Disposal of reservoir sludge has become a major problem in most of principal reservoirs in Taiwan. For the purposes of economy and ecology, we attempt to study the feasibility of using reservoir sludge as a substitute for a portion of fine aggregates in cement mortars. Through a cationic-exchange reaction with cationic surfactants, reservoir sludge in Taiwan mainly composed of smectite clay is first organo-modified. As a partial replacement of fine aggregates, the percentage of organo-modified reservoir sludge (OMRS) added in cement mortars ranges from 1% to 100%. The compressive strengths and permeability ratios of cement mortars with various percentages of OMRS particles were measured and then compared to those of plain cement mortars. Experimental results indicate that it is possible to replace up to 30% by weight of fine aggregates by OMRS particles in cement mortars for normal practice. Furthermore, excellent waterproof of cement mortars is achieved when the percentage of OMRS particles is within the range of 5-50%. Meanwhile, the microstructure of cement mortars is characterized by using SEM, EDS and MIP to evaluate the effects of OMRS particles on the improvements of mechanical properties of cement mortars.