracts, including renewal
options. In addition, we have experienced a historical contract renewal rate of
approximately 87 percent (see "-- Backlog" for a more detailed discussion).

      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 twenty years, excluding renewal options, and
typically include provisions such as put-or-pay arrangements and estimated
adjustments for 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 by 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.


                                       9
<PAGE>

      Our largest contract is with the New York Department of Environmental
Protection. The contract relates to the New York Organic Fertilizer Company
dryer and pelletizer facility and was assumed in connection with the Bio Gro
acquisition in 1999. The contract provides for the removal, transport and
processing of wastewater residuals into Class A product that is transported,
marketed and sold to the fertilizer industry for beneficial reuse. The contract
has a term of 15 years and expires in June 2013. The contract includes
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 treatment, and documentation for tracking
purposes. In addition, the contract includes a provision that allows for the New
York Department of Environmental Protection to terminate the contract. If,
however, the New York Department of Environmental Protection terminates the
contract within the first five years, the New York Department of Environmental
Protection would be required to pay liquidated damages to us.

BACKLOG

      At December 31, 2002, our estimated remaining contract value, which we
call backlog, was $2 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, 2002, would have been $1.4
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 that has developed, and is
implementing, a comprehensive internal growth strategy 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 percent renewal rate on expiring service contracts. For 2002, we achieved
a renewal rate of approximately 87 percent. 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 responds 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-term
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.

      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

      In August 2002, we purchased Earthwise Organics, Inc. and Earthwise
Trucking (collectively, "Earthwise"), a Class A biosolids and manure composting
and marketing company that serves the Western United States market.
Historically, acquisitions have been an important part of our growth strategy.
We completed 17 acquisitions from 1998 through 2002, highlighted by our
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. 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:


                                       10
<PAGE>

<TABLE>
<CAPTION>
      COMPANY                                                     DATE ACQUIRED      U.S. 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 Co. .........        March 2000         Mid-Atlantic           Rail Transportation
</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, such as
Earthwise, 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 in several ways, 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 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.

      In many cases, municipalities and industries choose not to outsource their
residuals management needs. In the municipal market, we estimate that up to 60
percent 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;


                                       11
<PAGE>

(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.

      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. Our patents have durations from 2008 to 2020. While
there is no single patent that is material to our business, we believe that our
aggregate patents are important to our prospects for future success. However, we
cannot be certain that future patent applications will be issued 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 6, 2003, we had approximately 960 full-time employees. These
employees include: 6 executive officers,


                                       12
<PAGE>

11 nonexecutive officers, 112 operations managers, 65 environmental specialists,
51 maintenance personnel, 175 drivers and transportation personnel, 90 land
application specialists, 302 general operation specialists, 42 sales employees
and 106 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 35 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;

      -     property damage; and

      -     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 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-funded exposure for health insurance 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; Sacramento, California; Denville, New
Jersey; Millersville, Maryland; Baltimore, Maryland, and have 16 district
offices throughout the United States.

      We own and operate three drying and pelletization facilities; one located
in New York, New York, and two in Baltimore, Maryland. We also operate one
pelletizing plant in Hagerstown, Maryland, and 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


                                       13
<PAGE>

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

      The Company leases land and operates a composting facility in Riverside
County, California, under a conditional use permit ("CUP") that expires on
January 1, 2010. The CUP allows for a reduction in material intake and CUP term
in the event of noncompliance with the CUP's terms and conditions. In response
to alleged noncompliance due to excessive odor, on or about June 22, 1999, the
Riverside County Board of Supervisors attempted to reduce the Company's intake
of biosolids from 500 tons per day to 250 tons per day. The Company believes
that this was not an authorized action by the Board of Supervisors. On September
15, 1999, the Company was granted a preliminary injunction restraining and
enjoining the County of Riverside ("County") from restricting the Company's
intake of biosolids at its Riverside composting facility.

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

      No trial date has been set at this time. The Company continues to operate
under the existing CUP while the parties explore settlement. The next status
conference before the Court is scheduled for July 7, 2003. Proposed terms of
settlement set forth in an expired Memorandum of Understanding with the County
serve as the basis for continuing settlement discussions, which terms include a
plan to relocate the compost facility to a piece of land owned by the County or
other acceptable sites. While the County has rejected the Company's most recent
offer to relocate, on October 22, 2002, the County approved a request by the
Santa Ana Watershed Project Authority ("SAWPA") to take over the process of
finding a new site and competitively negotiating with a company to operate the
site. This action provided the basis for a stay of the litigation which the
County approved on January 7, 2003. The stay is for six months, until July 7,
2003. During this time, the County has asked that SAWPA show progress in
developing a new facility. If SAWPA shows progress toward a replacement
operation, the County and the Company will begin discussions toward a
settlement, which will allow operations to continue at the existing facility
until such time as a new SAWPA-owned or endorsed facility becomes operational.
Development of the SAWPA facility will take approximately three years.

      Whether or not the parties reach settlement based on the terms of the
expired Memorandum of Understanding or otherwise, the site may be closed. The
Company may incur additional costs related to contractual agreements, relocation
and site closure, as well as the need to obtain new permits (including some from
the County) at a new site. The Company has incurred approximately $645,000 of
project costs in connection with a new facility, which is included in property
at December 31, 2002. If the Company is unsuccessful in its efforts to either
settle or prosecute the litigation, goodwill and certain assets may be impaired.
Total goodwill associated with the reporting unit is approximately $20.6 million
at December 31, 2002. The financial impact associated with site closure prior to
the expiration of our CUP cannot be reasonably estimated at this time. Although
the Company feels that its case is meritorious, the ultimate outcome of the
litigation cannot be determined at this time.


                                       14
<PAGE>

RELIANCE INSURANCE

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

      Claims have been asserted and/or brought against the Company and its
affiliates related to alleged acts or omissions occurring during the Reliance
Coverage period. It is possible, depending on the outcome of possible claims
made with various state insurance guaranty funds, that the Company will have no,
or insufficient, insurance funds available to pay any potential losses. There
are uncertainties relating to the Company's ultimate liability, if any, for
damages arising during the Reliance Coverage Period, the availability of the
insurance coverage, and possible recovery for state insurance guaranty funds.

      In June 2002, the Company settled one such claim that was pending in
Jackson County, Texas. The full amount of the settlement was paid by insurance
proceeds; however, as part of the settlement, the Company agreed to reimburse
the Texas Property and Casualty Insurance Guaranty Association an amount ranging
from $625,000 to $2,500,000 depending on future circumstances. The Company
estimated its exposure at approximately $1.9 million for the potential
reimbursement to the Texas Property and Casualty Insurance Guaranty Association
for costs associated with the settlement of this case and for unpaid insurance
claims and other costs for which coverage may not be available due to the
pending liquidation of Reliance. The Company previously 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. The Company
believes remaining accruals of approximately $1 million as of December 31, 2002,
are adequate to provide for its exposures. The final resolution of these
exposures 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 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, Synagro is seeking a judgment against AON for any and all sums that it 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. Synagro is also seeking a
declaratory judgment against the Reinsurers declaring that the Reinsurers owe
Synagro 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 the Company
that have arisen in the normal course of business and relate mainly to matters
of environmental, personal injury and property damage. The outcome of these
matters is not presently determinable but, in the opinion of our management, the
ultimate resolution of these matters will not have a material adverse effect on
the consolidated financial condition, results of operations or cash flows of the
Company.

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


                                       15
<PAGE>

COMMON STOCK PRICE RANGE

      The Company's Common Stock is listed on the Nasdaq Small Cap 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 2002 and 2001, as reported by the
Nasdaq.

<TABLE>
                                                     HIGH        LOW
                                                   --------    --------
<S>                                                <C>         <C>
                  FISCAL YEAR 2002
                  First Quarter ..............     $   2.54    $   2.00
                  Second Quarter .............         3.50        2.31
                  Third Quarter ..............         3.35        2.07
                  Fourth Quarter .............         2.73        1.95

                  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
</TABLE>

      As of March 6, 2003, the Company had 19,775,821 shares of Common Stock
issued and outstanding. On that date, there were 256 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.

EQUITY COMPENSATION PLAN INFORMATION

      The following table summarizes as of December 31, 2002, certain
information regarding equity compensation to our employees, officers, directors
and other persons under our equity compensation plans:

<TABLE>
<CAPTION>
                                                                                                           Number of Securities
                                                                 Number of                                Remaining Available for
                                                             Securities to be                              Future Issuance Under
                                                                Issued upon        Weighted Average         Equity Compensation
                                                                Exercise of       Exercise Price of                Plans
                                                             Outstanding Stock    Outstanding Stock        (Excluding Securities
                                                                  Options              Options           Reflected in column (a))
           Plan Category                                            (a)                  (b)                        (c)
           -------------                                            ---                  ---                        ---
<S>                                                               <C>                    <C>                      <C>
           Equity compensation plans approved by
              security holders (1) ...................            6,700,162              $ 2.84                   2,379,000
           Equity compensation not approved by
              Security holders (2) ...................            2,031,954              $ 3.36                          --
                                                                  ---------                                       ---------
           Total .....................................            8,732,116                                       2,379,000
                                                                  =========                                       =========
</TABLE>

      (1) The Company has 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.
There were 2,379,000 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.

      (2) Represents options granted pursuant to individual stock option
agreements. An aggregate of 1,181,954 options were granted to executive officers
in 1998 and prior. These options had an exercise price equal to the market
price, vested over three years, and expire ten years from the date of grant. An
aggregate of 850,000 options were granted to executive officers as an inducement
essential to the individuals entering into an employment contract with the
Company. These options have an exercise price equal to market value on the date
of grant, vest over three years, and expire ten years from the date of grant.


                                       16
<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, 2002.
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.

      The consolidated financial statements for the years ended December 31,
1998, through 2001, were audited by Arthur Andersen LLP ("Andersen"), who has
ceased operations. A copy of the report previously issued by Andersen on the
Company's financial statements as of December 31, 2001 and 2000, and for each of
the three years in the period ended December 31, 2001, is included elsewhere in
this Form 10-K. Such report has not been reissued by Andersen.

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                 -----------------------------------------------------------------
                                                                   2002            2001           2000          1999        1998
                                                                 ---------      ---------      ---------      -------     --------
                                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIO)
<S>                                                              <C>            <C>            <C>            <C>         <C>
            Sales ..........................................     $ 272,628      $ 260,196      $ 163,098      $56,463     $ 33,565
            Gross profit ...................................        70,748         68,275         43,198       13,992        5,449
            Selling, general and administrative
              expenses .....................................        22,935         21,784         14,337        6,876        4,181
            Reorganization expenses ........................           905             --             --           --           --
            Special charges (credit), net ..................            --         (4,982)            --        1,500          (64)
            Amortization of intangibles ....................           108          4,489          3,516        1,527          629
            Interest expense, net ..........................        23,498         26,969         18,908        3,236        1,558
            Net income (loss) before extraordinary loss
               on early retirement of debt, net of tax,
               cumulative effect of change in accounting for
               derivatives, preferred stock dividends and
               noncash beneficial conversion charge ........        15,553         19,664          6,551        1,148         (537)
            Extraordinary loss on early retirement of debt,
              net of tax benefits, of $2,751 ...............         4,489             --             --           --           --
            Cumulative effect of change in accounting
              for derivatives ..............................            --          1,861             --           --           --
            Preferred stock dividends ......................         7,659          7,248          3,939           --          420
            Noncash beneficial conversion charge ...........            --             --         37,045           --        3,515
            Net income (loss) applicable to common
              stock ........................................     $   3,405      $  10,555      $ (34,433)     $ 1,148     $ (4,472)

            Basic -
              Earnings per share before extraordinary loss
                on early retirement of debt, net of tax
                benefit, cumulative effect of change in
                accounting for derivatives, and noncash
                beneficial conversion charge ...............     $    0.40      $    0.64      $    0.14      $  0.07     $  (0.09)
              Extraordinary loss on early retirement of
                debt, net of tax benefit ...................         (0.23)            --             --           --           --
              Cumulative effect of change in accounting for
                derivatives ................................            --          (0.10)            --           --           --
              Noncash beneficial conversion charge .........            --             --          (1.92)     $    --     $  (0.31)
                                                                 ---------      ---------      ---------      -------     --------
              Net income (loss) per share - basic ..........     $    0.17      $    0.54      $   (1.78)     $  0.07     $  (0.40)
                                                                 =========      =========      =========      =======     ========

            Diluted -
              Earnings per share before preferred stock
                dividends (when dilutive), extraordinary
                loss on early retirement of debt, net of
                tax benefit, cumulative effect of change
                in accounting for derivatives, and noncash
                beneficial conversion charge ...............     $    0.30      $    0.40      $    0.14      $  0.07     $  (0.09)
              Extraordinary loss on early retirement of
                debt, net of tax benefit ...................         (0.09)            --             --           --           --
              Cumulative effect of change in accounting for
                derivatives ................................            --          (0.04)            --           --           --
              Noncash beneficial conversion charge .........            --             --          (1.92)     $    --     $  (0.31)
                                                                 ---------      ---------      ---------      -------     --------
              Net income (loss) per share - diluted ........     $    0.21      $    0.36      $   (1.78)     $  0.07     $  (0.40)
                                                                 =========      =========      =========      =======     ========

            Working capital ................................     $  19,069      $   7,315      $  17,734      $ 3,982     $  5,692
            Total assets ...................................       493,467        451,948        449,362       99,172       66,622
            Total long-term debt, net of current
              maturities ...................................       283,530        249,016        279,098       42,182       28,330
            Stockholders' equity ...........................        65,800         61,891         53,564       45,314       34,249
</TABLE>


                                       17



<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."

BACKGROUND

      We generate substantially all of our revenue by providing water and
wastewater residuals management services to municipal and industrial customers.
We provide our customers with 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 2002, we experienced a contract retention rate (both renewals and
rebids) of approximately 87 percent.

      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. Effective January 1, 2002, goodwill is no longer amortized
in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," and the
line item will contain only amortization of intangibles for the year ended
December 31, 2002.

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,
                                                                                                 --------------------------
                                                                                                 2002        2001     2000
                                                                                                 -----      -----     -----
<S>                                                                                              <C>        <C>       <C>
     STATEMENT OF OPERATIONS DATA:
     Revenue ...............................................................................     100.0%     100.0%    100.0%
     Gross profit ..........................................................................      26.0%      26.2%     26.5%
     Selling, general and administrative expenses ..........................................       8.4%       8.4%      8.8%
     Reorganization costs ..................................................................       0.3%        --        --
     Special credits, net ..................................................................        --       (1.9)%      --
     Amortization of intangibles ...........................................................        --        1.7%      2.2%
     Income from operations ................................................................      17.2%      18.1%     15.5%
     Interest expense, net .................................................................       8.6%      10.4%     11.6%
     Income before provision for income taxes ..............................................       9.2%       7.8%      4.0%
     Net income before extraordinary loss on early retirement of debt, net of
       the tax benefit, cumulative effect of change in accounting for derivatives,
       preferred stock dividends and noncash beneficial conversion charge ..................       5.7%       7.6%      4.0%
</TABLE>


                                       18
<PAGE>

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

      For the year ended December 31, 2002, revenue was approximately
$272,628,000 compared to approximately $260,196,000 for the same period in 2001,
an increase of approximately $12,432,000, or 4.8 percent, with approximately
$3,500,000 relating to the Earthwise acquisition and the balance from internal
growth.

      Cost of services and gross profit for the year ended December 31, 2002,
were approximately $201,880,000 and $70,748,000, respectively, compared to
approximately $191,921,000 and $68,275,000, respectively, for the year ended
2001. Gross profit, as a percentage of revenue, was 26.0 percent in 2002
compared to 26.2 percent in 2001.

      Selling, general and administrative expenses were approximately
$22,935,000, or 8.4 percent of revenues, for the year ended December 31, 2002,
compared to approximately $21,784,000, or 8.4 percent of revenues, for 2001, an
increase of approximately $1,151,000, but no change as a percentage of revenues.

      During 2002, the Company decided to reorganize by reducing the number of
its operating regions, which resulted in approximately $678,000 of severance
costs in connection with the termination of 39 employees and approximately
$227,000 of terminated office lease arrangements. The total costs incurred of
approximately $905,000 have been reported as reorganization costs in 2002. There
were no such reorganization costs in the prior year.

      Special credits, net, totaling approximately $4,982,000 in 2001 included
an approximately $6,043,000 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 National Indemnity
Company, which is in liquidation. There were no special charges or credits in
2002.

      Amortization of intangibles decreased from approximately $4,489,000 in
2001 to approximately $108,000 in 2002 as a result of the adoption of SFAS No.
142 in January 2002, which no longer allows the amortization of goodwill.

      As a result of the foregoing, income from operations for the year ended
December 31, 2002, was approximately $46,801,000 compared to approximately
$46,984,000 for the same period in 2001, a decrease of approximately $183,000 or
0.4 percent.

      Other income for the year ended December 31, 2002, was approximately
$1,786,000 compared to approximately $221,000 for the same period in 2001. The
increase relates primarily to a noncash gain of approximately $1,700,000 related
to market value adjustments on a fixed-to-floating interest rate swap agreement.
There was no such item in 2001.

      Interest expense for the year ended December 31, 2002, was approximately
$23,498,000 compared to approximately $26,969,000 for the same period in 2001.
Interest expense as a percent of revenue decreased from 10.4 percent in 2001 to
8.6 percent in 2002. The decrease in interest expense is related to reductions
in debt funded from cash flow from operations and a decrease in the Company's
weighted average interest rate.

      For the year ended December 31, 2002, the Company recorded a provision for
income taxes of approximately $9,535,000 compared to $573,000 in the prior year.
There were minimal tax requirements in 2001 as the valuation allowance related
to certain deferred taxes offset deferred tax provision requirements. The
Company's 2002 tax provision is principally a deferred provision that will not
significantly impact cash flow since the Company has significant tax deductions
in excess of book deductions and net operating loss carryforwards available to
offset taxable income.

      As a result of the foregoing, net income before extraordinary loss on
early retirement of debt, net of tax benefit, cumulative effect of change in
accounting for derivatives, preferred stock dividends, and noncash beneficial
conversion charges of approximately $15,554,000 was reported for the year ended
December 31, 2002, compared to approximately $19,664,000 for the same period in
2001.

      In April 2002, the Company completed the sale of $150 million aggregate
principal amount 9 1/2 percent Senior Subordinated Notes due 2009 and used the
proceeds to pay down approximately $92 million of senior bank debt and to pay
off $53 million of 12 percent subordinated debt. In May 2002, the Company
entered into a new $150 million senior credit facility that provides for a $70
million funded term loan and up to a $50 million revolver, which can be
increased to $80 million upon the request of the Company and bank


                                       19
<PAGE>

approval. The term loan proceeds were used to pay off the existing senior debt
that remained unpaid after the Senior Subordinated Notes offering. Accordingly,
the Company recorded a $4.5 million noncash extraordinary loss on early
retirement of debt, net of tax benefit of $2.8 million, during the three months
ended June 30, 2002, which represents the unamortized deferred debt costs
related to the debt that was repaid with the net proceeds received from the
Senior Subordinated Notes and the new senior credit facility.

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 percent. 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 $191,921,000 and $68,275,000, 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 percent in 2000 to 26.2 percent 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
$21,784,000 for the year ended December 31, 2001, compared to approximately
$14,337,000 for 2000, an increase of approximately $7,447,000 or 51.9 percent.
The increase relates primarily to personnel added as a result of our
acquisitions in 2000. Selling, general and administrative expenses decreased
from 8.8 percent of revenue in 2000 to 8.0 percent 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.

      Special credits, 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.

      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.

      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 of approximately
$21,639,000 or 85.4 percent. Income from operations, excluding the special
credit, net, as a percentage of revenue increased from 15.5 percent in 2000 to
16.2 percent 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 percent in 2000 to
10.4 percent 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 8 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.


                                       20
<PAGE>

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 earn out
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,
2002, cash flows from operating activities were approximately $29,651,000
compared to approximately $38,208,000 for the same period in 2001, a decrease of
approximately $8,557,000, or 22.4 percent. The decrease primarily relates to a
cash gain of approximately $6,043,000 from a litigation settlement in 2001 and
an increase in prepaid and other costs associated with long-term contracts,
partially offset by an increase in deferred taxes.

      Cash Flows from Investing Activities. For the year ended December 31,
2002, cash flows used for investing activities were approximately $16,689,000
compared to approximately $14,049,000 for the same period in 2001, an increase
of approximately $2,640,000. The increase primarily relates to the acquisition
of Earthwise.

      Cash Flows from Financing Activities. For the year ended December 31,
2002, cash flows used for financing activities were approximately $12,975,000
compared to approximately $28,505,000 for the same period in 2001, a decrease of
approximately $15,530,000. The decrease primarily relates to the use of funds
for debt issuance costs related to refinancing debt in April and May of 2002 and
the acquisition of Earthwise.

CAPITAL EXPENDITURE REQUIREMENTS

      Capital expenditures for the year ended December 31, 2002, totaled
approximately $21,833,000, which includes capital leases of approximately
$9,828,000, compared to approximately $13,313,000 in 2001. Our ongoing capital
expenditure program consists of expenditures for replacement equipment,
betterments and growth. We expect our capital expenditures for 2003 to be
approximately $13 to $14 million.

DEBT SERVICE REQUIREMENTS

      In August 2002, the Company incurred indebtedness of $1.5 million in
connection with the Earthwise acquisition. Terms of the note issued in
connection with the acquisition require three annual, equal installments
beginning October 2003. Interest of five percent per annum is payable quarterly
beginning October 1, 2002.

      In May 2002, the Company entered into a new $150 million senior credit
facility that provides for a $70 million funded term loan and up to a $50
million revolver, with the ability to increase the total commitment to $150
million. The term loan proceeds were used to pay off the existing senior debt
that remained unpaid after the private placement of our 9 1/2 percent Senior
Subordinated Notes due 2009. This new facility is secured by substantially all
of the Company's assets and those of its subsidiaries (other than assets
securing nonrecourse debt) and includes covenants restricting the incurrence of
additional indebtedness, liens, certain payments and sale of assets. The new
senior credit agreement contains standard covenants, including compliance with
laws, limitations on capital expenditures, restrictions on dividend payments,
limitations on mergers and compliance with certain financial covenants. During
the three months ended June 30, 2002, the Company recorded a noncash
extraordinary charge, net of tax, of approximately $4.5 million, which
represents the unamortized deferred debt costs related to the debt that was
repaid with the net proceeds received from the 9 1/2 percent Senior Subordinated
Notes due 2009 and the new senior credit facility. The Company believes that its
effective interest rate on the 9 1/2 percent Senior Subordinated Notes due 2009
and the new credit facility is not materially different than the effective
interest rate on its previously existing debt. The Company's 2002 minimum
principal payment due on its long-term debt decreased by approximately $12
million under the terms of the 9 1/2 percent Senior Subordinated Notes due 2009
and the new credit facility compared to the terms of its previously existing
debt. Requirements for mandatory debt payments from excess cash flows, as
defined, are unchanged in the new credit facility.


                                       21
<PAGE>

      In April 2002, the Company completed the private placement of $150 million
aggregate principal amount of 9 1/2 percent Senior Subordinated Notes due 2009
and used the proceeds to pay down approximately $92 million of senior bank debt
and to pay off approximately $53 million of 12 percent subordinated debt. In
September 2002, the Company exchanged all of its outstanding unregistered 9 1/2
percent Senior Subordinated Notes due 2009 for registered 9 1/2 percent Senior
Subordinated Notes due 2009, with substantially identical terms.

      In 1996, the Maryland Energy Financing Administration issued nonrecourse
tax-exempt project revenue bonds (the "Maryland Project Revenue Bonds") in the
aggregate amount of $58,550,000. The Administration loaned the proceeds of the
Maryland Project Revenue Bonds to Wheelabrator Water Technologies Baltimore
L.L.C., now our wholly owned subsidiary 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 Maryland Project Revenue Bonds. The loan financed a portion of
the costs of constructing thermal facilities located in Baltimore County,
Maryland, at the site of its Back River Wastewater Treatment Plant, and in the
City of Baltimore, Maryland, at the site of its Patapsco Wastewater Treatment
Plant. The Company assumed all obligations associated with the Maryland Project
Revenue Bonds in connection with its acquisition of the Bio Gro Division of
Waste Management, Inc. in 2000. Maryland Project Revenue Bonds in the aggregate
amount of $12,185,000 have already been paid, and the remaining Maryland Project
Revenue Bonds bear interest at annual rates between 5.65 percent and 6.45
percent and mature on dates between December 1, 2003, and December 1, 2016.

      In December 2002, the California Pollution Control Financing Authority
(the "Authority") issued nonrecourse revenue bonds ("Sacramento Biosolids
Facility Project") in the aggregate amount of $21,275,000. The nonrecourse
revenue bonds consist of $20,075,000 Series 2002-A and $1,200,000 Series 2002-B
(taxable) (collectively, the "Bonds"). The Authority loaned the proceeds of the
Bonds to Sacramento Project Finance, Inc., a wholly owned subsidiary of the
Company, pursuant to a loan agreement dated December 1, 2002. The loan will
finance the acquisition, design, permitting, constructing and equipping of a
biosolids dewatering and heat drying/pelletizing facility for the Sacramento
Regional Sanitation District. The Bonds bear interest at annual rates between
4.25 percent and 5.5 percent and mature on dates between December 1, 2006, and
December 1, 2024.

      At December 31, 2002, future minimum principal payments of long-term debt,
Nonrecourse Project Revenue Bonds (see Note 6) and Capital Lease Obligations
(see Note 7) are as follows:

<TABLE>
<CAPTION>
                                                                     NONRECOURSE          CAPITAL
                                                  LONG-TERM            PROJECT             LEASE
              YEAR ENDED DECEMBER 31,                DEBT           REVENUE BONDS       OBLIGATIONS             TOTAL
              -----------------------           ------------        -------------       -----------         ------------
<S>                                             <C>                 <C>                 <C>                 <C>
            2003 ......................         $  1,111,410         $ 2,430,000         $1,279,667         $  4,821,077
            2004 ......................            1,111,410           2,570,000          1,405,082            5,086,492
            2005 ......................            1,111,410           2,710,000          1,406,829            5,228,239
            2006 ......................              611,410           1,191,000          1,396,572            3,198,982
            2007 ......................              604,875                  --          1,032,342            1,637,217
            2008-2012 .................          207,311,875          21,565,000          2,697,299          231,574,174
            2013-2017 .................                   --          26,274,870                 --           26,274,870
            Thereafter ................                   --          10,530,349                 --           10,530,349
                                                ------------         -----------         ----------         ------------
            Total .....................         $211,862,390         $67,271,219         $9,217,791         $288,351,400
                                                ============         ===========         ==========         ============
</TABLE>

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

<TABLE>
<CAPTION>
                           YEAR ENDING DECEMBER 31,
                           ------------------------
<S>                                                                 <C>
                           2003 ...............................     $   5,203,000
                           2004 ...............................         4,720,000
                           2005 ...............................         3,968,000
                           2006 ...............................         3,477,000
                           2007 ...............................         2,762,000
                           Thereafter .........................        17,008,000
                                                                    -------------
                                                                    $  37,138,000
                                                                    =============
</TABLE>

      In 2002, we entered into three capital leases totaling approximately
$9,298,000 for transportation equipment. Future minimum lease payments, together
with the present value at the minimum lease payments, are as follows:


                                       22
<PAGE>

<TABLE>
<CAPTION>
              YEAR ENDED DECEMBER 31,
              -----------------------
<S>                                                                                     <C>
                   2003 ........................................................        $ 1,914,884
                   2004 ........................................................          1,964,243
                   2005 ........................................................          1,844,893
                   2006 ........................................................          1,676,336
                   2007 ........................................................          1,248,143
                   Thereafter ..................................................          2,697,296
                                                                                        -----------
              Total minimum lease payments .....................................         11,345,795
              Amount representing interest .....................................         (2,128,004)
                                                                                        -----------
                   Present value of minimum lease payments .....................          9,217,791
                   Current portion of capital lease obligations ................         (1,279,667)
                                                                                        -----------
                   Long-term capital lease obligation ..........................        $ 7,938,124
                                                                                        ===========
</TABLE>

      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, including payment of interest on our
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 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 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 are 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 accrued, 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 shares of Series D Preferred Stock, excluding accrued
dividends, were converted at December 31, 2002, 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 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 accrued, 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 shares
of Series E Preferred Stock, excluding accrued dividends, were converted at
December 31, 2002, they would represent 17,903,475 shares of common stock.

      The future issuance of Series D and Series E Preferred Stock may result in
noncash beneficial conversions valued in future periods recognized as preferred
stock dividends if the market value of the Company's common stock is higher than
the conversion price at the date of issuance.


                                       23
<PAGE>

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 No. 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 accumulated 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 SFAS No. 142, "Goodwill and Other
Intangible Assets." SAS No. 141 requires all business combinations initiated
after June 30, 2001, to be accounted for using the purchase method. Under SFAS
No. 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 of the
Company has completed the initial impairment test required by the provisions of
SFAS No. 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 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. The Company's asset
retirement obligations primarily consist of equipment dismantling and foundation
removal at certain of its facilities and temporary storage facilities. The
estimated noncash transition adjustment of approximately $500,000, net of tax,
related to the adoption of this statement will be reflected as "cumulative
effect of a change in accounting for asset retirement obligations" in the
statement of operations for the three months ended March 31, 2003.

      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.
The Company adopted SFAS No. 144 during the first quarter of 2002 and there was
no effect on the Company's results of operations and financial position.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent that
meets criteria for classification as an extraordinary item. SFAS No. 145 is
effective for the Company beginning January 1, 2003. As a result of this
statement the Company expects to reclassify its 2002 extraordinary loss on early
extinguishments of debt, net of tax, above the line to other expense and income
tax expense, respectively.

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred.


                                       24
<PAGE>

The Company adopted SFAS No. 146 during the first quarter of 2003 and there was
no effect on the Company's results of operations and financial position.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair-value-based method of accounting for stock-based
employee compensation. Companies must disclose in both annual and interim
financial statements the method used to account for stock-based compensation.
The Company will continue to apply APB Opinion No. 25 and related
interpretations in accounting for its plan. Therefore, no compensation cost has
been recognized in the consolidated financial statements for the Company's stock
option plan.

       In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The Company has adopted the disclosure requirements
of FIN 45 in the 2002 consolidated financial statements and will apply the
initial recognition and measurement provisions of the standard prospectively in
2003.

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.

      Property and Equipment/Long-Lived Assets - Management adopted SFAS No. 144
during the first quarter 2002. Property and equipment is reviewed for impairment
pursuant to the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The carrying amount of an asset (group) is
considered impaired if it exceeds the sum of our estimate of the undiscounted
future cash flows expected to result from the use and eventual disposition of
the asset (group), excluding interest charges.

      The Company has contracts for the design, permitting and construction of
biosolids processing facilities. If the permits and/or other government
approvals are not obtained, the Company may not be reimbursed for its costs
incurred. The Company has approximately $4,505,000 of design and permitting
costs included in other long-term assets at December 31, 2002.

      Goodwill - Goodwill attributable to the Company's reporting units are
tested for impairment by comparing the fair value of each reporting unit with
its carrying value. Significant estimates used in the determination of fair
value include estimates of future cash flows, future growth rates, costs of
capital and estimates of market multiples. As required under current accounting
standards, the Company tests for impairment annually at year end unless factors
become known that an impairment may have occurred prior to year end.

      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 estimate 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.


                                       25
<PAGE>

      Fair Value of Financial Instruments -- The carrying amounts of cash and
cash equivalents, receivables, accounts payable and accrued liabilities
approximate their fair values because of the short-term nature of these
instruments. Management believes the carrying amounts of the current and
long-term debt approximate their fair value based on interest rates for the same
or similar debt offered to the Company having the same or similar terms and
maturities.

      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 maintain two leases with an affiliate of one of our stockholders. 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
2002 totaled approximately $97,000. The second lease has an initial term through
December 31, 2013. Rental payments made under the second lease in 2002 totaled
approximately $110,000.

      As of December 31, 2002, we had generated net operating loss ("NOL")
carryforwards of approximately $86 million 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 our 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, 2002 and 2001. We estimate that our effective
tax rate in 2003 will approximate 38 percent of pre-tax 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 our 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 wastewater residuals 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.


                                       26
<PAGE>

      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 wastewater 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 wastewater 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.

WE ARE SUBJECT TO EXTENSIVE AND INCREASINGLY STRICT 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 agreement can be lengthy
and expensive. We may not be able to meet applicable regulatory or permit
requirements, and therefore may 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. In states where we currently conduct
business, certain counties and municipalities have banned the land application
of Class B biosolids. Other states and local authorities are reviewing their
current regulations relative to land application of biosolids. There can be no
assurances that 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. It is possible that landfill
operators will not 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 DIRECT OR INDIRECT COMPETITION WITH OTHER
BUSINESSES THAT PROVIDE SOME OR ALL OF THE SAME SERVICES THAT WE PROVIDE.


                                       27
<PAGE>

      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 have.

      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 ten customers), provide for
termination of the contract by the customer after giving relative short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event 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 contract 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
operation.

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. 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. For the year
ended December 31, 2002, our single largest customer accounted for 15 percent of
our revenues and our top ten customers accounted for approximately 35 percent of
our revenues.

WE MAY NOT BE ABLE TO OBTAIN BONDING REQUIRED IN CONNECTION WITH CERTAIN
CONTRACTS ON WHICH WE BID.

      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.
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. As of March 21, 2003, we had a bonding capacity of
approximately $182 million with approximately $127 million utilized as of that
date.

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. It is possible that we will not be
able to maintain such insurance coverage in the future. Further, we could 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.

      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.


                                       28
<PAGE>

WE ARE DEPENDENT ON THE AVAILABILITY AND SATISFACTORY PERFORMANCE OF
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 design and construction of our facilities. The
insufficient availability of and unsatisfactory performance by these
unaffiliated third-party 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 nonperformed 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, such indemnification may not 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 upon which biosolids
can be beneficially reused and applied to crop land. 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 reduce our revenues and
operational results causing a material adverse effect on our business and
financial condition.

FLUCTUATIONS IN FUEL COSTS COULD INCREASE OUR OPERATING EXPENSES AND NEGATIVELY
IMPACT OUR NET INCOME.

      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 offset increased fuel 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.

      Any of the contracts included in our backlog, or estimated remaining
contract value, presented herein may not result in actual revenues in any
particular period or the actual revenues from such contracts may not 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, it is possible
that not 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. Our defense to these claims or any
other claims against us may not be successful. If we lose these or future
lawsuits, we may have to pay significant damages and legal expenses, and we
could be subject to injunctions, court orders, loss of revenues and defaults
under our credit and other agreements.

      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.

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


                                       29
<PAGE>

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.

      In addition, it is possible that we will not be successful in consummating
future acquisitions on favorable terms or at all.

WE ARE DEPENDENT ON OUR CHIEF EXECUTIVE OFFICER FOR HIS DEPTH OF INDUSTRY
EXPERIENCE AND KNOWLEDGE.

      We are highly dependent on the services of Ross M. Patten, our CEO and
Chairman of the Board. Mr. Patten has been in the industry for more than 28
years and has substantial industry knowledge and contacts. If Mr. Patten were to
terminate his employment with us, we would lose valuable human capital,
adversely affecting our business. We currently do not maintain key man insurance
on Mr. Patten or any other member of our senior management team. Neither Mr.
Patten nor any other member of our senior management team intends to retire or
is nearing retirement age.

      We generally enter into employment agreements with members of our senior
management team, which contain noncompete and other provisions. The laws of each
state differ concerning the enforceability of noncompetition agreements. State
courts will examine all of the facts and circumstances at the time a party seeks
to enforce a noncompete covenant. We cannot predict with certainty whether or
not a court will enforce a noncompete 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 noncompete 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 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. 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.

      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


                                       30
<PAGE>

over the landfill. 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.

      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 be assured
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.

IF WE DETERMINE THAT OUR GOODWILL IS IMPAIRED, WE MAY HAVE TO WRITE-OFF ALL OR
PART OF IT.

      Goodwill represents the aggregate purchase price paid by us in
acquisitions accounted for as a purchase over the fair value of the net assets
acquired. Under Statement of Financial Accounting Standards, or SFAS No. 142, we
no longer amortize goodwill, but review annually for impairment. In the event
that facts and circumstances indicate that goodwill may be impaired, an
evaluation of recoverability would be performed. If a write-down to market value
of all or part of our goodwill becomes necessary, our accounting results and net
worth would be adversely affected. As of December 31, 2002, our total goodwill,
net of amortization, was $168,463,870.

WE MAY EXPERIENCE A DECLINE IN OUR RECENT REVENUE AND INCOME DUE TO A SHIFT IN
FOCUS AWAY FROM ACQUISITION TOWARDS INTERNAL GROWTH.

      In 2001, we shifted our focus away from acquisitions to internal growth.
As a result, we may experience a reduction in the rate of increase of our
revenues. You should not expect revenues to increase at the same rates as when
we were focused on acquisitions. See "Business - Acquisitions History."

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.


                                       31
<PAGE>

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 No. 133. Changes in the fair
value of these derivatives recognized in earnings in 2001 as interest expense
totaled $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 12
percent subordinated debt, and terminated the previously existing interest rate
swap and option agreements noted above. Accordingly, 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 of accumulated other comprehensive loss recognized as
a noncash expense in 2002 and 2001 was approximately $813,000 and $532,466,
respectively. The Company 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 debited to interest
expense, net, for the twelve months ended December 31, 2001, totaled
approximately $267,000.

      The 12 percent subordinated debt was repaid on April 17, 2002, with the
proceeds from the sale of the 9 1/2 percent Senior Subordinated Notes due 2009.
Accordingly, the Company discontinued using hedge accounting for the reverse
swap agreement on April 17, 2002. From April 17, 2002, through June 25, 2002,
the fair value of this fixed-to-floating reverse swap decreased by $1.7 million.
This $1.7 million mark-to-market gain is included in other income in the
Company's financial statement. On June 25, 2002, the Company entered into a
floating-to-fixed interest rate swap agreement that is expected to substantially
offset market value changes in the Company's reverse swap agreement. The
liability related to this reverse swap agreement and the floating-to-fixed
offset agreement totaling approximately $3,437,000 is reflected in other
long-term liabilities at December 31, 2002. Gains recognized during the year
ended December 31, 2002, related to the floating-to-fixed interest rate swap
agreement were approximately $655,000, while losses recognized related to the
reverse swap agreement since June 25, 2002, were approximately $840,000. The
amount of the ineffectiveness of the reverse swap agreement debited to other
income is approximately $185,000 for the twelve months ended December 31, 2002.

      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 1/2 percent 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, totaled $36,000 and $66,000 for the
twelve months ended December 31, 2002 and 2001, respectively.

INTEREST RATE RISK

      Total debt at December 31, 2002, included approximately $60,336,000 in
floating rate debt attributed to the Senior Credit Agreement at a base interest
rate plus 2.5 percent, or approximately 4.5 percent at December 31, 2002. As a
result, the Company's interest cost in 2003 will fluctuate based on short-term
interest rates. The impact on annual cash flow of a ten percent change in the
floating rate would be approximately $173,000.


                                       32
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                 PAGE
                                                                                                 ----
<S>                                                                                              <C>
           Report of Independent Accountants - PricewaterhouseCoopers LLP ...............         34
           Report of Independent Public Accountants - Arthur Andersen LLP ...............         35
           Consolidated Balance Sheets as of December 31, 2002 and 2001 .................         36
           Consolidated Statements of Operations for the Years Ended
              December 31,2002, 2001 and 2000 ...........................................         37
           Consolidated Statements of Stockholders' Equity for the Years Ended
              December 31, 2002, 2001 and 2000 ..........................................         38
           Consolidated Statements of Cash Flows for the Years Ended
              December 31,2002, 2001 and 2000 ...........................................         39
           Notes to Consolidated Financial Statements ...................................         41
</TABLE>


                                       33
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Synagro Technologies, Inc.:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Synagro
Technologies, Inc. and its subsidiaries at December 31, 2002, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The consolidated financial statements of
Synagro Technologies, Inc. as of and for the each of the two years in the period
ended December 31, 2001, were audited by other independent public accountants
who have ceased operations. Those independent public accountants expressed an
unqualified opinion on those financial statements in their report dated March
13, 2002.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."

As discussed above, the consolidated financial statements of Synagro
Technologies, Inc. as of December 31, 2001 and for each of the two years in the
period ended December 31, 2001, were audited by other independent public
accountants who have ceased operations. As described in Note 1, these
consolidated financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," which was adopted by the Company as of
January 1, 2002. We audited the transitional disclosures described in Note 1. In
our opinion, the transitional disclosures for 2000 and 2001 in Note 1 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2000 and 2001 consolidated financial statements of Synagro
Technologies, Inc. other than with respect to such disclosures and, accordingly,
we do not express an opinion or any other form of assurance on the 2000 and 2001
consolidated financial statements taken as a whole.


PricewaterhouseCoopers LLP

Houston, Texas
March 21, 2003


                                       34
<PAGE>

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP ("ANDERSEN"). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN AND ANDERSEN DID
NOT CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT (AS INCLUDED IN
THIS FORM 10-K) INTO ANY OF THE COMPANY'S REGISTRATION STATEMENTS.

AS DISCUSSED IN NOTE 1, THE COMPANY HAS REVISED ITS FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000, TO INCLUDE THE TRANSITIONAL DISCLOSURES
REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTS STANDARDS NO. 142, "GOODWILL AND
INTANGIBLE ASSETS." THE ANDERSEN REPORT DOES NOT EXTEND TO THESE CHANGES. THE
REVISIONS TO THE 2001 AND 2000 FINANCIAL STATEMENTS RELATED TO THESE
TRANSITIONAL DISCLOSURES WERE REPORTED ON BY PRICEWATERHOUSECOOPERS LLP AS
STATED IN THEIR REPORT APPEARING HEREIN.

SYNAGRO TECHNOLOGIES, INC.'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2000,
AND THE CONSOLIDATED STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY AND CASH
FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999, ARE NOT REQUIRED TO BE PRESENTED AND
ARE NOT INCLUDED IN THIS FORM 10-K.

                    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.

Synagro Technologies, Inc.'s consolidated balance sheet as of December 31, 2000,
and the consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1999, are not required to be presented and
are not included in this Form 10-K.

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


                                       35
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                           DECEMBER 31,
                                                                                              -------------------------------------
                                                                                                   2002                    2001
                                                                                              -------------           -------------
<S>                                                                                           <C>                     <C>
                                                       ASSETS
Current Assets:
  Cash and cash equivalents ........................................................          $     239,000           $     251,821
  Restricted cash ..................................................................              1,695,517               3,281,045
  Accounts receivable, net .........................................................             54,813,729              49,531,654
  Note receivable, current portion .................................................                554,384                 201,000
  Prepaid expenses and other current assets ........................................             15,398,736              10,181,030
                                                                                              -------------           -------------
          Total current assets .....................................................             72,701,366              63,446,550

Property, machinery & equipment, net ...............................................            213,331,158             206,114,267

Other Assets:
  Goodwill .........................................................................            168,463,870             163,739,059
  Restricted cash -- construction fund .............................................             17,732,970                      --
  Restricted cash -- debt service fund .............................................              7,491,176               5,780,152
  Other, net .......................................................................             13,746,204              12,867,901
                                                                                              -------------           -------------
          Total assets .............................................................          $ 493,466,744           $ 451,947,929
                                                                                              =============           =============

                                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current portion of long-term debt ................................................          $   1,111,410           $  12,880,693
  Current portion of nonrecourse project revenue bonds .............................              2,430,000               2,300,000
  Current portion of capital lease obligations .....................................              1,279,667                      --
  Accounts payable and accrued expenses ............................................             48,811,464              40,951,059
                                                                                              -------------           -------------
          Total current liabilities ................................................             53,632,541              56,131,752

Long-Term Debt:
  Long-term debt obligations, net ..................................................            210,750,980             202,650,523
  Nonrecourse project revenue bonds, net ...........................................             64,841,219              46,365,000
  Capital lease obligations, net ...................................................              7,938,124                      --
                                                                                              -------------           -------------
     Total long-term debt ..........................................................            283,530,323             249,015,523
Other Long-Term Liabilities:
  Other long-term liabilities ......................................................              8,976,332               9,328,065
  Fair value of interest rate swap .................................................              3,436,909               5,150,502
                                                                                              -------------           -------------
     Total other long-term liabilities .............................................             12,413,241              14,478,567

          Total liabilities ........................................................            349,576,105             319,625,842

Commitments and Contingencies:
Redeemable Preferred Stock, 69,792.29 shares issued and
  outstanding, redeemable at $1,000 per share ......................................             78,090,196              70,431,063

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, 19,775,821 and 19,476,781 shares issued
     and outstanding, respectively .................................................                 39,552                  38,954
  Additional paid in capital .......................................................            109,166,862             109,167,460
  Accumulated deficit ..............................................................            (41,599,663)            (45,004,998)
  Accumulated other comprehensive loss .............................................             (1,806,308)             (2,310,392)
                                                                                              -------------           -------------
          Total stockholders' equity ...............................................             65,800,443              61,891,024
                                                                                              -------------           -------------
Total liabilities and stockholders' equity .........................................          $ 493,466,744           $ 451,947,929
                                                                                              =============           =============
</TABLE>

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


                                       36
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                                                               2002                  2001                  2000
                                                                          -------------         -------------         -------------
<S>                                                                       <C>                   <C>                   <C>
Revenue ..........................................................        $ 272,628,171         $ 260,195,667         $ 163,097,783
Cost of services .................................................          201,879,869           191,920,525           119,899,924
                                                                          -------------         -------------         -------------
Gross profit .....................................................           70,748,302            68,275,142            43,197,859

Selling, general and administrative expenses .....................           22,934,588            21,783,734            14,336,948
Reorganization costs .............................................              904,703                    --                    --
Special credits, net .............................................                   --            (4,981,584)                   --
Amortization of intangibles ......................................              108,417             4,488,667             3,515,931
                                                                          -------------         -------------         -------------
  Income from operations .........................................           46,800,594            46,984,325            25,344,980
                                                                          -------------         -------------         -------------
Other (income) expense:
  Other (income), net ............................................           (1,786,239)             (221,383)             (114,024)
  Interest expense, net ..........................................           23,497,968            26,968,733            18,907,891
                                                                          -------------         -------------         -------------
     Total other expense, net ....................................           21,711,729            26,747,350            18,793,867
                                                                          -------------         -------------         -------------
Income before provision for income taxes .........................           25,088,865            20,236,975             6,551,113
  Provision for income taxes .....................................            9,535,264               573,247                    --
                                                                          -------------         -------------         -------------
Net income before extraordinary loss on early
  retirement of debt, net of tax benefit, cumulative effect
  of change in accounting for derivatives, preferred
  stock dividends, and noncash beneficial conversion
  charge .........................................................           15,553,601            19,663,728             6,551,113
Extraordinary loss on early retirement of debt, net of
  tax benefit of $2,751,405 ......................................            4,489,133                    --                    --
Cumulative effect of change in accounting for
  derivatives ....................................................                   --             1,860,685                    --
                                                                          -------------         -------------         -------------
Net income before preferred stock dividends and
  noncash beneficial conversion charge ...........................           11,064,468            17,803,043             6,551,113
                                                                          -------------         -------------         -------------
Preferred stock dividends ........................................            7,659,133             7,247,759             3,938,499
Noncash beneficial conversion charge .............................                   --                    --            37,045,268
                                                                          -------------         -------------         -------------
Net income (loss) applicable to common stock .....................        $   3,405,335         $  10,555,284         $ (34,432,654)
                                                                          =============         =============         =============

Earnings per share:
Basic -
  Earnings per share before extraordinary loss on early
    retirement of debt, net of tax benefit, cumulative
    effect of change in accounting for derivatives, and
    noncash beneficial conversion charge .........................        $        0.40         $        0.64         $        0.14
  Extraordinary loss on early retirement of debt, net of
    tax benefit ..................................................                (0.23)                   --                    --
  Cumulative effect of change in accounting for
    derivatives ..................................................                   --                 (0.10)                   --
  Noncash beneficial conversion charge ...........................                   --                    --                 (1.92)
                                                                          -------------         -------------         -------------
  Net income (loss) per share - basic ............................        $        0.17         $        0.54         $       (1.78)
                                                                          =============         =============         =============

Diluted -
  Earnings per share before preferred stock dividends
    (when dilutive), extraordinary loss on early
    retirement of debt, net of tax benefit, cumulative
    effect of change in accounting for derivatives, and
    noncash beneficial conversion charge .........................        $        0.30         $        0.40         $        0.14
  Extraordinary loss on early retirement of debt, net of
    tax benefit ..................................................                (0.09)                   --                    --
  Cumulative effect of change in accounting for
    derivatives ..................................................                   --                 (0.04)                   --
  Noncash beneficial conversion charge ...........................                   --                    --                 (1.92)
                                                                          -------------         -------------         -------------
  Net income (loss) per share - diluted ..........................        $        0.21         $        0.36         $       (1.78)
                                                                          =============         =============         =============

Weighted average shares outstanding, basic .......................           19,627,132            19,457,389            19,289,720
Weighted average shares outstanding, diluted .....................           52,526,462            49,648,094            19,289,720
</TABLE>

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


                                       37
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<TABLE>
<CAPTION>

                                                      COMMON STOCK            ADDITIONAL
                                                 ----------------------        PAID-IN          ACCUMULATED
                                                   SHARES        AMOUNT        CAPITAL            DEFICIT
                                                 ----------     -------     -------------      ------------
<S>                                              <C>            <C>         <C>                <C>
BALANCE, December 31, 1999 ..............        17,693,489     $35,388     $  66,406,731      $(21,127,628)
  Shares issued in acquisition ..........         1,325,000       2,650         5,468,010                --
  Exercise of options and
      warrants ..........................           417,292         834           165,533                --
  Noncash beneficial
    conversion charge ...................                --          --        37,045,268
  Net loss applicable to common
    stock ...............................                --          --                --       (34,432,654)
                                                 ----------     -------     -------------      ------------
BALANCE, December 31, 2000 ..............        19,435,781      38,872       109,085,542       (55,560,282)
                                                 ----------     -------     -------------      ------------
  Change in other comprehensive
    loss ................................                --          --                --                --
  Exercise of options and
    warrants ............................            41,000          82            81,918                --
  Net income applicable to common
    stock ...............................                --          --                --        10,555,284
                                                 ----------     -------     -------------      ------------
BALANCE, December 31, 2001 ..............        19,476,781      38,954       109,167,460       (45,004,998)
                                                 ----------     -------     -------------      ------------
  Change in other comprehensive
    loss ................................                --          --                --                --
  Exercise of options and
    warrants ............................           299,040         598              (598)               --
  Net income applicable to common
    stock ...............................                --          --                --         3,405,335
                                                 ----------     -------     -------------      ------------
BALANCE, December 31, 2002 ..............        19,775,821     $39,552     $ 109,166,862      $(41,599,663)
                                                 ==========     =======     =============      ============
</TABLE>

<TABLE>
<CAPTION>
                                                     ACCUMULATED
                                                        OTHER
                                                    COMPREHENSIVE                      COMPREHENSIVE
                                                        LOSS              TOTAL         INCOME (LOSS)
                                                    ------------      ------------      ------------
<S>                                                 <C>               <C>               <C>
BALANCE, December 31, 1999 ..............           $         --      $ 45,314,491      $  1,148,013
  Shares issued in acquisition ..........                     --         5,470,660                --
  Exercise of options and
      warrants ..........................                     --           166,367                --
  Noncash beneficial
    conversion charge ...................                     --        37,045,268
  Net loss applicable to common
    stock ...............................                     --       (34,432,654)      (34,432,654)
                                                    ------------      ------------      ------------
BALANCE, December 31, 2000 ..............                     --        53,564,132       (34,432,654)
                                                    ------------      ------------      ------------
  Change in other comprehensive
    loss ................................             (2,310,392)       (2,310,392)       (2,310,392)
  Exercise of options and
    warrants ............................                     --            82,000                --
  Net income applicable to common
    stock ...............................                     --        10,555,284        10,555,284
                                                    ------------      ------------      ------------
BALANCE, December 31, 2001 ..............             (2,310,392)       61,891,024         8,244,892
                                                    ------------      ------------      ------------
  Change in other comprehensive
    loss ................................                504,084           504,084           504,084
  Exercise of options and
    warrants ............................                     --                --                --
  Net income applicable to common
    stock ...............................                     --         3,405,335         3,405,335
                                                    ------------      ------------      ------------
BALANCE, December 31, 2002 ..............           $ (1,806,308)     $ 65,800,443      $  3,909,419
                                                    ============      ============      ============
</TABLE>

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


                                       38
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                 2002                 2001                2000
                                                                             -------------        ------------        -------------
<S>                                                                          <C>                  <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) applicable to common stock .......................       $   3,405,335        $ 10,555,284        $ (34,432,654)
     Adjustments to reconcile net income (loss)
       applicable to common stock to net cash provided
       by operating activities:
       Extraordinary loss on early retirement of debt, net of
            tax benefit ..............................................           4,489,133                  --                   --
       Cumulative effect of change in accounting for
            derivatives ..............................................                  --           1,860,685                   --
       Noncash beneficial conversion charge ..........................                  --                  --           37,045,268
       Preferred stock dividends .....................................           7,659,133           7,247,759            3,938,499
       Depreciation ..................................................          15,287,681          13,578,618            7,557,599
       Amortization ..................................................           1,375,898           6,454,110            4,694,710
       Provision for deferred income taxes ...........................           6,783,859             573,247                   --
       Gain on sale of property, machinery and
          equipment ..................................................            (244,472)           (221,239)             (30,192)
     Changes in working capital and other items,
        excluding the effects of acquisitions:
        Accounts receivable ..........................................          (4,693,054)           (405,573)            (768,558)
        Prepaid expenses and other assets ............................          (8,661,256)         (3,211,420)          (2,351,607)

  Increase in the following:
        Accounts payable, accrued expenses, and other
          liabilities ................................................           4,249,234           1,776,856            3,967,204
                                                                             -------------        ------------        -------------
        Net cash provided by operating activities ....................          29,651,491          38,208,327           19,620,269
                                                                             -------------        ------------        -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of businesses including contingent
       consideration, net of cash acquired ...........................          (4,553,341)         (1,708,757)        (245,385,665)
  Purchases of property, machinery and equipment .....................         (12,534,107)        (13,312,534)          (5,805,151)
  Proceeds from sale of property, machinery and
       equipment .....................................................             602,309             967,628              176,723
  Other ..............................................................            (204,102)              4,430               68,097
                                                                             -------------        ------------        -------------
       Net cash used in investing activities .........................         (16,689,241)        (14,049,233)        (250,945,996)
                                                                             -------------        ------------        -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from debt .................................................         220,000,000                  --          285,456,070
  Payments on debt ...................................................        (226,745,374)        (27,079,475)        (100,722,093)
  Debt issuance costs ................................................          (7,310,456)            (72,289)         (10,406,439)
  (Increase) decrease in restricted cash .............................           1,080,759          (1,434,929)           1,819,930
  Issuance of preferred stock, net of offering costs .................                  --                  --           59,428,679
  Exercise of options and warrants ...................................                  --              82,000              166,367
                                                                             -------------        ------------        -------------
      Net cash provided by (used in) financing
        activities ...................................................         (12,975,071)        (28,504,693)         235,742,514
                                                                             -------------        ------------        -------------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS ...................................................             (12,821)         (4,345,599)           4,416,787
CASH AND CASH EQUIVALENTS, beginning of year .........................             251,821           4,597,420              180,633
                                                                             -------------        ------------        -------------
CASH AND CASH EQUIVALENTS, end of year ...............................       $     239,000        $    251,821        $   4,597,420
                                                                             =============        ============        =============
SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid ......................................................       $  24,038,199        $ 25,576,646        $  15,913,071
  Taxes paid .........................................................       $     361,216        $    276,426        $     419,218
</TABLE>


                                       39
<PAGE>

NONCASH INVESTING AND FINANCING ACTIVITIES

      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 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.

      During 2002, dividends totaled approximately $7,659,000, of which
approximately $6,605,000 represents the eight percent dividend on the Company's
Preferred Stock that was paid with additional shares of preferred stock, and
approximately $1,054,000 represents accretion and amortization of issuance
costs.

      During 2002, the Company issued nonrecourse bonds totaling $21,275,000 to
fund the capital to build a biosolids, dewatering and heat drying/pelletizing
facility for the Sacramento Regional Sanitation District.

      During 2002, the Company issued an aggregate of 299,040 shares relating to
cashless exercises of certain warrants pursuant to an exemption from
registration under Section 3(a)(9) of the Securities Act.

      During 2002, the Company entered into three capital lease agreements to
purchase transportation equipment totaling approximately $9,298,000.

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


                                       40
<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 water and
wastewater residuals management company serving more than 1,000 municipal and
industrial water and 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.

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 less accumulated
depreciation. Depreciation is being provided using the straight-line method over
estimated useful lives of three to thirty 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

      Effective January 1, 2002, the Company discontinued amortization of
goodwill in accordance with its adoption of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."

      Goodwill attributable to the Company's reporting units are tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. Significant estimates used in the determination of fair value include
estimates of future cash flows, future growth rates, costs of capital and
estimates of market multiples. As required under current accounting standards,
the Company tests for impairment annually at year end unless factors become
known that an impairment may have occurred prior to year end.

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 after the employee has
separated from the Company. Noncompete agreements, net of accumulated
amortization at December 31, 2002 and 2001, totaled approximately $312,000 and
$421,000, respectively. Amortization expense was approximately $108,000 in 2002,
$124,000 in 2001, and $72,000 in 2000.


                                       41
<PAGE>

DEFERRED FINANCING COSTS

      Deferred financing costs, net of accumulated amortization at December 31,
2002 and 2001, totaled approximately $5,947,000 and $7,012,000, 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.

USE OF ESTIMATES

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

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

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

            Property and Equipment/Long-Lived Assets - Management adopted SFAS
      No. 144 during the first quarter 2002. Property and equipment is reviewed
      for impairment pursuant to the provisions of SFAS No. 144, "Accounting for
      the Impairment or Disposal of Long-Lived Assets." The carrying amount of
      an asset (group) is considered impaired if it exceeds the sum of our
      estimate of the undiscounted future cash flows expected to result from the
      use and eventual disposition of the asset (group), excluding interest
      charges.

            The Company has contracts for the design, permitting and
      construction of facilities. The Company has approximately $4,505,000 of
      design and permitting costs included in other long-term assets at
      December 31, 2002. If the permits and/or other government approvals are
      not obtained, the Company may not be reimbursed for its costs incurred.

            Goodwill - Goodwill attributable to the Company's reporting units
      are tested for impairment by comparing the fair value of each reporting
      unit with its carrying value. Significant estimates used in the
      determination of fair value include estimates of future cash flows, future
      growth rates, costs of capital and estimates of market multiples. As
      required under current accounting standards, the Company tests for
      impairment annually at year end unless factors become known that an
      impairment may have occurred prior to year end.

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

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

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


                                       42
<PAGE>

            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 15
percent, 14 percent and 11 percent of total revenue for the years ended
December 31, 2002, 2001 and 2000, respectively. No other customers accounted for
more than ten percent of revenues. The Company reviews its accounts receivable
and provides allowances as deemed necessary.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued liabilities approximate their fair values because of the
short-term nature of these instruments. With the exception of the $150 million
Senior Subordinated Notes, management believes the carrying amounts of the
current and long-term debt approximate their fair value based on interest rates
for the same or similar debt offered to the Company having the same or similar
terms and maturities. As of December 31, 2002, the fair value of the $150
million Senior Subordinated Notes approximated $156 million.

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 No. 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
accumulated 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 No. 141 requires all business combinations initiated
after June 30, 2001, to be accounted for using the purchase method. Under SFAS
No. 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. The Company
completed the initial impairment test required by the provisions of SFAS No. 142
as of January 1, 2002, and determined that there was no impairment of the
Company's goodwill.

      Effective January 1, 2002, the Company discontinued the amortization of
goodwill in accordance with its adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets." The following table provides pro forma disclosure of net
income and earnings per share for the years ended December 31, 2001 and 2000, as
if goodwill had not been amortized and disclosure of actual results for the
year ended December 31, 2002, for comparative purposes:


                                       43
<PAGE>

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED
                                                                                              DECEMBER 31,
                                                                               ---------------------------------------------
                                                                                  2002            2001             2000
                                                                               ----------      -----------      ------------
<S>                                                                                            <C>              <C>
            Reported net income applicable to common stock ..............      $3,405,335      $10,555,284      $(34,432,654)
            Add back: Goodwill amortization, net of tax .................              --        3,313,805         3,515,931
                                                                               ----------      -----------      ------------
            Adjusted net income .........................................      $3,405,335      $13,869,089      $(30,916,723)
                                                                               ==========      ===========      ============

            Basic income per share:
                Reported earnings per share .............................      $     0.17      $      0.54      $      (1.78)
                Adjusted earnings per share .............................            0.17             0.71             (1.60)

            Diluted income per share:
                Reported earnings per share .............................      $     0.21      $      0.36      $      (1.78)
                Adjusted earnings per share .............................            0.21             0.43             (1.60)
</TABLE>

      The changes in the carrying amount of goodwill for the year ended
December 31, 2002, were as follows (in thousands):

<TABLE>
<S>                                                                               <C>
                    Balance at January 1, 2002 ...............................    $  163,739,059
                    Goodwill acquired during the year ........................         4,643,196
                    Adjustments ..............................................            81,615
                                                                                  --------------
                    Balance at December 31, 2002 .............................    $  168,463,870
                                                                                  ==============
</TABLE>

      The goodwill acquired during the year relates to the Company's acquisition
of Earthwise Organics, Inc. and Earthwise Trucking (collectively "Earthwise")
(see Note 2), while goodwill adjustments primarily represent payments of
contingent consideration made on acquisitions prior to 2002.

      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. The Company's asset
retirement obligations primarily consist of equipment dismantling and foundation
removal at certain of its facilities and temporary storage facilities. The
estimated noncash transition adjustment of approximately $500,000, net of tax,
related to the adoption of this statement will be reflected as "cumulative
effect of a change in accounting for asset retirement obligations" in the
statement of operations for the three months ended March 31, 2003.

      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.
The Company has adopted SFAS No. 144 during the first quarter of 2002 and there
was no effect on the Company's results of operation and financial position.

      In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent that
meets criteria for classification as an extraordinary item. SFAS No. 145 is
effective for the Company beginning January 1, 2003. As a result of this
statement, the Company expects to reclassify its 2002 extraordinary loss on
early extinguishments of debt, net of tax, above the line to other expense and
income tax expense, respectively.


                                       44
<PAGE>

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. The
Company adopted SFAS No. 146 during the first quarter of 2003 and there was no
effect on the Company's results of operations and financial position.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair-value-based method of accounting for stock-based
employee compensation. Companies must disclose in both annual and interim
financial statements the method used to account for stock-based compensation.
The Company will continue to apply APB Opinion No. 25 and related
interpretations in accounting for its plans. Therefore, no compensation cost has
been recognized in the consolidated financial statements for the Company's stock
option plans.

      During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, which is effective for fiscal years beginning after
December 15, 1995, establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
SFAS No. 123 requires, among other things, that compensation cost be calculated
for fixed stock options at the grant date by determining fair value using an
option-pricing model. The Company has the option of recognizing the compensation
cost over the vesting period as an expense in the income statement or making pro
forma disclosures in the notes to the financial statements for employee
stock-based compensation.

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

<TABLE>
<CAPTION>
                                                                     2002                 2001                 2000
                                                                 -----------          -----------          ------------
<S>                                                              <C>                  <C>                  <C>
            Net income (loss)
              as reported ............................           $ 3,405,335          $10,555,284          $(34,432,654)
            Pro forma for SFAS No. 123 ...............           $   707,960          $ 6,432,514          $(38,297,625)
            Diluted earnings (loss) per share-
              as reported ............................           $      0.21          $      0.36          $      (1.78)
            Pro forma for SFAS No. 123 ...............           $      0.16          $      0.13          $      (1.99)
</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 $1.35, $1.49, and $2.29 for grants made during the years ended
December 31, 2002, 2001, and 2000, respectively. The following assumptions were
used for option grants in 2002, 2001, and 2000, respectively: expected
volatility of 42 percent, 82 percent and 88 percent; risk-free interest rates of
5.20 percent, 4.97 percent and 6.42 percent; 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.

      In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The Company has adopted the disclosure requirements
of FIN 45 in the 2002 consolidated financial statements and will apply the
initial recognition and measurement provisions of the standard in 2003.

(2) ACQUISITIONS

2002 ACQUISITION

In August 2002, the Company purchased Earthwise, a Class A biosolids and manure
composting and marketing company. In connection with the purchase of Earthwise,
the former owners are entitled to receive up to an additional $4,000,000 over
the next three years if certain performance targets are met. The preliminary


                                       45
<PAGE>

allocation of the purchase price, which is subject to final adjustment, resulted
in approximately $4,643,000 of goodwill. The assets acquired and liabilities
assumed relating to the acquisition are summarized below:

<TABLE>
<S>                                                                                           <C>
            Cash paid, including transaction costs, net of cash acquired .........            $ 3,580,000
            Note payable to seller ...............................................              1,500,000
            Less:  Net assets acquired ...........................................               (437,000)
                                                                                              -----------
            Goodwill .............................................................            $ 4,643,000
                                                                                              ===========
</TABLE>

The note payable to the former owners is due in three equal, annual installments
beginning in October 2003, with interest payable quarterly at a rate of five
percent.

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 and subsequent performance
target payments resulted in approximately $108,833,000 of goodwill that was
amortized through December 2001. The assets acquired and liabilities assumed
relating to the 2000 Acquisitions are summarized below and include $1,201,000
paid to former owners during 2002 for attaining certain performance targets:

<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 ...................................................               248,293,000
              Less: Fair value of net tangible assets acquired .............               139,460,000
                                                                                          ------------
              Goodwill .....................................................              $108,833,000
                                                                                          ============
</TABLE>

      The following unaudited pro forma information for 2000 set forth below
gives effect to the 2000 Acquisitions. 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
                                                                                              ----
                                                                                           (UNAUDITED)
<S>                                                                                  <C>
            Revenue ..............................................................        $248,700,000
            Net income before preferred stock dividends ..........................          10,635,000
            Net income applicable to common stock ................................           3,541,000
            Net earnings per share
              Basic ..............................................................        $       0.18
              Diluted ............................................................        $       0.18
</TABLE>


                                       46
<PAGE>

(3) PROPERTY, MACHINERY AND EQUIPMENT

      Property, machinery and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                    ESTIMATED USEFUL    ---------------------------------
                                                                      LIFE-IN YEARS         2002                  2001
                                                                    ----------------    ------------         ------------
<S>                                                                 <C>                 <C>                  <C>
                Land ........................................              N/A          $  3,568,430         $  3,546,730
                Buildings and improvements ..................              7-25           32,739,864           32,071,873
                Machinery and equipment .....................              3-30          211,160,630          194,272,860
                Office furniture and equipment ..............              3-10            3,842,703            1,917,053
                Construction in process .....................                --            6,159,810            3,571,510
                                                                                        ------------         ------------
                                                                                         257,471,437          235,380,026
                Less:  Accumulated depreciation .............                             44,140,279           29,265,759
                                                                                        ------------         ------------
                                                                                        $213,331,158         $206,114,267
                                                                                        ============         ============
</TABLE>

(4) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

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

<TABLE>
                                                                                           DECEMBER 31,
                                                                          ---------------------------------------------
                                                                              2002             2001             2000
                                                                          -----------       ----------      -----------
<S>                                                                       <C>               <C>             <C>
            Balance at beginning of year ...........................      $ 2,164,866       $1,701,475      $   522,896
            Uncollectible receivables written off ..................         (868,910)              --          (45,000)
            Allowance for doubtful accounts established
              through purchase accounting and charged through
              expense ..............................................           35,000          463,391        1,223,579
                                                                          -----------       ----------      -----------
            Balance at end of year .................................      $ 1,330,956       $2,164,866      $ 1,701,475
                                                                          ===========       ==========      ===========
</TABLE>

      Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                   ---------------------------------
                                                                                      2002                   2001
                                                                                   -----------           -----------
<S>                                                                                <C>                   <C>
                Accounts payable .......................................           $30,341,323           $25,447,341
                Accrued legal and other claims costs ...................               799,490             2,238,540
                Accrued interest .......................................             4,252,521             2,711,473
                Accrued salaries and benefits ..........................             5,780,429             3,618,286
                Accrued insurance ......................................             2,189,103               865,214
                Other accrued expenses .................................             5,448,598             6,070,205
                                                                                   -----------           -----------
                Total ..................................................           $48,811,464           $40,951,059
                                                                                   ===========           ===========
</TABLE>

(5)  LONG-TERM DEBT OBLIGATIONS

     Long-term debt obligations consist of the following:

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                   ------------------------------------
                                                                                       2002                   2001
                                                                                   -------------          -------------
<S>                                                                                <C>                    <C>
            Revolver .....................................................         $          --          $          --
            Credit facility -- term loans ................................            60,336,250            161,936,292
            Subordinated debt ............................................           150,000,000             52,760,393
            Fair value adjustment related to subordinated debt ...........                    --                801,857
            Notes payable to seller ......................................             1,500,000                     --
            Other notes payable ..........................................                26,140                 32,674
                                                                                   -------------          -------------
                  Total debt .............................................           211,862,390            215,531,216
            Less: Current maturities .....................................            (1,111,410)           (12,880,693)
                                                                                   -------------          -------------
                  Long-term debt, net of current maturities ..............         $ 210,750,980          $ 202,650,523
                                                                                   =============          =============
</TABLE>


                                       47
<PAGE>

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 was subsequently syndicated on March 15,
2000, and amended August 14, 2000, and February 25, 2002, increasing the
capacity.

      On May 8, 2002, the Company entered into an amended and restated Senior
Credit Agreement by and among the Company, Bank of America, N.A., and certain
other lenders to fund working capital for acquisitions, to provide working
capital for operations, to refinance existing debt, to fund capital expenditures
and for 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 loan commitments under the Senior Credit Agreement are as follows:

      (i)   Revolving Loan up to $50,000,000 outstanding at any one time;

      (ii)  Term B Loans (which, once repaid, may not be reborrowed) of
            $70,000,000; and

      (iii) Letters of Credit up to $50,000,000 as a subset of the Revolving
            Loan. At December 31, 2002, the Company had approximately
            $26,300,000 of Letters of Credit outstanding.

      The total credit facility can be increased to $150 million upon the
request of the Company and bank approval. The amounts borrowed under the Senior
Credit Agreement are subject to repayment as follows:

<TABLE>
<CAPTION>
                                                                  REVOLVING           TERM
                           PERIOD ENDING DECEMBER 31,                LOAN             LOANS
                      ----------------------------------          ---------          -------
<S>                                                                 <C>              <C>
                      2002 .............................                 --            0.25%
                      2003 .............................                 --            1.00%
                      2004 .............................                 --            1.00%
                      2005 .............................                 --            1.00%
                      2006 .............................                 --            1.00%
                      2007 .............................            100.00%            1.00%
                      2008 .............................                 --           94.75%
                                                                    ------           ------
                                                                    100.00%          100.00%
                                                                    ======           ======
</TABLE>

      The Senior Credit Agreement includes mandatory repayment provisions
related to excess cash flows, proceeds from certain asset sales, debt issuances
and equity issuances, all as defined in the Senior Credit Agreement. These
mandatory repayment provisions may also reduce the available commitment. The
Senior Credit Agreement contains standard covenants including compliance with
laws, limitations on capital expenditures, restrictions on dividend payments,
limitations on mergers and compliance with financial covenants. The Company
believes that it is in compliance with those covenants as of December 31, 2002.
The Senior Credit Agreement is secured by all the assets of the Company and
expires on December 31, 2008. As of December 31, 2002, the Company had
outstanding under the Senior Credit Agreement approximately $60,300,000, which
was primarily used to refinance existing debt. As of December 31, 2002, the
Company had approximately $23,700,000 of unused borrowings under the Senior
Credit Agreement.

SENIOR SUBORDINATED NOTES

         In April 2002, the Company issued $150 million in principal amount of
its 9 1/2 percent Senior Subordinated Notes due on April 1, 2009 (the "Notes").
The Notes are unsecured senior indebtedness and are guaranteed by all of the
Company's existing and future domestic subsidiaries, other than subsidiaries
treated as unrestricted subsidiaries ("the Guarantors"). As of December 31,
2002, all subsidiaries, other than the subsidiaries formed to own and operate
the Sacramento dryer project ("the Non-Guarantor Subsidiaries") (see Note 6),
were guarantors of the Notes. Interest on the Notes accrues from April 17, 2002,
and is payable semi-annually on April 1 and October 1 of each year,


                                       48
<PAGE>

commencing October 1, 2002. On or after April 1, 2006, the Company may redeem
some or all of the Notes at the redemption prices (expressed as percentages of
principal amount) listed below, plus accrued and unpaid interest and liquidated
damages, if any, on the Notes redeemed, to the applicable date of redemption, if
redeemed during the 12-month period commencing on April 1 of the years indicated
below:

<TABLE>
<CAPTION>
                                YEARS                                 LOAN
                  ------------------------------                    --------
<S>                                                                 <C>
                  2006 .........................                    104.750%
                  2007 .........................                    102.375%
                  2008 and thereafter ..........                    100.000%
</TABLE>

      At any time prior to April 1, 2005, the Company may redeem up to 35
percent of the original aggregate principal amount of the Notes with the net
cash of public offerings of equity, provided that at least 65 percent of the
original aggregate principal amount of the Notes remains outstanding after the
redemption. Upon the occurrence of specified change of control events, unless
the Company has exercised its option to redeem all the Notes as described above,
each holder will have the right to require the Company to repurchase all or a
portion of such holder's Notes at a purchase price in cash equal to 101 percent
of the aggregate principal amount of the Notes repurchased plus accrued and
unpaid interest and liquidated damages, if any, on the Notes repurchased, to the
applicable date of purchase. The Notes were issued under an indenture, dated as
of April 17, 2002, among the Company, the Guarantors and Wells Fargo Bank
Minnesota, National Association, as trustee (the "Indenture"). The Indenture
limits the ability of the Company and the restricted subsidiaries to, among
other things, incur additional indebtedness and issue preferred stock, pay
dividends or make other distributions, make other restricted payments and
investments, create liens, incur restrictions on the ability of certain of its
subsidiaries to pay dividends or other payments to the Company, enter into
transactions with affiliates, and engage in mergers, consolidations and certain
sales of assets.

      The Notes and the guarantees of the Guarantors are (i) unsecured;
(ii) subordinate in right of payment to all existing and future senior
indebtedness (including all borrowings under the new credit facility and surety
obligations) of Synagro and the Guarantors; (iii) equal in right of payment to
all future and senior subordinated indebtedness of Synagro and the Guarantors;
and (iv) senior in right of payment to future subordinated indebtedness of
Synagro and the Guarantors.

      The net proceeds from the sale of the Notes was approximately $145
million, and were used to repay and refinance existing indebtedness under the
Company's previously existing credit facility and subordinated debt as of
April 17, 2002.

SUBORDINATED DEBT

      On January 27, 2000, the Company entered into an agreement with GTCR
Capital providing up to $125 million in subordinated debt financing to fund
acquisitions and for certain other uses, in each case as approved by the Board
of Directors of the Company and GTCR Capital. The agreement was amended on
August 14, 2000, allowing, among other things, for the syndication of 50 percent
of the commitment. The loans bore interest at an annual rate of 12 percent that
was paid quarterly and provided warrants that were convertible into Preferred
Stock at $.01 per warrant. The agreement contained general and financial
covenants. Warrants to acquire 9,225.839 shares of Series C, D, and E Preferred
Stock were issued in connection with these borrowings and were immediately
exercised. This debt was repaid with the proceeds from the issuance of the
Notes.

EARLY EXTINGUISHMENT OF DEBT

      In conjunction with the issuance of the Notes and entering into the Senior
Credit Agreement, the Company paid off the then outstanding subordinated debt
and credit facility. The Company recognized an extraordinary charge of
approximately $4.5 million, net of income tax benefit, relating to the write-off
of unamortized deferred financing costs and the difference in the debt carrying
value affected by prior adjustments relating to the reverse swap previously
designated as a fair value hedge.

NOTES PAYABLE TO SELLER

      In connection with the Earthwise acquisition, the Company entered into a
$1,500,000 note payable with the former owners of Earthwise. The note is payable
in three equal, annual installments beginning in October 2003. Interest is
payable quarterly at an annual rate of five percent beginning October 1, 2002.


                                       49
<PAGE>

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 No. 133. Changes in the fair
value of these derivatives recognized in earnings in 2001 as interest expense
totaled $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 12
percent subordinated debt, and terminated the previously existing interest rate
swap and option agreements noted above. Accordingly, 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 of accumulated other comprehensive loss recognized as
a noncash expense in 2002 and 2001 was approximately $813,000 and $532,466,
respectively. The Company had 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 debited to interest
expense, net, for the twelve months ended December 31, 2001, totaled
approximately $267,000.

     The 12 percent subordinated debt was repaid on April 17, 2002, with the
proceeds from the sale of the Notes. Accordingly, the Company discontinued using
hedge accounting for the reverse swap agreement on April 17, 2002. From
April 17, 2002, through June 25, 2002, the fair value of this fixed-to-floating
reverse swap decreased by $1.7 million. This $1.7 million mark-to-market gain is
included in other income in the Company's consolidated statement of operations.
On June 25, 2002, the Company entered into a floating-to-fixed interest rate
swap agreement that is expected to substantially offset market value changes in
the Company's reverse swap agreement. The liability related to this reverse swap
agreement and the floating-to-fixed offset agreement totaling approximately
$3,437,000 is reflected in other long-term liabilities at December 31, 2002.
Gains recognized during the year ended December 31, 2002, related to the
floating-to-fixed interest rate swap agreement were approximately $655,000,
while losses recognized related to the reverse swap agreement since June 25,
2002, were approximately $840,000. The amount of the ineffectiveness of the
reverse swap agreement debited to other income is approximately $185,000 for the
twelve months ended December 31, 2002.

      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 1/2 percent 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, totaled $36,000 and $66,000 for the
twelve months ended December 31, 2002 and 2001, respectively.

FUTURE PAYMENTS

      At December 31, 2002, future minimum principal payments of long-term debt,
Nonrecourse Project Revenue Bonds (see Note 6) and Capital Lease Obligations
(see Note 7) are as follows:

<TABLE>
<CAPTION>
                                                                         NONRECOURSE          CAPITAL
                                                      LONG-TERM            PROJECT             LEASE
                   YEAR ENDED DECEMBER 31,              DEBT            REVENUE BONDS        OBLIGATIONS            TOTAL
                ---------------------------         ------------        -------------        -----------        ------------
<S>                                                 <C>                 <C>                  <C>                <C>
                2003 ......................         $  1,111,410         $ 2,430,000         $1,279,667         $  4,821,077
                2004 ......................            1,111,410           2,570,000          1,405,082            5,086,492
                2005 ......................            1,111,410           2,710,000          1,406,829            5,228,239
                2006 ......................              611,410           1,191,000          1,396,572            3,198,982
                2007 ......................              604,875                  --          1,032,342            1,637,217
                2008-2012 .................          207,311,875          21,565,000          2,697,299          231,574,174
                2013-2017 .................                   --          26,274,870                 --           26,274,870
                Thereafter ................                   --          10,530,349                 --           10,530,349
                                                    ------------         -----------         ----------         ------------
                Total .....................         $211,862,390         $67,271,219         $9,217,791         $288,351,400
                                                    ============         ===========         ==========         ============
</TABLE>

      The Company estimates the fair value of long-term debt as of December 31,
2002 and 2001, to be approximately the same as the recorded value.


                                       50
<PAGE>

(6) NONRECOURSE PROJECT REVENUE BONDS

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,      DECEMBER 31,
                                                                                               2002              2001
                                                                                           ------------      ------------
<S>                                                                                        <C>               <C>
              Maryland Energy Financing Administration Limited Obligation
                Solid Waste Disposal Revenue Bonds, 1996 series --
                   Revenue bonds due 2002 to 2005 at stated interest
                     rates of 5.65% to 5.85% ......................................        $  7,710,000      $ 10,010,000
                   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% ....          22,359,870        22,360,000
                                                                                           ------------      ------------
                                                                                             46,364,870        48,665,000
              California Pollution Control Financing Authority Solid Waste
                Revenue Bonds --
                   Series 2002A -- Revenue bonds due 2008 to 2024
                     at stated interest rates of 4.375% to 5.50% ..................          19,715,349                --
                   Series 2002B-- Revenue bonds due 2006 at stated
                     interest rate of 4.25% .......................................           1,191,000                --
                                                                                           ------------      ------------
                                                                                             20,906,349                --
                                                                                           ------------      ------------
              Total nonrecourse project revenue bonds .............................          67,271,219        48,665,000
                   Less:  Current maturities ......................................          (2,430,000)       (2,300,000)
                                                                                           ------------      ------------
                   Nonrecourse project revenue bonds, net of current maturities....        $ 64,841,219      $ 46,365,000
                                                                                           ============      ============
              Amounts recorded in other assets as restricted cash -
                debt service fund .................................................           7,491,176         5,780,152
</TABLE>

      In 1996, the Maryland Energy Financing Administration (the
"Administration") issued nonrecourse tax-exempt project revenue bonds (the
"Maryland Project Revenue Bonds") in the aggregate amount of $58,550,000. The
Administration loaned the proceeds of the Maryland Project Revenue Bonds to
Wheelabrator Water Technologies Baltimore L.L.C., now Synagro's wholly owned
subsidiary 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 Maryland Project
Revenue Bonds. The loan financed a portion of the costs of constructing thermal
facilities located in Baltimore County, Maryland, at the site of its Back River
Wastewater Treatment Plant, and in the City of Baltimore, Maryland, at the site
of its Patapsco Wastewater Treatment Plant. The Company assumed all obligations
associated with the Maryland Project Revenue Bonds in connection with its
acquisition of Bio Gro in 2000. Maryland Project Revenue Bonds in the aggregate
amount of approximately $12,185,000 have already been paid. The remaining
Maryland Project Revenue Bonds bear interest at annual rates between 5.65
percent and 6.45 percent and mature on dates between December 1, 2003, and
December 1, 2016.

      The Maryland Project Revenue Bonds are primarily collateralized by the
pledge of revenues and assets related to 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 Maryland Project Revenue Bonds.

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

      Synagro-Baltimore, L.L.C., one of the Company's 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. Synagro has agreed to pay Waste Management
$500,000 per year beginning in 2007 until the Maryland Project Revenue Bonds are
paid or its guarantee is removed. Neither Synagro-Baltimore, L.L.C nor Waste
Management has guaranteed payment of the Maryland Project Revenue Bonds or the
loan funded by the Maryland Project Revenue Bonds.

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

      At December 31, 2002, the Maryland Project Revenue Bonds were
collateralized by property, machinery and equipment with a net book value of
approximately $57,930,000 and restricted cash of approximately $6,919,000, of
which approximately $5,778,000 is in a debt service fund that is established to
partially secure certain payments and can be utilized to make the final payment
at the Company's request.


                                       51
<PAGE>

      In December 2002, the California Pollution Control Financing Authority
(the "Authority") issued nonrecourse revenue bonds in the aggregate amount of
$20,906,349 (net of original issue discount of $368,661). The nonrecourse
revenue bonds consist of $19,715,349 (net of original issue discount of
$359,661) Series 2002-A ("Series A") and $1,191,000 (net of original issue
discount of $9,000) Series 2002-B ("Series B") (collectively, the "Bonds"). The
Authority loaned the proceeds of the Bonds to Sacramento Project Finance, Inc.,
a wholly owned subsidiary of the Company, pursuant to a loan agreement dated
December 1, 2002. The purpose of the loan is to finance the design, permitting,
constructing and equipping of a biosolids dewatering and heat drying/pelletizing
facility for the Sacramento Regional Sanitation District. The Bonds bear
interest at annual rates between 4.25 percent and 5.5 percent and mature on
dates between December 1, 2006, and December 1, 2024. Currently, the Company is
in the design and permitting phases of the project.

      The Bonds are primarily collateralized by the pledge of certain revenues,
all of the property of Sacramento Project Finance, Inc., and a standby letter of
credit for $2,300,000. The facility will be owned by Sacramento Project Finance,
Inc. and leased to Synagro Organic Fertilizer Company of Sacramento, Inc., a
wholly owned subsidiary of Synagro Technologies, Inc. Synagro Organic Fertilizer
Company of Sacramento, Inc. will be obligated under a lease agreement dated
December 1, 2002, to pay base rent to Sacramento Project Finance, Inc. in an
amount exceeding the debt service of the Bonds. The facility will be located on
property owned by the Sacramento Regional County Sanitation District
("Sanitation District"). The Sanitation District will provide the principal
source of revenues to Synagro Organic Fertilizer Company of Sacramento, Inc.
through a service fee under a contract that has been executed.

      At the Company's option it may cause the redemption of some Series A and
Series B Bonds early subject to redemption prices specified in the loan
agreement.

      The loan agreement requires that Sacramento Project Finance, Inc. place
certain monies in restricted accounts and that those funds be used for
designated purposes (e.g., operation and maintenance expense account, reserve
requirement accounts, etc.). Monies in these funds will remain restricted until
the Bonds are paid.

      At December 31, 2002, the Bonds are partially collateralized by restricted
cash of approximately $19,446,000, of which approximately $1,713,000 is in a
debt service fund that is established to secure certain payments and can be
utilized to make the final payment at the Company's request, and a standby
letter of credit of $2,300,000. Synagro Technologies, Inc. is not a guarantor of
the Bonds or the loan funded by the Bonds.

      Nonrecourse Project Revenue Bonds are excluded from the financial covenant
calculations required by the Company's Senior Credit Facility.

(7) CAPITAL LEASE OBLIGATIONS

      During 2002, the Company entered into three capital lease agreements to
purchase transportation equipment. The lease terms are for three to six years
with interest rates from 6.03 percent to 8.61 percent. Equipment under capital
lease at December 31, 2002, totaled $9,217,791, with related accumulated
depreciation of $48,794. There were no capital leases at December 31, 2001.
Future minimum lease payments, together with the present value of the minimum
lease payments, are as follows:

<TABLE>
<CAPTION>
             YEAR ENDED DECEMBER 31,
             -----------------------
<S>                                                                                    <C>
                  2003 ........................................................        $  1,914,884
                  2004 ........................................................           1,964,243
                  2005 ........................................................           1,844,893
                  2006 ........................................................           1,676,336
                  2007 ........................................................           1,248,143
                  Thereafter ..................................................           2,697,296
                                                                                       ------------
             Total minimum lease payments .....................................          11,345,795
             Amount representing interest .....................................          (2,128,004)
                                                                                       ------------
                  Present value of minimum lease payments .....................           9,217,791
                  Current portion of capital lease obligations ................          (1,279,667)
                                                                                       ------------
                  Long-term capital lease obligation ..........................        $  7,938,124
                                                                                       ============
</TABLE>


                                       52
<PAGE>

(8) INCOME TAXES

      The following summarizes the provision for income taxes included in the
Company's consolidated statement of operations:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                                ---------------------------------------
                                                                   2002           2001           2000
                                                                -----------     --------      ---------
<S>                                                             <C>             <C>           <C>
                Provision for income taxes .............        $ 9,535,264     $573,000      $      --
                Income tax benefit related to
                  extraordinary loss on debt ...........         (2,751,405)          --             --
                                                                -----------     --------      ---------
                                                                $ 6,783,859     $573,000      $      --
                                                                ===========     ========      =========
</TABLE>

     Federal and state income tax provisions are as follows:

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                          ------------------------------------------
                                                             2002             2001            2000
                                                          ----------       --------        ---------
<S>                                                       <C>              <C>             <C>
                      Federal:
                        Current .............             $       --       $     --        $      --
                        Deferred ............              6,250,859        390,000         (350,000)
                      State:
                        Current .............                137,000        175,000          350,000
                        Deferred ............                396,000          8,000               --
                                                          ----------       --------        ---------
                                                          $6,783,859       $573,000        $      --
                                                          ==========       ========        =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                         ---------------------------
                                                                                         2002      2001        2000
                                                                                         ----      -----       -----
<S>                                                                                      <C>       <C>         <C>
                Provision at the statutory rate .................................        35.0%      35.0%       35.0%
                Increase (decrease) resulting from:
                  Goodwill, net .................................................         0.0%       0.0%       (5.0)%
                  State income taxes, net of benefit for federal deduction ......         2.7%       0.6%        5.0%
                  Other items, net ..............................................         0.3%     (11.4)%       0.0%
                  Change in accounting for derivatives ..........................         0.0%      (3.2)%       0.0%
                  Special credits, net ..........................................         0.0%      (9.8)%       0.0%
                  Change in valuation allowance .................................         0.0%      (8.4)%     (35.0)%
                                                                                         ----      -----       -----
                                                                                         38.0%       2.8%        0.0%
                                                                                         ====      =====       =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                    -------------------------------
                                                                                        2002               2001
                                                                                    ------------       ------------
<S>                                                                                 <C>                <C>
                Deferred tax assets --
                  Net operating loss carryforwards ...........................      $ 31,840,000       $ 25,540,000
                  Alternative minimum tax credit .............................            40,000             40,000
                  Accruals not currently deductible for tax purposes .........         3,755,000          6,025,000
                  Allowance for bad debts ....................................           403,000            744,000
                  Other ......................................................         1,402,000          1,783,000
                                                                                    ------------       ------------
                     Total deferred tax assets ...............................        37,440,000         34,132,000
                Valuation allowance for deferred tax assets ..................           (94,000)        (1,297,000)
                Deferred tax liability --
                  Differences between book and tax bases of fixed assets .....       (35,900,000)       (26,577,000)
                  Differences between book and tax bases of goodwill .........        (5,623,000)        (4,681,000)
                                                                                    ------------       ------------
                     Total deferred tax liabilities ..........................       (41,523,000)       (31,258,000)
                                                                                    ------------       ------------
                     Net deferred tax asset (liability) ......................      $ (4,177,000)      $  1,577,000
                                                                                    ============       ============
</TABLE>


                                       53
<PAGE>

      As of December 31, 2002, the Company generated net operating loss ("NOL")
carryforwards of approximately $86 million 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. A valuation allowance was established in prior years to partially
offset the net deferred tax asset at December 31, 2002 and 2001. The valuation
allowance decreased by $1,203,000 for the year ended December 31, 2002, due to
basis differences in fixed assets and goodwill reduced by deferred tax assets
related to increases in tax NOL carryforwards. The change in the valuation
allowance in 2002 was charged to goodwill.

(9) COMMITMENTS AND CONTINGENCIES

LEASES

      The Company leases certain facilities and equipment for its corporate and
operations offices under noncancelable long-term operating lease agreements.
Rental expense was approximately $5,036,000, $4,794,000 and $3,861,000 for 2002,
2001, and 2000, respectively. Minimum annual rental commitments under these
leases are as follows:

<TABLE>
<CAPTION>
                        YEAR ENDING DECEMBER 31,
                        ------------------------
<S>                                                              <C>
                        2003 ........................            $   5,203,000
                        2004 ........................                4,720,000
                        2005 ........................                3,968,000
                        2006 ........................                3,477,000
                        2007 ........................                2,762,000
                        Thereafter ..................               17,008,000
                                                                 -------------
                                                                 $  37,138,000
                                                                 =============
</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 top ten
contracts), provide for termination of the contract by the customer after giving
relatively short notice (in some cases as little as ten 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 on 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, 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.


                                       54
<PAGE>

Riverside County

      The Company leases land and operates a composting facility in Riverside
County, California, under a conditional use permit ("CUP") that expires on
January 1, 2010. The CUP allows for a reduction in material intake and CUP term
in the event of noncompliance with the CUP's terms and conditions. In response
to alleged noncompliance due to excessive odor, on or about June 22, 1999, the
Riverside County Board of Supervisors attempted to reduce the Company's intake
of biosolids from 500 tons per day to 250 tons per day. The Company believes
that this was not an authorized action by the Board of Supervisors. On September
15, 1999, the Company was granted a preliminary injunction restraining and
enjoining the County of Riverside ("County") from restricting the Company's
intake of biosolids at its Riverside composting facility.

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

      No trial date has been set at this time. The Company continues to operate
under the existing CUP while the parties explore settlement. The next status
conference before the Court is scheduled for July 7, 2003. Proposed terms of
settlement set forth in an expired Memorandum of Understanding with the County
serve as the basis for continuing settlement discussions, which terms include a
plan to relocate the compost facility to a piece of land owned by the County or
other acceptable sites. While the County has rejected the Company's most recent
offer to relocate, on October 22, 2002, the County approved a request by the
Santa Ana Watershed Project Authority ("SAWPA") to take over the process of
finding a new site and competitively negotiating with a company to operate the
site. This action provided the basis for a stay of the litigation which the
County approved on January 7, 2003. The stay is for six months, until July 7,
2003. During this time, the County has asked that SAWPA show progress in
developing a new facility. If SAWPA shows progress toward a replacement
operation, the County and the Company will begin discussions toward a
settlement, which will allow operations to continue at the existing facility
until such time as a new SAWPA-owned or endorsed facility becomes operational.
Development of the SAWPA facility will take approximately three years.

      Whether or not the parties reach settlement based on the terms of the
expired Memorandum of Understanding or otherwise, the site may be closed. The
Company may incur additional costs related to contractual agreements, relocation
and site closure, as well as the need to obtain new permits (including some from
the County) at a new site. The Company has incurred approximately $645,000 of
project costs in connection with a new facility, which is included in property
at December 31, 2002. If the Company is unsuccessful in its efforts to either
settle or prosecute the litigation, goodwill and certain assets may be impaired.
Total goodwill associated with the reporting unit is approximately $20.6 million
at December 31, 2002. The financial impact associated with site closure prior to
the expiration of our CUP cannot be reasonably estimated at this time. Although
the Company feels that its case is meritorious, the ultimate outcome of the
litigation cannot be determined at this time.

Reliance Insurance

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

      Claims have been asserted and/or brought against the Company and its
affiliates related to alleged acts or omissions occurring during the Reliance
Coverage period. It is possible, depending on the outcome of possible claims
made with various state insurance guaranty funds, that the Company will have no,
or insufficient, insurance funds available to pay any potential losses. There
are uncertainties relating to the Company's ultimate liability, if any, for
damages arising during the Reliance Coverage Period, the availability of the
insurance coverage, and possible recovery for state insurance guaranty funds.

      In June 2002, the Company settled one such claim that was pending in
Jackson County, Texas. The full amount of the settlement was paid by insurance
proceeds; however, as part of the settlement, the Company agreed to reimburse
the Texas Property and Casualty


                                       55
<PAGE>

Insurance Guaranty Association an amount ranging from $625,000 to $2,500,000
depending on future circumstances. The Company estimated its exposure at
approximately $1.9 million for the potential reimbursement to the Texas Property
and Casualty Insurance Guaranty Association for costs associated with the
settlement of this case and for unpaid insurance claims and other costs for
which coverage may not be available due to the pending liquidation of Reliance.
The Company previously 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. The Company believes remaining accruals of
approximately $1 million as of December 31, 2002, are adequate to provide for
its exposures. The final resolution of these exposures 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 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, Synagro is seeking a judgment against AON for any and all sums that it 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. Synagro is also seeking a
declaratory judgment against the Reinsurers declaring that the Reinsurers owe
Synagro 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.

Design and Build Contract Risk

      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 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 operation. Further, as the general contractor, we are
legally responsible for the performance of our contracts and, if such contracts
are underperformed or nonperformed 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.

      The Company has experienced delays in completing the construction and
performance test requirements at a manure digestion facility. While construction
has been substantially completed, the Company is currently in the process of
conducting the performance test. The Company believes the performance test will
be met; however, there is a risk that the facility will not pass the contractual
performance requirements. The potential impact on the Company's financial
position, or results of operations if the performance test is not passed, cannot
be determined at this time.

Other

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

      As of March 21, 2003, Synagro has issued performance bonds of
approximately $127 million 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>

(10) OTHER COMPREHENSIVE LOSS

      The Company's accumulated comprehensive loss for the twelve months ended
December 31, 2002 and 2001, is summarized as follows:

<TABLE>
<CAPTION>
                                                                                         YEAR ENDED DECEMBER 31,
                                                                                   --------------------------------
                                                                                       2002                 2001
                                                                                       ----                 ----
<S>                                                                                <C>                  <C>
                Cumulative effect of change in accounting for
                   derivatives ...........................................         $(2,058,208)         $(2,058,208)
                Change in fair value of derivatives ......................          (2,200,696)          (2,200,696)
                Reclassification adjustment to earnings ..................           1,345,506              532,466
                Tax benefit of changes in fair value .....................           1,107,090            1,416,046
                                                                                   -----------          -----------
                                                                                   $(1,806,308)         $(2,310,392)
                                                                                   ===========          ===========
</TABLE>

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

(11) STOCKHOLDERS' EQUITY

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 Company's common stock and
any of its equity securities. The liquidation value of each share of Series C
Preferred Stock is $1,000 per share 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. and its affiliates for a nominal price in connection with
the issuance of subordinated debt, which were immediately converted into 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
dividing (i) the sum of (a) the number of shares to be converted multiplied by
the liquidation value and (b) the amount of accrued and unpaid dividends by (ii)
the conversion price then in effect. The initial conversion price is $2.50 per
share, provided that in order to prevent dilution, the conversion price may be
adjusted. The Series D Preferred Stock is senior to the Company's common stock
and any other of its equity securities. The liquidation value of each share of
Series D Preferred Stock is $1,000 per share. Dividends on each share of Series
D Preferred Stock accrue on a daily basis at the rate of eight percent per annum
on the aggregate liquidation value and may be paid in cash or accrued at the
Company's option. Upon conversion of the Series D Preferred Stock by the
holders, the holders may elect to


                                       57
<PAGE>

receive the accrued and unpaid dividends in shares of the Company's common stock
at the conversion price. The Series D Preferred Stock is entitled to one vote
per share. Shares of Series D Preferred Stock are subject to mandatory
redemption by the Company on January 26, 2010, at a price per share equal to the
liquidation value plus accrued and unpaid dividends.

      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. and its affiliates 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,
bringing the total Series D Preferred Stock issued to GTCR Fund VII, L.P. to
25,033.601 shares, which includes Series C Preferred Stock previously converted
to Series D Preferred Stock. If the Series D Preferred Stock were converted,
they would represent 10,013,441 shares of Common 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
dividing (i) the sum of (a) the number of shares to be converted multiplied by
the liquidation value and (b) the amount of accrued and unpaid dividends by (ii)
the conversion price then in effect. The initial conversion price is $2.50 per
share, provided that in order to prevent dilution, the conversion price may be
adjusted. The Series E Preferred Stock is senior to the Company's common stock
and any other of its equity securities. The liquidation value of each share of
Series E Preferred Stock is $1,000 per share. Dividends on each share of Series
E Preferred Stock accrue on a daily basis at the rate of eight percent per annum
on the aggregate liquidation value and may be paid in cash or accrued at the
Company's option. Upon conversion of the Series E Preferred Stock by the
holders, the holders may elect to receive the accrued and unpaid dividends in
shares of the Company's common stock at the conversion price. The Series E
Preferred Stock is entitled to one vote per share. Shares of Series E Preferred
Stock are subject to mandatory redemption by the Company on January 26, 2010, at
a price per share equal to the liquidation value plus accrued and unpaid
dividends.

      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 Fund VII, L.P. and its affiliates for a nominal price in
connection with the issuance of subordinated debt, which warrants were
immediately converted into 1,400 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 its 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.
If the Series E Preferred Stock were converted, they would represent 17,903,475
shares of common stock.

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. The additional issuances
of Series D and Series E Preferred Stock may result in noncash beneficial
conversions valued in future periods recognized as preferred stock dividends if
the market value of the Company's common stock is higher than the conversion
price at date of issuance.

EARNINGS PER SHARE

      Basic earnings per share (EPS) is computed by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding for the period. For periods in which the Company has reported either
an extraordinary item or a cumulative effect of an accounting change, the
Company uses income from continuing operations as the "control number" in
determining whether potential common shares are dilutive or antidilutive. That
is, the same number of potential common shares used in computing the diluted
per-share amount for income from continuing operations has been used in
computing all other reported diluted per-share amounts even if those amounts
will be antidilutive to their respective basic per-share amounts. Diluted EPS is


                                       58
<PAGE>

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.

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

      The following table summarizes the net income and weighted average shares
to reconcile basic EPS and diluted EPS for the fiscal years 2002, 2001, and
2000:

<TABLE>
<CAPTION>
                                                                                               YEAR ENDED DECEMBER 31,
                                                                                  ----------------------------------------------
                                                                                      2002             2001             2000
                                                                                  ------------     ------------     ------------
<S>                                                                               <C>              <C>              <C>
      Net Income:

      Net income before extraordinary loss on early retirement of debt,
         net of tax benefit, cumulative effect of change in accounting for
         derivatives, preferred stock dividends and noncash beneficial
         conversion charge ................................................       $ 15,553,601     $ 19,663,728     $  6,551,113
      Extraordinary loss on early retirement of debt, net of tax benefit
         of $2,751,405 ....................................................          4,489,133               --               --
      Cumulative effect of change in accounting for derivatives ...........                 --        1,860,685               --
                                                                                  ------------     ------------     ------------
      Net income before preferred stock dividends .........................         11,064,468       17,803,043        6,551,113
      Preferred stock dividends ...........................................          7,659,133        7,247,759        3,938,499
      Noncash beneficial conversion charge ................................                 --               --      (37,045,268)
                                                                                  ------------     ------------     ------------
      Net income (loss) applicable to common stock ........................       $  3,405,335     $ 10,555,284     $(34,432,654)
                                                                                  ============     ============     ============

      Earnings per share:

      Basic
         Earnings per share before extraordinary loss on early retirement
            of debt, net of tax benefit, cumulative effect of change in
            accounting for derivatives and noncash beneficial conversion
            charge ........................................................       $       0.40     $       0.64     $       0.14
         Extraordinary loss on early retirement of debt, net of tax benefit              (0.23)              --               --
         Cumulative effect of change in accounting for derivatives ........                 --            (0.10)              --
         Noncash beneficial conversion charge .............................                 --               --            (1.92)
                                                                                  ------------     ------------     ------------
         Net income (loss) per share ......................................       $       0.17     $       0.54     $      (1.78)
                                                                                  ============     ============     ============
      Diluted
         Earnings (loss) per share before preferred stock dividends,
            extraordinary loss on early retirement of debt, net of tax
            benefit, and cumulative effect of change in accounting for
            derivatives ...................................................       $       0.30     $       0.40     $       0.14
         Extraordinary loss on early retirement of debt,
            net of tax benefit ............................................              (0.09)              --               --
         Cumulative effect of change in accounting for derivatives ........                 --            (0.04)              --
         Noncash beneficial conversion charge .............................                 --               --            (1.92)
                                                                                  ------------     ------------     ------------
         Net income (loss) per share ......................................       $       0.21     $       0.36     $      (1.78)
                                                                                  ============     ============     ============

      Weighted average shares:

      Weighted average shares outstanding for basic earning per share .....         19,627,132       19,457,389       19,289,720
      Effect of dilutive stock options ....................................            208,058           10,095               --
      Effect of convertible preferred stock under the "if converted"
         method ...........................................................         32,691,272       30,180,610               --
                                                                                  ------------     ------------     ------------
      Weighted average shares outstanding for diluted earnings per share ..         52,526,462       49,648,094       19,289,720
                                                                                  ============     ============     ============
</TABLE>


                                       59
<PAGE>

STOCKHOLDERS' RIGHTS PLAN

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

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

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

      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.

(12) STOCK OPTION PLANS

      At December 31, 2002, 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, 2002, there were 2,379,000 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 percent (110 percent
for 10 percent 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 ten percent or
greater stockholders and for no longer than ten years for others.

      A summary of the Company's stock option plans as of December 31, 2002,
2001, and 2000, 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, 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
        Granted ................................................          1,225,000                  2.50          2.50
        Canceled ...............................................            (83,500)                 2.50          2.50
                                                                          ---------          ------------      --------
      Options outstanding at December 31, 2002 .................          5,639,489          $2.50 - 6.31      $   2.72
                                                                          =========          ============      ========
      Exercisable at December 31, 2002 .........................          1,460,089          $2.50 - 6.31      $   3.34
                                                                          =========          ============      ========
</TABLE>


                                       60
<PAGE>

1993 Plan

<TABLE>
<CAPTION>
                                                                                                                 WEIGHTED
                                                                                                                  AVERAGE
                                                                          SHARES UNDER         EXERCISE          EXERCISE
                                                                             OPTION           PRICE RANGE         PRICE
                                                                          ------------        -----------        --------
<S>                                                                       <C>                 <C>                <C>
            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
              Canceled/expired ..................................            (35,000)          3.00 - 3.63           3.18
                                                                           ---------          ------------      --------
            Options outstanding at December 31, 2002 ............          1,060,673          $2.00 - 6.31         $ 3.48
                                                                           =========          ============         ======
            Exercisable at December 31, 2002 ....................          1,060,673          $2.00 - 6.31         $ 3.48
                                                                           =========          ============         ======
</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, which were
issued at exercise prices equal to the fair market value at the grant date of
the options, and summarized as follows:

<TABLE>
<CAPTION>
                                                                                                WEIGHTED
                                                                                                AVERAGE
                                                                         SHARES UNDER           EXERCISE             EXERCISE
                                                                            OPTION             PRICE RANGE             PRICE
                                                                         ------------         ------------         ------------
<S>                                                                      <C>                  <C>                  <C>
            Options outstanding at December 31, 2000 ............          2,525,613          $2.00 - 6.94              $3.65
              Canceled ..........................................           (488,659)          2.75 - 6.31               5.01
                                                                           ---------          ------------              -----
            Options outstanding at December 31, 2001 ............          2,036,954           2.00 - 6.94               3.36
              Canceled ..........................................             (5,000)                 2.00               2.00
                                                                           ---------          ------------              -----
            Options outstanding at December 31, 2002 ............          2,031,954          $2.00 - 6.94              $3.36
                                                                           =========          ============              =====
            Exercisable at December 31, 2002 ....................          2,031,954          $2.00 - 6.94              $3.36
                                                                           =========          ============              =====
</TABLE>

      The following ranges of options were outstanding as of December 31, 2002:

<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>
            6,350,470                          $2.00 - 2.99           $   2.49                    7.76                  2,171,070
            1,533,326                           3.00 - 3.99               3.23                    5.65                  1,533,326
              251,988                           4.00 - 5.99               4.55                    7.41                    251,988
              596,332                           6.00 - 6.94               6.54                    7.28                    596,332
</TABLE>

(13) REORGANIZATION COSTS

      During 2002, the Company decided to reorganize by reducing the number of
its operating regions, which resulted in approximately $678,000 of severance
costs in connection with the termination of 24 employees and approximately
$227,000 of terminated office lease arrangements. The total costs incurred of
approximately $905,000 have been reported as reorganization costs in 2002. There
were no such reorganization costs in the prior years.

(14) SPECIAL CREDITS, NET

      In 2001, the Company recognized $5.0 million of net special credits, which
includes the $6.1 million 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


                                       61
<PAGE>
National Indemnity Company, partially offset by a $1.1 million special credit
resulting from the settlement of the Marshall litigation as such matter was
settled in an amount favorable to prior estimates. See Note 9.

(15) 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 percent 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 2002, 2001,
and 2000, the matching contributions totaled approximately $1,097,000,
$1,033,000, and $223,000, respectively.

(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

      Quarterly financial information for the years ended December 31, 2002 and
2001, is summarized as follows (in thousands, except per share data).

<TABLE>
<CAPTION>
                                                           QUARTER ENDED                                QUARTER ENDED
                                           -------------------------------------------    -----------------------------------------
                                            (in thousands, except for per share data)     (in thousands, except for per share data)
                                           MARCH 31,   JUNE 30,    SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,  SEPT. 30,  DEC. 31,
                                             2002        2002         2002       2002       2001        2001       2001      2001
                                           --------    --------    ---------   -------    --------    -------   ---------  --------
<S>                                        <C>         <C>          <C>        <C>        <C>         <C>       <C>        <C>
         Revenues ......................   $ 56,817    $ 69,499     $74,712    $71,600    $ 58,795    $65,800    $70,067    $65,534
         Gross profit ..................     13,559      19,499      19,426     18,264      13,468     18,711     19,091     17,005
         Operating income ..............      7,763      13,861      13,328     11,849       6,984     12,333     18,218      9,449
         Net income (loss) applicable to
           common stock ................   $   (412)   $   (303)    $ 2,537    $ 1,583    $ (3,973)   $ 3,443    $10,151    $   934
         Earnings per share
           Basic .......................   $  (0.02)   $  (0.02)    $  0.13    $  0.08    $  (0.21)   $  0.18    $  0.52    $  0.05
           Diluted .....................   $  (0.02)   $   0.03     $  0.08    $  0.07    $  (0.21)   $  0.11    $  0.24    $  0.05
</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.

(17) RELATED PARTY

Proceeds from the sale of $150 million aggregate principal amount of Notes were
used to repay and refinance existing indebtedness under the Company's previous
credit facility as of April 17, 2002, and the Company's subordinated debt.
Affiliates of GTCR Golder Rauner LLC and The TCW Group, Inc., the Company's
preferred stockholders, were participating lenders under the subordinated debt,
and as such, they received the portion of the proceeds from the sale of the
Notes that were used to retire all amounts outstanding under the subordinated
debt, approximately $26,380,000 each.

As part of the purchase price of Earthwise, the Company entered into a $1.5
million note agreement with the former owners who stayed on as employees. The
note is payable in three equal, annual installments beginning October 2003, and
has an interest rate of five percent paid quarterly.

(18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As discussed in Note 5, as of December 31, 2002, all of the Company's
subsidiaries, except the Non-Guarantor Subsidiaries, are Guarantors for
the Senior Subordinated Notes. Additionally, Synagro Technologies, Inc.,
the parent company, is not a Guarantor for the debt of the Non-Guarantor
Subsidiaries. Accordingly, the following condensed consolidating balance sheet
as of December 31, 2002, has been provided. As the Non-Guarantor Subsidiaries
had no significant operations and cash flows from the time they were formed in
December 2002 through December 31, 2002, no condensed consolidating statements
of operations or cash flows have been provided.

                     CONDENSED CONSOLIDATING BALANCE SHEET
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                    DECEMBER 31, 2002
                                        -------------------------------------------------------------------------
                                                     GUARANTOR      NON-GUARANTOR
                                         PARENT     SUBSIDIARIES     SUBSIDIARIES     ELIMINATIONS   CONSOLIDATED
                                        ---------   ------------   ----------------   ------------   ------------
<S>                                     <C>         <C>            <C>                <C>            <C>
               ASSETS
Current Assets:
  Cash and cash equivalents...........  $      81     $    158              --          $     --       $    239
  Restricted cash.....................         --        1,695              --                --          1,695
  Accounts receivable, net............         --       54,814              --                --         54,814
  Note receivable, current portion....         --          554              --                --            554
  Prepaid expenses and other
     current assets...................         --       15,399              --                --         15,399
                                        ---------     --------         -------          --------       --------
     Total current assets.............         81       72,620              --                --         72,701
Property, machinery & equipment, net..         --      213,331              --                --        213,331
Other Assets:
  Goodwill............................         --      168,464              --                --        168,464
  Investments in subsidiaries.........     77,482           --              --           (77,482)            --
  Restricted cash -- construction
     fund.............................         --           --          17,733                --         17,733
  Restricted cash -- debt service
     fund.............................         --        5,778           1,713                --          7,491
  Other, net..........................      6,371        5,410           1,965                --         13,746
                                        ---------     --------         -------          --------       --------
     Total assets.....................  $  83,934     $465,603         $21,411          $(77,482)      $493,466
                                        =========     ========         =======          ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current portion of long-term debt...  $   1,111     $     --         $    --          $     --       $  1,111
  Current portion of nonrecourse
     project revenue bonds............         --        2,430              --                --          2,430
  Current portion of capital lease
     obligations......................         --        1,280              --                --          1,280
  Accounts payable and accrued
     expenses.........................         --       48,811              --                --         48,811
                                        ---------     --------         -------          --------       --------
     Total current liabilities........      1,111       52,521              --                --         53,632

Long-Term Debt:
  Long-term debt obligations, net.....    209,225        1,526              --                --        210,751
  Nonrecourse project revenue bonds,
      net.............................         --       43,935          20,906                --         64,841
  Intercompany........................   (273,729)     273,729              --                --             --
  Capital lease obligations, net......         --        7,938              --                --          7,938
                                        ---------     --------         -------          --------       --------
     Total long-term debt.............    (64,504)     327,128          20,906                --        283,530
Other Long-Term Liabilities:
  Other long-term liabilities.........         --        8,977              --                --          8,977
  Fair value of interest rate swap....      3,437           --              --                --          3,437
                                        ---------     --------         -------          --------       --------
     Total other long-term
       liabilities....................      3,437        8,977              --                --         12,414
         Total liabilities............    (59,956)     388,626          20,906                --        349,576
Commitments and Contingencies
Redeemable Preferred Stock,
  69,792.29 shares issued and
  outstanding, redeemable at $1,000
  per share...........................     78,090           --              --                --         78,090
Stockholders' Equity:
  Capital.............................    109,206       38,585             505           (39,090)       109,206
  Accumulated deficit.................    (41,600)      38,392              --           (38,392)       (41,600)
  Accumulated other comprehensive
    loss..............................     (1,806)          --              --                --         (1,806)
                                        ---------     --------         -------          --------       --------
     Total stockholders' equity.......     65,800       76,977             505           (77,482)        65,800
                                        ---------     --------         -------          --------       --------
Total liabilities and stockholders'
  equity..............................  $  83,934     $465,603         $21,411          $(77,482)      $493,466
                                        =========     ========         =======          ========       ========
</TABLE>


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

      The Company filed a Form 8-K on August 7, 2002, confirming the dismissal
of Arthur Andersen LLP as the Company's independent auditor and appointing
PricewaterhouseCoopers LLP as the Company's independent auditor.

                                    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,
2002, 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.


                                       62
<PAGE>

ITEM 14. CONTROLS AND PROCEDURES

      Based on their most recent evaluation, which was completed within 90 days
of the filing of this Form 10-K, the Company's Chief Executive Officer and Chief
Financial Officer believe the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective in timely
alerting the Company's management to material information required to be
included in this Form 10-K and other Exchange Act filings.

      There were no significant changes in the Company's internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation, and there were no significant deficiencies or material
weaknesses which required corrective actions.


                                       63
<PAGE>

                                     PART IV

ITEM 15. 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 Accountants - PricewaterhouseCoopers LLP ..............          36
                  Report of Independent Public Accountants - Arthur Andersen LLP ..............          37
                  Consolidated Balance Sheets as of December 31, 2002 and 2001 ................          38
                  Consolidated Statements of Operations for the Years Ended
                     December 31,2002, 2001 and 2000 ..........................................          39
                  Consolidated Statements of Stockholders' Equity for the Years Ended
                     December 31, 2002, 2001 and 2000 .........................................          40
                  Consolidated Statements of Cash Flows for the Years Ended
                     December 31,2002, 2001 and 2000 ..........................................          41
                  Notes to Consolidated Financial Statements ..................................          43
</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>
<S>                           <C>
                  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 (Incorporated by
                              reference to Exhibit No. 3.2 to the Company's
                              Annual Report on Form 10-K for the year ended
                              December 31, 2001).

                  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   --    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).

                  4.3   --    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).

                  4.4   --    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).

                  4.5   --    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
</TABLE>


                                       64
<PAGE>

<TABLE>
<S>                           <C>
                              by reference to Exhibit 2.5 to the Company's
                              Current Report on Form 8-K, dated August 28,
                              2000).

                  4.6   --    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).

                  4.7   --    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).

                  4.8   --    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).

                  4.9   --    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).

                  4.10  --    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  --    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).

                  10.2  --    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).

                  10.3  --    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).

                  10.4  --    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 institution (Incorporated
                              by reference to Exhibit 10.5 to the Company's
                              Annual Report on Form 10-K for the year ended
                              December 31, 2001).

                  10.5  --    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).
</TABLE>

                                       65
<PAGE>

<TABLE>
<S>                           <C>
                  10.6  --    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).

                  10.7  --    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).

                  10.8  --    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).

                  10.9  --    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).

                 10.10  --    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).

                 10.11  --    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).

                 10.12  --    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).

                 10.13  --    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).

                 10.14  --    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).

                 10.15  --    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
</TABLE>


                                       66
<PAGE>

<TABLE>
<S>                           <C>
                              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).

                 10.16  --    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)

                 10.17  --    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)

                 10.18  --    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)

                 10.19  --    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)

                 10.20  --    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)

                 10.21  --    Amendment No. 2 to Agreement Concerning Employment
                              Rights dated March 1, 2001, by and between Synagro
                              Technologies, Inc. and Ross M. Patten
                              (Incorporated by reference to the Company's Annual
                              Report on Form 10-K for the year ended
                              December 31, 2001).(1)

                 10.22  --    Amendment No. 2 to Agreement Concerning Employment
                              Rights dated March 1, 2001, by and between Synagro
                              Technologies, Inc. and Mark A. Rome (Incorporated
                              by reference to the Company's Annual Report on
                              Form 10-K for the year ended December 31, 2001).(1)

                 10.23  --    Amendment No. 2 to Agreement Concerning Employment
                              Rights dated March 1, 2001, by and between Synagro
                              Technologies, Inc. and Alvin L. Thomas, II
                              (Incorporated by reference to the Company's Annual
                              Report on Form 10-K for the year ended
                              December 31, 2001).(1)

                 10.24  --    Amendment No. 2 to Agreement Concerning Employment
                              Rights dated March 1, 2001, by and between Synagro
                              Technologies, Inc. and J. Paul Withrow
                              (Incorporated by reference to the Company's Annual
                              Report on Form 10-K for the year ended
                              December 31, 2001).(1)
</TABLE>


                                       67
<PAGE>

<TABLE>
<S>                           <C>
                 10.25  --    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)

                 10.26  --    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)

                 10.27  --    Employment Agreement dated March 1, 2002, by and
                              between Synagro Technologies, Inc. and Robert
                              Boucher (Incorporated by reference to the
                              Company's Annual Report on Form 10-K for the year
                              ended December 31, 2001).(1)

                 10.28  --    Amendment No. 1 to Employment Agreement dated
                              effective February 1, 2002, by and between Synagro
                              Technologies, Inc. and Randall S. Tuttle
                              (Incorporated by reference to the Company's Annual
                              Report on Form 10-K for the year ended
                              December 31, 2001).(1)

                 10.29  --    Third Amended and Restated Credit Agreement dated
                              May 8, 2002, among Synagro Technologies, Inc.,
                              various financial institutions, and Bank of
                              America, N.A. (Incorporated by reference to the
                              Company's Form 10-Q for the period ended March 31,
                              2002).

                 21.1*  --    Subsidiaries of Synagro Technologies, Inc.

                 23.1*  --    Consent of Independent Accountants

                 99.1*  --    Certification of Chief Executive Officer

                 99.2*  --    Certification of Chief Financial Officer
</TABLE>

----------

*     Filed with this Form 10-K.

(1)   Management contract or compensatory plan or agreement.

      (b)   Reports on Form 8-K:

      None.

                                       68
<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 21, 2003

      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>
           /s/ ROSS M. PATTEN                         Chairman of the Board and Chief                    March 21, 2003
---------------------------------------                Executive Officer and Director
             Ross M. Patten                            (Principal Executive Officer)

           /s/ J. PAUL WITHROW                       Chief Financial Officer (Principal                  March 21, 2003
---------------------------------------                     Accounting Officer)
             J. Paul Withrow

            /s/ GENE MEREDITH                                     Director                               March 21, 2003
---------------------------------------
              Gene Meredith

       /s/ KENNETH CHUAN-KAI LEUNG                                Director                               March 21, 2003
---------------------------------------
         Kenneth Chuan-kai Leung

          /s/ ALFRED TYLER, 2ND                                   Director                               March 21, 2003
---------------------------------------
            Alfred Tyler, 2nd

          /s/ DAVID A. DONNINI                                    Director                               March 21, 2003
---------------------------------------
            David A. Donnini

          /s/ VINCENT J. HEMMER                                   Director                               March 21, 2003
---------------------------------------
            Vincent J. Hemmer
</TABLE>


                                       69
<PAGE>

                                  CERTIFICATION

I, Ross M. Patten , certify that:

1.    I have reviewed this annual report on Form 10-K of Synagro Technologies,
      Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report;

4.    The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
      have:

      a.    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      b.    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      c.    presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of the registrant's board of directors (or persons performing
      the equivalent function):

      a.    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b.    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officers and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.


Date: March 21, 2003                                /s/ Ross M. Patten
      --------------                       ------------------------------------
                                            Chairman and Chief Executive Officer


                                       70
<PAGE>

                                  CERTIFICATION

I, J. Paul Withrow , certify that:

1.    I have reviewed this annual report on Form 10-K of Synagro Technologies,
      Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report;

4.    The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
      have:

      a.    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      b.    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      c.    presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of the registrant's board of directors (or persons performing
      the equivalent function):

      a.    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b.    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officers and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.


Date: March 21 , 2003                                /s/ J. Paul Withrow
      ---------------                      ------------------------------------
                                                   Chief Financial Officer


                                       71
<PAGE>

                                 Exhibit Index

<TABLE>
<S>                           <C>
                  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 (Incorporated by
                              reference to Exhibit No. 3.2 to the Company's
                              Annual Report on Form 10-K for the year ended
                              December 31, 2001).

                  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   --    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).

                  4.3   --    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).

                  4.4   --    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).

                  4.5   --    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
</TABLE>
<PAGE>

<TABLE>
<S>                           <C>
                              by reference to Exhibit 2.5 to the Company's
                              Current Report on Form 8-K, dated August 28,
                              2000).

                  4.6   --    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).

                  4.7   --    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).

                  4.8   --    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).

                  4.9   --    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).

                  4.10  --    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  --    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).

                  10.2  --    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).

                  10.3  --    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).

                  10.4  --    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 institution (Incorporated
                              by reference to Exhibit 10.5 to the Company's
                              Annual Report on Form 10-K for the year ended
                              December 31, 2001).

                  10.5  --    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).
</TABLE>
<PAGE>

<TABLE>
<S>                           <C>
                  10.6  --    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).

                  10.7  --    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).

                  10.8  --    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).

                  10.9  --    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).

                 10.10  --    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).

                 10.11  --    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).

                 10.12  --    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).

                 10.13  --    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).

                 10.14  --    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).

                 10.15  --    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).
</TABLE>

<PAGE>

<TABLE>
<S>                           <C>
                 10.16  --    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)

                 10.17  --    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)

                 10.18  --    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)

                 10.19  --    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)

                 10.20  --    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)

                 10.21  --    Amendment No. 2 to Agreement Concerning Employment
                              Rights dated March 1, 2001, by and between Synagro
                              Technologies, Inc. and Ross M. Patten
                              (Incorporated by reference to the Company's Annual
                              Report on Form 10-K for the year ended
                              December 31, 2001).(1)

                 10.22  --    Amendment No. 2 to Agreement Concerning Employment
                              Rights dated March 1, 2001, by and between Synagro
                              Technologies, Inc. and Mark A. Rome (Incorporated
                              by reference to the Company's Annual Report on
                              Form 10-K for the year ended December 31, 2001).(1)

                 10.23  --    Amendment No. 2 to Agreement Concerning Employment
                              Rights dated March 1, 2001, by and between Synagro
                              Technologies, Inc. and Alvin L. Thomas, II
                              (Incorporated by reference to the Company's Annual
                              Report on Form 10-K for the year ended
                              December 31, 2001).(1)

                 10.24  --    Amendment No. 2 to Agreement Concerning Employment
                              Rights dated March 1, 2001, by and between Synagro
                              Technologies, Inc. and J. Paul Withrow
                              (Incorporated by reference to the Company's Annual
                              Report on Form 10-K for the year ended
                              December 31, 2001).(1)
</TABLE>

<PAGE>

<TABLE>
<S>                           <C>
                 10.25  --    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)

                 10.26  --    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)

                 10.27  --    Employment Agreement dated March 1, 2002, by and
                              between Synagro Technologies, Inc. and Robert
                              Boucher (Incorporated by reference to the
                              Company's Annual Report on Form 10-K for the year
                              ended December 31, 2001).(1)

                 10.28  --    Amendment No. 1 to Employment Agreement dated
                              effective February 1, 2002, by and between Synagro
                              Technologies, Inc. and Randall S. Tuttle
                              (Incorporated by reference to the Company's Annual
                              Report on Form 10-K for the year ended
                              December 31, 2001).(1)

                 10.29  --    Third Amended and Restated Credit Agreement dated
                              May 8, 2002, among Synagro Technologies, Inc.,
                              various financial institutions, and Bank of
                              America, N.A. (Incorporated by reference to the
                              Company's Form 10-Q for the period ended March 31,
                              2002).

                 21.1*  --    Subsidiaries of Synagro Technologies, Inc.

                 23.1*  --    Consent of Independent Accountants

                 99.1*  --    Certification of Chief Executive Officer

                 99.2*  --    Certification of Chief Financial Officer
</TABLE>

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* Filed with this Form 10-K.