<PAGE>

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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, 2004

                                       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)

<Table>
<S>                                            <C>
                   DELAWARE                                      88-0219860
         (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
</Table>

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         Common Stock, $.002 par value
                        Preferred Stock Purchase Rights
                             (Title of each class)

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

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

    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 aggregate market value of the 18,442,140 shares of the Registrant's
common stock held by nonaffiliates of the Registrant was $52,375,678 on June 30,
2004, based on the $2.84 last sale price of the Registrant's common stock on the
Nasdaq Small Cap Market on that date.

    As of March 17, 2005, 20,149,292 shares of the Registrant's common stock
were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

    The Proxy Statement for the 2005 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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<PAGE>

                                     PART I

ITEM 1.  BUSINESS

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 are discussed under "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Risk Factors Which May
Affect Future Results."

BUSINESS OVERVIEW

  GENERAL

     We are the largest recycler of biosolids and other organic residuals in the
United States and the only national company focused exclusively on the $8
billion organic residuals industry, which includes water and wastewater
residuals. We serve more than 600 municipal and industrial water and wastewater
treatment accounts with operations in 37 states and the District of Columbia.

     Biosolids and other organic residuals are solid or liquid material
generated by municipal wastewater treatment facilities or residual management
facilities. We provide our customers with services and capabilities that focus
on the beneficial reuse of organic nonhazardous residuals, including biosolids,
resulting primarily 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 water and wastewater residuals.

     We partner with our clients to develop cost-effective and environmentally
sound solutions for their residuals processing and beneficial use requirements.
Our broad range of services include drying and pelletization, composting,
product marketing, incineration, alkaline stabilization, land application,
collection and transportation, regulatory compliance, dewatering, and facility
cleanout services. We currently operate six heat-drying facilities, five
composting facilities, three incineration facilities and 31 permanent and 35
mobile dewatering units.

     Our existing customer base is comprised primarily of municipal customers,
which accounted for approximately 88 percent of our revenues for the year ended
December 31, 2004, as well as industrial and commercial waste generators. We
also cater to buyers who purchase our fertilizers and other marketed products,
which total approximately 3 percent of our total revenues. Our size and scale
offer significant advantages over our competitors in terms of operating
efficiencies and the breadth of services we provide our

                                        2
<PAGE>

customers. Approximately 89 percent of our revenue for the year ended December
31, 2004 was derived from sources that we believe are recurring in nature,
including contracts, purchase orders and product sales.

     Contract revenues accounted for approximately 83 percent of our revenue for
the year ended December 31, 2004. These revenues were generated through more
than 560 contracts that range from one to twenty-five years in length. Contract
revenues are generated primarily from land application, collection and
transportation services, dewatering, incineration, composting, drying and
pelletization services and facility operations and maintenance services. These
contracts have an estimated remaining contract value including renewal options,
which we call backlog, of approximately $2.2 billion as of December 31, 2004.
This backlog represents more than six times our revenue for the year ended
December 31, 2004. Our estimated backlog, excluding renewal options, was
approximately $1.5 billion as of December 31, 2004. See -- "Backlog." Our top
ten customers, which represent approximately $1.2 billion, or 55%, of our
backlog as of December 31, 2004, have an average of eight years remaining on
their current contracts, including renewal options. We have historically enjoyed
high contract retention rates (both renewals and rebids) of approximately 85
percent to 90 percent of contract revenue value. As of December 31, 2004, our
contract retention rate was approximately 88 percent.

  DESCRIPTION OF BUSINESS BY SEGMENT

     The Company evaluates operating results, assesses performance and allocates
resources on a geographic basis, with the exception of its rail operations and
its engineering, facilities, and development ("EFD") group which are separately
monitored. Accordingly, the Company reports the results of its activities in
three operating segments, which include: Residuals Management Operations, Rail
Transportation, and EFD. The Company has determined that its segment disclosures
for 2003 and 2002 should be restated to expand its segment disclosure from one
reporting segment as was originally reported to three reporting segments.
Accordingly, the segment information presented for 2003 and 2002 herein has been
restated.

     The table below shows the total revenues (in thousands) contributed
annually by each of our reportable segments in the three-year period ended
December 31, 2004. More information about our results of operations by
reportable segment is included in Note 20 to the consolidated financial
statements included in this report.

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2004       2003       2002
                                                       --------   --------   --------
                                                               (IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
Residuals Management Operations......................  $274,790   $253,610   $226,738
Rail Transportation..................................    33,822     36,217     28,893
Engineering Facilities and Development...............    17,252      8,725     16,997
                                                       --------   --------   --------
  Total revenues.....................................  $325,864   $298,552   $272,628
                                                       ========   ========   ========
</Table>

     Revenues generated from the services that the Company provides are
summarized below:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                       ----------------------------------
                                                         2004        2003         2002
                                                       --------   ----------   ----------
                                                                  (RESTATED)   (RESTATED)
                                                                 (IN THOUSANDS)
<S>                                                    <C>        <C>          <C>
Facilities operations................................  $100,222    $ 92,388     $ 80,576
Product marketing....................................    11,486      12,910       10,776
Land application and disposal........................   176,202     175,576      153,154
Cleanout services....................................    26,780      12,658       16,916
Design and build.....................................    11,174       5,020       11,206
                                                       --------    --------     --------
  Total revenues.....................................  $325,864    $298,552     $272,628
                                                       ========    ========     ========
</Table>

     Facilities operations include revenues generated from providing drying and
pelletization, composting, and incineration operations services. Land
application and disposal includes revenues generated from providing

                                        3
<PAGE>

land application, dewatering, and disposal services. Product marketing includes
revenues generated from selling pellets and compost as organic fertilizers.
Cleanout services include revenues generated from lagoon and digester cleanout
projects.

     Residuals Management Operations derives its revenues from facilities
operations, product marketing, land application and disposal, and cleanout
services. Rail Transportation derives its revenues from land application and
disposal services. EFD derives its revenues from product marketing, and design
and build services.

INDUSTRY OVERVIEW

  HISTORY

     We believe that the organic residuals industry, which includes water and
wastewater residuals, is approximately $8 billion in size and will continue to
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, including:

     - Population growth and population served;

     - Pressures to better manage wastewater;

     - More restrictive laws and regulations; and

     - Advances in technology.

     Most residential, commercial, and industrial wastewater is collected
through an extensive network of sewers (laterals, interceptors and force mains),
and transported to wastewater treatment plants, which are primarily publicly
owned treatment works ("POTWs"). When wastewater is treated at POTWs or at
industrial wastewater pre-treatment facilities, the treatment process normally
consists of biological and/or chemical treatment (secondary treatment) followed
by some type of clarification (separates the liquid portion of the wastewater
from the solids/wastewater residuals). The clarified water may be further
treated (disinfection and filtration -- tertiary treatment) depending upon
effluent limitation requirements contained in the POTW's National Pollutant
Discharge Elimination System permit and discharged -- typically into a river or
other surface water. Prior to the promulgation of the 40 CFR Part 503
Regulations by the Environmental Protection Agency, or EPA, pursuant to Section
405 of the Clean Water Act ("Part 503 Regulations") on February 19, 1993, many
POTWs were beneficially recycling their wastewater residuals under 40 CFR Part
257. Some POTWs were landfilling, incinerating, or surface disposing of their
residuals. Ocean dumping was banned in 1989 and completely phased out by 1991.
The Part 503 Regulations were much more comprehensive than Part 257, especially
in the level of risk assessment that was done by the EPA to develop the
pollutant concentration requirements. The Part 503 Regulations supported the
EPA's beneficial use policy that was published in 1984 and provided some closure
to regulatory process that had been on going since the Clean Water Act
amendments of 1977. Once the Part 503 regulations were final, they 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
requirements of Class A or B standards as defined in the Part 503 Regulation.

  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
or vector attraction reduction requirements contained in

                                        4
<PAGE>

the Part 503 Regulations. This classification is determined by the level of
processing the biosolids have undergone. Pursuant to the Part 503 Regulations,
there are specific methods available to achieve Class A standards and other
specific methods available to achieve Class B standards, otherwise the biosolids
are considered Sub-Class B. Each alternative for Class A requires that the
resulting biosolids be essentially pathogen free. In general, Class A biosolids
are generated by more capital intensive processes, such as composting, heat
drying, heat treatment, high temperature digestion and alkaline stabilization.
Class A biosolids have the highest market value, are sold as fertilizer, and can
be applied to any type of land or crop.

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

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

  MARKET SIZE/FRAGMENTATION

     According to the EPA's 1999 study entitled Biosolids Generation, Use, and
Disposal in the United States, the quantity of municipal biosolids produced in
the United States was projected to be approximately 7.1 million dry tons in
2000, processed through approximately 16,000 POTWs. It is estimated that 8.2
million dry tons of biosolids will be generated in 2010, and that an additional
3,000 POTWs will be built by 2012. It is also estimated that 63 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, including EPA studies and manuals and research and
analysis reports from Informa Economics, Inc., and internal information have led
us to estimate that a total volume of 135 million dry tons of organic residuals
are processed each year. Therefore, we estimate the total size of the combined
municipal and industrial wastewater residuals market to be $8 billion.

     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.

     We believe we compete in a stable, recession resistant industry. We provide
a necessary service to our municipal and industrial customers. We derive
substantially all of our revenues from municipal water and wastewater utilities.
Demand for our industry's services are promulgated by government regulations
defining the use and disposal of wastewater residuals. We believe that
population growth, better wastewater management treatment processes and stricter
regulations are factors driving growth in the industry.

  MARKET GROWTH

     We believe the estimated $8 billion organic residuals industry, which
includes water and wastewater residuals, will continue to 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

                                        5
<PAGE>

more wastewater. It is expected that the amount of wastewater residuals managed
on a daily basis by municipal wastewater treatment plants will increase to more
than 8.2 million dry tons by 2010.

     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.

     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.

                                        6
<PAGE>

COMPETITIVE STRENGTHS

     We believe that the following strengths differentiate us in the
marketplace:

     National, Full-Service Industry Leader.  We are the largest recycler of
biosolids and other organic residuals in the United States and the only national
company focused exclusively on water and wastewater residuals management. We
provide our customers with services and capabilities, including drying and
pelletization, composting, product marketing, incineration, alkaline
stabilization, land application, collection and transportation, regulatory
compliance, dewatering, and facility cleanout services. We believe our broad
range of services exceeds those offered by our competitors in the water and
wastewater residuals management industry and provides us with a unique and
differentiated service offering platform. 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.

     Recurring Revenues and Stable Operating Cash Flows.  Approximately 89
percent of our revenue for the year ended December 31, 2004 was derived from
sources that we believe are recurring in nature, including long-term contracts
primarily with municipal customers. These contracts accounted for approximately
83 percent of our revenue for the year ended December 31, 2004. Our contract
expirations are staggered, mitigating the impact of any individual contract
loss. Our contract revenue backlog, including renewal options, was approximately
$2.2 billion as of December 31, 2004. This backlog represents more than six
times our revenue for the year ended December 31, 2004. Our estimated backlog,
excluding renewal options, was approximately $1.5 billion as of December 31,
2004. We believe our recurring revenue base, stable capital expenditures
requirements and minimal working capital requirements will allow us to maintain
predictable and consistent cash flows. See "Business -- Backlog."

     Significant Land Base.  We have a large land base available for the land
application of wastewater residuals. As of December 31, 2004, we maintained
permits and registration or licensing agreements on more than 913,000 acres of
land in 25 states. We feel that this land base provides us with an important
advantage when bidding for 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 currently operate 11 Class A processing
facilities and believe that our next two largest Class A competitors operate
five and three Class A facilities, respectively. Class A residuals undergo more
processing than Class B residuals, and may be distributed and marketed as
commercial fertilizer. We have numerous capabilities to achieve Class A
standards, and we currently operate six heat-drying facilities and five
composting facilities. In addition, we are a leader in marketing Class A
biosolids either generated by us or by others. For the year ended December 31,
2004, we marketed 165,000 tons or approximately 52 percent of the heat-dried
pellets produced in the United States. We also marketed 401,000 tons of compost,
which we believe is significantly more than any other producer of municipal
based compost materials.

     Experienced Sales Force.  We have a sales force dedicated to the wastewater
residuals market. We market our services via a multi-tiered sales force,
utilizing a combination of 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.

     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.

                                        7
<PAGE>

     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 the financial health of the company requesting the bonding.
Operators without adequate bonding may be ineligible to bid or negotiate on many
projects. Our national presence and tenure in the market have helped us develop
strong bonding relationships with large national sureties that smaller industry
participants do not possess. 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.

     Strong, Experienced Management Team.  We have a strong and experienced
management team at the corporate and operating levels. Our senior management on
average has been involved in the environmental services industry for over 20
years. We believe the skill and experience of our management team continue to
provide significant benefits to us as we evaluate opportunities to expand our
business.

BUSINESS STRATEGY

     Our goals are to maintain and strengthen our position as the only national
company exclusively focused on water and wastewater residuals management. Our
business strategy is to increase cash flow from operations and profitability
through a combination of organic growth, growth through complementary
acquisitions and a disciplined approach to capital expenditures.

     Organic Growth.  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. The principal factors contributing to our
organic growth include:

     - Developing New Customers.  Our sales and marketing efforts focus on
       adding new customers by marketing our products and services. In many
       cases, we believe that we can provide the customer with better service at
       a cost to them that is lower than what it costs them to provide the
       service internally or with their current service provider. 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.

     - Capitalize on Increased Demand for Facilities Operations Services.  In
       order to take advantage of operating efficiencies, technology and our
       comprehensive capabilities, we will endeavor to capitalize on the
       increased demand for facilities operations services, including drying and
       pelletizing, dewatering, composting and incineration. We believe this
       focus will result in more long-term contracts and recurring revenue. In
       addition, we are building several new facilities, which we expect will
       also result in longer-term contracts, steady revenue streams, higher
       barriers to entry for competitors, higher switching costs for the
       customer and lower seasonality. We opened one of these facilities in
       Sacramento in 2004.

     Growth through Complementary Acquisitions.  We plan to continue to pursue
strategic acquisitions in a disciplined manner in order to achieve further
growth. 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 our strategic acquisitions enable us to
gain new industry residuals expertise and efficiencies in our existing
operations. Determination of attractive acquisition targets is based on many
factors, including the size and location of the business and customers served,
existing contract terms, potential operating efficiencies and cost savings.

     Disciplined Approach to Capital Expenditures.  Whether a new contract or an
acquisition, we are focused on the ability to generate the revenues and
operating cash flow to validate the capital investment

                                        8
<PAGE>

decision. As such, new contracts, renewals and/or acquisitions undergo a
comprehensive financial analysis to ensure that our return criteria are being
met. In addition, capital expenditures relating to maintenance activities are
also subject to rigorous internal review and a formal approval process.

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 innovative and cost effective 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.

                   [Wastewater Residuals Services FLOWCHART]

     1. Design and Build Services.  We designed, built, and operate six
heat-drying and pelletization facilities and five composting facilities. We
currently have one new drying facility under permit and construction that we
will operate when it is 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.

                                        9
<PAGE>

     2. 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.

     3. 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 billing departments to ensure
correct invoicing 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.

     4. 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
31 permanent and 35 mobile dewatering units.

     5. 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.

     6. 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 and 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 five composting
facilities.

                                        10
<PAGE>

     7. Drying and Pelletization.  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 six drying and pelletization facilities with
municipalities, including one in Pinellas County, Florida, two in Baltimore,
Maryland, one in New York, New York, one in Hagerstown, Maryland and one in
Sacramento, California. We are currently in the construction phase of one drying
and pelletization facility for Honolulu, Hawaii, which we will operate when the
facility is completed.

     8. 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 891,000 cubic yards of compost
and 165,000 tons of pelletized biosolids annually. OPMG markets a majority of
its biosolids products under the trade names GranuliteCompany and AllGroCompany.
Based on our experience, OPMG is capable of marketing biosolids products to the
highest paying markets. We are the leader in marketing end-use wastewater
residuals products, such as compost and heat-dried pellets used for fertilizers.
In 2004, we marketed 165,000 tons or approximately 52 percent of the heat-dried
pellets produced in the United States. We also marketed 401,000 tons of compost,
which we believe is significantly more than any other producer of municipal
based compost materials.

     9. 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.

     10. 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.

     11. 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 25 states.
Our revenues from land application services are the highest among our service
offerings.

                                        11
<PAGE>

CONTRACTS

     Contract revenues accounted for approximately 83 percent of our revenue for
the year ended December 31, 2004. These revenues were generated through more
than 560 contracts that range from one to twenty-five years in length. Contract
revenues are generated primarily from land application, collection and
transportation services, dewatering, incineration, composting, drying and
pelletization services and facility operations and maintenance services. These
contracts have an estimated backlog, including renewal options, of approximately
$2.2 billion as of December 31, 2004. This backlog represents more than six
times our revenue for the year ended December 31, 2004. 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 eight years remaining on their current contracts, including
renewal options. We have historically enjoyed high contract retention rates
(both renewals and rebids) of approximately 85 percent to 90 percent of contract
revenue value. During 2004, our contract retention rate was approximately 88
percent. See "-- Backlog" for a more detailed discussion.

     Our contract with the New York City Department of Environmental Protection
accounted for 16% of our revenues in 2004. No other customer accounted for more
than 10% of our revenues in 2004.

     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.

     Our largest contract is with the New York City 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 2000. 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 City Department of Environmental Protection to terminate the contract. See
"Risk Factors -- Risks Relating to our Business and the Industry -- 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."

                                        12
<PAGE>

BACKLOG

     At December 31, 2004, our estimated remaining contract value including
renewal options, which we call backlog, was approximately $2.2 billion, of which
we estimate approximately $191.0 million will be realized in 2005. 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. Assuming the renewal provisions
are not exercised, we estimate our backlog at December 31, 2004 would have been
approximately $1.5 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. See
"Risk Factors -- Risks Relating to our Business and Industry -- 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."

SALES AND MARKETING

     We have a sales and marketing group that has developed and implemented 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 retain
our existing service contracts. For 2004, we achieved a retention rate (renewals
and rebids) of approximately 88 percent. We believe that the ability to retain
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 facilities operations 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 offers 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 May 2003, we purchased Aspen Resources, Inc. ("Aspen Resources"). The
purchase of Aspen Resources provides us with added expertise in the management
of pulp and paper organic residuals. Historically, acquisitions have been an
important part of our growth strategy. We completed 18 acquisitions from 1998
through 2004, highlighted by our acquisition in August 2000 of Waste
Management's Bio Gro Division. Bio Gro had been 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

                                        13
<PAGE>

services in 24 states and was the market leader in thermal drying and
pelletization. Other acquisitions from 1998 to the present include the
following:

<Table>
<Caption>
COMPANY                          DATE ACQUIRED   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
Earthwise Organics, Inc and
  Earthwise Trucking...........  August 2002     West                 Composting and
                                                                      Transportation
</Table>

COMPETITION

     We provide a variety of services relating to the transportation and
treatment of wastewater residuals. Although water, land application, fertilizer,
farming, consulting and composting companies provide some of the same services
we offer, we believe that we are the only national company to provide a
comprehensive suite of services. 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. Our direct competitors
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, state and local environmental authorities regulate the activities
of the municipal and industrial wastewater generators and enforce standards for
the discharge from wastewater treatment plants (effluent

                                        14
<PAGE>

wastewater) with permits issued under the authority of the Clean Water Act, as
amended, state water quality control acts and local regulations. 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 various parties, including: (1) present owners and operators of
facilities at which hazardous substances were disposed; (2) past owners and
operators at the time of disposal; (3) generators of hazardous substances that
were disposed at such facilities; and (4) parties who arranged for the disposal
of hazardous substances at such facilities. CERCLA 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 generally 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

                                        15
<PAGE>

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 current patents expire between 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 16, 2005, we had approximately 964 full-time employees. These
employees include approximately 4 executive officers, 11 nonexecutive officers,
119 operations managers, 64 environmental specialists, 46 maintenance personnel,
168 drivers and transportation personnel, 91 land application specialists, 286
general operation specialists, 42 sales employees and 133 technical support,
administrative, financial and other employees. Additionally, we use contract
labor for various operating functions, including hauling and spreading services,
when it is economically advantageous.

     Although we have approximately 36 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

                                        16
<PAGE>

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 18,414 square feet of office space at our
principal place of business located in Houston, Texas. We also lease regional
operational facilities in: Houston, Texas; El Dorado Hills, California; Mount
Arlington, New Jersey; Baltimore, Maryland and Waterbury, Connecticut; and we
have 18 district offices throughout the United States.

     We own and operate four drying and pelletization facilities; one located in
New York, New York, two in Baltimore, Maryland, and one in Sacramento,
California. We also operate two drying and pelletizing facilities in Hagerstown,
Maryland and Pinellas County, Florida, and three incineration facilities located
in Woonsocket, Rhode Island; Waterbury, Connecticut; and New Haven, Connecticut.
We also operate five composting facilities located in Corona, California;
Burlington, New Jersey; Rockland, New Jersey; Salome, Arizona; and Chino,
California. 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
approximately 913,000 acres of land in 25 states for applications of biosolids.

ITEM 3.  LEGAL PROCEEDINGS

     Our business activities are subject to environmental regulation under
federal, state and local laws and regulations. In the ordinary course of
conducting our business activities, we become involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. We believe that these matters will not have a material
adverse effect on our business, financial condition, results of operations and
cash flows.

     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 any changes in regulatory requirements will not have a
materially adverse effect on our financial condition, results of operations or
cash flows.

RELIANCE INSURANCE

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

     Claims have been asserted and/or brought against us and our affiliates
related to alleged acts or omissions occurring during the Reliance Coverage
Period. It is possible, depending on the outcome of possible claims made with
various state insurance guaranty funds, that we will have no, or insufficient,
insurance funds available to pay any potential losses. There are uncertainties
relating to our ultimate liability, if any, for
                                        17
<PAGE>

damages arising during the Reliance Coverage Period, the availability of the
insurance coverage, and possible recovery for state insurance guaranty funds.

     In June 2002, we 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, we agreed to reimburse the Texas Property
and Casualty Insurance Guaranty Association an amount ranging from $0.6 to $2.5
million depending on future circumstances. We estimated our exposure at
approximately $1.0 million for the potential reimbursement to the Texas Property
and Casualty Insurance Guaranty Association for costs associated with the
settlement of this case and for unpaid insurance claims and other costs
(including defense costs) for which coverage may not be available due to the
pending liquidation of Reliance. We believe accruals of approximately $1.0
million as of December 31, 2004, are adequate to provide for our exposures. The
final resolution of these exposures could be substantially different from the
amount recorded.

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 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 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 under-performed 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.

OTHER

     There are various other lawsuits and claims pending against us 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 management, the ultimate
resolution of these matters will not have a material adverse effect on our
consolidated financial condition, results of operations or cash flows.

  SELF-INSURANCE

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

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

     None.

                                        18
<PAGE>

                                    PART II

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

COMMON STOCK PRICE RANGE

     Our 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 our Common Stock for each fiscal quarter of the fiscal years
ended 2004 and 2003, as reported by the Nasdaq.

<Table>
<Caption>
                                                              HIGH     LOW
                                                              -----   -----
<S>                                                           <C>     <C>
FISCAL YEAR 2004
First Quarter...............................................  $3.07   $2.12
Second Quarter..............................................   3.36    2.75
Third Quarter...............................................   3.21    2.52
Fourth Quarter..............................................   3.10    2.79
FISCAL YEAR 2003
First Quarter...............................................  $2.61   $2.15
Second Quarter..............................................   2.83    2.24
Third Quarter...............................................   2.55    2.20
Fourth Quarter..............................................   2.46    2.05
</Table>

     As of March 9, 2005, we had 19,809,621 shares of Common Stock issued and
outstanding and 262 holders of record of our Common Stock.

DIVIDEND POLICY

     Historically, we have reinvested earnings available for distribution to
holders of Common Stock, and accordingly, we have not paid any cash dividends on
our Common Stock. Currently, covenants relating to our outstanding preferred
stock and bank debt restrict our ability to pay dividends. We expect that our
board of directors will adopt a dividend policy in the second quarter of 2005
that reflects an intention to distribute a substantial portion of the cash
generated by our business in excess of operating needs, interest and principal
payments on our indebtedness and capital expenditures as regular quarterly
dividends to our stockholders. In connection with the adoption of such a policy,
we would enter into a new credit facility allowing for the payment of dividends
and all of our outstanding preferred stock would be converted into shares of
Common Stock.

EQUITY COMPENSATION PLAN INFORMATION

     The following table summarizes as of December 31, 2004, certain information
regarding equity compensation to our employees, officers, directors and other
persons under our equity compensation plans:

<Table>
<Caption>
                                                                                        NUMBER OF SECURITIES
                                                                                       REMAINING AVAILABLE FOR
                                      NUMBER OF SECURITIES                              FUTURE ISSUANCE UNDER
                                       TO BE ISSUED UPON        WEIGHTED AVERAGE         EQUITY COMPENSATION
                                          EXERCISE OF           EXERCISE PRICE OF         PLANS (EXCLUDING
                                          OUTSTANDING              OUTSTANDING          SECURITIES REFLECTED
                                         STOCK OPTIONS            STOCK OPTIONS            IN COLUMN (A))
PLAN CATEGORY                                 (A)                      (B)                       (C)
-------------                         --------------------   -----------------------   -----------------------
<S>                                   <C>                    <C>                       <C>
Equity compensation plans approved
  by security holders(1)............       5,957,425                  $2.84                   3,614,000
  Equity compensation not approved
     by security holders(2).........       2,942,622                  $2.77                          --
                                           ---------                  -----                   ---------
  Total.............................       8,900,047                                          3,614,000
                                           =========                                          =========
</Table>

                                        19
<PAGE>

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

(1) We have outstanding stock options granted under the 2000 Stock Option Plan
    (the "2000 Plan") and the Amended and Restated 1993 Stock Option Plan (the
    "1993 Plan") for officers, directors and key employees. There are 3,614,000
    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 have
    been 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 us. 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.

ITEM 6.  SELECTED FINANCIAL DATA

     The following table summarizes our selected consolidated financial data for
each fiscal year of the five-year period ended December 31, 2004. The following
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, including the notes
thereto, included elsewhere herein.

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------
                                            2004       2003       2002       2001       2000
                                          --------   --------   --------   --------   --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>        <C>        <C>        <C>        <C>
Revenue.................................  $325,864   $298,552   $272,628   $260,196   $163,098
Gross profit............................    67,822     64,101     70,748     68,095     43,198
Selling, general and administrative
  expenses..............................    24,346     26,070     22,935     21,958     14,337
Reorganization costs....................        --      1,169        905         --         --
Special charges, net....................       320         --         --      1,018         --
Amortization of intangibles.............       126        450        108      4,458      3,516
Gain from litigation settlement.........        --         --         --     (6,000)        --
Interest expense, net...................    22,247     23,356     23,498     26,968     18,908
Net income before cumulative effect of
  change in accounting for derivatives
  and asset retirement obligations,
  preferred stock dividends and noncash
  beneficial conversion charge..........    12,954      7,754     11,064     17,568      6,551
Cumulative effect of change in
  accounting for derivatives............        --         --         --      1,153         --
Cumulative effect of change in
  accounting for asset retirement
  obligations...........................        --        476         --         --         --
Preferred stock dividends...............     8,827      8,209      7,659      7,248      3,939
Noncash beneficial conversion charge....        --         --         --         --     37,045
Net income (loss) applicable to common
  stock.................................  $  4,127   $   (931)  $  3,405   $  9,167   $(34,433)
</Table>

                                        20
<PAGE>

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------
                                            2004       2003       2002       2001       2000
                                          --------   --------   --------   --------   --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>        <C>        <C>        <C>        <C>
Basic --
  Earnings (loss) per share before
     cumulative effect of change in
     accounting for derivatives and
     asset retirement obligations, and
     noncash beneficial conversion
     charge.............................  $   0.21   $  (0.03)  $   0.17   $   0.53   $   0.14
  Cumulative effect of change in
     accounting for derivatives.........        --         --         --      (0.06)        --
  Cumulative effect of change in
     accounting for asset retirement
     obligations........................        --      (0.02)        --         --         --
  Noncash beneficial conversion
     charge.............................        --         --         --         --      (1.92)
                                          --------   --------   --------   --------   --------
  Net income (loss) per share --basic...  $   0.21   $  (0.05)  $   0.17   $   0.47   $  (1.78)
                                          ========   ========   ========   ========   ========
Diluted --
  Earnings (loss) per share before
     preferred stock dividends,
     cumulative effect of change in
     accounting for derivatives and
     asset retirement obligations and
     noncash beneficial conversion
     charge.............................  $   0.21   $  (0.03)  $   0.17   $   0.35   $   0.14
  Cumulative effect of change in
     accounting for derivatives.........        --         --         --      (0.02)        --
  Cumulative effect of change in
     accounting for asset retirement
     obligations........................        --      (0.02)        --         --         --
  Noncash beneficial conversion
     charge.............................        --         --         --         --      (1.92)
                                          --------   --------   --------   --------   --------
  Net income (loss) per common share --
     diluted............................  $   0.21   $  (0.05)  $   0.17   $   0.33   $  (1.78)
                                          ========   ========   ========   ========   ========
Working capital.........................  $ 10,919   $ 20,517   $ 20,890   $  9,135   $ 17,734
Total assets............................   510,784    490,677    492,120    448,775    449,398
Total long-term debt, net of current
  maturities............................   248,799    269,133    283,530    249,016    279,098
Redeemable preferred stock..............    95,126     86,299     78,090     70,431     63,367
Stockholders' equity....................    68,725     64,022     64,449     60,540     53,601
</Table>

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

OVERVIEW

     The following is a discussion of our results of operations and financial
position for the periods described below. 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 "Forward-Looking
Statements" and "Risk Factors Which May Affect Future Results."

RESTATEMENT

     Pursuant to SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information", the Company has restated its segment disclosure from one
reporting segment as was originally reported to three reporting segments (see
Note 20).

                                        21
<PAGE>

BACKGROUND

     We generate substantially all of our revenue by providing water and
wastewater residuals management services to municipal and industrial customers.
We provide our customers with services and capabilities, including, drying and
pelletization, composting, product marketing, incineration, alkaline
stabilization, land application, collection and transportation, regulatory
compliance, dewatering, and facility cleanout services. We currently serve more
than 600 customers in 37 states and the District of Columbia. Our contracts
typically have inflation price adjustments, renewal clauses and broad force
majeure provisions. For the year ended December 31, 2004, we experienced a
contract retention rate (both renewals and rebids) of approximately 88 percent.

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

     Contract revenues are generated primarily from land application, collection
and transportation services, dewatering, incineration, composting, drying and
pelletization services and facility operations and maintenance, and are
typically performed under a contract with terms ranging from 1 to 25 years.
Contract revenues accounted for approximately 83 percent, 84 percent and 81
percent of total revenues in 2004, 2003 and 2002, respectively.

     Purchase order revenues are primarily from facility operations, maintenance
services, and collection and transportation services where services are
performed on a recurring basis, but not under a long-term contract. Purchase
order revenues accounted for approximately three percent, four percent and five
percent of total revenues in 2004, 2003 and 2002, respectively.

     Product sales revenues are primarily generated from sales of composted and
pelletized biosolids from internal and external facilities. Revenues from
product sales accounted for approximately three percent of total revenues in
2004 and four percent of total revenues in 2003 and 2002, respectively.

     Design\build construction revenues are derived from construction projects
where we agree to design and build a biosolids processing facility such as a
drying and pelletization facility, composting facility, incineration facility or
a dewatering facility that we will subsequently operate once the facility
commences commercial operations. Revenues from design/build construction
projects accounted for approximately three percent, two percent and four percent
of total revenues in 2004, 2003 and 2002 respectively.

     Event project revenues are typically generated from digester or lagoon
cleanout projects and temporary dewatering projects. Revenue from event projects
accounted for approximately eight percent, six percent and six percent of total
revenues in 2004, 2003 and 2002.

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

     Our costs relating to service contracts include processing, transportation,
spreading and disposal costs, and depreciation of operating assets. Our
spreading, transportation and disposal costs can be adversely affected by
unusual weather conditions and unseasonably heavy rainfall, which can
temporarily reduce the availability of land application. Material must be
transported to either a permitted storage facility (if available) or to a local
landfill for disposal. In either case, this results in additional costs for
transporting, storage and disposal of the biosolid materials versus land
application in a period of normal weather conditions. Processing and
transportation costs can also be adversely impacted by higher fuel costs. In
order to manage this risk at processing facilities, we generally enter into
contracts that pass-thru fuel cost increases to the customer, or we lock in our
fuel costs with our fuel suppliers for terms ranging from twelve to twenty four
months. We subcontract a significant portion of our transportation requirements
to numerous contractors which enables us to minimize the impact of changes in
fuel costs for over the road equipment. We have also periodically

                                        22
<PAGE>

implemented temporary fuel surcharges with selected customers. Our costs
relating to construction contracts primarily include subcontractor costs related
to design, permit and general construction. Our selling, general and
administrative expenses are comprised of accounting, information systems,
marketing, legal, human resources, regulatory compliance, and regional and
executive management costs. 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 and acquisition-related
costs for the years ended December 31, 2004, 2003 and 2002.

     Our management reviews and analyzes several trends and key performance
indicators in order to manage our business. Since approximately 90% of our
revenues are generated from municipal water and wastewater plants, we monitor
trends involving municipal generators, including, among other things, aging
infrastructure, technology advances, and regulatory activity in the water and
wastewater residuals management industry. We use this information to anticipate
upcoming growth opportunities, including new facility growth opportunities
similar to the Sacramento, California and Pinellas County, Florida dryer
projects that we started over the past two years. We also use this information
to manage potential business risks such as increased regulatory pressure or
local public opposition to residuals management programs. On an ongoing basis,
our management also considers several variables associated with the ongoing
operations of the business, including, among other things:

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

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

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

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

                                        23
<PAGE>

RESULTS OF OPERATIONS

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

<Table>
<Caption>
                                                   FOR THE YEARS ENDED DECEMBER 31,
                                       --------------------------------------------------------
                                             2004               2003                2002
                                       ----------------   -----------------   -----------------
<S>                                    <C>        <C>     <C>        <C>      <C>        <C>
Revenue..............................  $325,864   100.0%  $298,552    100.0%  $272,628    100.0%
Cost of services.....................   258,042    79.2%   234,451     78.5%   201,880     74.0%
                                       --------   -----   --------   ------   --------   ------
Gross profit.........................    67,822    20.8%    64,101     21.5%    70,748     26.0%
Selling, general and administrative
  expenses...........................    24,346     7.5%    26,070      8.7%    22,935      8.4%
(Gain) loss on sale of assets........      (854)   (0.3)%        7      0.0%      (244)    (0.1)%
Reorganization costs.................        --      --      1,169      0.4%       905      0.4%
Special charges, net.................       320     0.1%        --       --         --       --
Amortization of intangibles..........       126     0.0%       450      0.2%       108      0.0%
                                       --------   -----   --------   ------   --------   ------
  Income from operations.............    43,884    13.5%    36,405     12.2%    47,044     17.3%
                                       --------   -----   --------   ------   --------   ------
Other expense:
  Other expense, net.................        37     0.0%        70      0.0%     5,698      2.1%
  Interest expense, net..............    22,247     6.9%    23,356      7.9%    23,498      8.6%
                                       --------   -----   --------   ------   --------   ------
     Total other expense, net........    22,284     6.9%    23,426      7.9%    29,196     10.7%
                                       --------   -----   --------   ------   --------   ------
Income before provision for income
  taxes..............................    21,600     6.6%    12,979      4.3%    17,848      6.6%
  Provision for income taxes.........     8,646     2.6%     5,225      1.7%     6,784      2.5%
                                       --------   -----   --------   ------   --------   ------
Net income before cumulative effect
  of change in accounting for asset
  retirement obligations and
  preferred stock dividends..........    12,954     4.0%     7,754      2.6%    11,064      4.1%
Cumulative effect of change in
  accounting for asset retirement
  obligations........................        --      --        476      0.2%        --       --
                                       --------   -----   --------   ------   --------   ------
Net income before preferred stock
  dividends..........................    12,954     4.0%     7,278      2.4%    11,064      4.1%
                                                  =====              ======              ======
  Preferred stock dividends..........     8,827              8,209               7,659
                                       --------           --------            --------
  Net income (loss) applicable to
     common stock....................  $  4,127           $   (931)           $  3,405
                                       ========           ========            ========
</Table>

                                        24
<PAGE>

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

<Table>
<Caption>
                                                       FOR THE YEARS ENDED DECEMBER 31,
                                                       ---------------------------------
                                                         2004        2003        2002
                                                       ---------   ---------   ---------
<S>                                                    <C>         <C>         <C>
Revenue
  Residuals Management Operations....................  $274,790    $253,610    $226,738
  Rail Transportation................................    38,035      40,035      32,194
  Engineering, Facilities, and Development...........    17,252       8,725      16,997
  Eliminations.......................................    (4,213)     (3,818)     (3,301)
                                                       --------    --------    --------
                                                       $325,864    $298,552    $272,628
                                                       ========    ========    ========
Income (loss) from operations
  Residuals Management Operations....................  $ 55,857    $ 46,655    $ 52,922
  Rail Transportation................................     5,134       6,194       5,505
  Engineering, Facilities, and Development...........    (1,628)     (3,842)     (1,713)
  Corporate..........................................   (15,479)    (12,602)     (9,670)
                                                       --------    --------    --------
                                                       $ 43,884    $ 36,405    $ 47,044
                                                       ========    ========    ========
</Table>

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

     For the year ended December 31, 2004, revenue was approximately $325.9
million compared to approximately $298.6 million for 2003, an increase of
approximately $27.3 million, or 9.1 percent. Approximately $20.0 million of the
increase related to an 8 percent increase in contract service revenues,
approximately $5.9 million of the increase related to design build work and
approximately $4.9 million of the increase was associated with event revenues.
Contract revenues include $6.7 million of revenue in 2004 on a contract that was
originally expected to be completed over a multi-year period. Excluding this
work, contract revenues increased 5 percent in 2004 compared to 2003. These
revenue increases were partially offset by declines in product sales and
purchase order revenues. Our Residuals Management Operations revenues for the
year ended December 31, 2004, increased approximately $21.2 million or 8.4
percent to $274.8 million compared to $253.6 million for 2003 due primarily to
the approximately $20.0 million increase in contract revenue described above.
Our Rail Transportation revenues for the year ended December 31, 2004, decreased
approximately $2.0 million or 5.0 percent to $38.0 million compared to $40.0
million for 2003 due primarily to a decrease in event revenues from cleanout
services. Our Engineering, Facilities, and Development revenues for the year
ended December 31, 2004, increased approximately $8.5 million to $17.3 million
compared to $8.7 million for 2003 due primarily to an increase in construction
revenues on a new facility in Honolulu, Hawaii, and the startup of a new dryer
facility in Pinellas County, Florida.

     Gross profit for the year ended December 31, 2004, was approximately $67.8
million compared to approximately $64.1 million for 2003, an increase of
approximately $3.7 million, or 5.8 percent. Gross profit increased due to an
increase in margins from increased revenue growth, an improvement in land
application margins (which benefited from more normal weather patterns in 2004
compared to 2003) and a significant improvement on cleanout and other event
margins, partially offset by higher repairs and maintenance expenses at the
Company's drying and incineration facilities, a $1.3 million increase in
depreciation and amortization expense, and a $2.1 million decrease related to a
one-time non-cash gain associated with a positive settlement of a warranty
obligation recorded as a reduction of cost of operations in 2003. In 2003, land
application margins were negatively impacted by unusually inclement weather
primarily on the east coast, which significantly increased our storage,
landfill, and transportation costs as we were not able to efficiently access our
landbase. Fiscal 2003 was one of the wettest years on record in the mid-Atlantic
and southeast states. Land application margins returned to expected levels in
2004 as we experienced more normal weather patterns. Cleanout margins were in
line with our internal expectations in 2004, and significantly improved over
2003 margins which were negatively impacted by certain large cleanout jobs that
experienced cost overruns.

                                        25
<PAGE>

     Selling, general and administrative expenses were approximately $24.3
million for the year ended December 31, 2004 compared to approximately $26.1
million for the year ended December 31, 2003, a decrease of $1.7 million or 6.6
percent. Selling, general and administrative expenses as a percentage of
revenues decreased to 7.5 percent in 2004 from 8.7 percent in 2003. The decrease
in general and administrative expenses primarily relates to a $1.0 million
provision for bad debts recognized in 2003 versus a $0.3 million provision
recognized in 2004, a reduction in overhead and certain administrative functions
implemented in the fourth quarter of 2003, which were partially offset by
increased incentive compensation and commissions related to improved operating
results in 2004. The reduction in certain administrative functions resulted from
a management review of our overhead structure in response to the lower than
expected operating results for 2003.

     (Gain) loss on sale of assets increased by $0.9 million primarily as a
result of a gain on the sale of land in June 2004.

     As a result of the reduction of overhead and certain administrative
functions in the fourth quarter of 2003, we recorded $1.2 million in
reorganization costs in 2003 related to severance and termination costs. No such
costs were recorded in 2004.

     We incurred a special charge of $0.3 million for costs associated with the
re-audit of our 2001 financial statements during the third quarter of 2004.
There was no such special charge during 2003.

     Amortization of intangibles decreased to approximately $0.1 million in 2004
from approximately $0.5 million in 2003. The amortization in 2003 resulted from
the write off of $0.4 million of due diligence costs on potential acquisitions
that were not consummated. There were no such write offs in 2004.

     As a result of the foregoing, income from operations for the year ended
December 31, 2004, was approximately $43.9 million compared to approximately
$36.4 million in 2003, an increase of approximately $7.5 million, or 20.5
percent. Our Residuals Management Operations income from operations increased
from $46.7 million in 2003 to $55.9 million in 2004 due primarily to the
increase in contract and event revenues described above and the improvement in
land application and event gross profit margins described above. Our Rail
Transportation income from operations decreased from $6.2 million in 2003 to
$5.1 million in 2004 due primarily to the decrease in revenues described above
and an increase in rail and overhead costs. Our Engineering, Facilities, and
Development loss from operations decreased from a loss of $3.8 million in 2003
to a loss of $1.6 million in 2004 due primarily to the increase in construction
revenues and the startup of a new dryer facility described above.

     Other expense, net for the year ended December 31, 2004, was approximately
$22.3 million compared to approximately $23.4 million in 2003, a decrease of
approximately $1.1 million. The decrease relates primarily to a reduction of
$1.1 million in interest expense related to reductions in debt and savings
associated with interest rate swaps.

     For the year ended December 31, 2004, we recorded a provision for income
taxes of approximately $8.6 million compared to $5.2 million in the prior year.
Our effective tax rate was 40.0 percent in 2004 compared to 40.4 percent in
2003. The decrease in the effective tax rate is primarily related to the
decrease in other non-deductible expenses including meals and entertainment
expenses. Our provision for income taxes differs from the federal statutory rate
primarily due to state income taxes. Our 2004 tax provision is principally a
deferred tax provision that will not significantly impact cash flow since we
have significant tax deductions in excess of book deductions and net operating
loss carryforwards available to offset taxable income.

     As a result of the foregoing, net income before cumulative effect of change
in accounting for asset retirement obligations and preferred stock dividends
increased to approximately $13.0 million for 2004 compared to approximately $7.8
million in 2003.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

     For the year ended December 31, 2003, revenue was approximately $298.6
million compared to approximately $272.6 million for 2002, an increase of
approximately $26.0 million, or 9.5 percent. Approxi-

                                        26
<PAGE>

mately $25.0 million of the increase in revenues relates to increased volume
from service and maintenance contracts and approximately $6.2 million of the
increase in revenue relates to acquisitions. The $6.2 million increase in
revenues from acquisitions relates to the net increase in year over year
contract revenues realized from the Aspen Resource acquisition which was
completed in May 2003, and the acquisition of Earthwise Organics, Inc. and
Earthwise Trucking (collectively "Earthwise"), which was completed in September
2004. The increase in revenues from contracts and acquisitions was partially
offset by a decrease of approximately $6.3 million related to design/build
contract revenues as projects were completed in the first half of 2003 and were
expected to be replaced by the Honolulu project, which was delayed beyond 2003.
Our Residuals Management Operations revenues for the year ended December 31,
2003, increased approximately $26.9 million or 11.9 percent to $253.6 million
compared to $226.7 million for 2002 due primarily to the approximately $25.0
million increase in contract revenue described above. Our Rail Transportation
revenues for the year ended December 31, 2003, increased approximately $7.8
million or 24.4 percent to $40.0 million compared to $32.2 million for 2002 due
primarily to an increase in event revenues from cleanout services and an
increase in contracted land application revenues. Our Engineering, Facilities,
and Development revenues for the year ended December 31, 2003, decreased
approximately $8.3 million to $8.7 million compared to $17.0 million for 2002
due primarily to a decrease in construction revenues on a new dryer facility in
Pinellas County, Florida which was completed in 2002.

     Gross profit for the year ended December 31, 2003, was approximately $64.1
million compared to approximately $70.7 million for 2002, a decrease of
approximately $6.6 million, or 9.3 percent. Gross profit as a percentage of
revenue decreased to 21.5 percent in 2003 from 26.0 percent in 2002. The
decrease in gross profit from 2003 to 2002 is primarily due to
higher-than-expected handling, storage and disposal costs due to unusually
inclement weather incurred primarily in the first half of the year that could
not be passed to the customer and cost overruns on certain one-time event
projects. Additionally, gross profit in 2003 was negatively impacted by higher
repairs and utilities costs of $2.3 million. The settlement of the litigation
between the Company and Riverside County, California resulted in an increase of
$0.7 million in depreciation expense, which impacted 2003, as well as increased
insurance costs from unfavorable development of prior year claims on our
self-insured risk management program totaling $0.6 million, and approximately
$1.0 million of facility startup costs. These decreases in gross profit were
partially offset by margin from the overall increase in revenue and
approximately $2.1 million of income from a positive settlement of a warranty
obligation.

     Selling, general and administrative expenses were approximately $26.1
million, or 8.7 percent of revenues, for the year ended December 31, 2003,
compared to approximately $22.9 million, or 8.4 percent of revenues, for 2002,
an increase of approximately $3.2 million. Selling, general and administrative
expenses increased as a percent of revenues primarily due to recording bad debt
expense of $1.0 million in the fourth quarter of 2003.

     In response to lower-than-expected operating results, management performed
a review of our overhead structure and reorganized certain administrative
functions in the fourth quarter of 2003. As a result of these decisions, we
recorded $1.2 million in reorganization costs in 2003 related to severance and
termination costs.

     Amortization of intangibles increased from approximately $0.1 million in
2002 to approximately $0.4 million in 2003 resulting from the write off of $0.4
million of due diligence costs on potential acquisitions that were not
consummated.

     As a result of the foregoing, income from operations for the year ended
December 31, 2003, decreased to approximately $36.4 million from approximately
$47.0 million in 2002, a decrease of approximately $10.6 million, or 22.6
percent. Our Residuals Management Operations income from operations decreased
from $52.9 million in 2002 to $46.7 million in 2003 due primarily to a decrease
in land application and event gross profit margins described above, partially
offset by incremental contract revenues described above. Our Rail Transportation
income from operations increased from $5.5 million in 2002 to $6.2 million in
2003 due primarily to the increase in revenues described above. Our Engineering,
Facilities, and Development loss from operations increased from a loss of $1.7
million in 2002 to a loss of $3.8 million in 2003 due primarily to the decrease
in construction revenues related to a new dryer facility described above.

                                        27
<PAGE>

     Other expense for the year ended December 31, 2003, was approximately $0.1
million compared to approximately $5.7 million in 2002, a decrease of
approximately $5.6 million. The decrease relates primarily to the write off of
deferred debt costs of $7.2 million related to the refinancing of debt in 2002,
offset by a gain associated with an offset swap arrangement entered into in 2002
of approximately $1.7 million. There was no such swap activity in 2003.

     Interest expense for the year ended December 31, 2003, remained flat at
approximately $23.4 million compared to approximately $23.5 million in 2002.

     For the year ended December 31, 2003, we recorded a provision for income
taxes of approximately $5.2 million compared to $6.8 million in the prior year.
Our effective tax rate was 40.4 percent in 2003 compared to 38 percent in 2002.
The increase in the effective tax rate is primarily related to the increase in
income taxes at the state level. Our provision for income taxes differs from the
federal statutory rate primarily due to state income taxes. Our 2003 tax
provision is principally a deferred tax provision that will not significantly
impact cash flow since we have significant tax deductions in excess of book
deductions and net operating loss carryforwards available to offset taxable
income.

     As a result of the foregoing, net income before cumulative effect of change
in accounting for derivatives and asset retirement obligations and preferred
stock dividends decreased to approximately $7.8 million for 2003 compared to
approximately $11.1 million in 2002.

LIQUIDITY AND CAPITAL RESOURCES

  OVERVIEW

     During the past three years, our principal sources of funds were cash
generated from our operating activities. 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,
2004, cash flows from operating activities increased to approximately $35.1
million from approximately $24.1 million for the same period in 2003, an
increase of approximately $10.9 million, or 45.2 percent. The increase primarily
relates to a $5.1 million increase in net income applicable to common stock, a
$4.3 million increase in noncash charges related to depreciation and
amortization expense and deferred income taxes, and a reduction of cash required
for working capital of $4.1 million. Accounts receivable and current costs and
estimated earnings in excess of billings as a percentage of total annual revenue
increased from 20.2 percent at December 31, 2003 to 22.1 percent at December 31,
2004. This increase is primarily related to an increase in costs and estimated
earnings in excess of billings of approximately $12.0 million on contracts
accounted for under the percentage of completion method of accounting. This
increase in cost in excess of billings was offset by an increase in accounts
payable (including payments to subcontractors which are not made until payments
on construction billings have been received from the customer), accrued expenses
for incentive compensation, insurance premiums and reserves, and other reserves.
The increase in accounts receivable and costs in excess of billings is believed
to be fully collectible and thus no additional increase to allowance for
doubtful accounts has been deemed necessary.

     For the year ended December 31, 2003, cash flows from operating activities
decreased to approximately $24.1 million from approximately $29.7 million for
the same period in 2002, a decrease of approximately $5.6 million, or 18.9
percent. The decrease primarily relates to the decrease in income from
operations of $10.4 million partially offset by cash flow generated from the
decrease in prepaid expenses as a result of the change in renewal dates for
insurance.

                                        28
<PAGE>

     Cash Flows from Investing Activities.  For the year ended December 31,
2004, cash flows used for investing activities increased to approximately $13.5
million from approximately $2.6 million for the same period in 2003, an increase
of approximately $10.9 million. The increase primarily relates to a $12.4
million decrease in proceeds from asset sales in 2004 compared to 2003, and a
$2.2 million increase in capital expenditures partially offset by a $3.8 million
decrease in acquisition spending (we completed an acquisition in the second
quarter of 2003).

     For the year ended December 31, 2003, cash flows used for investing
activities decreased to approximately $2.6 million from approximately $15.6
million for the same period in 2002, a decrease of approximately $13.0 million.
The decrease is primarily due to approximately $14.2 million of proceeds from a
sale-leaseback transaction in the second quarter of 2003.

     Cash Flows from Financing Activities.  For the year ended December 31,
2004, cash flows used for financing activities decreased to approximately $21.4
million from approximately $21.6 million for the same period in 2003, a decrease
of approximately $0.2 million. The decrease primarily relates to a $0.6 million
decrease in debt issuance costs partially offset by a $0.5 million increase in
net repayments on debt totaling approximately $21.3 million during 2004 compared
to $20.8 million during 2003.

     For the year ended December 31, 2003, cash flows used for financing
activities increased to approximately $21.6 million from approximately $14.1
million for the same period in 2002, an increase of approximately $7.5 million.
Cash flows used for financing activities in 2003 primarily related to $20.8
million of payments on debt, while 2002 relates to payments on debt, net of
proceeds from debt totaling $6.7 million and $7.3 million of debt issuance
costs.

  CAPITAL EXPENDITURE REQUIREMENTS

     Capital expenditures for the year ended December 31, 2004 totaled
approximately $25.6 million (which included approximately $15.5 million for new
facilities, including $11.9 million to fund construction of the Sacramento
biosolids processing facility) compared to approximately $18.4 million (which
included $6.5 million for new facilities, including $6.1 million to fund
construction of the Sacramento biosolids processing facility) in the same period
of 2003. Our ongoing capital expenditure program consists of expenditures for
replacement equipment, betterments, and growth. We expect our capital
expenditures for 2005 to be approximately $11.0 million to $13.0 million, which
excludes approximately $39.0 million expected to be spent on new facilities in
2005.

  DEBT SERVICE REQUIREMENTS

     In May 2003, we incurred indebtedness of $0.5 million in connection with
the Aspen Resources acquisition. The note payable to the former owners is due
monthly at an annual interest rate of five percent beginning May 2004.

     In August 2002, we incurred indebtedness of approximately $1.5 million to
the former owners of Earthwise in connection with the Earthwise acquisition.
Terms of the note issued in connection with the acquisition require three equal,
annual installments beginning October 2003. Interest of five percent per annum
is payable quarterly beginning October 1, 2002. The first payment was made on
September 30, 2003.

     In May 2002, we entered into an amended and restated $150 million Senior
Credit Agreement 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 $150 million aggregate
principal amount of 9 1/2 percent Senior Subordinated Notes due 2009. This
credit facility is secured by substantially all of our assets and those of our
subsidiaries (other than assets securing nonrecourse debt) and includes
covenants restricting the incurrence of additional indebtedness, liens, certain
payments and sale of assets. The Senior Credit Agreement contains standard
covenants, including compliance with laws, limitations on capital expenditures,
restrictions on dividend payments, limitations on mergers, and compliance with
certain financial covenants. During May 2003, we amended our Senior Credit
Agreement to increase the revolving loan commitment to approximately

                                        29
<PAGE>

$95 million. Requirements for mandatory debt payments from excess cash flows, as
defined, are unchanged in the new credit facility. On March 9, 2004, we further
amended our Senior Credit Agreement to, among other things, exclude certain
charges from its financial covenant calculations, to clarify certain defined
terms, to increase the amount of indebtedness permitted under its total leverage
ratio, and to reset capital and operating lease limitations.

     In April 2002, we 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, we exchanged all of our 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. During 2002, we recorded a
$7.2 million noncash write off to other expense, which represents the
unamortized deferred debt costs related to the debt that was repaid with the net
proceeds received from the Notes and the new senior credit facility.

     In 1996, the Maryland Energy Financing Administration (the
"Administration") issued nonrecourse tax-exempt project revenue bonds (the
"Maryland Project Revenue Bonds") in the aggregate amount of $58.6 million. The
Administration loaned the proceeds of the Maryland Project Revenue Bonds to
Wheelabrator Water Technologies Baltimore L.L.C., now our wholly owned
subsidiary known as Synagro -- Baltimore, L.L.C., pursuant to a June 1996 loan
agreement, and the terms of the loan mirror the terms of the Maryland Project
Revenue Bonds. The loan financed a portion of the costs of constructing thermal
facilities located in Baltimore County, Maryland, at the site of its Back River
Wastewater Treatment Plant, and in the City of Baltimore, Maryland, at the site
of its Patapsco Wastewater Treatment Plant. We assumed all obligations
associated with the Maryland Project Revenue Bonds in connection with our
acquisition of Bio Gro in 2000. Maryland Project Revenue Bonds in the aggregate
amount of approximately $17.2 million have already been paid, and the remaining
Maryland Project Revenue Bonds bear interest at annual rates between 5.85
percent and 6.45 percent and mature on dates between December 1, 2005 and
December 1, 2016.

     In December 2002, the California Pollution Control Financing Authority (the
"Authority") issued nonrecourse revenue bonds in the aggregate amount of $21.3
million. The nonrecourse revenue bonds consist of a face amount of $20.1 million
Series 2002-A and a face amount of $1.2 million Series 2002-B (taxable)
(collectively, the "Sacramento Bonds"). The Authority loaned the proceeds of the
Sacramento Bonds to Sacramento Project Finance, Inc., one of our wholly owned
subsidiaries, pursuant to a loan agreement dated December 1, 2002. The 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 Sacramento Bonds bear interest at annual rates
between 4.25 percent and 5.50 percent and mature on dates between December 1,
2006, and December 1, 2024.

     At December 31, 2004, future minimum principal payments of long-term debt,
nonrecourse project revenue bonds (see Note 7), capital lease obligations (see
Note 8), estimated interest expense on debt and operating lease obligations are
as follows (in thousands):

<Table>
<Caption>
                                      NONRECOURSE      CAPITAL
                         LONG-TERM      PROJECT         LEASE      ESTIMATED   OPERATING
YEAR ENDED DECEMBER 31,    DEBT      REVENUE BONDS   OBLIGATIONS   INTEREST     LEASES      TOTAL
-----------------------  ---------   -------------   -----------   ---------   ---------   --------
<S>                      <C>         <C>             <C>           <C>         <C>         <C>
2005..................        848         3,300          3,028       20,519       8,300      35,995
2006..................        353         3,480          2,787       20,106       6,015      32,741
2007..................      5,452         3,710          3,507       19,483       5,191      37,343
2008..................     23,182         3,935          4,129       18,794       4,151      54,191
2009..................    150,000         4,165            761        6,483       3,953     165,362
2010-2013.............         --        24,965            134       10,300      11,323      46,722
2014-2018.............         --        10,475             --        3,765       1,491      15,731
Thereafter............         --         8,610             --        1,650       1,000      11,260
                         --------       -------        -------     --------     -------    --------
Total.................   $179,835       $62,640        $14,346     $101,100     $41,424    $399,345
                         ========       =======        =======     ========     =======    ========
</Table>

                                        30
<PAGE>

     Interest expense is estimated because certain of our debt has variable
interest rates. For purposes of this estimate, variable interest rates as of
December 31, 2004 were utilized.

     We have entered into various lease transactions to purchase transportation
and operating equipment that have been accounted for as capital lease
obligations and operating leases. The capital leases have lease terms of three
to six years with interest rates from 5.0 percent to 7.18 percent. The net book
value of the equipment related to these capital leases totaled approximately
$15.7 million as of December 31, 2004. The operating leases have terms of two to
eight years. Additionally, we have guaranteed a maximum lease risk amount to the
lessor of one of the operating leases. The fair value of this guaranty is
approximately $0.1 million as of December 31, 2004 and is included in current
liabilities.

     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 Maryland Project Revenue Bonds and the
Sacramento Bonds. We cannot assure, however, that our business will generate
sufficient cash flow from operations, that any cost savings and any operating
improvements will be realized or that future borrowings will be available to us
under our credit facility in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness on or before maturity. We make no assurance
that we will be able to refinance any of our indebtedness, including our credit
facility, on commercially reasonable terms or at all.

     Historically, we have reinvested earnings available for distribution to
holders of Common Stock, and accordingly, we have not paid any cash dividends on
our Common Stock. Currently, covenants relating to our outstanding preferred
stock and bank debt restrict our ability to pay dividends. We expect that our
board of directors will adopt a dividend policy in the second quarter of 2005
that reflects an intention to distribute a substantial portion of the cash
generated by our business in excess of operating needs, interest and principal
payments on our indebtedness and capital expenditures as regular quarterly
dividends to our stockholders. In connection with the adoption of such a policy,
we would enter into a new credit facility allowing for the payment of dividends,
all of our outstanding preferred stock would be converted into shares of Common
Stock, and we expect to issue additional shares of our Common Stock to the
public ("the offering").

     Our ability to service the new credit facility will depend on our ability
to generate cash in the future. We may need to refinance all or a portion of the
new credit facility on or before maturity. We may not be able to refinance the
new credit facility on commercially reasonable terms or at all. If we were
unable to renew or refinance the new credit facility, our failure to repay all
amounts due on the maturity date would cause a default under the new credit
facility.

     Based on the dividend policy with respect to our common stock which our
board of directors will adopt upon the closing of the offering, we may not have
any significant cash available to meet any large unanticipated liquidity
requirements, other than available borrowings, if any, under our new revolver.
As a result, we may not retain a sufficient amount of cash to finance growth
opportunities, including acquisitions, or unanticipated capital expenditures or
to fund our operations. If we do not have sufficient cash for these purposes,
our financial condition and our business will suffer. However, our board of
directors may, in its discretion, amend or repeal this dividend policy to
decrease the level of dividends provided for under the policy, or discontinue
entirely the payment of dividends.

  SERIES D REDEEMABLE PREFERRED STOCK

     We have authorized 32,000 shares of Series D Preferred Stock, par value
$.002 per share. In 2000, we issued a total of 25,033.601 shares of the Series D
Preferred Stock to GTCR Fund VII, L.P. and its affiliates, which is convertible
by the holders into a number of shares of our common stock computed by dividing
(i) the sum of (a) the number of shares to be converted multiplied by the
liquidation value and (b) the amount of accrued and unpaid dividends by (ii) the
conversion price then in effect. The initial conversion price is $2.50 per share
provided that in order to prevent dilution, the conversion price may be
adjusted. The Series D Preferred Stock is senior to our common stock or any
other of our equity securities. The liquidation value of each share of Series D
Preferred Stock is $1,000 per share. Dividends on each share of Series D
Preferred

                                        31
<PAGE>

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. Upon
conversion of the Series D Preferred Stock by the holders, the holders may elect
to receive the accrued and unpaid dividends in shares of our common stock at the
conversion price. The Series D Preferred Stock 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 outstanding shares of Series D Preferred
Stock excluding accrued dividends were converted at December 31, 2004, 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
7,254.462 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 and 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. Upon conversion of the Series
E Preferred Stock by the holders, the holders may elect to receive the accrued
and unpaid dividends in shares of our common stock at the conversion price. The
Series E Preferred Stock 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 outstanding shares of Series E Preferred Stock excluding
accrued dividends were converted at December 31, 2004, 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 our common stock is higher than the
conversion price at date of issuance.

  RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, Statement of Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation" was revised (SFAS No. 123R). This
Statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement addresses
concerns of users and others, improves the comparability of reported financial
information by eliminating alternative accounting methods and simplifies
generally accepted accounting standards in the United States. The Statement is
effective for periods beginning after June 15, 2005. The Company is in the
process of evaluating the impact of the implementation of this Statement.

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, 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

                                        32
<PAGE>

those estimates. The following are our significant estimates and assumptions
made in preparation of our financial statements that deal with the greatest
amount of uncertainty:

     Allowance for Doubtful Accounts -- We estimate losses for uncollectible
accounts receivables based on the aging of the accounts receivable and the
evaluation and the likelihood of success in collecting the receivable. Accounts
receivables are written off periodically during the year as they are deemed
uncollectible when collection efforts have been unsuccessful. Allowance for
doubtful accounts at December 31, 2004 and 2003, was approximately $1.2 million
and $1.5 million, respectively and is recorded as a reduction of accounts
receivables.

     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. The total accrual for loss contracts included in the consolidated
balance sheet was $0.4 million and $4.2 million, as of December 31, 2003 and
2002, respectively, related to one contract entered into in 1996. An accrual for
loss contracts was not required as of December 31, 2004.

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

     Property and Equipment/Long-Lived Assets -- Management adopted SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" during
2002. If significant events or changes in circumstances indicate that the
carrying value of an asset or asset group may not be recoverable, we perform a
test of recoverability. 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.

     We regularly incur costs to develop potential projects or facilities and
procure contracts for the design, permitting, construction and operations of
facilities. We recorded $29.2 million in property and long-term assets related
to these activities at December 31, 2004, compared to $14.7 million at December
31, 2003 (approximately $21.8 million and $8.2 million are classified as
construction in progress as of December 31, 2004 and 2003, respectively). We
routinely review the status of each of these projects to determine if these
costs are realizable.

     Goodwill -- Goodwill attributable to our reporting units is 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,
we test for impairment annually at year end unless factors otherwise indicate
that impairment may have occurred.

     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. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the activity underlying these
assets become deductible. We consider the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. If actual future taxable income differs from our
estimates, we may not realize deferred tax assets to the extent we have
estimated.

                                        33
<PAGE>

     As of December 31, 2004, we had generated net operating loss ("NOL")
carryforwards of approximately $78.6 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. We estimate that our effective tax
rate in 2005 will approximate 40 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.

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

     Self-Insurance Reserves -- We are substantially self-insured for workers'
compensation, employers' liability, auto liability, general liability and
employee group health claims in view of the relatively high per-incident
deductibles we absorb under our insurance arrangements for these risks. Losses
up to deductible amounts are estimated and accrued based upon known facts,
historical trends, industry averages and actuarial assumptions regarding future
claims development and claims incurred but not reported.

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

  OTHER

     We maintain one lease with an affiliate of one of our stockholders. The
lease has an initial term through December 31, 2013. Rental payments made under
this lease in 2004 totaled approximately $0.1 million.

RISK FACTORS WHICH MAY AFFECT FUTURE RESULTS

 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 invest significant capital to bring operations into compliance or to
temporarily or permanently stop operations that are not permitted under the law.
Those costs or actions could have a material adverse effect on our business,
financial condition and results of operations.

     Federal environmental authorities regulate the activities of the municipal
and industrial wastewater generators and enforce standards for the discharge
from wastewater treatment plants (effluent wastewater) with permits issued under
the authority of the Clean Water Act, as amended. The treatment of wastewater
produces an effluent and wastewater solids. The treatment of these solids
produces biosolids. The use and disposal of biosolids and wastewater residuals
is regulated by 40 CFR Part 503 Regulations promulgated by the EPA pursuant to
the Clean Water Act ("Part 503 Regulations"). The Part 503 Regulations also
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.

                                        34
<PAGE>

 WE ARE SUBJECT TO EXTENSIVE AND INCREASINGLY STRICT FEDERAL, STATE AND LOCAL
 ENVIRONMENTAL REGULATION AND PERMITTING, WHICH COULD IMPOSE SUBSTANTIAL COSTS
 ON OUR OPERATIONS OR REDUCE OUR OPERATIONAL FLEXIBILITY.

     Our operations are subject to increasingly strict environmental laws and
regulations, including laws and regulations governing the emission, discharge,
treatment, storage, 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 designated 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 and local authorities, and some
private parties, have sought to prohibit or limit the land application,
agricultural use, thermal processing or composting of biosolids. 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.

     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 these or other
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, which could have a material adverse effect on our ability
to conduct our business.

 WE ARE AFFECTED BY UNUSUALLY ADVERSE WEATHER AND WINTER CONDITIONS, WHICH MAY
 ADVERSELY AFFECT OUR REVENUES AND OPERATIONAL RESULTS.

     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. Material must be
transported to either a permitted storage facility (if available) or to a local
landfill for disposal. In either case, this results in additional costs for
disposal of the biosolids material. 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 results of operations and financial position.

                                        35
<PAGE>

 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.

     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.

 IF OUR LONG-TERM CONTRACTS ARE RENEWED ON LESS ATTRACTIVE TERMS, OR NOT RENEWED
 AT ALL, OR IF WE ARE UNSUCCESSFUL IN BIDDING ON NEW LONG-TERM CONTRACTS, OUR
 OPERATING RESULTS AND FINANCIAL CONDITION WOULD BE ADVERSELY AFFECTED.

     We derive a substantial portion of our revenue from services provided under
municipal contracts. A portion of our contracts expire annually and are
sometimes subject to competitive bidding. Any contracts that are successfully
renewed may be on less attractive terms and conditions than the expired
agreement. We also intend to bid on new municipal contracts. In the event we are
unable to renew our existing contracts on attractive terms, or at all, or be
successful in bidding on new contracts, our operating results and financial
condition would be adversely affected.

 IF ONE OR MORE OF OUR CUSTOMER CONTRACTS ARE TERMINATED PRIOR TO THE EXPIRATION
 OF THEIR 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 WOULD HAVE A MATERIAL AND ADVERSE EFFECT ON OUR BUSINESS,
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     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 OUR NEW FACILITIES IS NOT COMPLETED AS SCHEDULED, AND WE ARE
 NOT ABLE TO REPLACE REVENUES FROM THE NEW FACILITY, THIS COULD HAVE A MATERIAL
 AND ADVERSE EFFECT ON OUR FINANCIAL PERFORMANCE AND CASH FLOW.

     Our ability to generate revenues and cash flow sufficient to pay dividends
on our outstanding common stock and interest on outstanding debt is dependent
upon successfully financing and completing five new facilities scheduled to
commence operations in 2005 and 2006. Although permitting processes for all five
new facilities are complete and construction is in progress or near completion,
there can be no assurance that we will be able to complete construction as
scheduled and begin to operate the facilities without the need to remedy certain
defects that may arise immediately after construction. In addition, as with our
other facilities, our relationship is governed by customer contracts which can
be terminated prior to the expiration of their term.

 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 our ability to provide services to our 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, 2004, our single largest customer accounted for 16 percent of our
revenues and our top ten customers accounted for approximately 37 percent of our
revenues.

                                        36
<PAGE>

 IF WE WERE UNABLE TO OBTAIN BONDING REQUIRED IN CONNECTION WITH CERTAIN
 PROJECTS, WE WOULD BE INELIGIBLE TO BID ON THOSE PROJECTS.

     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 16, 2005, we had a bonding capacity of
approximately $178 million with approximately $138 million utilized as of that
date.

 WE COULD FACE PERSONAL INJURY, THIRD-PARTY OR ENVIRONMENTAL CLAIMS OR OTHER
 DAMAGES RESULTING IN SUBSTANTIAL LIABILITY FOR WHICH WE ARE UNINSURED OR
 INADEQUATELY INSURED AND WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
 BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     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.

     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 single loss.

 WE ARE DEPENDENT ON THE AVAILABILITY AND SATISFACTORY PERFORMANCE OF
 SUBCONTRACTORS FOR OUR DESIGN AND BUILD OPERATIONS AND THE INSUFFICIENCY AND
 UNAVAILABILITY OF AND UNSATISFACTORY PERFORMANCE BY THESE UNAFFILIATED THIRD
 PARTY CONTRACTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

 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.

 IF WE FAIL TO PROPERLY ESTIMATE THE COST OF COMPLETING A PROJECT, AND WE CANNOT
 PASS ADDITIONAL COSTS THROUGH TO OUR CUSTOMERS, WE MAY NOT GENERATE SUFFICIENT
 REVENUE FROM THE PROJECT TO COVER THE OPERATING COSTS OF SUCH PROJECT, WHICH
 WOULD ADVERSELY AFFECT OUR NET INCOME.

     Our customer contracts involve performing tasks for a fixed cost (in total
or on a per unit basis), and if actual costs end up exceeding anticipated costs,
our net income would be adversely affected. Due in part to the

                                        37
<PAGE>

technical imprecision inherent in estimating the volume of residuals, we may
misestimate the volume of residuals, which may increase our costs. To the extent
that unexpected costs may arise in connection with work done pursuant to
contracts that do not allow us to fully transfer such costs to our customers,
our operating costs would increase and our net income would in turn be
negatively affected.

 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, part or all of
our backlog may not 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 of 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. See "Business--Legal Proceedings."

 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. We regularly engage in discussions with respect to
possible acquisitions. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities, which could have a material adverse effect upon our business,
financial position 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.

     As we pursue our acquisition strategy, we might experience periods of rapid
growth that could strain our management, as well as our operational, financial
and other resources. Such a strain might negatively impact our ability to retain
our existing employees. In order to maintain and manage our growth effectively,
we will need to expand our management information systems capabilities and
improve our operational and financial systems and controls. As we grow, our
staffing requirements will increase significantly. We will need to attract,
train, motivate, retain and manage our senior managers, technical professionals
and other employees. We might not be able to find and train qualified personnel,
or do so on a timely basis, or expand our operations and systems to the extent,
and in the time, required.

                                        38
<PAGE>

 WE ARE DEPENDENT ON OUR SENIOR MANAGEMENT FOR THEIR DEPTH OF INDUSTRY
 EXPERIENCE AND KNOWLEDGE.

     We are highly dependent on the services of our senior management team. Our
senior management team has been in the industry for many years and has
substantial industry knowledge and contacts. If a member of our senior
management team were to terminate his association with us, we could lose
valuable human capital, adversely affecting our business. We currently do not
maintain key man insurance on any member of our senior management team.

     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.

     Certain groups of our employees have chosen to be represented by unions,
and we have negotiated collective bargaining agreements with some of the groups.
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 OR OTHER FEDERAL OR STATE CLEANUP LAWS, WHICH
 COULD INCREASE OUR COSTS OF OPERATIONS.

     The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") generally imposes strict, joint and several liability for cleanup
costs upon various parties, including: (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 or a
cleanup required by applicable state environmental laws can be very expensive.
Given the difficulty of obtaining insurance for environmental impairment
liability, CERCLA liability or any liability imposed under state cleanup laws
could have a material impact on our business and financial condition.

     CERCLA 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 manage 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 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

                                        39
<PAGE>

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.

     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 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, 2004, our total goodwill, net of
amortization, was approximately $171.9 million.

  WE MAY BE UNABLE TO MEET CHANGING LAWS, REGULATIONS AND STANDARDS RELATED TO
  CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE.

     We are spending increasing amount of management time and external resources
to comply with changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and Nasdaq Stock Market rules. In particular, Section 302 and
404 of the Sarbanes-Oxley Act of 2002 require management's annual review and
evaluation of our disclosure controls and procedures, and beginning in 2005
attestations of the effectiveness of these controls by our independent
registered public accounting firm. The process of documenting and testing our
controls has required that we hire additional personnel and outside advisory
services and has resulted in additional accounting and legal expenses. While we
invested significant time and money in our effort to evaluate and test our
internal control over financial reporting, material weaknesses were identified
in our internal control over financial reporting at December 31, 2004 (see Item
9A. Controls and Procedures). Although we believe that the steps we are taking
have or will remediate the material weaknesses identified, our disclosure of the
material weaknesses may impact investor perception of our company and may affect
our stock price. In addition, there are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including
cost limitations, the possibility of human error, judgments and assumptions
regarding the likelihood of future events, and the circumvention or overriding
of the controls and procedures. Accordingly even effective disclosure controls
and procedures can provide only reasonable assurance of achieving their control
objectives.

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
                                        40
<PAGE>

financial instruments. Management does not currently use derivative financial
instruments for trading or to speculate on changes in interest rates or
commodity prices.

  DERIVATIVES AND HEDGING ACTIVITIES

     On September 21, 2004, we entered into an interest rate swap transaction on
$67 million of our 9 1/2 percent Senior Subordinated Notes due 2009 that matures
on April 1, 2005. Under the terms of the agreement, we pay a fixed rate of 2.62
percent and receive a floating rate based on six month LIBOR. The mark to market
value of this swap was recorded as a reduction in interest expense of $0.2
million as of December 31, 2004.

     On July 24, 2003, we entered into two interest rate swap transactions with
two financial institutions to hedge our exposure to changes in the fair value on
$85 million of our Notes. The purpose of these transactions was to convert
future interest due on $85 million of the Notes to a lower variable rate in an
attempt to realize savings on our future interest payments. The terms of the
interest rate swap contract and the underlying debt instruments are identical.
We have designated these swap agreements as fair value hedges. On September 23,
2004, we unwound $18 million of these swaps and received a settlement payment of
approximately $0.1 million that was deducted from interest expense. Accordingly,
we currently have $67 million of the original $85 million of interest rate swaps
outstanding. The swaps have notional amounts of $50 million and $17 million and
mature in April 2009 to mirror the maturity of the Notes. Under the agreements,
we pay on a semi-annual basis (each April 1 and October 1) a floating rate based
on a six-month U.S. dollar LIBOR rate, plus a spread, and receive a fixed-rate
interest of 9 1/2 percent. During 2004, we recorded interest savings related to
these interest rate swaps of $1.5 million, which reduced interest expense. The
$0.5 million fair value of these derivative instruments is included in other
long-term liabilities, as of December 31, 2004. The carrying value of our Notes
was decreased by the same amount. On January 6, 2005, we unwound the $50 million
and $17 million remaining balance on these swaps and paid $0.5 million for the
settlement of these swaps.

     The 12 percent subordinated debt was repaid on April 17, 2002, with the
proceeds from the sale of the Notes. On June 25, 2002, we entered into a
floating-to-fixed interest rate swap agreement that substantially offsets market
value changes in our reverse swap agreement. The liability related to this
reverse swap agreement and the floating-to-fixed offset agreement totaling
approximately $2.2 million is reflected in other long-term liabilities at
December 31, 2004. The loss recognized during 2004, related to the
floating-to-fixed interest rate swap agreement was approximately $0.7 million,
while the gain recognized related to the reverse swap agreement was
approximately $0.7 million. The amount of the ineffectiveness of the reverse
swap agreement charged to other expense was approximately $38,000 as of December
31, 2004.

     On June 25, 2001, we entered into a reverse swap on our 12 percent
subordinated debt and used the proceeds from the reverse swap agreement to
retire previously outstanding floating-to-fixed interest rate swap agreements
(the "Retired Swaps") and option agreements. Accordingly, the balance included
in accumulated other comprehensive loss included in stockholders' equity related
to the Retired Swaps is being recognized in future periods' income over the
remaining term of the original swap agreement. The amount of accumulated other
comprehensive income recognized during 2004, was approximately $0.5 million.

  INTEREST RATE RISK

     Total debt at December 31, 2004, included approximately $21.4 million in
floating rate debt at a base interest rate plus 3.0 percent, or approximately
5.3 percent and approximately $2.5 million in floating rate debt at an interest
rate of approximately 7.1 percent attributed to the Senior Credit Agreement at
December 31, 2004. We also have interest rate swaps outstanding on our fixed
rate debt. As a result, our interest costs in 2005 will fluctuate based on
short-term interest rates. The impact on annual cash flow of a ten percent
change in the floating rate (i.e. LIBOR) would be approximately $0.2 million.

                                        41
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Registered Public Accounting
  Firm -- PricewaterhouseCoopers LLP........................   42
Consolidated Balance Sheets as of December 31, 2004 and
  2003......................................................   43
Consolidated Statements of Operations for the Years Ended
  December 31, 2004, 2003 and 2002..........................   44
Consolidated Statements of Stockholders' Equity for the
  Years Ended December 31, 2004, 2003 and 2002..............   45
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2004, 2003 and 2002..........................   46
Notes to Consolidated Financial Statements..................   48
</Table>

                                        42
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statement of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Synagro Technologies, Inc. and its subsidiaries (the "Company") at December 31,
2004, 2003 and 2002, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2004 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 audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

     As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2003, the Company adopted Statement of Financial Accounting Standards
No. 143, "Asset Retirement Obligations."

     As discussed in Note 20 to the consolidated financial statements, the
Company restated its previously issued consolidated financial statements for the
years ended December 31, 2003 and 2002.

                                          PricewaterhouseCoopers LLP

Houston, Texas
March 16, 2005

                                        43
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2004        2003
                                                              ---------   ---------
                                                              (IN THOUSANDS EXCEPT
                                                                   SHARE DATA)
<S>                                                           <C>         <C>
                                      ASSETS
Current Assets:
  Cash and cash equivalents.................................  $    326    $    206
  Restricted cash...........................................       655       1,410
  Accounts receivable, net..................................    63,891      59,581
  Costs and estimated earnings in excess of billings........     8,099         864
  Prepaid expenses and other current assets.................    11,793      10,318
                                                              --------    --------
     Total current assets...................................    84,764      72,379
Property, machinery & equipment, net........................   225,541     213,697
Other Assets:
  Costs and estimated earnings in excess of billings........     4,704          --
  Restricted cash -- construction fund......................     1,988      12,184
  Restricted cash -- debt service fund......................     7,287       7,275
  Goodwill..................................................   171,855     171,051
  Other, net................................................    14,645      14,091
                                                              --------    --------
     Total assets...........................................  $510,784    $490,677
                                                              ========    ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Short term debt...........................................  $  4,000    $     --
  Current maturities of long-term debt......................       848         955
  Current maturities of nonrecourse project revenue bonds...     3,300       2,570
  Current maturities of capital lease obligations...........     3,028       2,678
  Accounts payable..........................................    39,397      26,519
  Accrued expenses..........................................    23,272      19,140
                                                              --------    --------
     Total current liabilities..............................    73,845      51,862
Long-Term Debt:
  Long-term debt obligations, net...........................   178,453     194,084
  Nonrecourse project revenue bonds, net....................    59,028      62,301
  Capital lease obligations, net............................    11,318      12,748
                                                              --------    --------
       Total long-term debt.................................   248,799     269,133
     Other long-term liabilities............................    24,289      19,361
                                                              --------    --------
     Total liabilities......................................   346,933     340,356
Commitments and Contingencies
Redeemable Preferred Stock, 69,792.29 shares issued and
  outstanding, redeemable at $1,000 per share...............    95,126      86,299
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, 19,809,621 and 19,775,821 shares issued and
     outstanding in 2004 and 2003, respectively.............        40          40
  Additional paid in capital................................    73,358      82,113
  Accumulated deficit.......................................    (3,875)    (16,829)
  Accumulated other comprehensive loss......................      (798)     (1,302)
                                                              --------    --------
     Total stockholders' equity.............................    68,725      64,022
                                                              --------    --------
     Total liabilities and stockholders' equity.............  $510,784    $490,677
                                                              ========    ========
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        44
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                     YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------------
                                                            2004               2003              2002
                                                       ---------------   ----------------   ---------------
                                                        (IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
<S>                                                    <C>               <C>                <C>
Revenue..............................................    $   325,864       $    298,552       $   272,628
Cost of services.....................................        258,042            234,451           201,880
                                                         -----------       ------------       -----------
Gross profit.........................................         67,822             64,101            70,748
Selling, general and administrative expenses.........         24,346             26,070            22,935
(Gain) loss on sale of assets........................           (854)                 7              (244)
Reorganization costs.................................             --              1,169               905
Special charges, net.................................            320                 --                --
Amortization of intangibles..........................            126                450               108
                                                         -----------       ------------       -----------
  Income from operations.............................         43,884             36,405            47,044
                                                         -----------       ------------       -----------
Other expense:
  Other expense, net.................................             37                 70             5,698
  Interest expense, net..............................         22,247             23,356            23,498
                                                         -----------       ------------       -----------
     Total other expense, net........................         22,284             23,426            29,196
                                                         -----------       ------------       -----------
Income before provision for income taxes.............         21,600             12,979            17,848
  Provision for income taxes.........................          8,646              5,225             6,784
                                                         -----------       ------------       -----------
Net income before cumulative effect of change in
  accounting for asset retirement obligations and
  preferred stock dividends..........................         12,954              7,754            11,064
Cumulative effect of change in accounting for asset
  retirement obligations, net of tax benefit of
  $292...............................................             --                476                --
                                                         -----------       ------------       -----------
Net income before preferred stock dividends..........         12,954              7,278            11,064
Preferred stock dividends............................          8,827              8,209             7,659
                                                         -----------       ------------       -----------
Net income (loss) applicable to common stock.........    $     4,127       $       (931)      $     3,405
                                                         ===========       ============       ===========
Earnings (loss) per share:
Basic --
  Earnings (loss) per share before cumulative effect
     of change in accounting for asset retirement
     obligations.....................................    $      0.21       $      (0.03)      $      0.17
  Cumulative effect of change in accounting for asset
     retirement obligations..........................             --              (0.02)               --
                                                         -----------       ------------       -----------
  Earnings (loss) per share..........................    $      0.21       $      (0.05)      $      0.17
                                                         ===========       ============       ===========
Diluted --
  Earnings (loss) per share before cumulative effect
     of change in accounting for asset retirement
     obligations.....................................    $      0.21       $      (0.03)      $      0.17
  Cumulative effect of change in accounting for asset
     retirement obligations..........................             --              (0.02)               --
                                                         -----------       ------------       -----------
  Net earnings (loss) per share......................    $      0.21       $      (0.05)      $      0.17
                                                         ===========       ============       ===========
Weighted average shares:
     Weighted average shares outstanding for basic
       and diluted earnings per share................     19,777,041         19,775,821        19,627,132
                                                         ===========       ============       ===========
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        45
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

<Table>
<Caption>
                                                                                         ACCUMULATED
                                          COMMON STOCK       ADDITIONAL                     OTHER
                                       -------------------    PAID-IN     ACCUMULATED   COMPREHENSIVE             COMPREHENSIVE
                                         SHARES     AMOUNT    CAPITAL       DEFICIT         LOSS         TOTAL       INCOME
                                       ----------   ------   ----------   -----------   -------------   -------   -------------
                                                                   (IN THOUSANDS EXCEPT SHARE DATA)
<S>                                    <C>          <C>      <C>          <C>           <C>             <C>       <C>
BALANCE, January 1, 2002.............  19,476,781    $39      $97,982      $(35,171)       $(2,310)     $60,540
  Change in other comprehensive
    income...........................          --     --           --            --            504          504      $   504
  Preferred stock dividends..........          --     --       (7,659)           --             --       (7,659)          --
  Exercise of options and warrants...     299,040      1           (1)           --             --           --           --
  Net income before preferred stock
    dividends........................          --     --           --        11,064             --       11,064       11,064
                                       ----------    ---      -------      --------        -------      -------      -------
BALANCE, December 31, 2002...........  19,775,821     40       90,322       (24,107)        (1,806)      64,449      $11,568
                                       ----------    ---      -------      --------        -------      -------      -------
  Change in other comprehensive
    income...........................          --     --           --            --            504          504      $   504
  Preferred stock dividends..........          --     --       (8,209)           --             --       (8,209)          --
  Net income before preferred stock
    dividends........................          --     --           --         7,278             --        7,278        7,278
                                       ----------    ---      -------      --------        -------      -------      -------
BALANCE, December 31, 2003...........  19,775,821     40       82,113       (16,829)        (1,302)      64,022      $ 7,782
                                       ----------    ---      -------      --------        -------      -------      -------
  Change in other comprehensive
    income...........................          --     --           --            --            504          504      $   504
  Preferred stock dividends..........          --     --       (8,827)           --             --       (8,827)          --
  Exercise of options................      33,800     --           72            --             --           72           --
  Net income before preferred stock
    dividends........................          --     --           --        12,954             --       12,954       12,954
                                       ----------    ---      -------      --------        -------      -------      -------
BALANCE, December 31, 2004...........  19,809,621    $40      $73,358      $ (3,875)       $  (798)     $68,725      $13,458
                                       ==========    ===      =======      ========        =======      =======      =======
</Table>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        46
<PAGE>

                           SYNAGRO TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                                2004       2003       2002
                                                              --------   --------   ---------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss) applicable to common stock..............  $  4,127   $   (931)  $   3,405
  Adjustments to reconcile net income (loss) applicable to
     common stock to net cash provided by operating
     activities:
       Preferred stock dividends............................     8,827      8,209       7,659
       Cumulative effect of change in accounting for asset
          retirement obligations............................        --        476          --
       Bad debt expense.....................................       300        952          --
       Reorganization costs.................................        --      1,169         905
       Depreciation and amortization expense................    19,902     18,626      15,288
       Amortization of debt financing costs.................     1,244      1,140       1,376
       Write off of deferred debt costs.....................        --         --       7,241
       Provision for deferred income taxes..................     7,468      4,514       6,647
       Loss (gain) on sale of property, machinery and
          equipment.........................................      (854)         7        (244)
       (Increase) decrease in the following, net:
       Accounts receivable..................................    (4,609)    (5,633)     (4,693)
       Costs and estimated earnings in excess of billings...   (11,940)      (864)         --
       Prepaid expenses and other assets....................    (2,289)     4,390      (8,661)
  Increase (decrease) in the following:
       Accounts payable, accrued expenses and other
          long-term liabilities.............................    12,905     (7,906)        727
                                                              --------   --------   ---------
  Net cash provided by operating activities.................    35,081     24,149      29,650
                                                              --------   --------   ---------
Cash flows from investing activities:
     Purchase of businesses, including contingent
       consideration, net of cash acquired..................      (804)    (4,634)     (4,553)
     Purchases of property, machinery and equipment.........   (14,667)   (13,158)    (12,534)
     Proceeds from sale of property, machinery and
       equipment............................................     1,799     14,207         602
     Facility construction funded by restricted cash........   (10,928)    (5,270)         --
     Decrease in restricted cash for facility
       construction.........................................    10,200      5,270          --
     Decrease in other restricted cash accounts.............       740        780       1,081
     Other..................................................       124        213        (204)
                                                              --------   --------   ---------
  Net cash used in investing activities.....................   (13,536)    (2,592)    (15,608)
                                                              --------   --------   ---------
Cash flows from financing activities:
     Payments of debt.......................................   (26,421)   (20,816)   (226,745)
     Net increase in bank revolver borrowings...............     5,100         --          --
     Debt issuance costs....................................      (176)      (774)     (7,310)
     Proceeds from debt.....................................        --         --     220,000
     Exercise of options....................................        72         --          --
                                                              --------   --------   ---------
  Net cash used in financing activities.....................   (21,425)   (21,590)    (14,055)
Net increase (decrease) in cash and cash equivalents........       120        (33)        (13)
Cash and cash equivalents, beginning of period..............       206        239         252
                                                              --------   --------   ---------
Cash and cash equivalents, end of period....................  $    326   $    206   $     239
                                                              ========   ========   =========
Supplemental cash flow information:
  Interest paid during the period...........................  $ 20,009   $ 21,437   $  20,035
  Income taxes paid during the period.......................  $    959   $    247   $     361
</Table>

                                        47
<PAGE>

NONCASH INVESTING AND FINANCING ACTIVITIES RELATING TO CONSOLIDATED STATEMENT OF
                                   CASH FLOWS

     During 2002, dividends totaled approximately $7.7 million, of which
approximately $6.6 million represents the eight percent dividend on the
Company's preferred stock that was provided for with additional shares of
preferred stock, and approximately $1.1 million represents accretion and
amortization of issuance costs.

     During 2002, the Company issued nonrecourse bonds totaling $21.3 million 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 capital lease agreements to purchase
transportation equipment totaling approximately $9.3 million.

     During 2003, dividends totaled approximately $8.2 million, of which
approximately $7.2 million represents the eight percent dividend on the
Company's preferred stock that was provided for with additional shares of
preferred stock, and approximately $1.0 million represents accretion and
amortization of issuance costs.

     During 2003, the Company entered into capital lease agreements of
approximately $8.0 million to purchase operating and transportation equipment.

     During 2004, dividends totaled approximately $8.8 million, of which
approximately $7.8 million represents the eight percent dividend on the
Company's preferred stock that was provided for with additional shares of
preferred stock, and approximately $1.0 million represents accretion and
amortization of issuance costs.

     During 2004, the Company entered into a $4.0 million note to purchase land
and entered into capital lease agreements of approximately $1.7 million to
purchase operating and transportation equipment.

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        48
<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 600 municipal and
industrial water and wastewater treatment accounts and has operations in 37
states and the District of Columbia. Synagro offers many services that focus on
the beneficial reuse of organic nonhazardous residuals resulting from the
wastewater treatment process. Our broad range of services include drying and
pelletization, composting, product marketing, incineration, alkaline
stabilization, land application, collection and transportation, regulatory
compliance, dewatering, and facility cleanout services.

  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.

  COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS

     The asset "Costs and estimated earnings in excess of billings" represents
revenues recognized in excess of amounts billed under the terms of contracts
accounted for under the percentage of completion method of accounting. These
amounts are billable upon completion of contract performance milestones or other
specified conditions of the contracts.

  PROPERTY, MACHINERY AND EQUIPMENT, NET

     Property, machinery and equipment are stated at cost less accumulated
depreciation. Depreciation is recorded 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 lease term 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 income from operations in the consolidated
statements of operations.

     Interest is capitalized on certain assets under construction. Capitalized
interest included in construction in process totaled approximately $2.1 million
and $1.1 million as of December 31, 2004 and 2003, respectively.

  GOODWILL

     Goodwill represents the excess of aggregate purchase price paid by the
Company in acquisitions accounted for as purchases over the fair value of the
net tangible assets acquired. Goodwill attributable to the Company's reporting
units is 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 unless factors otherwise
indicate that an impairment may have occurred.
                                        49
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  NONCOMPETE AGREEMENTS

     Included in other assets, net are noncompete agreements. These agreements
are 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,
2004 and 2003, totaled approximately $0.1 million and $0.2 million,
respectively. Amortization expense was approximately $0.1 million in 2004, $0.1
million in 2003, and $0.1 million in 2002.

  SELF-INSURANCE LIABILITIES

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

  DEFERRED FINANCING COSTS

     Deferred financing costs, net of accumulated amortization at December 31,
2004 and 2003, totaled approximately $7.5 million and $8.5 million,
respectively, and are included in other assets. Deferred financing costs are
amortized to interest expense on a straight-line basis over the life of the
underlying instruments, which is not materially different from the effective
interest method.

  REVENUE RECOGNITION

     Revenues generated from 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.

     Revenues related to long-term construction projects are recognized in
accordance with percentage-of-completion accounting guidance. Percentage of
completion is measured principally by the percentage of costs incurred to date
for each contract to the estimated total costs for each contract at completion.
Due to uncertainties inherent in the estimation process, it is reasonably
possible that that the estimated completion costs will be revised in the near
term. Such revisions to cost and income are recognized in the periods in which
the revisions are determined.

     The Company provides for losses in connection with its 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 that deal with the greatest amount of
uncertainty:

          Allowance for Doubtful Accounts -- The Company estimates losses for
     uncollectible accounts based on the aging of the accounts receivable and
     the evaluation and the likelihood of success in collecting the receivable.
     Accounts are written off periodically during the year as they are deemed
     uncollectible when collection efforts have been unsuccessful. Allowance for
     doubtful accounts at December 31, 2004 and

                                        50
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     2003, was approximately $1.2 million and $1.5 million, respectively and is
     recorded as a reduction of accounts 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. The total accrual for loss
     contracts included in the consolidated balance sheet was $0.4 million and
     $4.2 million, as of December 31, 2003 and 2002, respectively, related to
     one contract entered into in 1996. An accrual for loss contracts was not
     required as of December 31, 2004.

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

          Property and Equipment/Long-Lived Assets -- Management adopted SFAS
     No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
     during 2002. If significant events or changes in circumstances indicate
     that the carrying value of an asset or asset group may not be recoverable,
     we perform a test of recoverability. 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 regularly incurs costs to develop potential projects or
     facilities and procure contracts for the design, permitting, construction
     and operations of facilities. The Company has recorded $29.2 million in
     property and long-term assets related to these activities at December 31,
     2004, compared to $14.7 million at December 31, 2003 (approximately $21.8
     million and $8.2 million are classified as construction in progress as of
     December 31, 2004 and 2003, respectively). The Company routinely reviews
     the status of each of these projects to determine if these costs are
     realizable.

          Goodwill -- Goodwill attributable to the Company's reporting units is
     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
     unless factors otherwise indicate that an impairment may have occurred.

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

          Income Taxes -- The Company assumes the deductibility of certain costs
     in its income tax filings and estimates the recovery of deferred income tax
     assets. The ultimate realization of deferred tax assets is dependent upon
     the generation of future taxable income during the periods in which the
     activity underlying these assets become deductible. The Company considers
     the scheduled reversal of deferred tax liabilities, projected future
     taxable income and tax planning strategies in making this assessment. If
     actual future taxable income differs from its estimates, the company may
     not realize deferred tax assets to the extent it was estimated.

                                        51
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

  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 16
percent, 17 percent and 15 percent of total revenue for the years ended December
31, 2004, 2003 and 2002, respectively. No other customers accounted for more
than ten percent of revenues. Municipal customers account for 88 percent, 86
percent and 88 percent of consolidated revenues for the years ended December 31,
2004, 2003 and 2002, respectively.

  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, 2004, the fair value of the $150
million Senior Subordinated Notes totaled approximately $163 million.

  INCOME TAXES

     The Company files a consolidated return for federal income tax purposes.
The Company accounts for income taxes in accordance with 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.

  RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2002, the Financial Accounting Standards Board ("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. SFAS No. 123
provides that companies record compensation expense for the estimated fair-value
of stock-based compensation, but also allows companies to continue to apply
Accounting Principles Board ("APB") Opinion No. 25 and related interpretations
in accounting for its plans. Companies must disclose in both annual and interim
financial

                                        52
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 accompanying consolidated financial statements for the Company's 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 been:

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                            -------------------------------
                                                              2004       2003        2002
                                                            --------   ---------   --------
                                                            (IN THOUSANDS EXCEPT PER SHARE
                                                                         DATA)
<S>                                                         <C>        <C>         <C>
Net income (loss) applicable to common stock, as
  reported................................................   $4,127     $  (931)    $3,405
Less: Compensation expense per SFAS No. 123, net of tax...    1,191       1,482      1,672
                                                             ------     -------     ------
Pro forma income (loss) after effect of SFAS No. 123......   $2,936     $(2,413)    $1,733
                                                             ======     =======     ======
Diluted earnings (loss) per share, as reported............   $ 0.21     $ (0.05)    $ 0.17
Pro forma earnings (loss) per share after effect of SFAS
  No. 123.................................................   $ 0.15     $ (0.12)    $ 0.09
</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 $2.51, $1.63 and $1.35 for grants made during the years ended December
31, 2004, 2003, and 2002, respectively. The following assumptions were used for
option grants made during 2004, 2003, and 2002, respectively: expected
volatility of 111 percent, 58 percent and 42 percent; risk-free interest rates
of 4.33 percent, 3.98 percent and 5.20 percent; expected lives of up to ten
years and no expected dividends to be paid. The compensation expense included in
the above pro forma data may not be indicative of amounts to be included in
future periods as the fair value of options granted prior to 1995 was not
determined and the Company expects future grants.

     In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation"
was revised (SFAS No. 123R). This Statement establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. The Statement is effective for periods beginning after June 15,
2005. The Company is in the process of evaluating the impact of the
implementation of this Statement.

     On January 1, 2003, the Company adopted SFAS No. 143, "Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. The Company's asset retirement
obligations primarily consist of equipment dismantling and foundation removal at
certain facilities and temporary storage facilities. During the first quarter of
2003, the Company recorded a charge related to the cumulative effect of change
in accounting for asset retirement obligations, net of tax, totaling
approximately $0.5 million (approximately $0.8 million before tax), increased
liabilities to approximately $1.6 million, and increased property, machinery and
equipment by approximately $0.5 million. There was no impact on the Company's
cash flows as a result of adopting SFAS No. 143. The pro forma asset retirement
obligation would have been approximately $1.5 million at January 1, 2002, and
$1.6 million at December 31, 2002 had the Company adopted SFAS No. 143 on
January 1, 2002. The asset retirement obligation, which is included on the
consolidated balance sheet in other long-term liabilities including accretion of
approximately $0.1 million, was approximately $1.5 million at December 31, 2004.

                                        53
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The pro forma effect on net income before preferred stock dividends, net
income applicable to common stock and income per share had SFAS No. 143 been
adopted as of January 1, 2002, would have been as follows:

<Table>
<Caption>
                                                                   YEAR ENDED
                                                               DECEMBER 31, 2002
                                                              --------------------
                                                                 AS         PRO
                                                              REPORTED     FORMA
                                                              ---------   --------
                                                              (IN THOUSANDS EXCEPT
                                                                PER SHARE DATA)
<S>                                                           <C>         <C>
Net income before preferred stock dividend..................   $11,064    $10,882
Income applicable to common stock...........................   $ 3,405    $ 3,223
Income per share:
  Basic.....................................................   $  0.17    $  0.16
  Diluted...................................................   $  0.17    $  0.16
</Table>

  RECLASSIFICATIONS

     The Company has reclassified its reporting of gains and losses from the
sale of fixed assets from other income and expense to income from operations for
all periods presented. Certain reclassifications have been made in prior period
financial statements to conform to current period presentation. These
reclassifications have not resulted in any changes to previously reported net
income for any periods.

(2)  ACQUISITIONS

  2003 ACQUISITION

     In May 2003, the Company purchased Aspen Resources, Inc. ("Aspen
Resources"). The purchase of Aspen Resources provides the Company with added
expertise in the management of pulp and paper organic residuals. The allocation
of purchase price resulted in approximately $3.4 million of goodwill. The assets
acquired and liabilities assumed relating to the acquisition are summarized
below (in thousands):

<Table>
<S>                                                            <C>
Cash paid, including transaction costs, net of cash
  acquired..................................................   $ 4,093
Note payable to former owner................................       500
Less: Net assets acquired...................................    (1,182)
                                                               -------
Goodwill....................................................   $ 3,411
                                                               =======
</Table>

     The note payable to the former owners is due in equal monthly installments
with interest payable at an annual rate of five percent beginning May 2004.

  2002 ACQUISITION --

     In August 2002, the Company purchased Earthwise Organics, Inc. and
Earthwise Trucking (collectively "Earthwise"), a Class A biosolids and manure
composting and marketing company. The purchase of Earthwise provides the Company
with a distribution channel for Class A products and a strategic platform to
grow the Company's product marketing presence. In connection with the purchase
of Earthwise, the former owners are entitled to receive up to an additional $4.0
million subsequent to August 2005 if certain performance targets are met over
this three-year period. The allocation of the purchase price resulted in

                                        54
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately $4.9 million of goodwill subject to future payments to the former
owners described above. The assets acquired and liabilities assumed relating to
the acquisition are summarized below (in thousands):

<Table>
<S>                                                            <C>
Cash paid, including transaction costs, net of cash
  acquired..................................................   $3,580
Note payable to former owner................................    1,500
Less: Net assets acquired...................................     (219)
                                                               ------
Goodwill....................................................   $4,861
                                                               ======
</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. The first payment was made September 30, 2003.

     Results of operations of Aspen and Earthwise are included in the
accompanying consolidated statements of operations as of May 7, 2003, and August
26, 2002, respectively. Pro forma results of operations, as if these entities
had been acquired as of the beginning of their respective acquisition years,
have not been presented as such results are not considered to be materially
different from the Company's actual results.

(3)  PROPERTY, MACHINERY AND EQUIPMENT

     Property, machinery and equipment consist of the following:

<Table>
<Caption>
                                                      ESTIMATED          DECEMBER 31,
                                                       USEFUL       -----------------------
                                                    LIFE IN YEARS       2004         2003
                                                    -------------   ------------   --------
                                                                        (IN THOUSANDS)
<S>                                                 <C>             <C>            <C>
Land..............................................       N/A          $  7,389     $  3,623
Buildings and improvements........................      7-25            34,903       33,684
Machinery and equipment...........................      3-30           227,164      218,558
Office furniture and equipment....................      3-10             6,221        5,427
Construction in process...........................        --            26,501       11,542
                                                                      --------     --------
                                                                      $302,178     $272,834
Less: Accumulated depreciation....................                      76,637       59,137
                                                                      --------     --------
Property, machinery and equipment, net............                    $225,541     $213,697
                                                                      ========     ========
</Table>

(4)  DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

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

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                             ------------------------
                                                              2004     2003     2002
                                                             ------   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Balance at beginning of year...............................  $1,530   $1,331   $2,165
Uncollectible receivables written off......................    (601)    (753)    (869)
Additions for bad debt expense.............................     300      952       --
Other......................................................      --       --       35
                                                             ------   ------   ------
Balance at end of year.....................................  $1,229   $1,530   $1,331
                                                             ======   ======   ======
</Table>

                                        55
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2004      2003
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Costs and estimated earnings on contracts in progress.......  $20,262   $ 3,214
Less -- Billings to date....................................   (7,459)   (2,350)
                                                              -------   -------
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $12,803   $   864
                                                              =======   =======
Current assets..............................................  $ 8,099   $   864
Non current assets..........................................    4,704        --
                                                              -------   -------
Total.......................................................  $12,803   $   864
                                                              =======   =======
</Table>

     Prepaid and other current assets consist of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2004      2003
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Prepaid insurance...........................................  $ 1,619   $   902
Prepaid other...............................................    3,989     4,648
Inventory...................................................    2,594     2,154
Notes receivable............................................      218       342
Other.......................................................    3,373     2,272
                                                              -------   -------
Prepaid and other current assets............................  $11,793   $10,318
                                                              =======   =======
</Table>

     The changes in the carrying amount of goodwill for the years ended December
31, 2004 and 2003, were as follows (in thousands):

<Table>
<S>                                                            <C>
Balance at January 1, 2003..................................   $167,117
Goodwill acquired during the year...........................      3,150
Adjustments.................................................        784
                                                               --------
Balance at January 1, 2004..................................    171,051
Adjustments.................................................        804
                                                               --------
Balance at December 31, 2004................................   $171,855
                                                               ========
</Table>

     The goodwill acquired during 2003 relates to the Company's acquisition of
Aspen Resources (see Note 2), while goodwill adjustments in 2004 and 2003
primarily represent payments of contingent consideration made on previous
acquisitions.

                                        56
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Accrued expenses consist of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2004      2003
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Accrued legal and other claims costs........................  $ 1,426   $ 1,426
Accrued interest............................................    4,018     4,222
Accrued salaries and benefits...............................    4,089     2,727
Accrued insurance...........................................    6,129     3,314
Other accrued expenses......................................    7,610     7,451
                                                              -------   -------
Accrued liabilities.........................................  $23,272   $19,140
                                                              =======   =======
</Table>

(5)  SHORT-TERM DEBT OBLIGATIONS

     In August 2004, the Company entered into a $4.0 million short term note
with a bank for the purchase of land. The note bears interest at LIBOR or prime
plus a margin which currently approximates 4.67 percent and was repaid in
February 2005 with borrowings on the Company's revolving line of credit. The
Company plans to use the land as part of the development of a compost facility
in Southern California. The total capital required to develop the project is
estimated at $30 to $35 million and the facility is expected to generate annual
revenues of approximately $12 million upon commencement of operations which is
expected in 2006. The Company is currently considering alternatives for the
permanent financing of this project.

(6)  LONG-TERM DEBT OBLIGATIONS

     Long-term debt obligations consist of the following:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2004       2003
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Senior credit facility --
  Revolving line of credit..................................  $  5,100   $     --
  Term loans................................................    23,867     44,274
Subordinated debt...........................................   150,000    150,000
Fair value adjustment of subordinated debt as a result of
  interest rate swaps.......................................      (534)      (755)
Notes payable to former owners..............................       855      1,500
Other notes payable.........................................        13         20
                                                              --------   --------
     Total debt.............................................  $179,301   $195,039
Less: Current maturities....................................      (848)      (955)
                                                              --------   --------
     Long-term debt, net of current maturities..............  $178,453   $194,084
                                                              ========   ========
</Table>

CREDIT FACILITY

     On May 8, 2002, the Company entered into a $150 million amended and
restated Senior Credit Agreement (the "Senior Credit Agreement") by and among
the Company, Bank of America, N.A., and certain other lenders to fund working
capital for acquisitions, to refinance existing debt, to provide working capital
for operations, to fund capital expenditures and for other general corporate
purposes. The Senior Credit Agreement bears interest at LIBOR or prime plus a
margin based on a pricing schedule as set out in the

                                        57
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Senior Credit Agreement which currently approximates 6.75 percent for the
Revolving Loan and 5.30 percent on the Term B loans.

     During May 2003, the Company further amended its Senior Credit Agreement to
increase the revolving loan commitment to approximately $95 million.

     The loan commitments under the Senior Credit Agreement, as amended, are as
follows:

           (i) Revolving Loan up to $95 million outstanding at any time;

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

          (iii) Letters of Credit up to $50 million as a subset of the Revolving
                Loan. At December 31, 2004, the Company had approximately $34.8
                million of Letters of Credit outstanding.

     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 was
in compliance with those covenants as of December 31, 2004. The Senior Credit
Agreement is collateralized by all the assets of the Company and expires on
December 31, 2008. As of December 31, 2004, the Company had approximately $55.1
million of unused borrowings under the Senior Credit Agreement, of which
approximately $51.9 million is available for borrowing based on the ratio
limitations included in the Senior Credit Agreement. On March 9, 2004, the
Company amended its credit facility to, among other things, exclude certain
charges from its financial covenant calculations, to clarify certain defined
terms, to increase the amount of indebtedness permitted under its total leverage
ratio, and to reset capital and operating lease limitations.

  SENIOR SUBORDINATED NOTES

     In April 2002, the Company issued $150 million aggregate 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"). Each of
the Guarantors is 100 percent owned by the parent company and the guarantees are
full, unconditional and joint and several. As of December 31, 2004, all
subsidiaries, other than the subsidiaries formed to own and operate the compost
project in Southern California, South Kern Industrial Center, L.L.C. (See Note
5) and the Sacramento dryer project, Synagro Organic Fertilizer Company of
Sacramento, Inc. and Sacramento Project Finance, Inc. (see Note 18), were

                                        58
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 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 at a premium of 9 1/2
percent 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.

                                        59
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  EARLY EXTINGUISHMENT OF DEBT

     In conjunction with the issuance of the Notes and entering into the Senior
Credit Agreement, the Company paid the then outstanding subordinated debt and
credit facility. In 2002, the Company recognized a charge of approximately $7.2
million related 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 SELLERS OF ACQUIRED BUSINESSES

     In connection with previous acquisitions, the Company has $0.9 million in
notes payable with certain former owners. The notes payable are due over three
remaining years in installments with interest payable at an annual rate of five
percent.

  DERIVATIVES AND HEDGING ACTIVITIES

     On September 21, 2004, the Company entered into an interest rate swap
transaction on $67 million of its Notes that matures on April 1, 2005. Under the
terms of the agreement, the Company pays a fixed rate of 2.62 percent and
receives a floating rate based on six month LIBOR. The mark to market value of
this swap was recorded as a reduction in interest expense of $0.2 as of December
31, 2004.

     On July 24, 2003, the Company entered into two interest rate swap
transactions with two financial institutions to hedge the Company's exposure to
changes in the fair value on $85 million of its Notes. The purpose of these
transactions was to convert future interest due on $85 million of the Notes to a
lower variable rate in an attempt to realize savings on the Company's future
interest payments. The terms of the interest rate swap contract and the
underlying debt instruments are identical. The Company has designated these swap
agreements as fair value hedges. On September 23, 2004, the Company unwound $18
million of these swaps and received a settlement payment of approximately $0.1
million that was deducted from interest expense. Accordingly, the Company
currently has $67 million of the original $85 million of interest rate swaps
outstanding. The swaps have notional amounts of $50 million and $17 million and
mature in April 2009 to mirror the maturity of the Notes. Under the agreements,
the Company pays on a semi-annual basis (each April 1 and October 1) a floating
rate based on a six-month U.S. dollar LIBOR rate, plus a spread, and receives a
fixed-rate interest of 9 1/2 percent. During 2004, the Company recorded interest
savings related to these interest rate swaps of $1.5 million, which reduced
interest expense. The $0.5 million fair value of these derivative instruments is
included in other long-term liabilities, as of December 31, 2004. The carrying
value of the Notes was decreased by the same amount. On January 6, 2005, the
Company unwound the $50 million and $17 million remaining balance on these swaps
and paid $0.5 million for the settlement of these swaps.

     The Company previously had outstanding 12 percent subordinated debt which
was repaid on April 17, 2002, with the proceeds from the sale of the Notes. On
June 25, 2002, the Company entered into a floating-to-fixed interest rate swap
agreement that substantially offsets market value changes in the Company's
reverse swap agreement. The liability related to this reverse swap agreement and
the floating-to-fixed offset agreement totaling approximately $2.2 million is
reflected in other long-term liabilities at December 31, 2004. The loss
recognized during 2004 related to the floating-to-fixed interest rate swap
agreement was approximately $0.7 million, while the gain recognized related to
the reverse swap agreement was approximately $0.7 million. The amount of the
ineffectiveness of the reverse swap agreement charged to other expense was
approximately $38,000 during 2004.

     On June 25, 2001, the Company entered into a reverse swap on its 12 percent
subordinated debt and used the proceeds from the reverse swap agreement to
retire previously outstanding floating-to-fixed interest rate swap agreements
(the "Retired Swaps") and option agreements. Accordingly, the balance included
in accumulated other comprehensive loss included in stockholders' equity related
to the Retired Swaps is being

                                        60
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized in future periods' income over the remaining term of the original
swap agreement. The amount of accumulated other comprehensive income recognized
during 2004 was approximately $0.5 million.

  FUTURE PAYMENTS

     At December 31, 2004, future minimum principal payments of long-term debt,
nonrecourse Project Revenue Bonds (see Note 7) and Capital Lease Obligations
(see Note 8) are as follows (in thousands):

<Table>
<Caption>
                                                      NONRECOURSE      CAPITAL
                                         LONG-TERM      PROJECT         LEASE
YEAR ENDED DECEMBER 31,                    DEBT      REVENUE BONDS   OBLIGATIONS    TOTAL
-----------------------                  ---------   -------------   -----------   --------
<S>                                      <C>         <C>             <C>           <C>
2005...................................  $    848       $ 3,300        $ 3,028     $  7,176
2006...................................       353         3,480          2,787        6,620
2007...................................     5,452         3,710          3,507       12,669
2008...................................    23,182         3,935          4,129       31,246
2009...................................   150,000         4,165            761      154,926
2010-2014..............................        --        24,965            134       25,099
2015-2019..............................        --        10,475             --       10,475
Thereafter.............................        --         8,610             --        8,610
                                         --------       -------        -------     --------
Total..................................  $179,835       $62,640        $14,346     $256,821
                                         ========       =======        =======     ========
</Table>

(7)  NONRECOURSE PROJECT REVENUE BONDS

     Nonrecourse project revenue bonds consist of the following:

<Table>
<Caption>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2004           2003
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Maryland Energy Financing Administration Limited Obligation
  Solid Waste Disposal Revenue Bonds, 1996 series --
     Revenue bonds due 2001 to 2005 at stated interest rates
       of 5.45% to 5.85%....................................    $ 2,710        $ 5,280
     Term revenue bond due 2010 at stated interest rate of
       6.30%................................................     16,295         16,295
     Term revenue bond due 2016 at stated interest rate of
       6.45%................................................     22,360         22,360
                                                                -------        -------
                                                                 41,365         43,935
</Table>

                                        61
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2004           2003
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
California Pollution Control Financing Authority Solid Waste
  Revenue Bonds --
     Series 2002A -- Revenue bonds due 2008 to 2024 at
       stated interest rates of 4.375% to 5.50%, net of
       discount of $309.....................................     19,766         19,741
     Series 2002B -- Revenue bonds due 2005 at stated
       interest rate of 4.25%, net of discount of $3........      1,197          1,195
                                                                -------        -------
                                                                 20,963         20,936
                                                                -------        -------
Total nonrecourse project revenue bonds.....................     62,328         64,871
  Less: Current maturities..................................     (3,300)        (2,570)
                                                                -------        -------
  Nonrecourse project revenue bonds, net of current
     maturities.............................................    $59,028        $62,301
                                                                =======        =======
Amounts recorded in other assets as restricted cash --
  Debt service fund.........................................    $ 7,287        $ 7,275
                                                                =======        =======
</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 $58.6 million. 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 known as Synagro-Baltimore, L.L.C., pursuant to a June 1996 loan
agreement, and the terms of the loan mirror the terms of the Maryland Project
Revenue Bonds. The loan financed a portion of the costs of constructing thermal
facilities located in Baltimore County, Maryland, at the site of its Back River
Wastewater Treatment Plant, and in the City of Baltimore, Maryland, at the site
of its Patapsco Wastewater Treatment Plant. The Company assumed all obligations
associated with the Maryland Project Revenue Bonds in connection with its
acquisition of the Bio Gro division of Waste Management, Inc. ("Bio Gro") in
2000. Maryland Project Revenue Bonds in the aggregate amount of approximately
$17.2 million have already been repaid. The remaining Maryland Project Revenue
Bonds bear interest at annual rates between 5.85 percent and 6.45 percent and
mature on dates between December 1, 2005, and December 1, 2016.

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

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

     Synagro-Baltimore, L.L.C. guarantees the performance of services under the
underlying service agreements with the City of Baltimore. Under the terms of the
Bio Gro acquisition purchase agreement, Waste Management, Inc. also guarantees
the performance of services under those service agreements. Synagro has agreed
to pay Waste Management $0.5 million per year beginning in 2007 until the
Maryland Project Revenue Bonds are paid or its guarantee is removed. Neither
Synagro-Baltimore, L.L.C nor Waste Management has guaranteed payment of the
Maryland Project Revenue Bonds or the loan funded by the Maryland Project
Revenue Bonds.

                                        62
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, 2004, the Maryland Project Revenue Bonds were
collateralized by property, machinery and equipment with a net book value of
approximately $54.3 million and restricted cash of approximately $6.2 million,
of which approximately $5.6 million is in a debt service fund that is
established to partially secure certain payments and can be utilized to make the
final payment at the Company's request.

SACRAMENTO PROJECT BONDS

     In December 2002, the California Pollution Control Financing Authority (the
"Authority") issued nonrecourse revenue bonds in the aggregate amount of $20.9
million (net of original issue discount of $0.4 million). The nonrecourse
revenue bonds consist of $19.7 million (net of original issue discount of $0.4
million) Series 2002-A and $1.2 million (net of original issue discount of
$9,000) Series 2002-B (collectively, the "Sacramento Bonds"). The Authority
loaned the proceeds of the Sacramento Bonds to Sacramento Project Finance, Inc.,
a wholly owned subsidiary of the Company, pursuant to a loan agreement dated
December 1, 2002. The purpose of the loan is to finance the design, permitting,
constructing and equipping of a biosolids dewatering and heat drying/pelletizing
facility for the Sacramento Regional County Sanitation District ("Sanitation
District"). The Sacramento Bonds bear interest at annual rates between 4.25
percent and 5.50 percent and mature on dates between December 1, 2006, and
December 1, 2024. The Sacramento facility has been constructed and commenced
commercial operations in December 2004.

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

     At the Company's option, it may cause the early redemption of some
Sacramento Bonds at any time on or after December 1, 2007, subject to redemption
prices specified in the loan agreement.

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

     At December 31, 2004, the Bonds are partially collateralized by restricted
cash of approximately $3.7 million, of which approximately $1.7 million is in a
debt service fund that was established to secure certain payments and can be
utilized to make the final payment at the Company's request, and the remainder
is reserved for construction costs expected to be incurred after notice to
proceed is received. The Company is not a guarantor of the Sacramento Bonds or
the loan funded by the Sacramento Bonds.

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

                                        63
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8)  CAPITAL LEASE OBLIGATIONS

     During 2003 and 2004, the Company entered into various capital lease
transactions to purchase transportation and operating equipment. The capital
leases have lease terms of three to six years with interest rates from 4.9
percent to 9.34 percent. The net book value of the equipment related to capital
leases totaled approximately $15.7 million as of December 31, 2004.

     Future minimum lease payments, together with the present value of the
minimum lease payments, are as follows (in thousands):

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
<S>                                                            <C>
  2005......................................................   $ 3,870
  2006......................................................     3,440
  2007......................................................     3,980
  2008......................................................     4,278
  2009......................................................       794
  Thereafter................................................       136
                                                               -------
Total minimum lease payments................................    16,498
Amount representing interest................................    (2,152)
                                                               -------
  Present value of minimum lease payments...................    14,346
  Current maturities of capital lease obligations...........    (3,028)
                                                               -------
  Long-term capital lease obligations.......................   $11,318
                                                               =======
</Table>

(9)  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,
                                                             ------------------------
                                                              2004     2003     2002
                                                             ------   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Provision for income taxes.................................  $8,646   $5,225   $6,784
Income tax benefit related to cumulative effect of change
  in accounting for asset retirement obligations in 2003...      --     (292)      --
                                                             ------   ------   ------
                                                             $8,646   $4,933   $6,784
                                                             ======   ======   ======
</Table>

     Federal and state income tax provisions are as follows:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
                                                              2004     2003     2002
                                                             ------   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Federal:
  Current..................................................  $  286   $   --   $   --
  Deferred.................................................   7,351    4,270    6,251
State:
  Current..................................................     892      419      137
  Deferred.................................................     117      244      396
                                                             ------   ------   ------
                                                             $8,646   $4,933   $6,784
                                                             ======   ======   ======
</Table>

                                        64
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Actual income tax provision differs from income tax provision 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,
                                                              -------------------------
                                                              2004      2003      2002
                                                              -----     -----     -----
<S>                                                           <C>       <C>       <C>
Provision at the statutory rate.............................  35.0%     35.0%     35.0%
Increase resulting from:
  State income taxes, net of benefit for federal
     deduction..............................................   4.6%      3.8%      2.7%
  Other items, net..........................................   0.4%      1.6%      0.3%
                                                              ----      ----      ----
                                                              40.0%     40.4%     38.0%
                                                              ====      ====      ====
</Table>

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

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2004      2003
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Deferred tax assets --
  Net operating loss carryforwards..........................  $28,801   $33,127
  Alternative minimum tax credit............................      326        40
  Accruals not currently deductible for tax purposes........    3,159     2,764
  Allowance for bad debts...................................      455       566
  Other.....................................................    2,108     1,212
                                                              -------   -------
     Total deferred tax assets..............................   34,849    37,709
Valuation allowance for deferred tax assets.................     (920)     (920)
Deferred tax liability --
  Differences between book and tax bases of fixed assets....   42,876    39,651
  Differences between book and tax bases of goodwill........    9,544     7,853
                                                              -------   -------
     Total deferred tax liabilities.........................   52,420    47,504
                                                              -------   -------
     Net deferred tax liability.............................  $18,491   $10,715
                                                              =======   =======
</Table>

     As of December 31, 2004, the Company had net operating loss ("NOL")
carryforwards of approximately $78.6 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. The net deferred tax liability is recorded in other long-term
liabilities in the accompanying consolidated balance sheet.

(10)  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 $7.9 million,

                                        65
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$7.5 million and $5.0 million for 2004, 2003 and 2002, respectively. Minimum
annual rental commitments under these leases are as follows (in thousands):

<Table>
<Caption>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                            <C>
2005........................................................   $ 8,300
2006........................................................     6,015
2007........................................................     5,191
2008........................................................     4,151
2009........................................................     3,953
Thereafter..................................................    13,814
                                                               -------
                                                               $41,424
                                                               =======
</Table>

     During 2004 and 2003, the Company entered into operating lease transactions
for transportation and operating equipment. The operating leases have terms of
two to eight years. Additionally, the Company has guaranteed a maximum lease
risk amount to the lessor of one of the operating leases. The fair value of this
guaranty is approximately $0.1 million as of December 31, 2004.

  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.

     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.

                                        66
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

     In June 2002, the Company settled one such claim that was pending in
Jackson County, Texas. The full amount of the settlement was paid by insurance
proceeds; however, as part of the settlement, the Company agreed to reimburse
the Texas Property and Casualty Insurance Guaranty Association an amount ranging
from $0.6 to $2.5 million depending on future circumstances. The Company
estimated its exposure at approximately $1.0 million for the potential
reimbursement to the Texas Property and Casualty Insurance Guaranty Association
for costs associated with the settlement of this case and for unpaid insurance
claims and other costs for which coverage may not be available due to the
pending liquidation of Reliance. The Company believes accruals of approximately
$1.0 million as of December 31, 2004, are adequate to provide for its exposures.
The final resolution of these exposures could be substantially different from
the amount recorded.

  DESIGN AND BUILD CONTRACT RISK

     The Company participates in design and build construction operations,
usually as a general contractor. Virtually all design and construction work is
performed by unaffiliated subcontractors. As a consequence, the Company is
dependent upon the continued availability of and satisfactory performance by
these subcontractors for the design and construction of its facilities. There is
no assurance that there will be sufficient availability of and satisfactory
performance by these unaffiliated subcontractors. In addition, inadequate
subcontractor resources and unsatisfactory performance by these subcontractors
could have a material adverse effect on the Company's business, financial
condition and results of operation. Further, as the general contractor, the
Company is legally responsible for the performance of its contracts and, if such
contracts are under-performed or nonperformed by its subcontractors, the Company
could be financially responsible. Although the Company's contracts with its
subcontractors provide for indemnification if its subcontractors do not
satisfactorily perform their contract, there can be no assurance that such
indemnification would cover the Company's financial losses in attempting to
fulfill the contractual obligations.

  OTHER

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

     The Company is required under various regulations to procure licenses and
permits to conduct its operations. These licenses and permits are subject to
periodic renewal without which its operations could be adversely affected. There
can be no assurance that regulatory requirements will not change to the extent
that it would materially affect the Company's consolidated financial statements.

     As of March 9, 2005, Synagro has issued performance bonds of approximately
$138 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.

                                        67
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  SELF-INSURANCE

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

(11)  OTHER COMPREHENSIVE LOSS

     The Company's accumulated comprehensive loss for the twelve months ended
December 31, 2004, 2003 and 2002, is summarized as follows:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2004      2003      2002
                                                          -------   -------   -------
                                                                (IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Cumulative effect of change in accounting for
  derivatives...........................................  $(2,058)  $(2,058)  $(2,058)
Change in fair value of derivatives.....................   (2,201)   (2,201)   (2,201)
Reclassification adjustment to earnings.................    2,972     2,159     1,346
Tax benefit of changes in fair value....................      489       798     1,107
                                                          -------   -------   -------
                                                          $  (798)  $(1,302)  $(1,806)
                                                          =======   =======   =======
</Table>

(12)  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 D REDEEMABLE PREFERRED STOCK

     The Company has authorized 32,000 shares of Series D Preferred Stock, par
value $.002 per share. In 2000, the Company issued a total of 25,033.601 shares
of the Series D Preferred Stock to GTCR Fund VII, L.P. and its affiliates, which
is convertible by the holders into a number of shares of the Company's 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 or 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 daily 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 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. If the outstanding shares of Series D Preferred
Stock excluding accrued dividends were converted at December 31, 2004, they
would represent 10,013,441 shares of common stock.

                                        68
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  SERIES E REDEEMABLE PREFERRED STOCK

     The Company has 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 7,254.462 shares. The Series E Preferred Stock is convertible by the holders
into a number of shares of the Company's 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 daily 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. If the
outstanding shares of Series E Preferred Stock excluding accrued dividends were
converted at December 31, 2004, 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 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 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 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.

                                        69
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes the net income and weighted average shares
to reconcile basic EPS and diluted EPS for the fiscal years 2004, 2003, and 2002
(in thousands except share and per share data):

<Table>
<Caption>
                                                        YEAR ENDED DECEMBER 31,
                                                ---------------------------------------
                                                   2004          2003          2002
                                                -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
Net Income:
  Net income before cumulative effect of
     change in accounting for asset retirement
     obligations and preferred stock
     dividends................................  $    12,954   $     7,754   $    11,064
  Cumulative effect of change in accounting
     for asset retirement obligations.........           --           476            --
                                                -----------   -----------   -----------
  Net income before preferred stock
     dividends................................       12,954         7,278        11,064
  Preferred stock dividends...................        8,827         8,209         7,659
                                                -----------   -----------   -----------
  Net income (loss) applicable to common
     stock....................................  $     4,127   $      (931)  $     3,405
                                                ===========   ===========   ===========
Earnings (loss) per share:
  Basic
     Earnings (loss) per share before
       cumulative effect of change in
       accounting for asset retirement
       obligations............................  $      0.21   $     (0.03)  $      0.17
     Cumulative effect of change in accounting
       for asset retirement obligations.......           --         (0.02)           --
                                                -----------   -----------   -----------
     Net income (loss) per share..............  $      0.21   $     (0.05)  $      0.17
                                                ===========   ===========   ===========
  Weighted average shares outstanding for
     basic earnings per share calculation.....   19,777,041    19,775,821    19,627,132
  Diluted
     Earnings (loss) per share before
       preferred stock dividends and
       cumulative effect of change in
       accounting for asset retirement
       obligations............................  $      0.21   $     (0.03)  $      0.17
     Cumulative effect of change in accounting
       for asset retirement obligations.......           --         (0.02)           --
                                                -----------   -----------   -----------
     Net income (loss) per share..............  $      0.21   $     (0.05)  $      0.17
                                                ===========   ===========   ===========
  Weighted average shares:
  Weighted average shares outstanding for
     basic and diluted earnings per share.....   19,777,041    19,775,821    19,627,132
                                                ===========   ===========   ===========
</Table>

     Basic and diluted EPS are the same for 2004, 2003 and 2002 because diluted
EPS was less dilutive than basic EPS. Accordingly, 38,903,912, 35,494,147 and
32,899,330 shares representing common stock equivalents have been excluded from
the diluted earnings per share calculations for 2004, 2003 and 2002,
respectively.

  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

                                        70
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

(13)  STOCK OPTION PLANS

     At December 31, 2004, 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, 2004, there were 3,614,000 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.

                                        71
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the Company's stock option plans as of December 31, 2004, 2003
and 2002, 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 January 1, 2002.............   4,435,092     $2.50-6.31     $2.73
  Granted..........................................     345,000           2.50      2.50
  Canceled.........................................    (218,500)          2.50      2.50
                                                      ---------     ----------     -----
Options outstanding at December 31, 2002...........   4,561,592     $2.50-6.31     $2.73
  Granted..........................................     127,500      2.50-2.61      2.52
  Canceled.........................................     (45,000)          2.50      2.50
                                                      ---------     ----------     -----
Options outstanding at December 31, 2003...........   4,644,092     $2.50-6.31     $2.72
  Granted..........................................     617,500      2.50-3.34      2.72
  Exercised........................................      (7,800)          2.50      2.50
  Canceled.........................................    (146,200)          2.50      2.50
                                                      ---------     ----------     -----
Options outstanding at December 31, 2004...........   5,107,592     $2.50-6.31     $2.73
                                                      =========     ==========     =====
Exercisable at December 31, 2004...................   3,229,892     $2.50-6.31     $2.83
                                                      =========     ==========     =====
</Table>

  1993 Plan

<Table>
<Caption>
                                                                                  WEIGHTED
                                                                                  AVERAGE
                                                     SHARES UNDER    EXERCISE     EXERCISE
                                                        OPTION      PRICE RANGE    PRICE
                                                     ------------   -----------   --------
<S>                                                  <C>            <C>           <C>
Options outstanding at January 1, 2002.............   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
  Canceled/expired.................................    (120,000)     2.75-4.00      3.48
                                                      ---------     ----------     -----
Options outstanding at December 31, 2003...........     940,673     $2.00-6.31     $3.48
  Exercised........................................      (3,000)          2.38      2.38
  Canceled/expired.................................     (87,840)     2.00-6.31      3.51
                                                      ---------     ----------     -----
Options outstanding at December 31, 2004...........     849,833     $2.00-6.31     $3.48
                                                      =========     ==========     =====
Exercisable at December 31, 2004...................     849,833     $2.00-6.31     $3.48
                                                      =========     ==========     =====
</Table>

                                        72
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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 are summarized as follows:

<Table>
<Caption>
                                                                      WEIGHTED
                                                                       AVERAGE
                                                      SHARES UNDER    EXERCISE     EXERCISE
                                                         OPTION      PRICE RANGE    PRICE
                                                      ------------   -----------   --------
<S>                                                   <C>            <C>           <C>
Options outstanding at January 1, 2002..............   2,036,954     $2.00-6.94     $3.36
  Granted...........................................   1,000,000           2.50      2.50
                                                       ---------     ----------     -----
Options outstanding at December 31, 2002............   3,036,954     $2.00-6.94     $3.08
  Granted...........................................     150,000           2.50      2.50
                                                       ---------     ----------     -----
Options outstanding at December 31, 2003............   3,186,954     $2.00-6.94     $3.05
  Exercised.........................................     (23,000)          2.00      2.00
  Canceled..........................................    (221,332)          6.94      6.94
                                                       ---------     ----------     -----
Options outstanding at December 31, 2004............   2,942,622     $2.00-4.75     $2.76
                                                       =========     ==========     =====
Exercisable at December 31, 2004....................   2,222,622     $2.00-4.75     $2.85
                                                       =========     ==========     =====
</Table>

     The following ranges of options were outstanding as of December 31, 2004:

<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>
6,914,630....          $2.00-2.99          $2.51               6.23          4,316,930
1,500,326....           3.00-3.99           3.24               4.96          1,500,326
160,091......           4.00-5.99           4.84               5.69            160,091
325,000......           6.00-6.94           6.31               6.03            325,000
</Table>

(14)  REORGANIZATION COSTS

     In response to lower-than-expected operating results, management performed
a review of its overhead structure and reorganized certain administrative
functions. As a result of these decisions, during 2003 the Company recorded $1.2
million of severance costs connected with the termination of 18 employees and
consultants. These costs are reported as reorganization costs in the
accompanying 2003 consolidated statement of operations. Approximately $0.7
million was recorded in accrued expenses at December 31, 2003, in the
accompanying 2003 consolidated balance sheet related to the 2003 reorganization.

     During 2002, the Company reorganized by reducing the number of its
operating regions, which resulted in approximately $0.7 million of severance
costs in connection with the termination of 39 employees and approximately $0.2
million of terminated office lease arrangements. The total costs incurred of
approximately $0.9 million have been reported as reorganization costs in the
accompanying 2002 consolidated statement of operations. All costs related to the
2002 reorganization were paid as of December 31, 2003.

(15)  SPECIAL CHARGES

     We incurred a special charge of $0.3 million for costs associated with the
re-audit of our 2001 financial statements during 2004.

                                        73
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(16)  EMPLOYEE BENEFIT PLANS

     The Company sponsors a defined contribution retirement plan for full-time
and some part-time employees. The plan covers employees at all of the Company's
operating locations. The defined contribution plan provides for contributions
ranging from 1 percent to 15 percent of covered employees' salaries or wages.
The Company may make a matching contribution as a percentage of the employee
contribution. The matching contributions totaled approximately $1.1 million for
each of 2004, 2003 and 2002.

(17)  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     Quarterly financial information for the years ended December 31, 2004 and
2003, is summarized as follows (in thousands, except per share data):

<Table>
<Caption>
                                       QUARTER ENDED                                   QUARTER ENDED
                       ----------------------------------------------   -------------------------------------------
                       MARCH 31,    JUNE 30,    SEPT. 30,    DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                         2004         2004         2004        2004       2003        2003       2003        2003
                       ---------   ----------   ----------   --------   ---------   --------   ---------   --------
                                   (RESTATED)   (RESTATED)
                         (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)       (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                    <C>         <C>          <C>          <C>        <C>         <C>        <C>         <C>
Revenues.............   $72,660     $82,164      $85,940     $85,100     $63,229    $75,641     $79,634    $80,048
Gross profit.........    12,316      18,911       19,373      17,222      11,842     20,140      18,660     13,459
Operating income.....     6,652      13,946       12,883      10,403       5,540     14,306      12,522      4,037
Net income (loss)
  applicable to
  common stock.......   $(1,258)    $ 2,950      $ 2,138     $   297     $(2,662)   $ 2,961     $ 2,230    $(3,460)
Earnings (loss) per
  share
  Basic..............   $ (0.06)    $  0.15      $  0.11     $  0.02     $ (0.13)   $  0.15     $  0.11    $ (0.17)
  Diluted............   $ (0.06)    $  0.09      $  0.07     $  0.02     $ (0.13)   $  0.09     $  0.08    $ (0.17)
</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.

     During the audit of the Company's year end financial statements an
adjustment was made to revenue recognized under the percentage-of-completion
method of accounting for imputed interest on receivables associated with a
long-term contract that will be collected over an extended period following
completion of the contract. In addition, the Company reclassified gains on
assets sales from other expense to income from operations. The adjustment
related to percentage of completion resulted in a restatement of the Company's
report on Form 10-Q/A and Form 10-Q during the quarters ended June 30, 2004 and
September 30, 2004, respectively. As a result, for the quarter ended June 30,
2004, revenue decreased $0.1 million from $82.3 million to $82.2 million, gross
profit decreased $0.1 million from $19.0 million to $18.9 million, operating
income increased $0.6 million from $13.3 million to $13.9 million, net income
applicable to common stock decreased $0.1 million from $3.0 million to $2.9
million and basic and diluted earnings per share remained the same. For the
quarter ended September 30, 2004, revenue decreased $0.4 million from $86.3
million to $85.9 million, gross profit decreased $0.3 million from $19.7 million
to $19.4 million, operating income decreased $0.3 million from $13.2 million to
$12.9 million, net income applicable to common stock decreased $0.2 million from
$2.3 million to $2.1 million and basic and diluted earnings per share decreased
by $0.01.

(18)  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

                                        74
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $26.4 million 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. The first payment was made
on September 30, 2003.

     In May 2003, the Company incurred indebtedness of $0.5 million to the
former owners of Aspen Resources in connection with the Aspen Resources
acquisition. The note to the former owners is payable monthly at an annual
interest rate of five percent.

     The Company maintains one lease with an affiliate of one of its
stockholders. The lease has an initial term through December 31, 2013. Rental
payments made under this lease in 2004 totaled approximately $0.1 million.

(19)  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

     As discussed in Note 6, as of December 31, 2004, all of the Company's 100%
owned domestic subsidiaries, except the subsidiaries formed to own and operate
the compost project in Southern California, South Kern Industrial Center, L.L.C.
(see Note 5), and the Sacramento biosolids processing facility, Synagro Organic
Fertilizer Company of Sacramento, Inc. and Sacramento Project Finance, Inc. (see
Note 7) (collectively the "Non-Guarantor Subsidiaries"), are Guarantors of the
Notes. Each of the Guarantors is 100 percent owned by the parent company and the
guarantees are full, unconditional and joint and several. Additionally, the
Company is not a Guarantor for the debt of the Non-Guarantor Subsidiaries.
Accordingly, the following condensed consolidating balance sheet as of December
31, 2004, and December 31, 2003, has been provided. The parent company has no
independent assets or operations. In addition, the Non-Guarantor Subsidiaries
had immaterial operations and cash flows from December 31, 2003, through
December 31, 2004, because the facility began operations at the end of December
2004. Consequently, no condensed consolidating statements of operations or cash
flows have been provided.

                                        75
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                     CONDENSED CONSOLIDATING BALANCE SHEETS
                            AS OF DECEMBER 31, 2004

<Table>
<Caption>
                                                                          NON-
                                                        GUARANTOR      GUARANTOR
                                             PARENT    SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                            --------   ------------   ------------   ------------   ------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                         <C>        <C>            <C>            <C>            <C>
                                                     ASSETS
Current Assets:
  Cash and cash equivalents...............  $     99     $     21       $   206       $      --       $    326
  Restricted cash.........................        --          655            --              --            655
  Accounts receivable, net................        --       63,367           524              --         63,891
  Note receivable, current................        --          218            --              --            218
  Prepaid expenses and other current
    assets................................        --       19,663            11              --         19,674
                                            --------     --------       -------       ---------       --------
         Total current assets.............        99       83,924           741              --         84,764
Property, machinery & equipment, net......        --      202,659        22,882              --        225,541
Other Assets:
  Goodwill................................        --      171,855            --              --        171,855
  Investments in subsidiaries.............    81,649           --            --         (81,649)            --
  Intercompany............................   261,399           --            --        (261,399)            --
  Restricted cash -- construction fund....        --           --         1,988              --          1,988
  Restricted cash -- debt service fund....        --        5,573         1,714              --          7,287
  Other, net..............................     5,204       11,135         3,010              --         19,349
                                            --------     --------       -------       ---------       --------
         Total assets.....................  $348,351     $475,146       $30,335       $(343,048)      $510,784
                                            ========     ========       =======       =========       ========

                                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Short term debt.........................  $     --     $     --       $ 4,000       $      --       $  4,000
  Current maturities of long-term debt....       244          604            --              --            848
  Current maturities of nonrecourse
    project revenue bonds.................        --        3,300            --              --          3,300
  Current maturities of capital lease
    obligations...........................        --        3,028            --              --          3,028
  Accounts payable and accrued expenses...     3,896       56,192         2,581              --         62,669
                                            --------     --------       -------       ---------       --------
         Total current liabilities........     4,140       63,124         6,581              --         73,845
Long-Term Debt:
  Long-term debt obligations, net.........   178,189          264            --              --        178,453
  Nonrecourse project revenue bonds,
    net...................................        --       38,065        20,963              --         59,028
  Intercompany............................        --      261,399            --        (261,399)            --
  Capital lease obligations, net..........        --       11,318            --              --         11,318
                                            --------     --------       -------       ---------       --------
    Total long-term debt..................   178,189      311,046        20,963        (261,399)       248,799
Other long-term liabilities...............     2,171       22,118            --              --         24,289
                                            --------     --------       -------       ---------       --------
         Total liabilities................   184,500      396,288        27,544        (261,399)       346,933
Commitments and Contingencies
Redeemable Preferred Stock, 69,792.29
  shares issued and outstanding,
  redeemable at $1,000 per share..........    95,126           --            --              --         95,126
Stockholders' Equity:
  Capital.................................    73,398       36,339         2,750         (39,089)        73,398
  Accumulated deficit.....................    (3,875)      42,519            41         (42,560)        (3,875)
  Accumulated other comprehensive loss....      (798)          --            --              --           (798)
                                            --------     --------       -------       ---------       --------
         Total stockholders' equity.......    68,725       78,858         2,791         (81,649)        68,725
                                            --------     --------       -------       ---------       --------
Total liabilities and stockholders'
  equity..................................  $348,351     $475,146       $30,335       $(343,048)      $510,784
                                            ========     ========       =======       =========       ========
</Table>

                                        76
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                     CONDENSED CONSOLIDATING BALANCE SHEETS
                            AS OF DECEMBER 31, 2003

<Table>
<Caption>
                                                                     NON-
                                                   GUARANTOR      GUARANTOR
                                        PARENT    SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                       --------   ------------   ------------   ------------   ------------
                                                              (DOLLARS IN THOUSANDS)
<S>                                    <C>        <C>            <C>            <C>            <C>
                                                  ASSETS
Current Assets:
  Cash and cash equivalents..........  $     91     $     64       $    51       $      --       $    206
  Restricted cash....................        --        1,410            --              --          1,410
  Accounts receivable, net...........        --       59,581            --              --         59,581
  Note receivable, current...........        --          342            --              --            342
  Prepaid expenses and other current
     assets..........................        --       10,840            --              --         10,840
                                       --------     --------       -------       ---------       --------
          Total current assets.......        91       72,237            51              --         72,379
Property, machinery & equipment,
  net................................        --      207,833         5,864              --        213,697
Other Assets:
  Goodwill...........................        --      171,051            --              --        171,051
  Investments in subsidiaries........    75,199           --            --         (75,199)            --
  Intercompany.......................   267,433           --            --        (267,433)            --
  Restricted cash -- construction
     fund............................        --           --        12,184              --         12,184
  Restricted cash -- debt service
     fund............................        --        5,561         1,714              --          7,275
  Other, net.........................     6,217        4,902         2,972              --         14,091
                                       --------     --------       -------       ---------       --------
          Total assets...............  $348,940     $461,584       $22,785       $(342,632)      $490,677
                                       ========     ========       =======       =========       ========

                                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current maturities of long-term
     debt............................  $    955     $     --       $    --       $      --       $    955
  Current maturities of nonrecourse
     project revenue bonds...........        --        2,570            --              --          2,570
  Current maturities of capital lease
     obligations.....................        --        2,678            --              --          2,678
  Accounts payable and accrued
     expenses........................        --       45,095           564              --         45,659
                                       --------     --------       -------       ---------       --------
          Total current
            liabilities..............       955       50,343           564              --         51,862
Long-Term Debt:
  Long-term debt obligations, net....   194,084           --            --              --        194,084
  Nonrecourse project revenue bonds,
     net.............................        --       41,365        20,936              --         62,301
  Intercompany.......................        --      267,433            --        (267,433)            --
  Capital lease obligations, net.....        --       12,748            --              --         12,748
                                       --------     --------       -------       ---------       --------
     Total long-term debt............   194,084      321,546        20,936        (267,433)       269,133
Other long-term liabilities..........     3,580       15,781            --              --         19,361
                                       --------     --------       -------       ---------       --------
          Total liabilities..........   198,619      387,670        21,500        (267,433)       340,356

Commitments and Contingencies
  Redeemable Preferred Stock,
  69,792.29 shares issued and
  outstanding, redeemable at $1,000
  per share..........................    86,299           --            --              --         86,299
Stockholders' Equity:
  Capital............................    82,153       37,804         1,285         (39,089)        82,153
  Accumulated deficit................   (16,829)      36,110            --         (36,110)       (16,829)
  Accumulated other comprehensive
     loss............................    (1,302)          --            --              --         (1,302)
                                       --------     --------       -------       ---------       --------
          Total stockholders'
            equity...................    64,022       73,914         1,285         (75,199)        64,022
                                       --------     --------       -------       ---------       --------
Total liabilities and stockholders'
  equity.............................  $348,940     $461,584       $22,785       $(342,632)      $490,677
                                       ========     ========       =======       =========       ========
</Table>

                                        77
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(20)  SEGMENT INFORMATION (RESTATED)

     The Company has determined that its segment disclosures for 2003 and 2002
should be restated to expand its segment disclosure from one reporting segment
as was originally reported to three reporting segments. Accordingly, the segment
information presented for 2003 and 2002 herein has been restated.

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

     Residuals Management Operations include the Company's business activities
that are managed on a geographic basis in the Northeast, Central, South, and
West regions of the United States. These geographic areas have been aggregated
and reported as a segment because they meet the aggregation criteria of SFAS
131. Rail Transportation includes the transfer and rail haul of materials across
several states where the material is typically either land applied or landfill
disposed. Rail Transportation is a separate segment because it is monitored
separately and because it only offers long-distance land application and
disposal services to its customers. EFD includes construction management
activities and start up operations for certain new processing facilities as well
as the marketing and sale of certain pellets and compost fertilizers.

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

<Table>
<Caption>
                              RESIDUALS                     ENGINEERING
                              MANAGEMENT        RAIL        FACILITIES    SEGMENTS    CORPORATE/
                              OPERATIONS   TRANSPORTATION   DEVELOPMENT   COMBINED   ELIMINATIONS   CONSOLIDATED
                              ----------   --------------   -----------   --------   ------------   ------------
<S>                           <C>          <C>              <C>           <C>        <C>            <C>
Year ended December 31, 2004
Revenue from external
  services..................   $274,790       $33,822         $17,252     $325,864     $     --       $325,864
Revenue from other
  segments..................         --         4,213              --        4,213       (4,213)            --
Depreciation and
  amortization expenses.....     17,296         1,619             143       19,058          844         19,902
Income (loss) from
  operations................     55,857         5,134          (1,628)      59,363      (15,479)        43,884
Total assets................    393,396        52,022          40,985      486,403       24,381        510,784
Capital expenditures........     11,848           733          12,127       24,708          887         25,595

Year ended December 31, 2003
  (Restated)
Revenue from external
  services..................   $253,610       $36,217         $ 8,725     $298,552     $     --       $298,552
Revenue from other
  segments..................         --         3,818              --        3,818       (3,818)            --
Depreciation and
  amortization expenses.....     15,789         1,477             138       17,404        1,222         18,626
Income (loss) from
  operations................     46,655         6,194          (3,842)      49,007      (12,602)        36,405
Total assets................    396,049        49,720          26,063      471,832       18,845        490,677
Capital expenditures........      9,823         1,082           6,150       17,055        1,373         18,428

Year ended December 31, 2002
  (Restated)
Revenue from external
  services..................   $226,738       $28,893         $16,997     $272,628     $     --       $272,628
Revenue from other
  segments..................         --         3,301              --        3,301       (3,301)            --
Depreciation and
  amortization expenses.....     13,419           803             102       14,324          964         15,288
Income (loss) from
  operations................     52,922         5,505          (1,713)      56,714       (9,670)        47,044
Capital expenditures........     10,274         1,263             192       11,729          805         12,534
</Table>

                                        78
<PAGE>
                           SYNAGRO TECHNOLOGIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Corporate assets primarily include prepaid expenses, investments in
subsidiaries and intercompany loans. Corporate expenses primarily include
general and administrative expenses and adjustments for insurance and other
benefit allocations.

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

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                         ---------------------------------
                                                          2004        2003         2002
                                                         -------   ----------   ----------
                                                                   (RESTATED)   (RESTATED)
                                                                   ----------   ----------
                                                                  (IN THOUSANDS)
<S>                                                      <C>       <C>          <C>
Segment income from operations.........................  $58,509    $49,014      $56,470
Corporate expenses and adjustments.....................   15,479     12,602        9,670
                                                         -------    -------      -------
Income from operations.................................   43,030     36,412       46,800
Total other expense, net...............................   21,430     23,433       28,952
                                                         -------    -------      -------
  Income before provision for income taxes.............  $21,600    $12,979      $17,848
                                                         =======    =======      =======
</Table>

     Revenues generated from the services that the Company provides are
summarized below:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                       ----------------------------------
                                                         2004        2002         2003
                                                       --------   ----------   ----------
                                                                  (RESTATED)   (RESTATED)
                                                                  ----------   ----------
                                                                 (IN THOUSANDS)
<S>                                                    <C>        <C>          <C>
Facilities operations................................  $100,222    $ 92,388     $ 80,576
Product marketing....................................    11,486      12,910       10,776
Land application and disposal........................   176,202     175,576      153,154
Cleanout services....................................    26,780      12,658       16,916
Design and build.....................................    11,174       5,020       11,206
                                                       --------    --------     --------
  Total revenues.....................................  $325,864    $298,552     $272,628
                                                       ========    ========     ========
</Table>

     Facilities operations include revenues generated from providing drying and
pelletization, composting, and incineration operations services. Land
application and disposal includes revenues generated from providing land
application, dewatering, and disposal services. Product marketing includes
revenues generated from selling pellets and compost as organic fertilizers.
Cleanout services include revenues generated from lagoon and digester cleanout
projects.

     The Company had one customer that accounted for approximately 16 percent,
17 percent, and 15 percent of total revenue for the years ended December 31,
2004, 2003, and 2002, respectively and whose revenue are included in the
Residuals Management Operations and Rail Transportation reporting segments.

                                        79
<PAGE>

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

     None.

ITEM 9A.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

     We maintain disclosure controls and procedures to alert us on a timely
basis to material information that would be required to include in our periodic
filings under the Exchange Act. Exchange Act Rule 13a-15(d) defines "disclosure
controls and procedures" to mean controls and procedures of a company that are
designed to ensure that information required to be disclosed by the company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms. The definition further states that disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that the information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.

     In preparing our consolidated financial statements for the year ended
December 31, 2004, the Company determined that its segment disclosures should be
restated from one reporting segment as was originally reported to three
reporting segments. The Company concluded, with the concurrence of the Audit
Committee that the consolidated financial statements for the years ended
December 31, 2003 and 2002 required restatement. This restatement is reflected
in this Form 10-K for the annual period ended December 31, 2004. Additionally,
the Company determined that its financial results for the third and second
quarters of 2004 should be restated to reflect an adjustment to revenue
recognized under the percentage of completion method of accounting for imputed
interest on receivables associated with a long-term contract which will be
collected over an extended period of time following the completion of the
contract. This restatement was reflected in Form 10-Q/A's as previously filed
and as reflected in Note 17 to the consolidated financial statements included
elsewhere herein.

     The Company has concluded that the errors resulting in these restatements
were attributable to control weaknesses related to our financial reporting
processes and constituted a material weakness in our internal controls over
financial reporting. This is due to the fact that the adjustments and
disclosures which resulted in this restatement were not identified by our
existing control structure.

     Accordingly, the Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures were ineffective at
December 31, 2004.

     During 2005 management has begun to take action and put procedures in place
to correct the weaknesses in our internal controls over financial reporting. The
Company has begun to formulate procedures related to documenting and analyzing
complex technical issues which will formally document conclusions regarding such
matters. Management is currently in the process of hiring an independent third
party to assist in the preparation of the Company's compliance with Rule 404 of
the Sarbanes Oxley Act of 2002.

     Other than the items noted above, there were no other changes in our
internal control over financial reporting during the quarter ended December 31,
2004 that has materially affected or is reasonably likely to affect our internal
control over financial reporting.

                                    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,
2004, 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 --

                                        80
<PAGE>

Management Stockholdings," "Principal Accountant Fees," and "Other
Information -- Certain Transactions," which sections and subsections of such
proxy statement are incorporated herein.

                                    PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     1. Financial Statements:

<Table>
<Caption>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Report of Independent Registered Public Accounting Firm --
  PricewaterhouseCoopers LLP................................    43
Consolidated Balance Sheets as of December 31, 2004 and
  2003......................................................    44
Consolidated Statements of Operations for the Years Ended
  December 31, 2004, 2003 and 2002..........................    45
Consolidated Statements of Stockholders' Equity for the
  Years Ended December 31, 2004, 2003 and 2002..............    46
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2004, 2003 and 2002..........................    47
Notes to Consolidated Financial Statements..................    49
</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>   <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
                     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).
</Table>

                                        81
<PAGE>
<Table>
<S>            <C>   <C>
        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    --    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).
       10.4    --    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).
       10.5    --    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).
       10.6    --    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).
       10.7    --    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).
       10.8    --    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).
       10.9    --    Amended and Restated Monitoring Agreement dated August 14,
                     2000, by and between Synagro Technologies, Inc., GTCR Golder
                     Rauner, L.L.C., and TCW/Crescent Mezzanine Partners II,
                     L.P., TCW/Crescent Mezzanine Trust II, TCW Leveraged Income
                     Trust, L.P., TCW Leveraged Income Trust II, L.P., and TCW
                     Leveraged Income Trust IV, L.P. (Incorporated by reference
                     to Exhibit 2.12 to the Company's Current Report on Form 8-K,
                     dated August 28, 2000).
       10.10   --    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)
       10.11   --    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)
</Table>

                                        82
<PAGE>
<Table>
<S>            <C>   <C>
       10.12   --    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)
       10.13   --    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)
       10.14   --    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)
       10.15   --    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)
       10.16   --    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)
       10.17   --    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)
       10.18   --    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)
       10.19   --    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)
       10.20   --    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)
       10.21   --    Third Amended and 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).
       10.22   --    Amendment No. 3 to Employment Agreement dated effective
                     December 30, 2003, 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, 2003).(1)
       10.23   --    General Release dated effective December 30, 2003, executed
                     and delivered by Ross M. Patten in favor of Synagro
                     Technologies, Inc. (Incorporated by reference to the
                     Company's Annual Report on Form 10-K for the year ended
                     December 31, 2003).(1)
       21.1    --    Subsidiaries of Synagro Technologies, Inc.
       23.1*   --    Consent of Independent Registered Public Accounting Firm
       31.1*   --    Section 302 Certification of Chief Executive Officer
       31.2*   --    Section 302 Certification of Chief Financial Officer
       32.1*   --    Section 906 Certification of Chief Executive Officer
       32.2*   --    Section 906 Certification of Chief Financial Officer
</Table>

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

 *  Filed with this Form 10-K.

(1) Management contract or compensatory plan or agreement.

                                        83
<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/ ROBERT C. BOUCHER, JR.
                                            ------------------------------------
                                            Robert C. Boucher, Jr.
                                            Chief Executive Officer

Date: March 21, 2005

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

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

                /s/ ROSS M. PATTEN                         Chairman of the Board           March 21, 2005
 ------------------------------------------------
                  Ross M. Patten


            /s/ ROBERT C. BOUCHER, JR.              Chief Executive Officer and Director   March 21, 2005
 ------------------------------------------------      (Principal Executive Officer)
              Robert C. Boucher, Jr.


               /s/ J. PAUL WITHROW                  Chief Financial Officer and Director   March 21, 2005
 ------------------------------------------------      (Principal Accounting Officer)
                 J. Paul Withrow


                /s/ GENE MEREDITH                                 Director                 March 21, 2005
 ------------------------------------------------
                  Gene Meredith


          /s/ KENNETH CH'UAN-K'AI LEUNG                           Director                 March 21, 2005
 ------------------------------------------------
            Kenneth Ch'uan-k'ai Leung


              /s/ ALFRED TYLER, 2ND                               Director                 March 21, 2005
 ------------------------------------------------
                Alfred Tyler, 2nd


               /s/ DAVID A. DONNINI                               Director                 March 21, 2005
 ------------------------------------------------
                 David A. Donnini


              /s/ VINCENT J. HEMMER                               Director                 March 21, 2005
 ------------------------------------------------
                Vincent J. Hemmer


              /s/ GEORGE E. SPERZEL                               Director                 March 21, 2005
 ------------------------------------------------
                George E. Sperzel
</Table>

                                        84
<PAGE>

                               INDEX TO EXHIBITS

<Table>
<C>    <C>   <S>
  3.1  --    Restated Certificate of Incorporation of Synagro
             Technologies, Inc. (the "Company") dated August 16, 1996
             (Incorporated by reference to Exhibit 3.1 to the Company's
             Post-Effective Amendment No. 1 to Registration Statement No.
             33-95028, dated October 25, 1996).
  3.2  --    Amended and Restated Bylaws of the Company dated effective
             January 27, 2000 (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
             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  --    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).
 10.4  --    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).
</Table>

                                        85
<PAGE>
<Table>
<C>    <C>   <S>
 10.5  --    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).
 10.6  --    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).
 10.7  --    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).
 10.8  --    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).
 10.9  --    Amended and Restated Monitoring Agreement dated August 14,
             2000, by and between Synagro Technologies, Inc., GTCR Golder
             Rauner, L.L.C., and TCW/Crescent Mezzanine Partners II,
             L.P., TCW/Crescent Mezzanine Trust II, TCW Leveraged Income
             Trust, L.P., TCW Leveraged Income Trust II, L.P., and TCW
             Leveraged Income Trust IV, L.P. (Incorporated by reference
             to Exhibit 2.12 to the Company's Current Report on Form 8-K,
             dated August 28, 2000).
10.10  --    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)
10.11  --    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)
10.12  --    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)
10.13  --    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)
10.14  --    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)
10.15  --    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)
10.16  --    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)
10.17  --    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>

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<PAGE>
<Table>
<C>    <C>   <S>
10.18  --    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)
10.19  --    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)
10.20  --    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)
10.21  --    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).
10.22  --    Amendment No. 3 to Employment Agreement dated effective
             December 30, 2003, 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, 2003). (1)
10.23  --    General Release dated effective December 30, 2003, executed
             and delivered by Ross M. Patten in favor of Synagro
             Technologies, Inc. (Incorporated by reference to the
             Company's Annual Report on Form 10-K for the year ended
             December 31, 2003). (1)
21.1*  --    Subsidiaries of Synagro Technologies, Inc.
23.1*  --    Consent of Independent Registered Public Accounting Firm
31.1*  --    Section 302 Certification of Chief Executive Officer
31.2*  --    Section 302 Certification of Chief Financial Officer
32.1*  --    Section 906 Certification of Chief Executive Officer
32.2*  --    Section 906 Certification of Chief Financial Officer
</Table>

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

 * Filed with this Form 10-K

** Previously filed

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