<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                -----------------

                                    FORM 10-K
(Mark One)

[x]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
              EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

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

                         Commission File Number 0-21054

                           SYNAGRO TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

             Delaware                                  76-0511324
    (State or other Jurisdiction of        (I.R.S. Employer Identification No.)
      Incorporation or Organization)

   16000 Stuebner Airline, Suite 420, Spring, Texas              77379
                 (Address of Principal                         (Zip Code)
                  Executive Offices)

       Registrant's telephone number, including area code: (281) 370-6700

           Securities registered pursuant to Section 12(g) Of The Act:

                          Common Stock, $.002 Par Value
                         Preferred Stock Purchase Rights
                                (Title of 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 (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [x]

         The number of shares outstanding of the issuer's common stock as of
April 10, 1998 was 7,610,305. The aggregate market value of the 6,354,462 shares
of the Company's Common Stock (and associated Preferred Stock Purchase Rights)
held by non-affiliates of the Company, based on the market price of the Common
Stock of $6.94 per share as of April 10, 1998, was approximately $44,084,080.

         The registrant's proxy statement to be filed in connection with the
registrant's 1998 Annual Meeting of Stockholders is incorporated by reference
into Part III of this report.

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                          1997 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>

<CAPTION>

 Item                                                                                                 Page

                                                   PART I

   <S>                                                                                                  <C>
   1      Business..............................................................................        1
          History of the Business...............................................................        1
          Business of the Company...............................................................        1
          Mergers, Acquisitions and Dispositions................................................        2
          Government Regulation.................................................................        4
          Marketing.............................................................................        6
          Bonding Requirements..................................................................        6
          Competition...........................................................................        6
          Patent and Trademarks.................................................................        6
          Employees.............................................................................        7
   2      Properties............................................................................        7
   3      Legal Proceedings.....................................................................        7
   4      Submission of Matters to a Vote of Security Holders...................................        8


                                                   PART II

   5      Market for Registrant's Common Equity and Related Stockholder Matters.................        8
   6      Selected Financial Data...............................................................        8
   7      Management's Discussion and Analysis of Financial Condition and Results of Operations.        9
          General...............................................................................        9
          Results of Operations.................................................................        9
          Bonding...............................................................................       12
          Year 2000 System Requirements.........................................................       12
          Liquidity and Capital Resources.......................................................       12
   8      Financial Statements and Supplementary Data...........................................       13
   9      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..       13


                                                  PART III

  10      Directors and Executive Officers of the Registrant....................................       13
  11      Executive Compensation................................................................       13
  12      Security Ownership of Certain Beneficial Owners and Management........................       13
  13      Certain Relationships and Related Transactions........................................       13


                                                   PART IV

  14      Exhibits. Financial Statement Schedules and Reports on Form 8-K.......................       14
          Financial Statements..................................................................       14
          Exhibit Index.........................................................................       14

</TABLE>

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         This report on Form 10-K contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties. When used in this document, the words "anticipate,"
"believe," "estimate" and "expect" and similar expressions, as they relate to
the Company, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including those discussed below. The Company's actual results could differ
materially from those anticipated in the forward-looking statements as a result
of certain factors including those set forth under Item 1. "Business" and Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

                                     PART I

Item 1.  BUSINESS.

History Of The Company

         Synagro Technologies, Inc. ("Synagro" or the "Company") was originally
incorporated on May 9, 1986 as a Nevada corporation under the name N-Viro
Recovery, Inc. On October 28, 1994, the Company changed its name to "Synagro
Technologies, Inc." to reflect the diversity of biosolids treatment services
provided by the Company.

         The Company reincorporated in Delaware on August 16, 1996 by means of a
merger (the "Reincorporation Merger") of the Company with and into a
wholly-owned subsidiary of the Company in Delaware known as Synagro
Technologies, Inc. ("Synagro Delaware"). On the effective date of the
Reincorporation Merger, each issued and outstanding share of Common Stock of the
Company was converted into one share of Common Stock of Synagro Delaware.
Synagro Delaware succeeded to all of the assets, liabilities and business of the
Company and possesses all of the rights and powers of the Company. (Synagro
Delaware and the Company are collectively referred to hereinafter as the
"Company").

Business Of The Company

         The Company engages in the business of the management of biosolids
through beneficial reuse of organic materials, including sewage sludge. The
Company provides transportation, treatment, site monitoring, land application
and environmental regulatory compliance services with respect to biosolids and
wastewater products to local and state agencies, municipalities and private
industries. The Company's vehicles pick up and transport biosolids and other
organic waste materials to sites operated by the Company. The Company's services
also include the dredging of sludge ponds, dewatering of biosolids, and cleaning
out municipal and industrial lagoons and digesters.

         Additionally, the Company provides professional management and
consulting services for treatment of biosolids and the monitoring and land
application of treated biosolids. The Company currently operates under
approximately 77 contracts with various state and local agencies, municipalities
and private industries with respect to sewage treatment and other waste
products. These entities include municipal utility districts, correctional
facilities and private businesses. The Company provides a variety of methods of
treatment of biosolids as a means of offering options to prospective customers
who may prefer alternative methods of biosolids treatment. These methods include
land application, pumping, transportation and dewatering of biosolids.

         There are two standards of pathogen reduction--Class A and Class B. The
Company is able to treat biosolids with Class A pathogen reduction and certain
levels of vector attraction reduction (i.e., pests, such as insects and
rodents), to produce "Exceptional Quality Biosolids." Exceptional Quality
Biosolids can be beneficially used on the land without limitations, site
restrictions or regulatory reporting. Non-Exceptional Quality Biosolids, while
less expensive to process, are subject to monitoring and detailed record keeping
requirements. These alternative methods provide a broader variety of choice to
prospective customers who may prefer to continue to use 


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methods which currently require lower initial cost, but which may require
additional future costs for monitoring of the related disposal sites.

         The Company also operates and maintains a fleet of trucks which pump,
collect and transport liquid or solid municipal biosolids to various land
application or treatment sites for tipping fees. These tipping fees, which are
fees generated by the Company in connection with the collection, transportation
and treatment of biosolids, constitute substantially all of the Company's
sources of revenues. The Company's vehicles are registered with federal, state
and local governmental agencies for such transportation purposes.

         The Company primarily conducts its business through its wholly-owned
subsidiaries CDR Environmental, Inc., a Texas corporation ("CDR"), and Pima Gro
Systems, Inc., an Arizona corporation ("Pima Gro"). The Company's primary
operations are conducted in Arkansas, Arizona, California, Georgia, Maryland,
Ohio, Pennsylvania, Texas, Virginia and Washington D.C. To a lesser extent, the
Company conducts business in Indiana, Louisiana, Mississippi, Missouri, Oklahoma
and South Carolina.

         Over the past few years, the Company has acquired certain agency and
licensing rights to market a patented sludge treatment technology, using cement
kiln dust ("CKD") and other related materials and an alkaline pasteurization
process (the "N-Viro Technology"), in certain states in the southwestern United
States.

         Through December 1996, the Company had generated nominal profits
through the commercialization of the N-Viro Technology. In December 1996, the
Board of Directors decided to write down the Company's investment in the N-Viro
Technology and associated assets. For this reason, the Company has voluntarily
given up its processing permit for the Hockley, Texas site, and will re-evaluate
its various agency agreements for the application of the N-Viro Technology. The
Company designated the N-Viro-related assets as held for sale. See "Mergers,
Acquisitions and Dispositions--Sale of Organi-Gro, Inc.," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Note 13 to the Notes to Consolidated Financial Statements.

Mergers, Acquisitions And Dispositions

         The Company's business plan has developed through the acquisition of
privately held biosolids treatment companies and their integration into the
business operations of the Company and its subsidiaries. The Company's
acquisition strategy has been developed with the intent to increase the
efficiency and profitability of each of these acquisition targets through
operational and marketing synergies with the Company's existing business
operations. There can be no assurances that the Company's acquisition strategy
will generate these synergies or result in profitable operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         BFI ORGANICS DIVISION. Effective August 1, 1997, the Company purchased
certain assets and revenue contracts of the Organics Division of Browning Ferris
Industries, Inc. ("BFI") in the District of Columbia, Georgia, Maryland, Ohio,
Pennsylvania, and Virginia for approximately $946,000. The acquisition was
financed through the issuance of third-party debt. The debt bears an interest
rate equal to 30 day commercial paper plus 2.77%.

         PIMA GRO SYSTEMS, INC. Effective July 1996, the Company entered into an
agreement pursuant to which the Company acquired 100% of the issued and
outstanding securities of Pima Gro. The amount of consideration paid in the
transaction was determined based on management's analysis of historical and
projected sales of Pima Gro, the estimated market value of Pima Gro and the
synergies to be achieved through the transaction.

         The purchase price for the acquisition of Pima Gro was $3,095,561. The
Company issued an aggregate of 155,000 shares of the Company's common stock, par
value $.002 per share ("Common Stock"), paid cash in the aggregate amount of
$1,277,265, and issued a promissory note in the aggregate principal amount of
$1,595,561. The shares of Common Stock issued to the former stockholders of Pima
Gro were valued at $1.437 per share for the purposes of the transaction. The
promissory note issued by the Company bears interest at the rate of 8% per 


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annum and is payable in four semi-annual installments of principal and accrued
interest, commencing January 1, 1997, with the final payment due on July 1,
1998.

         The Company agreed to pay an additional contingent sum on the purchase
price of $4.16 for each dollar by which the pre-tax earnings of Pima Gro, for
each of the fiscal years during 1996-1998, exceed the base amount of $380,000 in
1996 and, subject to certain adjustments to the base amount, during the two
following fiscal years. The additional contingent sum may be payable by the
Company, if at all, in cash, Common Stock or promissory notes, or any
combination thereof. Such amounts which may be payable as contingent sum
payments will be held in escrow until March 31, 1999, and subject to reduction
based on amounts expended by the Company for certain capital expenditures and
costs reserved for the development of certain business sites. As of December 31,
1997, there were no additional contingent amounts payable by the Company.

         In connection with this agreement, Wilson Nolan entered into a three
year employment agreement with Pima Gro at the annual base rate of $150,000,
plus other benefits. Mr. Nolan serves as the Chief Executive Officer and a
director of Pima Gro. In addition, Mr. Nolan entered into a non-competition
agreement with the Company for a period of six years following the date of the
employment agreement. In consideration of the non-competition agreement, the
Company has agreed to pay Mr. Nolan an additional contingent sum based on the
contingent sum formula payable to the former Pima Gro stockholders described
above, except that Mr. Nolan will be entitled to receive $1.04 for each dollar
by which the pre-tax earnings of Pima Gro exceed the relevant base amount for
each of the fiscal years during 1996-1998.

         Further, the former stockholders of Pima Gro granted a proxy to Donald
L. Thone, Chief Executive Officer of the Company, to vote any shares issued in
connection with the transaction for a period of three years following the
closing date.

        CHILDERS BROTHERS TRUCKING, INC. On October 1, 1994, the Company
acquired substantially all of the assets and assumed certain liabilities of
Childers Brothers Trucking, Inc. ("Childers Brothers"), Thompson Shaving
Service, Inc. ("Thompson"), Hodges Heavy Duty Truck Parts and Services, Inc.
("Hodges") and Zeiler Timber Products, Inc. ("Zeiler"). These purchases were
consolidated into Organi-Gro Inc., a wholly owned subsidiary ("Organi-Gro").

        In December 1996, the Company decided to sell substantially all of the
assets of its wholly owned subsidiary, Organi-Gro. In March 1997, the Company
sold these assets for consideration including subordinated notes with a face
value of approximately $1.4 million and the assumption of certain debt and
liabilities. The notes are payable in equal monthly installments of
approximately $15,000 for 48 months following the first anniversary date of the
note and bears interest at a rate of 6%. In addition, proceeds received from the
sale of products by the purchaser are to be remitted on a monthly basis with a
total amount of $603,930 due no later than September 16, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 13 to the Notes to Consolidated Financial Statements.

         THONE BROTHERS TRUCKING, INC. AND ORGANI-GRO, INC. In July 1993, the
Company entered into two agreements, pursuant to which the Company acquired 100%
of the common stock of: (i) Thone Brothers Trucking, Inc. ("Thone Brothers") in
exchange for 66,667 shares of the Company's Common Stock, and (ii) Organi-Gro in
exchange for $100,000 in cash and a secured promissory note in the principal
amount of approximately $1,050,000, bearing interest at the rate of 9% per
annum, which was paid in full as of March 8, 1996. Both of these companies were
engaged in the business of the transportation and/or treatment of biosolids and
poultry waste, primarily in the State of Arkansas.

         In connection with these transactions, the Company merged the business
operations of Thone Brothers into CDR, and Organi-Gro became a separate
wholly-owned subsidiary of the Company. In connection with the merger, Donald L.
Thone became a director of the Company. Mr. Thone currently serves as Chairman
of the Board of the Company.


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         CDR ENVIRONMENTAL, INC. On November 30, 1992, the Company entered into
a reorganization agreement with CDR pursuant to which the Company acquired 100%
of the issued and outstanding capital stock of CDR in exchange for 133,333
shares of the Company's Common Stock and a cash payment in the amount of
approximately $1,160,000. In connection with the reorganization agreement, CDR
became a wholly-owned subsidiary of the Company.

         ADDITIONAL ACQUISITIONS. As of January 1993, the Company acquired 100%
of the common stock of Bio-Star, Inc., Gro-Mor, Inc. and K-3 Environmental
Services, Inc., all of which were Texas corporations engaged in the business of
the transportation and/or treatment of biosolids and wastewater products. As of
April, 1994, the Company acquired all of the assets and related liabilities of
Border Farms, Inc. The Company merged the business operations of these companies
into CDR. The Company completed these four separate transactions for total
consideration of, 62,185 shares of Common Stock and cash of approximately
$1,147,000.

Government Regulation

         Federal and state environmental legislation and regulations require
substantial expenditures by wastewater sludge generators and impose liabilities
on such entities for noncompliance. Environmental laws and regulations are, and
will continue to be, a principal factor affecting the marketability of the
biosolids treatment methods marketed by the Company. Any changes in these laws
or regulations may affect the operations of the Company by imposing additional
regulatory compliance costs on the Company, requiring the modification of and/or
adversely affecting the market for the Company's biosolids treatment methods. To
the extent that demand for the Company's biosolids treatment methods is created
by the need to comply with such environmental laws and regulations, any
modification of the standards created by such laws and regulations may reduce
the demand for the Company's biosolids treatment methods, thereby adversely
affecting the Company's business prospects.

         The Company operates in a highly regulated environment and the
wastewater treatment and other plants at which the Company's biosolids treatment
methods may be implemented are required to have permits, registrations and
approvals from federal, state and local governments for the operation of such
facilities. Moreover, each facility is typically required to obtain a state
permit for the processing of Exceptional Quality Biosolids. In some
jurisdictions, state and/or local authorities have prohibited and, in other
jurisdictions, have sought and may seek to prohibit, the land application or
agricultural use of biosolid products.

         Any of the permits, registrations or approvals noted above, or
applications therefor, 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, the Company may be required to obtain additional
operating permits, registrations or approvals. The process of obtaining 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. There can be no assurances that the Company will be able to
meet applicable regulatory requirements or that further attempts by state or
local authorities to prohibit the land application or agricultural use of
biosolids will not be successful.

         In March 1993, the EPA regulations under the Clean Water Act of 1987
(40 CFR Part 503) which regulate methods for the disposal and use of biosolids
became effective. These regulations address the issues of treating biosolids
generated from the treatment of domestic sewage and septage and the subsequent
disposition of treated biosolids. These regulations establish biosolid use and
disposal standards applicable to approximately 35,000 publicly and privately
owned wastewater treatment plants in the United States. Under these regulations,
biosolids may be surface disposed, incinerated or land applied for beneficial
use in accordance with the requirements established by the regulations.
Biosolids may also be disposed in municipal solid waste landfills approved under
Subtitle D of the Resource Conservation and Recovery Act ("RCRA"). This type of
disposal is regulated under 40 C.F.R. Part 258. The last applicable deadline for
compliance with the new standards was February 19, 1995.


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         Land application regulations apply to generators (sources) of
biosolids, persons who treat the biosolids or persons who apply treated
biosolids to land. Beneficial uses for land application include use on
agricultural land, non- agricultural land (forest, range lands), public contact
sites (parks and golf courses), disturbed and reclamation sites (mines and
gravel pits) and home gardens.

         Any biosolids used for land application must meet two sets of standards
established by the EPA for pollutant limits. The first set establishes ceiling
concentrations for nine pollutants; biosolids which contain pollutants in
concentrations exceeding the ceiling limits cannot be applied to the land for
beneficial use. The second set establishes more stringent concentration levels
for eight of the nine pollutants which, if met, allow greater flexibility in the
use of the biosolids. The second set also constitutes the pollutant
concentrations, which when combined with Class A pathogen reduction and certain
levels of vector attraction reduction, form Exceptional Quality Biosolids.

         There are two standards of pathogen reduction. These standards are
classified as Class A or Class B. The standard of classification of biosolids as
Class A or Class B is based on pathogen levels in the treated biosolids.
Biosolids which meet the Class A standards for pathogen reduction and certain
standards for reduction of attraction to vectors and meet the lower pollutant
levels of the Exceptional Quality Biosolids may be applied to a site (which does
not require a permit for disposal) without the need for further monitoring under
EPA regulations. However, biosolids which do not meet the Exceptional Quality
standards, but which otherwise meet the Class A or Class B standards of pathogen
reduction and other less strict standards for pollutant control and vector
attraction, may only be applied to sites which have obtained governmental
permits for such deposit, and further, are subject to continuous monitoring and
detailed record keeping of the site.

         Class A pathogen reduction and vector attraction reduction requires
treating sludge to meet certain levels for indicator bacteria (such as fecal
coliform or salmonella). To meet the Exceptional Quality standard, sludge must
be treated with one of several alternative methods. These methods include heat
disinfection, alkaline stabilization and composting. Sludge which meets the
Exceptional Quality standards does not impose ongoing site management
restrictions.

         The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") generally imposes strict, joint and several liability for cleanup
costs upon (1) present owners and operators of facilities at which hazardous
substances were disposed; (2) past owners and operators at the time of disposal;
(3) generators of hazardous substances that were disposed at such facilities;
and (4) parties who arranged for the disposal of hazardous substances at such
facilities. CERCLA Section 107 liability extends to cleanup costs necessitated
by a release or threat of release of a hazardous substance. However, the
definition of "release" under CERCLA excludes the "normal application of
fertilizer." EPA regulations establish standards for biosolids applied to land
for beneficial use, such as a fertilizer substitute or soil conditioner. 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."
Although the biosolids and alkaline waste products may contain hazardous
substances (as defined under CERCLA), the Company has developed plans to manage
the risk of CERCLA liability, including training of operators, regular testing
of the 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.

         The Company currently maintains environmental impairment liability
insurance in the amount of $6,000,000. The Company could be adversely affected
by a claim that is not covered or is only partially covered by liability
insurance.

         Many states have regulations or guidelines covering the land
application of biosolids which set either a maximum allowable concentration or
maximum pollutant loading rate for at least one pollutant. In addition, some
states have established management practices for land application of biosolids.
In some jurisdictions, state and/or local authorities have imposed permit
requirements for, or have prohibited, the land application or agricultural use
of biosolid products, including Exceptional Quality 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
biosolid products will not be successful.


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         In addition, many states enforce landfilling restrictions for
nonhazardous biosolids and some states have site restrictions or other
management practices governing lands. These regulations typically require a
permit to sell or use biosolid products as landfill cover material. There can be
no assurances that landfill operators will be able to obtain required permits.

Marketing

         The Company markets its services by soliciting prospective customers,
attending trade shows, obtaining referrals and competitive bidding on potential
contracts. The Company's primary marketing and promotion targets are: (i)
government personnel (municipal, county and state); (ii) POTW operators and
landfill operators; (iii) politicians; (iv) consulting engineers and
construction contractors; (v) equipment and building products manufacturers and
distributors; (vi) the agricultural and horticultural industry; (vii)
transportation service companies; and (viii) the public.

         The Company provides services, through the operations of CDR and Pima
Gro, for the treatment of biosolids, including the transportation of municipal
sludge, and providing monitoring and assistance services in compliance with
governmental regulatory provisions. The Company primarily markets Class B
biosolids processing and land applications to customers who prefer this method
due to higher costs associated with Class A biosolids processing methods.

Bonding Requirements

         Commercial, federal, state and municipal projects, often require
contractors to post both performance and payment bonds at the execution of a
contract. Contractors without adequate bonding may be ineligible to bid or
negotiate on many projects. The Company has frequently been required to obtain
such bonds, and it should be assumed that the Company will continue to be
required to obtain such bonds, in the future, particularly with government
contracts. As of December 31, 1997, the Company had a bonding capacity of
approximately $15,000,000, with $3,369,737 utilized as of such date, which
management believes is sufficient to meet bonding needs for the foreseeable
future. To date, no payments have been made by any bonding company for bonds
issued for the Company.

Competition

         The Company provides a variety of services relating to the treatment of
biosolids. The Company is in direct and indirect competition with other
businesses, some of which are larger, more firmly established and have greater
capital resources. Many of these competitors provide aspects of the services
provided by the Company.

         Since November 1992, the Company has engaged in a business plan of the
acquisition of privately held companies which provide varieties and alternative
methods for the treatment and processing of biosolids, including the
acquisitions of Pima Gro, Thone Brothers, CDR, and certain of the assets and
revenue contracts of BFI's Organics Division. This business plan has enabled the
Company to offer alternative treatment methods and to diversify the Company's
services to prospective customers. Management of the Company believes that the
full range of treatment services provided by the Company provides a competitive
advantage over other entities which offer a lesser variety of services. However,
there can be no assurances that the Company will be able to achieve and maintain
a competitive position.

         The Company competes principally through offering quality services at
competitive prices. These methods are enhanced by the Company's ownership of
facilities and trucks and equipment utilized in the delivery of the Company's
services, which allow the Company to maintain costs and quality controls over
its services.

Patents And Trademarks

         The Company makes use of its trade secrets or "know-how" developed in
the course of its experience in the marketing of the Company's services. To the
extent that the Company relies upon trade secrets, unpatented 


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<PAGE>   9

know-how and the development of improvements in establishing and maintaining a
competitive advantage in the market for the Company's services, there can be 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 the Company's services.

Employees

         As of April 10, 1998, the Company had approximately 117 full-time
employees. These employees include: 4 executive officers and 2 non-executive
officers, 8 operations managers, 3 environmental specialists, 13 maintenance
personnel, 38 drivers, 13 land applications specialists, 17 general operation
specialists, 20 financial services/office support employees. The loss of the
services of key employees could have a material adverse effect on the Company's
business. Since there is intense competition for qualified personnel
knowledgeable of the Company's industry, no assurances can be given that the
Company will be successful in retaining and recruiting needed personnel.

         The Company's employees are not represented by a labor union or covered
by a collective bargaining agreement, and the Company believes it has good
relations with its employees. The Company provides its employees with certain
benefits, including health, life and dental insurance and 401(k) benefits.

ITEM 2.  PROPERTIES.

         The Company currently leases approximately 3,700 square feet of office
space located at 16000 Stuebner Airline, Suite 420, Spring, Texas 77379. This
facility serves as the Company's principal place of business. The Company pays
approximately $3,100 per month on a lease expiring in January, 2001. The Company
also leases additional facilities on a 430 acre site in Hockley, Texas under a 3
year lease with a current monthly rental payment of $5,000.

         The Company owns a 35 acre farm in Maysville, Arkansas with a 130,000
square foot composting facility for the processing of biosolids. The Maysville
site is subject to a note secured by a deed of trust in the amount of
approximately $1,000,000 held by an unaffiliated third party, with the
underlying loan personally guaranteed by Donald L. Thone, the Company's Chairman
of the Board. The Company also owns two acres of land in Russellville, Arkansas
with a 4,200 square foot office building which serves as the Company's Arkansas
division facilities. The Company also owns 367 acres of land in Arkansas on
which the Company has approximately 144,000 gallons of storage facilities for
biosolids.

         The Company leases a 2,800 square foot facility in Redlands, California
as a regional office for the operations of Pima Gro. The Company pays a monthly
rent of $1,400 on the lease, which expires in February 2000. The Company also
leases additional facilities in California, Arizona and Maryland which are used
as truck maintenance yards in connection with the operations of Pima Gro.

         The Company leases a 1,500 square foot facility in Oxford, Pennsylvania
as a regional office for the operations of CDR's Mid Atlantic Division. The
Company pays a monthly rent of $550 on the lease which expires in August 1998.

         The Company maintains permits, registrations or licensing agreements on
104,266 acres of land for applications of biosolids.

ITEM 3.  LEGAL PROCEEDINGS.

The Company is involved in litigation and claims arising in the ordinary course
of its business. Management believes, based on consultation with legal counsel
and accruals provided, that the ultimate outcome of these matters will not have
a material adverse impact on the Company's operations or financial position.



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

         None.


                                     PART II

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

         The Company's Common Stock has been listed for trading on The Nasdaq
SmallCap Market, under the symbol "SYGR", since October 1994. The reported high
and low bid prices of the Company's Common Stock on The Nasdaq SmallCap Market
for the past two fiscal years as adjusted for the reverse stock split are as
follows:

<TABLE>

<CAPTION>

                                                                                   HIGH             LOW
                 YEAR ENDED DECEMBER 31, 1997                                    -------          ------

                    <S>                                                          <C>              <C>   
                    1st Quarter...........................................       $  3.00          $ 1.88
                    2nd Quarter...........................................          2.38            1.50
                    3rd Quarter...........................................          3.66            1.94
                    4th Quarter...........................................          4.25            2.50

                 YEAR ENDED DECEMBER 31, 1996
                    1st Quarter...........................................          2.50            1.16
                    2nd Quarter...........................................          1.47            1.00
                    3rd Quarter...........................................          2.66            1.00
                    4th Quarter...........................................          4.75            2.00

</TABLE>

         As of April 10, 1998, the Company had 7,610,305 shares of Common Stock
issued and outstanding. On April 10, 1998, the market price for the Company's
Common Stock in the Nasdaq SmallCap Market was approximately $6.94 per share. As
of April 10, 1998, the Company had approximately 725 stockholders of record.

         Historically, the Company has not paid any dividends on its Common
Stock and has no present plans to pay such dividends. The payment of any future
dividends on Common Stock would depend, among other things, upon the current and
retained earnings and financial condition of the Company.

         On July 18, 1996, the Company issued 155,000 shares of Common Stock to
the former stockholders of Pima Gro in connection with the acquisition of that
entity by the Company pursuant to an exemption from registration under Section
4(2) of the Securities Act.

         On August 19, 1996, the Company issued or repriced options to purchase
246,296 and 125,000 shares of Common Stock to Donald L. Thone and Daniel L.
Shook, respectively, pursuant to an exemption from registration under Section
4(2) of the Securities Act, in connection with their respective employment
agreements.

ITEM 6.  SELECTED FINANCIAL DATA.

         The following table sets forth selected financial data with respect to
the Company and should be read in conjunction with the Consolidated Financial
Statements.



                                       8
<PAGE>   11

<TABLE>

<CAPTION>


                                                                     YEAR ENDED DECEMBER 31,
                                                 ----------------------------------------------------------------
                                                    1997          1996          1995         1994         1993
                                                 ----------    ----------    ----------   ----------   ----------
             FINANCIAL HIGHLIGHTS                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                <C>         <C>          <C>          <C>          <C>     
Net sales....................................      $ 25,303    $ 22,977     $ 17,976     $ 13,197     $  9,482
Gross profit.................................         4,296       3,723        2,858        2,502        2,136
Selling, general and administrative expenses.         3,572       6,141        4,150        3,900        3,393
Loss on asset held for sale and other special
charges (credit).............................          (721)      4,842        2,444        3,169           --
Interest expense, net........................           924         673          938          626          576
Net income (loss)............................           929      (7,589)      (4,553)      (4,165)      (1,999)
Net income (loss) per share (basic and diluted)         .12       (1.21)       (1.59)*      (2.19)*      (1.27)*
Working capital (deficit)....................          (796)     (2,075)       1,889         (667)         285
Total assets.................................        19,945      18,631       20,212       23,154       19,931
Total long-term debt, net....................         5,495       8,263        4,448        8,396        7,330
Stockholders' equity.........................         7,478       3,802       10,972       10,212        8,655

</TABLE>

*As adjusted for the 1 for 15 reverse split consummated on July 3, 1995.

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

         The following discussion and analysis of the Company's operations
should be read in conjunction with the "Business--Business of the Company,"
"--Government Regulation" and "--Competition" sections hereto. Certain
statements are forward-looking, based on the Company's expectations and, as
such, these statements are subject to uncertainty and risks.

General

         On August 1, 1997, the Company purchased the assets and certain revenue
contracts from BFI in the amount of $946,000. The acquisition was financed
through the issuance of third party debt, with all working capital requirements
funded under the existing credit facility. This acquisition increased the
Company's regional coverage by including the states of Georgia, Maryland, Ohio,
Pennsylvania, and Virginia.

         In December 1996, the Company decided that the Organi-Gro operations
were not part of its core business. In March 1997, the Company sold the assets
of Organi-Gro to the previous owners. The total consideration for this sale
resulted in approximately $1.4 million of subordinated notes receivable and the
assumption of certain debt and liabilities by the purchasers. See Note 13 to the
Notes to Consolidated Financial Statements.

         The improvement in results from operations as detailed below is the
result of a successful implementation of certain restructuring plans which
include: focus on core business, minimizing support expenses and management's
commitment to achieving the business goals previously established.

Results Of Operations

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

<TABLE>

<CAPTION>


                                                                                 Year Ended December 31,
                                                                         1997             1996            1995
                                                                         ----             ----            ----
STATEMENT OF OPERATIONS DATA:
<S>                                                                      <C>              <C>             <C> 
Net sales.....................................................           100%             100%            100%
Gross profit..................................................          17.0             16.2            15.9
Selling, general and administrative expenses..................          14.1             26.7            23.1
Loss on assets held for sale and other special charges (credits)        (2.9)            21.1            13.6
Interest expense, net.........................................           3.7              2.9             5.2
Net income (loss).............................................           3.7            (33.0)          (25.3)

</TABLE>


                                       9
<PAGE>   12

Results of Operations for the years ended December 31, 1997 and 1996.

         The Company's net sales increased by $2,325,665 or 10.1% in 1997 as
compared to 1996. The increase in sales is directly attributable to the purchase
of BFI's Organics Division, and the result of having a full year's revenues for
Pima Gro which was acquired in July 1996, partially offset by revenues
associated with the Organi-Gro divestiture in April 1997.

         Gross profit increased to $4,295,682, or 17% of sales in 1997, compared
to $3,722,501 or 16.2% of sales in 1996, as a result of continued reductions in
operations costs through obtaining land application sites closer to the waste
generator, and reduced personnel and associated costs.

         Selling, general and administrative expenses decreased to $3,571,765,
or 14.1% of sales, in 1997, compared to $6,141,013, or 26.7% of sales, in 1996.
Included in 1997 expenses is an additional provision for legal and other claims
costs of approximately $500,000. The decrease in selling, general and
administrative expenses is a result of management's restructuring plans as
previously indicated.

         Other charges (credits) decreased to ($721,286) in 1997 from $4,841,807
in 1996. The decrease relates to the sale of assets of Organi-Gro and the
write-off of the Company's interest in the N-Viro Technology recognized in 1996.
During 1997, the Company recognized other credits as a result of collection on
and expected realization of a portion of the subordinated notes received in
connection with the sale of Organi-Gro. See Note 13 to the Notes to Consolidated
Financial Statements.

         Other income and expense (net) was in line with 1996 expenses, but
interest expense increased in 1997 to $923,879, compared to $672,706 in 1996,
while other income increased to $407,177 in 1997 from $344,095 in 1996. The
increase in interest expense is a result of additional debt incurred throughout
the year, due to acquisitions.

         As a result of the foregoing, net income of $928,501 was reflected in
1997, as compared to a net loss of $7,588,930 in 1996.

         The Company has incurred substantial losses since inception and,
therefore, has not been subject to federal income taxes. As of December 31,
1997, the Company has generated net operating loss carryforwards for financial
reporting purposes of approximately $11.0 million. These carryforwards will
begin to expire in the year 2004 through 2012. The Company's ability to utilize
these carryforwards is limited by a "change in ownership", as such term is
defined by the federal income tax laws and regulations. As the Company has
incurred losses in recent years and the utilization of these carryforwards may
be limited as discussed above, a valuation allowance has been established to
fully offset the deferred tax asset at December 31, 1997.

Results of Operations For The Years Ended December 31, 1996 and 1995.

         The Company's net sales increased by $5,001,355, or 27.8%, in fiscal
1996 as compared to fiscal 1995. This increase in sales was directly
attributable to the acquisition of Pima Gro in July 1996. No other significant
changes occurred in the sale of other services or products in relation to the
respective periods.

         During the year ended December 31, 1996, cost of goods sold and gross
profit increased to $19,254,903 and $3,722,501, respectively from $15,117,950
and $2,858,099, respectively for the year ended December 31, 1995. Gross profit
as a percent of sales increased to 16.2% in 1996 from 15.9% in 1995.

         Selling, general administrative expenses increased to $6,141,013, or
26.7% of sales, for the year ended 1996 as compared to $4,150,437, or 23.1% of
sales, in 1995. The increase in such expenses was primarily the result of
increased expenses of approximately $1,000,000 related to the Pima Gro
acquisition and additional provisions related to legal or other claims costs of
approximately $800,000.


                                       10
<PAGE>   13

         In the fourth quarter of 1996, management evaluated the future
profitability of the investments made in Organi-Gro and the N-Viro technologies.
As a result, the Company decided to sell all of the assets of Organi-Gro (which
was accomplished in March 1997) and to write off its interest in the N-Viro
technology and associated assets. This decision resulted in a charge to
operation for the year of $4,841,807. See Notes 4 and 13 to the Notes to
Consolidate Financial Statements.

         Interest expense for fiscal year 1996 was $672,706, as compared to
$937,586 for 1995. This decrease of $264,880 was directly attributable to
reduced average debt levels throughout the year prior to assumption of debt
related to the purchase of Pima Gro.

         As a result of the foregoing, a net loss of $7,588,930 was reflected in
fiscal 1996 as compared to a net loss of $4,553,169 in fiscal 1995.

Results of Operations For The Years Ended December 31, 1995 and 1994.

         The Company's net sales increased by $4,778,788, or 36%, in fiscal 1995
as compared to fiscal 1994. This increase in sales was directly attributable to
sales from poultry bedding and wood waste materials from the October 1994
acquisitions of Childers Brothers, Thompson and Hodges. No other significant
changes occurred in the sale of other services or products in relation to the
respective periods.

         During the year ended December 31, 1995, cost of goods sold and gross
profit increased to $15,117,950 and $2,858,099, respectively, from $10,695,468
and $2,501,793, respectively, for the year ended December 31, 1994. Gross
margin, as a percentage of sales, decreased to 16% in 1995 from 19% in 1994.
This decrease in gross margin was directly attributable to the full year's
results in 1995 related to the October 1994 acquisitions of Childers Brothers,
Thompson and Hodges, in which gross margins were, historically, significantly
lower as a percent of sales than the Company's other operations.

         Selling, general and administrative expenses increased to $4,150,437,
or 23.1% of sales, in 1995 as compared to $3,889,727, or 29.5% of sales, for the
year ended 1994. The increase in absolute dollars of such expenses was primarily
the result of an increase in the allowance for doubtful accounts reserve of
$181,000. Historically, the Company has had minimal bad debt expense, and
management believes that this is not a recurring expense.

         In the first quarter of 1996, certain changes in events caused
management to take charges in the amount of approximately $2,444,000 directly
related to asset impairments as follows:

                  1.    The Company had continued to invest in the Company's
         sawmill operations in Arkansas in an attempt to produce its own
         shavings for the poultry bedding and wood waste markets and brought
         this facility to a production mode in the last part of 1995. In
         evaluating the efficiency of the mill for the remainder of 1995 and
         through March 1996, management determined that sufficient production
         quantities could not be sustained to justify further consideration.
         This decision resulted in a charge to fixed assets of $1,091,991 and an
         associated goodwill charge of $286,000.

                  2.    At December 31, 1994, the Company had an investment in 
         Pan American N-Viro of approximately $776,034. Pan American N-Viro was
         formed in 1994 to market the N-Viro Process in South and Central
         America and the Caribbean with the intent of generating a substantial
         revenue base prior to the end of 1995. Subsequent evaluation of this
         business venture and a review of the marketing efforts through March
         28, 1996, revealed continued losses for the year ending December 31,
         1995 of $152,000 and total losses since the formation of Pan American
         N-Viro of $244,178. Further, no sales were generated in this period and
         very little indication of significant future sales prospects. Based on
         management's decision to stop any future cash contributions to Pan
         American N-Viro, the Company decided to write off the investment in Pan
         American N-Viro in full as of December 31, 1995.


                                       11
<PAGE>   14

                  3.    In 1995, management determined that a charge to 
         operations of $290,000 was required to properly reflect the current
         fair market value of certain assets held for resale pertaining to the
         Company's then existing pelletized poultry waste products division.
         This decision was made based on a previous decision to discontinue
         these operations in 1994 and on market indications as of February 1996
         for the sale of these assets.

         Interest expense for 1995 was $937,586, as compared to $626,172 for
1994. This increase of $311,414 was directly attributable to the October 1994
acquisitions and the related debt assumed in connection with these acquisitions.

         As a result of the foregoing, a net loss of $4,553,169 was reflected in
fiscal 1995.

Bonding

         The amount of bonding capacity offered by sureties is a function of
financial health of the company requesting the bonding. As of December 31, 1997,
the Company had a bonding capacity of approximately $15,000,000 with $3,369,737
utilized as of such date, which management believes is sufficient to meet
bonding needs for the foreseeable future.

Year 2000 System Requirements

         The Company is performing an analysis of its systems in order to
determine the impact of year 2000 issues. Management is unable to predict at
this time the full impact year 2000 issues will have on the Company's
operations or future financial condition. However, the Company does not expect
that such costs to modify its programs and systems will be material to its
financial condition or results of operations. The Company does not currently
have information concerning the year 2000 compliance of its suppliers and
customers. In the event the Company's major suppliers or customers do not
successfully and timely achieve year 2000 compliance, the Company's operations
could be adversely affected.

Liquidity and Capital Resources

         The Company has historically financed its operations principally
through the sale of equity and debt securities and through funds provided by
operating activities.

         As of March 31, 1998, the Company issued a Series B Preferred Stock,
with shares outstanding of 1,458,335, for total cash consideration of
$3,500,004. This Series B Preferred Stock is convertible into common on a 1:1
ratio at a conversion price of $2.40.

         In August 1997, the Company acquired certain assets and revenue
contracts from BFI. This acquisition was financed through the issuance of third
party debt.

         On February 22, 1997, the Company completed its call of 3,000,000
warrants to purchase Common Stock. Warrants for 1,324,243 shares of Common Stock
were converted providing net proceeds to the Company in the amount of
$3,117,636. The remaining outstanding warrants were redeemed by the Company for
$167,576.

         The Company purchased additional capital assets during 1997 in the
amount of $1,089,076.

         In 1997, the Company generated negative cash flow from operations
of ($1,200,575) primarily due to the funding of working capital needs of the
acquisition mentioned above.

         As of December 31, 1997, the Company had current maturities on
long-term debt of $2,951,291, as compared to $2,434,057 in 1996. The Company's
long-term debt of $5,494,549 in 1997 reflects a reduction of $2,768,345 over
1996. This decrease is due primarily to the use of cash proceeds from the
previously disclosed warrant call to extinguish certain indebtedness.

         The Company has a credit facility with LaSalle National Bank
("LaSalle") in the amount of $10,000,000 ($5 million term and $5 million line of
credit). At December 31, 1997, the Company had borrowings under the term loan in
the amount of $4,000,000 and $1,037,270 under the line of credit. Amounts under
the line of credit are subject to a borrowing base consisting of 85% of accounts
receivable, as defined in the credit facility. The LaSalle credit facility
requires the Company to meet certain loan covenants, and the Company was in
compliance with those covenants as of December 31, 1997. This credit facility
expires in September 1999 and management anticipates that it will renegotiate
and/or refinance this credit facility prior to that time.

         At December 31, 1997, the Company had a working capital deficit of
$(795,972). The Company's revolving line of credit has a lock box requirement
and subjective acceleration clause. As a result, in order to comply with
Emerging Issues Task Force pronouncement 95-22, the Company has classified the
revolving line as a current liability. However, management believes the bank
will continue to provide credit to the Company through the expiration date of
September 30, 1999. The Company believes that its cash requirements for 1998 can
be met with its existing cash and short-term investments at December 31, 1997,
the March 31, 1998 convertible preferred stock proceeds, cash flow from
operations and its borrowing availability under its credit facility. Beyond
1998, there can be no assurances that additional financing 


                                       12
<PAGE>   15

requirements will not be required to maintain liquidity as the LaSalle credit
facility will expire in September 1999 and will need to be renegotiated and/or
refinanced prior to that time.

         The Company has undergone significant recapitalization and
restructuring events throughout the last two fiscal years. As a result of these
changes, management believes that the Company is better positioned to respond to
opportunities in the biosolids market and aggressively pursue its goal of
acquiring additional biosolids management companies.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The financial statements required by this Item 8 are incorporated
herein by reference as set forth on pages F-1 to F-18 attached hereto.

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

         On December 13, 1996, the Company replaced Singer Lewak Greenbaum &
Goldstein, LLP ("SLGG") as its principal accountant with Arthur Andersen LLP
("AA").

         The report of SLGG on the Company's financial statements for the last
three fiscal years did not contain an adverse opinion or a disclaimer of
opinion, nor was such opinion qualified or modified as to uncertainty, audit
scope, or accounting principles. During the Company's three most recent fiscal
years and subsequent interim periods preceding the replacement of SLGG, the
Company had no disagreements with SLGG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
During the Company's three most recent fiscal years and subsequent interim
periods preceding the retention of AA, neither the Company nor anyone on the
Company's behalf, consulted AA regarding any matter.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information regarding the executive officers and directors of the
Company and compliance with Section 16(a) of the Exchange Act is incorporated by
reference to the information set forth under the caption "Election of Directors"
in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION.

         Information regarding executive compensation is incorporated by
reference to the information set forth under the caption "Other
Information--Executive Compensation" in the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the information set forth under
the caption "Other Information--Principal Stockholders" and "Election of
Directors--Management Stockholdings" in the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth under the caption "Other
Information--Certain Transactions" in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders.


                                       13
<PAGE>   16

                                     PART IV

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

(a)      1.        Financial Statements.

         Synagro Technologies, Inc. and Subsidiaries consolidated balance sheets
as of December 31, 1997 and 1996, and related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997.

         2.       Financial Schedules.

         Schedule II--Synagro Technologies, Inc. and Subsidiaries consolidated
schedule of valuation and qualifying accounts for each of the three years in the
period ended December 31, 1997.

         All other 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.

(b)      None

(c)      Exhibit Index

<TABLE>

<CAPTION>

  EXHIBIT                                DESCRIPTION OF EXHIBIT

     <S>          <C>  
     3.1          Restated Certificate of Incorporation of Synagro Technologies, Inc. (the "Company") dated August
                  16, 1996 (Exhibit 3.1 to the Company's  Post-Effective  Amendment No. 1 to Registration Statement
                  No. 33-95028, dated October 25, 1996, is incorporated herein by reference).

     3.2          Bylaws of the Company dated August 5, 1996. (Exhibit 3.2 to the Company's Post-Effective
                  Amendment No. 1 to Registration Statement No. 33-95028, dated October 25, 1996, is incorporated
                  herein by reference).

     4.1          Specimen Common Stock Certificate of the Company. (Exhibit 4.1 to the Company's Registration
                  Statement on Form 10, dated December 29, 1992, is incorporated herein by reference).

     4.2          Specimen Warrant Certificate of the Company. (Exhibit 4.2 to the Company's Registration
                  Statement on Form S-1 (No. 33-95028), dated July 27, 1995, and as amended, is incorporated
                  herein by reference).

     4.3          Rights Agreement, dated as of December 20, 1996, between the Company and Intercontinental
                  Registrar & Transfer Agency, Inc., as Rights Agent, which includes as Exhibit A thereto the
                  Synagro Technologies, Inc. Statement of Designations, Preferences, Limitations and Relative
                  Rights of its Series A Junior Participating Preferred Stock, and as Exhibit C thereto the Form
                  of Rights Certificate (Incorporated by reference to Exhibit No. 4.1 to Registrant's Registration
                  Statement on Form 8-A dated December 27, 1996).

    *4.4          Certificate of Designation, Preferences, Rights and Limitations of Series B Preferred Stock of
                  Synagro Technologies, Inc.

    *4.5          Registration Rights Agreement, dated as of March 31, 1998, among the Company, Environmental 
                  Opportunities Fund, L.P., Environmental Fund (Cayman), L.P. and other purchasers of the
                  Company's Series B Preferred Stock as listed on Exhibit A thereto.

    *4.6          Specimen Series B Preferred Stock Certificate.

   *10.1          Synagro Technologies, Inc. Subscription Agreement, dated as of March 31, 1998 among the Company,
                  Environmental Opportunities Fund, L.P., Environment Opportunities Fund (Cayman), L.P. and other
                  purchasers of the Company's Series B Preferred Stock as listed on Exhibit A thereto.

    10.2          Form of Indemnification Agreement. (Appendix F to the Company's Proxy Statement on Schedule 14A 
                  for Annual Meeting of Stockholders, dated May 9, 1996, is incorporated herein by reference).

    10.3          Amended and Restated 1993 Stock Option Plan dated August 5, 1996. (Exhibit 4.1 to the Company's
                  Registration Statement on Form S-8 (No. 333-18029), dated December 17, 1996, is incorporated
                  herein by reference).

    10.4          Lease Agreement between the Company and Green Coast Enterprises, Inc. dated February 1, 1996.
                  (Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995,
                  is incorporated herein by reference).

</TABLE>


                                       14
<PAGE>   17

<TABLE>

     <S>          <C>  
    10.5          Employment Agreement between Pima Gro Systems, Inc. and Wilson Nolan, dated July 18, 1996.
                  (Exhibit 10.1 to the Company's Current Report on Form 8-K, dated July 31, 1996, is incorporated
                  herein by reference).

    10.6          Agreement for the Purchase of Stock by and among Synagro Technologies, Inc., CDR Environmental,
                  Inc., Pima Gro, Pima Gro Systems 2, Inc., Wilson Nolan, Herbert Kai and John Kai, Jr., dated
                  July 18, 1996. (Exhibit 2.1 to the Company's Current Report on Form 8-K, dated July 31, 1996,
                  is incorporated herein by reference).

    10.7          6% Promissory Note made by Custom Poultry to Organi-Gro and the Company in the principal amount
                  of $1,152,381, dated April 1, 1997 (Exhibit 10.8 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1996, is incorporated herein by reference).

    10.8          Guaranty of Tony D. Childers ("Childers") for 6% Promissory Note made by Custom Poultry to
                  Organi-Gro, dated April 1, 1997 (Exhibit 10.9 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1996, is incorporated herein by reference).

    10.9          6% Promissory Note made by Hodges to Organi-Gro and the Company in the principal amount of
                  $308,203, dated April 1, 1997. (Exhibit 10.10 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1996, is incorporated herein by reference).

   10.10          Guaranty of Childers and Jack Hodges for 6% Promissory Note made by Hodges to Organi-Gro, dated
                  April 1, 1997 (Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1996, is incorporated herein by reference).

    16.1          Letter dated December 13, 1996, from Singer Lewak Greenbaum & Goldstein LLP to the Commission.
                  (Exhibit 16.1 to the Company's Current Report Form 8-K dated December 17, 1996 is incorporated
                  herein by reference.)

   *21.1          Subsidiaries of Synagro Technologies, Inc.

   *23.1          Consent of Arthur Andersen LLP.

   *27.1          Financial Data Schedule.

</TABLE>

-------------
*    Filed herewith.


                                       15
<PAGE>   18


                                   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 on April 10, 1998.

                           SYNAGRO TECHNOLOGIES, INC.


                                       By:     /s/ Donald L. Thone
                                          -------------------------------------
                                                   Donald L. Thone,
                                         Chairman of the Board and Director


         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 indicated on April 10, 1998.

<TABLE>


<S>           <C>                                               <C> 
By:           /s/   Donald L. Thone                             Chairman of the Board and Director
    -------------------------------------------
                   Donald L. Thone



By:           /s/   Ross M. Patten                              Chief Executive Officer, President
    -------------------------------------------                 and Director
                   Ross M. Patten                               



By:           /s/   Daniel L. Shook                             Chief Financial Officer, Vice President of Finance,
    -------------------------------------------                 Secretary and Director
                   Daniel L. Shook                              



By:           /s/   Irwin I. Gelbart                            Director
    -------------------------------------------
                   Irwin I. Gelbart



By:           /s/   J. Mark Myers                               Director
    -------------------------------------------
                   J. Mark Myers



By:           /s/   Kenneth Chuan-kai Leung                     Director
    -------------------------------------------
                   Kenneth Chuan-kai Leung

</TABLE>


                                       16
<PAGE>   19






                           SYNAGRO TECHNOLOGIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>



<S>                                                                                                        <C>
Report of Independent Public Accountants                                                                   F-1

Report of Independent Certified Public Accountants                                                         F-2

Consolidated Balance Sheets as of December 31, 1997 and 1996                                               F-3

Consolidated Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995                                                                                              F-4

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997,
1996 and 1995                                                                                              F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995                                                                                              F-6-7

Notes to Consolidated Financial Statements                                                                 F-8

</TABLE>


<PAGE>   20




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Synagro Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Synagro
Technologies, Inc. (a Delaware corporation), and subsidiaries as of December 31,
1997 and 1996, and the related statements of operations, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Synagro
Technologies, Inc., and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.


ARTHUR ANDERSEN LLP


Houston, Texas
February 20, 1998 (except with respect 
   to certain matters discussed in Note 7 and 
   the matters discussed in Note 14, 
   as to which the date is April 14, 1998)





                                      F-1
<PAGE>   21

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Synagro Technologies, Inc. and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and consolidated
cash flows of Synagro Technologies, Inc. and subsidiaries for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.


SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
February 28, 1996




                                      F-2
<PAGE>   22


                           SYNAGRO TECHNOLOGIES, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>

<CAPTION>

                                                                              December 31
                                                                      ----------------------------
                                                                           1997            1996
                                                                      -----------    -------------
                               ASSETS                                                
                               ------
<S>                                                                   <C>             <C>  
CURRENT ASSETS:                                                                      
   Cash and cash equivalents                                          $    166,994    $    643,109
   Short-term investments                                                   64,504         560,000
   Restricted cash, current portion                                        172,925         159,285
   Accounts receivable, net of allowance of $189,862                                 
     and $287,514                                                        3,942,355       2,910,781
   Notes receivable                                                        500,133              --
   Prepaid expenses and other current assets                             1,330,018         218,224
                                                                      ------------    ------------
                                                                                     
                     Total current assets                                6,176,929       4,491,399
                                                                                     
PROPERTY, MACHINERY AND EQUIPMENT, net                                   8,914,588       8,582,862
                                                                                     
OTHER ASSETS:                                                                        
   Goodwill, net of accumulated amortization of $869,079                 
     and $737,184                                                        4,430,277       4,562,172                     
   Restricted cash, long-term portion                                      173,387         186,077
   Assets held for sale, net                                                    --         702,246
   Other                                                                   249,938         106,531
                                                                      ------------    ------------   
                     Total assets                                     $ 19,945,119    $ 18,631,287
                                                                      ============    ============   
                        LIABILITIES AND STOCKHOLDERS' EQUITY                         
                        ------------------------------------                         
CURRENT LIABILITIES:                                                                 
   Current portion of long-term debt                                  $  2,951,291    $  2,434,057
   Accounts payable and accrued expenses                                 4,021,610       4,132,212
                                                                      ------------    ------------   
                     Total current liabilities                           6,972,901       6,566,269
                                                                                     
LONG-TERM DEBT, net                                                      5,494,549       8,262,894
                                                                                     
COMMITMENTS AND CONTINGENCIES                                                      

STOCKHOLDERS' EQUITY:
   Preferred stock, $.002 par value, authorized 10,000,000 shares,
     none issued and outstanding                                                --              --
   Common stock, $.002 par value, authorized 100,000,000 shares,
     7,610,305 shares and 6,355,434 shares issued and outstanding           15,221          12,712
   Additional paid-in capital                                           25,323,915      22,579,380
   Accumulated deficit                                                 (17,861,467)    (18,789,968)
                                                                      ------------    ------------
                     Total stockholders' equity                          7,477,669       3,802,124
                                                                      ------------    ------------
                     Total liabilities and stockholders' equity       $ 19,945,119    $ 18,631,287
                                                                      ============    ============

</TABLE>



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


                                      F-3
<PAGE>   23


                           SYNAGRO TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>

<CAPTION>


                                                               1997             1996            1995
                                                            ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>         
 NET SALES                                                  $ 25,303,069    $ 22,977,404    $ 17,976,049

 COST OF SERVICES                                             21,007,387      19,254,903      15,117,950
                                                            ------------    ------------    ------------

                        Gross profit                           4,295,682       3,722,501       2,858,099
                                                            ------------    ------------    ------------

 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                  3,571,765       6,141,013       4,150,437

 OTHER CHARGES (CREDITS):
    Loss on assets held for sale and other special              
      charges / (credits)                                       (721,286)      4,841,807       2,158,025
    Write-off of goodwill                                             --              --         286,000
                                                            ------------    ------------    ------------
                         Income (Loss) from operations         1,445,203      (7,260,319)     (3,736,363)
                                                            ------------    ------------    ------------

 OTHER INCOME (EXPENSE):
    Other income, net                                            407,177         344,095         120,780
    Interest                                                    (923,879)       (672,706)       (937,586)
                                                            ------------    ------------    ------------
                                                                (516,702)       (328,611)       (816,806)
                                                            ------------    ------------    ------------

 NET INCOME (LOSS) BEFORE BENEFIT FOR INCOME TAXES               928,501      (7,588,930)     (4,553,169)

 PROVISION FOR INCOME TAXES                                           --              --              --
                                                            ------------    ------------    ------------

 NET INCOME (LOSS)                                          $    928,501    $ (7,588,930)   $ (4,553,169)
                                                            ============    ============    ============

 INCOME PER COMMON AND COMMON SHARE EQUIVALENT:
    Net income (loss), basic                                $        .12    $      (1.21)   $      (1.59)
    Net income (loss), diluted                              $        .12    $      (1.21)   $      (1.59)

 WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC                    7,545,113       6,266,759       2,864,195
 WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED                  7,740,344       6,266,759       2,864,195

</TABLE>



      Reflects a one for 15 reverse stock split effective on July 3, 1995.










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



                                      F-4
<PAGE>   24


                           SYNAGRO TECHNOLOGIES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>

<CAPTION>

                                               COMMON STOCK           ADDITIONAL
                                          -----------------------       PAID-IN      ACCUMULATED
                                           SHARES        AMOUNT         CAPITAL        DEFICIT        TOTAL
                                          ---------    ----------    ------------   ------------  ------------
<S>                                       <C>          <C>           <C>            <C>           <C>
 BALANCE, December 31, 1994               1,957,449    $    3,915    $ 16,855,772   $ (6,647,869) $ 10,211,818
    Sale of common stock                  3,000,000         6,000       5,994,000              --    6,000,000
    Conversion of long-term debt            715,709         1,431       1,468,527              --    1,469,958
    Conversion of long-term debt,
      related parties                       400,000           800         799,200              --      800,000
    Offering costs                           12,867            26      (1,382,928)                  (1,382,902)
    Exercise of options                      18,999            38         121,676              --      121,714
    Shares issued for services                8,800            18          29,216              --       29,234

    Shares repurchased in legal             
      settlement                            (20,000)          (40)       (500,960)             --     (501,000)
    Repurchase of shares                     (1,067)           (2)        (23,998)             --      (24,000)
    Shares exchanged for investment         (40,000)          (80)     (1,199,920)             --   (1,200,000)
    Net Loss                                     --            --              --      (4,553,169)  (4,553,169)
                                          ---------      --------     -----------    ------------   ----------
 BALANCE, December 31, 1995               6,052,757        12,106      22,160,585     (11,201,038)  10,971,653

    Shares issued for acquisition           155,000           310         222,425              --      222,735
    Conversion of long-term debt            144,344           289         189,711              --      190,000
    Exercise of options                       3,333             7           6,659              --        6,666
    Net Loss                                     --            --              --      (7,588,930)  (7,588,930)
                                          ---------      --------     -----------    ------------   ----------
 BALANCE, December 31, 1996               6,355,434        12,712      22,579,380     (18,789,968)   3,802,124

    Redemption of warrants, net           1,324,243         2,648       2,947,412              --    2,950,060
    Shares exchanged in repayment of                                                           --
      notes receivable and other            (74,372)         (149)       (212,867)                    (213,016)
    Exercise of options                       5,000            10           9,990              --       10,000
    Net Income                                   --            --              --         928,501      928,501
                                          ---------      --------     -----------    ------------   ----------
 BALANCE, December 31, 1997               7,610,305      $ 15,221     $25,323,915    $(17,861,467)  $7,477,669
                                          =========      ========     ===========    ============   ==========

</TABLE>




      Reflects a one for 15 reverse stock split effective on July 3, 1995.











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


                                      F-5
<PAGE>   25



                           SYNAGRO TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>

<CAPTION>


                                                                1997          1996         1995
                                                            -----------   -----------  ----------- 
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                         <C>           <C>          <C>         
   Net lncome (Loss)                                        $   928,501   $(7,588,930) $(4,553,169)
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities-
       Depreciation                                           1,498,255     1,951,518    1,681,616
       Amortization                                             131,895       255,690      505,295
       Write-off of goodwill                                         --            --      286,000
       Loss on assets held for sale and other special          
         charges (credits)                                     (721,286)    4,841,807    2,158,025
       Gain on sale of property, machinery and equipment       (251,470)     (261,319)      (5,597)
       Stock issued for payment of interest and services             --            --       64,196
       Conversion of accrued interest into note payable              --            --       33,533
       Other                                                   (113,133)           --     (119,028)
       (Increase) decrease in the following, excluding
         the effects of acquisitions-
           Accounts receivable                               (1,408,821)     (635,872)     505,557
           Inventory                                                 --       111,429      459,623
           Prepaid expenses and other current assets         (1,111,794)      758,253     (362,655)
           Other assets                                        (143,407)      (27,627)    (106,042)
       Increase (decrease) in the following excluding 
         the effects of acquisitions-
           Accounts payable and accrued expenses                 (9,315)    1,472,235     (209,285)
                                                            ===========   ===========  =========== 
       Net cash provided by (used in) operating              (1,200,575)      877,184      338,069
                                                            -----------   -----------  ----------- 

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of businesses, net of cash acquired                      --    (1,277,265)          --
   Purchase of property, machinery and equipment             (1,089,076)   (1,404,815)  (1,224,110)
   Proceeds from sale of property, machinery and equipment      456,564       640,404      559,033
   Sales (purchases) of short-term investments, net             495,496       455,743   (1,015,743)
   Proceeds from notes receivable                               121,286            --           --
                                                            -----------   -----------  ----------- 
        Net cash used in investing activities                   (15,730)   (1,585,933)  (1,680,820)
                                                            ===========   ===========  ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from debt                                         1,082,410     5,797,696    3,538,284
   Payments on debt                                          (3,301,330)   (7,135,023)  (4,638,099)
   Increase in restricted cash                                     (950)       (5,105)    (103,825)
   Deferred offering costs                                           --            --      128,663
   Sale of common stock, net of offering costs                2,960,060         6,666    4,807,290
   Purchase of common stock                                          --            --      (24,000)
                                                            -----------   -----------  ----------- 
        Net cash provided by (used in) financing activities     740,190    (1,335,766)   3,708,313
                                                            -----------   -----------  ----------- 
NET INCREASE (DECREASE) IN CASH EQUIVALENTS                    (476,115)   (2,044,515)   2,365,562

CASH AND CASH EQUIVALENTS, beginning of year                    643,109     2,687,624      322,062
                                                            -----------   -----------  ----------- 
CASH AND CASH EQUIVALENTS, end of year                      $   166,994   $   643,109  $ 2,687,624
                                                            ===========   ===========  ===========

</TABLE>





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



                                      F-6
<PAGE>   26





                           SYNAGRO TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

                                   (Continued)


<TABLE>

<CAPTION>


                                                                1997              1996             1995
                                                                ----              ----             ----
       SUPPLEMENTAL CASH FLOW INFORMATION:
<S>                                                          <C>               <C>              <C>      
      Interest paid                                          $ 942,877         $ 760,339        $ 880,668

</TABLE>

                   NONCASH INVESTING AND FINANCING ACTIVITIES

The Company sold the operations of a wholly-owned subsidiary in 1997. The net
assets and liabilities sold were approximately $978,000 and assumed debt by the
purchaser was approximately $978,000 in exchange for a note receivable of
approximately $1.4 million which was reserved at the date of sale.

In 1997, $946,000 of assets were purchased in accordance with a purchase and
sale agreement. The purchase was financed through debt.

In 1997, $212,998 of notes receivable was repaid with 65,538 shares of common
stock.

The Company purchased all of the common stock of an entity during 1996. The
assets acquired and liabilities assumed were as follows for the year ended
December 31, 1996:

<TABLE>

<S>                                                                           <C>        
Fair value of assets acquired                                                 $ 6,211,327
Liabilities assumed                                                            (3,115,766)
Promissory notes payable                                                       (1,595,561)
Common stock issued                                                              (222,735)
                                                                              -----------
                         Net cash paid                                        $ 1,277,265
                                                                              ===========
</TABLE>


In 1996, $190,000 of debentures were converted into 144,344 shares of common
stock.

In 1996, $1,325,150 of machinery and equipment was acquired with debt.

In 1995, $1,050,000 of debentures and $34,961 of accrued interest were converted
into 404,273 shares of common stock.

In 1995, $384,997 of long-term debt was converted to 311,436 shares of common
stock.

In 1995, $800,000 of long-term debt to related parties was converted to 400,000
shares of common stock.

In 1995, the Company completed its exchange of $1,200,000 of investment in
partnership for 40,000 shares of common stock based on an agreement entered into
in August 1994.

In 1995, the Company transferred 100 percent of the stock in its Agkone, Inc.,
subsidiary in exchange for 20,000 shares of common stock, valued at $501,000.





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



                                      F-7
<PAGE>   27




                           SYNAGRO TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --

Organization and Line of Business

Synagro Technologies, Inc. (the Company), is engaged in the biosolids management
business. The Company does this through beneficial reuse of organic materials,
transportation and monitoring of biosolids, and the marketing of end products
from the treatment of such materials. The Company's primary concentration of
customers is in the states of Arkansas, Arizona, California, Georgia, Maryland,
Ohio, Pennsylvania, Texas, Virginia and the District of Columbia.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated.

Cash Equivalents and Short-Term Investments

The Company considers all investments with an original maturity of three months
or less when purchased to be cash equivalents. Short-term investments have
maturities greater than three months at the date of purchase. At December 31,
1997 and 1996, short-term investments consisted of certificates of deposit. All
short-term investments have been classified as held-to-maturity at December 31,
1997 and 1996. These investments have various maturity dates which do not exceed
one year. These securities are carried at cost which approximates fair value.

Property, Machinery and Equipment

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

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

In the second quarter of 1997, the Company changed the estimated useful lives of
certain fixed assets. The change did not materially effect current year
depreciation expense.

Goodwill

In 1997, the Company changed the estimated useful lives of remaining excess of
cost over the fair value of net assets (goodwill) at one of its subsidiaries
from 20 to 40 years. As a result of the change, the Company recorded $96,986
less in amortization expense in the current year. Amortization expense was
$131,895, $255,690, and $246,376 in 1997, 1996 and 1995, respectively.

In the event that facts and circumstances indicate that goodwill may be
impaired, an evaluation of recoverability would be performed. If an evaluation
were required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or 


                                      F-8
<PAGE>   28

discounted cash flow value was necessary. The Company believes the goodwill
remaining as of December 31, 1997, is fully realizable.

Revenue Recognition

Revenues are primarily recognized as services are completed and provided.

Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, 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.

Long-Lived Assets

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The Company adopted SFAS No. 121 on January 1, 1996. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's adoption of SFAS No. 121 did not materially impact the results of its
operations.

Reclassifications

Certain reclassifications have been made to the prior years' financial
statements to conform with the 1997 presentation.

(2)      ACQUISITIONS --

On August 1, 1997, the Company acquired the assets and certain revenue contracts
of a division of an unrelated company in Georgia, Ohio, Pennsylvania, Maryland,
Virginia, and the District of Columbia for $946,000 in cash.
The acquisition was accounted for under the purchase method.

Effective July 1, 1996, the Company acquired all the issued and outstanding
stock of Pima Gro Systems, Inc., and Pima Gro Systems 2, Inc. (collectively,
PimaGro), a company engaged in the business of recycling and transportation of
biosolids. The aggregate purchase price was $3,095,561, consisting of $1,277,265
in cash, $1,595,561 in notes payable and 155,000 shares of the Company's common
stock valued at $222,735, subject to an additional contingent sum on the
purchase price of $5.20 for each dollar by which the pretax earnings of PimaGro,
for each of the fiscal years during 1996 through 1998, exceed the base amount of
$380,000 in 1996 and, subject to certain adjustments to the base amount, during
the two following fiscal years. The additional contingent sum may be payable by
the Company, if at all, in cash, common stock or promissory notes, or any
combination thereof. Such amounts which may be payable as contingent sum
payments will be held in escrow until March 31, 1999, and subject to reduction
based on amounts expended by the Company for certain capital expenditures and
costs reserved for the development of certain business sites. As of December 31,
1997, there were no additional contingent amounts payable by the Company. The
acquisition has been accounted for under the purchase method and, accordingly,
the operating results of PimaGro have been included in the operating results of
the Company since the date of acquisition. The excess of the total acquisition
cost over the fair value of the net assets acquired (goodwill) in the amount of
$1,419,000 is being amortized on a straight-line basis over 40 years.

The following unaudited pro forma information for the periods set forth below
gives effect to the acquisition of Pima Gro as if it had occurred at the
beginning of each period. The unaudited pro forma information is presented for
information purposes only and is not necessarily indicative of what would have
occurred if the acquisition had been made as of those dates.


                                      F-9
<PAGE>   29

<TABLE>

<CAPTION>

                                                                                            YEAR ENDED
                                                                                      DECEMBER 31 (UNAUDITED)
                                                                                   ----------------------------
                                                                                       1996             1995
                                                                                   -----------      ----------- 
<S>                                                                                <C>              <C>        
Net sales                                                                          $27,152,000      $26,524,000
Net loss                                                                           $(7,547,000)     $(4,173,000)
Net loss per share (basic and diluted)                                             $     (1.19)     $     (1.38)

</TABLE>


(3)      PROPERTY, MACHINERY AND EQUIPMENT --

Property, machinery and equipment consists of the following:

<TABLE>

<CAPTION>

                                                                                          DECEMBER 31 
                                                                                  -----------------------------
                                                                                      1997             1996
                                                                                  ------------     ------------
<S>                                                                               <C>              <C>         
Land                                                                              $    576,884     $    676,884
Buildings                                                                              252,093          483,207
Machinery and equipment                                                             12,678,260       11,332,460
Office furniture and equipment                                                         362,578          338,663
Leasehold improvements                                                                  93,080           99,555
Construction in process                                                                116,725          162,075
                                                                                  ------------     ------------
                                                                                    14,079,620       13,092,844

Less- Accumulated depreciation and amortization                                      5,165,032        4,509,982
                                                                                  ------------     ------------
                                                                                  $  8,914,588     $  8,582,862
                                                                                  ============     ============

</TABLE>

(4)      AGENCY RIGHTS --

The Company had the exclusive agency rights to market the "N-Viro Process" in
the southwestern United States. The "N-Viro Process" is a process to convert
biological organic waste into marketable products. The Company acted as the
agent to collect all of the fees from any licensees and to pay to N-Viro
International any amounts not payable to the Company as compensation pursuant to
the agency and license agreements.

In December 1996, the Company decided to wind down and discontinue its
operations relating to the N-Viro Process and accordingly determined that a
permanent impairment had occurred in the value of the agency rights. The
carrying value of the agency rights of $1,178,325 was charged to operations. In
addition, the Company sold certain assets related to these operations and
recorded a charge to operations in the fourth quarter of 1996 amounting to
$1,200,426 to adjust the carrying values of these assets to their estimated fair
market values. These charges are included in "loss on assets held for sale and
other special charges (credits)" in the accompanying consolidated statements of
operations. The remaining assets in the amount of $397,040 and $436,508 in 1997
and 1996, respectively, have been classified as property, machinery and
equipment in the accompanying consolidated balance sheet at December 31, 1997
and 1996.

(5)      INVESTMENT IN PARTNERSHIP --

In 1995, the Company sold its limited partnership interest in N-Viro Energy
Systems in exchange for 40,000 shares of the Company's common stock, valued at
$1,200,000.

(6)      EQUITY INVESTMENT --

In 1994, the Company entered into a 50 percent/50 percent partnership agreement
with N-Viro International pursuant to which the Company agreed to transfer the
Company's rights for the Central and South America N-Viro Process" license
agreement to Pan-American N-Viro, Inc. (Pan-American). The corporation was
formed by the parties for the purpose of marketing the N-Viro Technology in the
South and Central American and Caribbean territories. N-Viro International
contributed $150,000 in cash and its marketing and technical expertise to
Pan-American.

At December 31, 1995, the Company determined that its partnership interest in
Pan-American had suffered permanent impairment due to the inability of the
partnership to successfully market the "N-Viro Process," 


                                      F-10
<PAGE>   30

continued losses since the inception of the partnership and the need for
additional funding which neither partner is expected to contribute. Accordingly,
the remaining investment of $662,254 was charged to operations.

(7)      DEBT --

Credit Facility

On December 16, 1996, the Company, through two of its subsidiaries, obtained a
new credit facility with a bank. The credit facility consists of a $5 million
revolving line of credit and a $5 million term loan. The credit facility was
used to retire certain debt payable to various individuals and financial
institutions. The credit facility is secured by substantially all of the
Company's assets. The Company is required to pay a facility fee of 1 percent and
 .5 percent for 1997 and 1998, respectively. In addition, the agreement provides
for a prepayment premium of $100,000 through December 16, 1997, and $50,000
through December, 1998.

The credit facility matures September 30, 1999, as a result of an extension
negotiated in April 1998 , and bears interest at the prime rate plus 1
percent (9.5 percent at December 31, 1997). The weighted average interest rate
in 1997 was 9.5%. Amounts available under the line of credit at December 31,
1997 totaled approximately $1,446,000 and are subject to a borrowing base
consisting of 85 percent of eligible accounts receivable, as defined. The term
loan requires principal payments of $1,000,000 a year with the remaining
principal balance due upon maturity.

Pursuant to the terms of the credit facility, the Company is required to satisfy
certain financial covenants. Specifically, the two subsidiaries of the Company
are required to maintain (a) a ratio of current assets to current liabilities of
1 to 1, (b) a ratio of debt to tangible net worth, as defined, not to exceed 2.5
to 1 and (c) a tangible net worth, as defined, of not less than $3,600,000
through September 30, 1999, and $4,100,000 from January 1, 1997, through
September 30, 1999. The bank has the right to accelerate borrowings outstanding
in the event the bank reasonably feels insecure for any material reason.
Additionally, the Company's cash collections are subject to a lockbox
arrangement. As a result, in order to comply with Emerging Issues Task Force
pronouncement 95-22, the Company has classified the revolving line of credit
portion of the credit facility as a current liability in the accompanying
balance sheet as of December 31, 1997. However, management believes the bank
will continue to provide credit to the Company through the expiration date of
September 30, 1999.

Third-Party Debt

The Company has third-party debt, including the credit facility discussed above,
as follows:

<TABLE>

<CAPTION>

                                                                                          DECEMBER 31
                                                                                   ------------------------
                                                                                      1997          1996
                                                                                   -----------  -----------
<S>                                                                                <C>          <C>        
Term loan with a bank                                                              $ 4,000,000  $ 4,614,099
Revolving line of credit with a bank                                                 1,037,270           --
Economic development revenue bonds                                                     945,000    1,030,000
Notes payable to banks and financial institutions, maturing in varying
   installments through the year 2002, secured by certain assets of the Company,
   with interest rates ranging from 4% to 10%, $300,000 guaranteed by
   an officer of the Company                                                           300,000      898,425
Notes payable to financial institutions, maturing in varying installments through
   the year 2000, secured by certain assets of the Company, with interest rates
   ranging from 8% to 16.56%, assumed by purchasers of Organi-Gro
   (see Note 13)                                                                            --    1,034,743
Notes payable to financial institutions and individuals, maturing in varying
   installments through the year 2008, secured by equipment and real estate, with
   interest rates ranging from 8% to 10%                                             1,764,680    1,524,123
Note payable to former owners of PimaGro, maturing in 1998, secured by Pima Gro
common
   stock, bearing interest at 8%                                                       398,890    1,595,561
                                                                                   -----------  -----------
                                   Total debt                                        8,445,840   10,696,951

Less- Current maturities                                                             2,951,291    2,434,057
                                                                                   -----------  -----------
                                   Long-term debt                                  $ 5,494,549  $ 8,262,894
                                                                                   ===========  ===========

</TABLE>


The economic development revenue bonds have annual maturities of $90,000 in
1998, increasing to $150,000 by its maturity date in 2005. Interest was payable
at 6.9 percent and 6.8 percent per annum in 1997 and 1996, respectively,
increasing to 7.3 percent by 2005. Monthly payments are required to be deposited
into restricted cash 


                                      F-11
<PAGE>   31

accounts from which the annual principal and semiannual interest are paid.
Included in the accompanying consolidated balance sheets as of December 31, 1997
and 1996, is restricted cash of $346,312 and $345,362, respectively, for future
payment of principal and interest on the bonds. The bonds are secured by certain
real estate in Arkansas and are guaranteed by an officer of the Company.

In January 1996, $190,000 of convertible promissory notes were converted to
144,344 shares of the Company's common stock and the remaining $1,225,001 of the
notes were repaid.

Principal payments of debt are as follows:

Year ending December 31-

<TABLE>

       <S>                                       <C>         
       1998                                      $  2,951,291
       1999                                         3,829,643
       2000                                           328,067
       2001                                           358,099
       2002 and thereafter                            978,740
                                                 ------------
       Total                                     $  8,445,840
                                                 ============
</TABLE>


(8)      ACCOUNTS PAYABLE AND ACCRUED EXPENSES --

Accounts payable and accrued expenses consist of the following:

<TABLE>

<CAPTION>


                                                                                          DECEMBER 31
                                                                                   --------------------------
                                                                                      1997            1996
                                                                                   ----------      ----------
<S>                                                                                <C>             <C>       
Accounts payable                                                                   $2,461,811      $1,989,263
Accrued legal and other claims costs                                                  937,065        858,480
Professional fees                                                                      90,000        389,430
Accrued salaries and benefits                                                          77,803        365,984
Other accrued expenses                                                                454,931        529,055
                                                                                   ----------      ----------
                   Total                                                           $4,021,610      $4,132,212
                                                                                   ==========      ==========

</TABLE>

(9)      INCOME TAXES --

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 taxes which are computed by
applying applicable tax rates to temporary (timing) differences. Therefore,
expenses recorded for financial statement purposes before they are deducted for
tax purposes create temporary difference which give rise to deferred tax assets.
Expenses deductible for tax purposes before they are recognized in the financial
statements create temporary differences which give rise to deferred tax
liabilities.

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

<TABLE>

<CAPTION>


                                                                                          DECEMBER 31
                                                                                   --------------------------
                                                                                       1997           1996
                                                                                   -----------    -----------
Deferred tax assets-
   <S>                                                                             <C>            <C>        
   Net operating loss carryforwards                                                $ 3,756,000    $ 2,612,000
   Accrual not currently deductible for tax purposes                                   240,000        412,000
   Allowance for bad debts                                                              65,000         98,000
   Write-off of assets not currently deductible for tax purposes                       505,000        591,000
   Difference between book and tax bases of fixed assets                                    --         70,000
   Other                                                                                 1,000          3,000
                                                                                   -----------    -----------
                     Total deferred tax assets                                       4,567,000      3,786,000

Valuation allowance for deferred tax assets                                        (4,143,000)     (3,786,000)

Deferred tax liability-
   Differences between book and tax bases of fixed assets                             (424,000)            --
                                                                                   -----------    -----------
                     Net deferred tax liability                                    $        --    $        --
                                                                                   ===========    ===========

</TABLE>


                                      F-12
<PAGE>   32

As of December 31, 1997, the Company has generated net operating loss (NOL)
carryforwards of approximately $11,047,000 available to reduce future income
taxes. These carryforwards begin to expire in 2004 through 2012. A change in
ownership, as defined by federal income tax regulations, could significantly
limit the Company's ability to utilize its carryforwards. Accordingly, the
Company's ability to utilize its NOLs to reduce future taxable income and tax
liabilities may be limited. Additionally, because federal tax laws limit the
time during which these carryforwards may be applied against future taxes, the
Company may not be able to take full advantage of these attributes for federal
income tax purposes. As the Company has incurred losses in recent years and the
utilization of these carryforwards could be limited as discussed above, a
valuation allowance has been established to fully offset the net deferred tax
asset at December 31, 1997 and 1996. The valuation allowance increased $357,000
and $2,121,000 for the year ended December 31, 1997 and 1996, respectively, due
to the Company's tax losses.

(10)     COMMITMENTS AND CONTINGENCIES --

Leases

The Company leases certain facilities for its corporate and operations offices
under non-cancelable long-term lease agreements. Minimum annual rental
commitments under these leases are as follows:

<TABLE>

<S>                                                              <C>
Year ending December 31-                         
     1998                                                        $   537,685
     1999                                                            312,388
     2000                                                            166,990
     2001                                                             26,409
     2002                                                                 --
                                                                 -----------
                                                                 $ 1,043,472
                                                                 =========== 

</TABLE>

Rental expense was $530,685, $633,751 and $160,683 for 1997, 1996 and 1995,
respectively.

Litigation

The Company is involved in litigation and claims arising in the ordinary course
of its business. Management believes, based on consultation with legal counsel
and accruals provided, that the ultimate outcome of these matters will not have
a material adverse impact on the Company's operations or financial position.

(11)     STOCK, STOCK OPTIONS AND WARRANTS --

Reorganization

In 1995, the Company effected a recapitalization that included a 1 for 15 
reverse stock split of the common stock. The common stock outstanding and
weighted average shares outstanding for all years presented have been adjusted
for this stock split. The financial statements give effect to these transactions
for all years presented.

Sale of Common Stock

In October 1995, the Company completed a secondary public offering of its common
stock. The offering consisted of 500,000 units at $12.00 per unit, each unit
consisting of six shares of common stock and six redeemable common stock
purchase warrants. The 3,000,000 warrants have an exercise price of $2.40 per
share and expire in October 2000. These warrants are redeemable by the Company
at $0.10 per warrant, subject to certain events occurring. The underwriters were
issued a warrant which expires in October 2000 to purchase 50,000 units
(includes 300,000 warrants) at $16.20 per unit.

On December 23, 1996, the Company called the 3,000,000 warrants, for redemption
on February 22, 1997. Prior to redemption, 1,324,243 warrants were converted
into common shares providing net proceeds to the Company of 


                                      F-13
<PAGE>   33

$3,117,636 in 1997. In February 1997, the remaining 1,675,757 warrants were
redeemed by the Company for $167,576.

Warrants

At December 31, 1997 and 1996, the Company had warrants to purchase 16,667
shares of common stock outstanding, which are exercisable at $90.00 per share
and expire December 1998.

Stock Option Plans

At December 31, 1997, the Company had outstanding stock options granted under
the Amended and Restated 1993 Stock Option Plan (the Plan) for officers,
directors, key employees and certain consultants of the Company.

Under the Plan, the Company has reserved 540,000 shares of common stock for
issuance. 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 the
Company's common stock on the date of grant. Options must be granted within 10
years from the date of the Plan and become exercisable at such times as
determined by the Plan committee. Options are exercisable for no longer than
five years for certain 10 percent or greater stockholders and for no longer than
10 years for others.

A summary of the Company's stock option plans as of December 31, 1997, 1996 and
1995, and changes during those years is presented below:

<TABLE>

<CAPTION>


                                                                                                    WEIGHTED
                                                                                                     AVERAGE
                                                                                   SHARES UNDER     EXERCISE
                                                                                      OPTION          PRICE
                                                                                     --------       --------
<S>                                                                                  <C>               <C> 
Options outstanding at December 31, 1994                                                   --      $     --
   Converted from "other" options                                                      24,100         10.80
   Granted                                                                             99,894          9.64
   Canceled/expired                                                                   (13,067)        10.80
   Exercised                                                                          (19,000)         6.56
                                                                                      -------      

Options outstanding at December 31, 1995                                               91,927         10.48
   Granted                                                                            174,667          2.00
   Canceled/expired                                                                  (162,662)         5.09
   Exercised                                                                           (3,333)         2.00
                                                                                      -------      
Options outstanding at December 31, 1996                                              100,599          4.75
   Granted                                                                            206,000          2.13
   Canceled/expired                                                                   (29,667)         2.89
   Exercised                                                                           (5,000)         2.00
                                                                                      -------      
Options outstanding at December 31, 1997                                              271,932          2.58
                                                                                      =======      
Exercisable at December 31, 1997                                                      116,914
                                                                                      =======      

</TABLE>

At December 31, 1997, there were 268,068 shares of common stock reserved under
the Plan for the future granting of stock options.

Other options

In addition to options issuable under the stock option plans, the Company has
options outstanding to employees and consultants of the Company. The options
were issued at exercise prices equal to or greater than the fair market value at
the grant date of the options.


                                      F-14
<PAGE>   34

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

<TABLE>

<CAPTION>


                                                                                                    WEIGHTED
                                                                                                     AVERAGE
                                                                                    SHARES UNDER    EXERCISE
                                                                                       OPTION         PRICE
                                                                                    ------------    -------- 
<S>                                                                                  <C>           <C>     
Options outstanding at December 31, 1994                                                26,100     $  56.25
   Canceled/expired                                                                     (2,000)       56.25
   Converted to ISOP/NSOP                                                              (24,100)       56.25
   Granted                                                                             400,000        10.80
                                                                                     ---------
Options outstanding at December 31, 1995                                               400,000        10.80
                                                                                     ---------
   Granted                                                                             221,296         2.00
                                                                                     ---------
Options outstanding at December 31, 1996                                               621,296         2.00
                                                                                     ---------
   Granted                                                                             806,800         3.03
                                                                                     ---------
Options outstanding at December 31, 1997                                             1,428,096         2.58
                                                                                     =========
Exercisable at December 31, 1997                                                     1,229,821         2.58
                                                                                     =========

</TABLE>

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

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

<TABLE>

<CAPTION>

                                                                   1997             1996             1995                      
                                                               -----------      -----------      -----------
<S>                                                            <C>              <C>              <C>                           
       Net income (loss)
          As reported                                          $   928,501      $(7,588,930)     $(4,553,169)                  
          Pro forma                                             (1,212,604)      (7,781,351)      (5,194,188)                  
       Diluted earnings (loss) per share-
          As reported                                          $       .12     $      (1.21)    $      (1.59)                 
          Pro forma                                                   (.16)           (1.24)           (1.81)                 

</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
$2.79, $0.78, and $7.47 for grants made during the years ended December 31,
1997, 1996, and 1995, respectively. The following assumptions were used for
option grants in 1997, 1996 and 1995, respectively: expected volatility of 70
percent, 87 percent and 78 percent; risk-free interest rates of 6.45 percent,
6.47 percent, and 6.04 percent; and expected lives of up to 6.5 years. The
compensation expense included in the above pro forma net income data, may not be
indicative of amounts to be included in future periods as the fair value of
options granted prior to 1995 was not determined.

The FASB issued SFAS No. 128, "Earnings Per Share" in February 1997.
Implementation of SFAS No. 128 is required for periods ending after December 15,
1997. SFAS No. 128 requires dual presentation of earnings per share (EPS); basic
EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For purposes of this calculation outstanding stock options
are considered common stock 


                                      F-15
<PAGE>   35

equivalents. The following table summarizes the basic EPS and diluted EPS
computations for fiscal 1997, 1996 and 1995 (in thousands, except per share
amounts):

<TABLE>

<CAPTION>

                                                                      1997             1996              1995
                                                                  ----------       ------------      ------------
Basic earnings per share:
<S>                                                               <C>            <C>               <C>          
   Net income (loss)                                              $  928,501       $ (7,588,930)     $ (4,553,169)
                                                                  ----------       ------------      ------------ 
   Weighted average number of common shares                        7,545,113          6,266,579         2,864,195
                                                                  ----------       ------------      ------------ 
   Basic earnings (loss) per share                                $     0.12       $      (1.21)     $      (1.59)
                                                                  ==========       ============      ============
Diluted earnings (loss) per share:
   Net income available to common stockholders                    $  928,501       $ (7,588,930)     $  4,553,169
                                                                  ----------       ------------      ------------ 
   Weighted average number of common shares                        7,545,113          6,266,579         2,864,195
                                                                  ----------       ------------      ------------ 
   Stock options and other                                           195,231                 --                --
                                                                  ----------       ------------      ------------ 
   Adjusted weighted average number of common shares               7,740,344          6,266,579         2,864,195
                                                                  ----------       ------------      ------------ 
   Diluted earnings (loss) per share                              $     0.12       $      (1.21)     $      (1.59)
                                                                  ==========       ============      ============
</TABLE>


(12)     STOCKHOLDERS' RIGHTS PLAN --

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

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

(13)     OTHER CHARGES (CREDITS) TO OPERATIONS --

Sale of Organi-Gro, Inc.

In March 1997, the Company sold the operations of Organi-Gro, a wholly owned
subsidiary, to its former owners. Consideration included subordinated notes of
approximately $1.4 million and the assumption of certain debt and liabilities.
The notes are payable in equal monthly installments of approximately $15,000 for
48 months following the first anniversary date of the note and bears interest at
a rate of 6 percent. In addition, proceeds received from the sale of products by
the purchaser are to be remitted on a monthly basis with a total amount of
$603,930 due no later than September 16, 1998. The balance of the notes are due
in March 2002. The notes were reserved at the date of sale due to considerable
doubt relative to realization. During 1997, approximately $300,000 was realized
on the notes through cash collections or other consideration and has been
included in "loss on assets held for sale and other special charges (credits)"
in the accompanying consolidated statements of operations. During the fourth
quarter of 1997, management assessed realization of the notes based on
collection history to date and current 


                                      F-16
<PAGE>   36

financial condition of the purchasers and recognized approximately $500,000 of
the notes which has also been included in "loss on assets held for sale and
other special charges (credits)". As a result of the sale, the Company recorded
a charge to operations in the fourth quarter of 1996 amounting to approximately
$2.5 million to adjust the carrying value of Organi-Gro's net assets to its
estimated fair market value. This charge is included in "losses on assets held
for sale and other special charges (credits)" in the accompanying consolidated
statements of operations.

During December 1997, one of the notes was substantially paid off with the
remaining balance being paid in lieu of cash by the buyers, providing repair
services on equipment in the amount of $1,000 per month for the next 50 months.

Write-Off of Fixed Assets

At December 31, 1995, the Company determined that certain equipment had suffered
impairment in value. This equipment, which was acquired in October 1994, and for
which additional refurbishing costs were incurred in 1995, had suffered
impairment of $1,091,991 due to operating losses and the decision to not
actively pursue the business which utilized that equipment. In addition, the
Company determined that certain other equipment had suffered permanent
impairment of $290,000 due to operating losses and the decision to not pursue
the business which utilized that equipment. Accordingly, a provision in the
amount of $1,381,991 for impairment of fixed assets was charged to operations
and is included in "loss on assets held for sale and other special charges
(credits)" in the accompanying consolidated statements of operations. In
addition, the remaining net book value of these assets amounting to $605,000 has
been classified as machinery and equipment held for sale at December 31, 1995.
In 1996, these assets were sold resulting in a gain of approximately $200,000
which is included in "other income" in the accompanying consolidated statements
of operations.

Write-Off of Goodwill

At December 31, 1995, the Company determined that there had been a permanent
impairment in the value of the excess of cost over fair value of net assets
acquired (goodwill) relating to certain equipment which was written off as a
result of the impairment. Accordingly, $286,000 of excess of cost over fair
value of net assets acquired was charged to operations.

(14)     SUBSEQUENT EVENTS --

Extension of Credit Facility

On April 14, 1998, the maturity date of the credit facility, consisting of a $5
million revolving line of credit and a $5 million term loan, was extended to
September 30, 1999.

Issuance of Preferred Stock

On March 31, 1998, the Company issued 1,458,335 shares of Series B Preferred
Stock, par value $.002 per share for total consideration of $3,500,004.

The Series B Preferred Stock is convertible by the holders to common shares at a
rate of 1:1, with a beneficial conversion feature permitting the shareholders to
convert their holdings to common shares at $2.40. The market price of the
Company's common stock at date of issuance was $4.81. The Company will recognize
the value of the beneficial conversion feature of approximately $3.5 million as
a preferred dividend during its first quarter of 1998. The value of such
preferred dividend will have no impact on the Company's cash flows, but will
reduce basic and diluted earnings available to common stockholders. The Company
is required to effect one registration statement to register such securities. If
any holder elects not to include its securities in such registration, they will
have no other rights to have such securities registered except as discussed
below. At any time the Company proposes to register for sale for cash any of its
equity securities (excluding registrations on Form S-8 or Form S-4, or any
comparable successor forms), the holders shall have the right to be included.


                                      F-17
<PAGE>   37

Each share of Preferred Stock is entitled to vote with the Common Stock with one
vote per share. The vote of a majority of the Preferred Stock is required to
validate certain specified actions by the Company. Holders of the Preferred
Stock are entitled to a liquidation preference equal to the face value and
accrued and unpaid dividends, if any, plus a special redemption premium in the
event of a dissolution, liquidation or winding up of the affairs of the Company
or if a change of control occurs, as defined. The special redemption premium
begins at 112% of the liquidation preference in 1998 and increases to 172% in
2003 or thereafter.

Unless restricted from doing so by law or covenant of a loan or financing
agreement, as defined therein, the Preferred Stock is redeemable by the Company
on April 1, 2003, at the greater of the sum of $2.40 per share, and accrued but
unpaid dividends, if any, or fair market value, as defined. The Preferred Stock
will automatically convert to Common Stock in certain circumstances related to
an underwritten public offering generating proceeds in excess of a defined
amount or within four years if the Company achieves a certain level of trailing
twelve-month diluted earnings per share. The Preferred Stock contains certain
anti-dilution conversion features.

No dividends accrue on the Preferred Stock through its fifth anniversary date.
Thereafter, if not redeemed, dividends accrue at a quarterly rate of $.108 per
share, decreasing at a rate of $.0048 per quarter thereafter.
Dividends are payable in additionally issued Preferred Stock.

Stock Options

During March 1998, the Company granted 485,000 options to an officer at the
market price of $3.25, with vesting at one third at time of grant, one third at
the first anniversary and one third at the second anniversary.

During April 1998, the Company issued options to a newly elected director to buy
50,000 shares of common stock at the market price of $5.06.



                                      F-18
<PAGE>   38

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                                   ON SCHEDULE

To Synagro Technologies, Inc.:

We have audited in accordance with generally accepted auditing standards the
consolidated financial statements of Synagro Technologies, Inc., and
subsidiaries included in this Form 10-K and have issued our report thereon dated
February 20, 1997, except with respect to certain matters discussed in Note 7
and the matters discussed in Note 14 as to which the date is April 14, 1998. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Part IV, Item 14 (a)(2) for
Synagro Technologies, Inc., and subsidiaries is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.


ARTHUR ANDERSEN LLP


Houston, Texas
February 20, 1998

                                      F-19
<PAGE>   39


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                                   ON SCHEDULE

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

In connection with our audits of the consolidated financial statements of
Synagro Technologies, Inc., referred in our report dated February 28, 1996, we
have also audited Schedule II for the years ended December 31, 1995 and 1994. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.

Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
February 28, 1996



                                      F-20
<PAGE>   40



                                                                    SCHEDULE II
                           SYNAGRO TECHNOLOGIES, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>

<CAPTION>


                                                                  ADDITIONS
                                               BALANCE,          CHARGED TO
                                               BEGINNING          COSTS AND                          BALANCE,
          DESCRIPTION                           OF YEAR           EXPENSES          DEDUCTIONS      END OF YEAR
--------------------------------               ---------         -----------      -------------     -----------
<S>                                            <C>               <C>              <C>                <C> 
Allowance for doubtful accounts-
   Year ended December 31, 1997                $287,514                 --        $  (97,652)(a)     $189,862

   Year ended December 31, 1996                $217,724          $ 268,463        $ (198,673)(a)     $287,514

   Year ended December 31, 1995                  36,622            184,377            (3,275)(a)      217,724

</TABLE>


(a)      Recoveries, net of write-offs.



                                      F-21
<PAGE>   41


                                  EXHIBIT INDEX

<TABLE>

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  EXHIBIT                                DESCRIPTION OF EXHIBIT

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     3.1          Restated Certificate of Incorporation of Synagro Technologies, Inc. (the "Company") dated August
                  16, 1996 (Exhibit 3.1 to the Company's  Post-Effective  Amendment No. 1 to Registration Statement
                  No. 33-95028, dated October 25, 1996, is incorporated herein by reference).

     3.2          Bylaws of the Company dated August 5, 1996. (Exhibit 3.2 to the Company's Post-Effective
                  Amendment No. 1 to Registration Statement No. 33-95028, dated October 25, 1996, is incorporated
                  herein by reference).

     4.1          Specimen Common Stock Certificate of the Company. (Exhibit 4.1 to the Company's Registration
                  Statement on Form 10, dated December 29, 1992, is incorporated herein by reference).

     4.2          Specimen Warrant Certificate of the Company. (Exhibit 4.2 to the Company's Registration
                  Statement on Form S-1 (No. 33-95028), dated July 27, 1995, and as amended, is incorporated
                  herein by reference).

     4.3          Rights Agreement, dated as of December 20, 1996, between the Company and Intercontinental
                  Registrar & Transfer Agency, Inc., as Rights Agent, which includes as Exhibit A thereto the
                  Synagro Technologies, Inc. Statement of Designations, Preferences, Limitations and Relative
                  Rights of its Series A Junior Participating Preferred Stock, and as Exhibit C thereto the Form
                  of Rights Certificate (Incorporated by reference to Exhibit No. 4.1 to Registrant's Registration
                  Statement on Form 8-A dated December 27, 1996).

    *4.4          Certificate of Designation, Preferences, Rights and Limitations of Series B Preferred Stock of
                  Synagro Technologies, Inc.

    *4.5          Registration Rights Agreement, dated as of March 31, 1998, among the Company, Environmental 
                  Opportunities Fund, L.P., Environmental Fund (Cayman), L.P. and other purchasers of the
                  Company's Series B Preferred Stock as listed on Exhibit A thereto.

    *4.6          Specimen Series B Preferred Stock Certificate.

   *10.1          Synagro Technologies, Inc. Subscription Agreement, dated as of March 31, 1998 among the Company,
                  Environmental Opportunities Fund, L.P., Environment Opportunities Fund (Cayman), L.P. and other
                  purchasers of the Company's Series B Preferred Stock as listed on Exhibit A thereto.

    10.2          Form of Indemnification Agreement. (Appendix F to the Company's Proxy Statement on Schedule 14A 
                  for Annual Meeting of Stockholders, dated May 9, 1996, is incorporated herein by reference).

    10.3          Amended and Restated 1993 Stock Option Plan dated August 5, 1996. (Exhibit 4.1 to the Company's
                  Registration Statement on Form S-8 (No. 333-18029), dated December 17, 1996, is incorporated
                  herein by reference).

    10.4          Lease Agreement between the Company and Green Coast Enterprises, Inc. dated February 1, 1996.
                  (Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995,
                  is incorporated herein by reference).

    10.5          Employment Agreement between Pima Gro Systems, Inc. and Wilson Nolan, dated July 18, 1996.
                  (Exhibit 10.1 to the Company's Current Report on Form 8-K, dated July 31, 1996, is incorporated
                  herein by reference).

    10.6          Agreement for the Purchase of Stock by and among Synagro Technologies, Inc., CDR Environmental,
                  Inc., Pima Gro, Pima Gro Systems 2, Inc., Wilson Nolan, Herbert Kai and John Kai, Jr., dated
                  July 18, 1996. (Exhibit 2.1 to the Company's Current Report on Form 8-K, dated July 31, 1996,
                  is incorporated herein by reference).

    10.7          6% Promissory Note made by Custom Poultry to Organi-Gro and the Company in the principal amount
                  of $1,152,381, dated April 1, 1997 (Exhibit 10.8 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1996, is incorporated herein by reference).

    10.8          Guaranty of Tony D. Childers ("Childers") for 6% Promissory Note made by Custom Poultry to
                  Organi-Gro, dated April 1, 1997 (Exhibit 10.9 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1996, is incorporated herein by reference).

    10.9          6% Promissory Note made by Hodges to Organi-Gro and the Company in the principal amount of
                  $308,203, dated April 1, 1997. (Exhibit 10.10 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1996, is incorporated herein by reference).

   10.10          Guaranty of Childers and Jack Hodges for 6% Promissory Note made by Hodges to Organi-Gro, dated
                  April 1, 1997 (Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1996, is incorporated herein by reference).

    16.1          Letter dated December 13, 1996, from Singer Lewak Greenbaum & Goldstein LLP to the Commission.
                  (Exhibit 16.1 to the Company's Current Report Form 8-K dated December 17, 1996 is incorporated
                  herein by reference.)

   *21.1          Subsidiaries of Synagro Technologies, Inc.

   *27.1          Financial Data Schedule.

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