<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                    FORM 8-K
 
                                 CURRENT REPORT
 
                       PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
       DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) OCTOBER 15, 1998
 
                         ALLIED WASTE INDUSTRIES, INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
 
                                    DELAWARE
                 (STATE OR OTHER JURISDICTION OF INCORPORATION)
 
<TABLE>
<S>                                            <C>
                   0-19285                                       88-0228636
           (COMMISSION FILE NUMBER)                  (IRS EMPLOYER IDENTIFICATION NO.)

   15880 N. GREENWAY/HAYDEN LOOP, SUITE 100
             SCOTTSDALE, ARIZONA                                   85260
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (602) 423-2946
 
                                 NOT APPLICABLE
         (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
 
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<PAGE>   2
 
ITEM 5.  OTHER EVENTS.
 
     Allied Waste Industries, Inc. (the "Company" or "Allied") files herewith
restated supplemental financial statements and other financial data to reflect
the significant acquisitions completed in 1998 that were accounted for using the
pooling-of-interests method of business combinations.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (AS RESTATED FOR THE 1998 ACQUISITIONS ACCOUNTED FOR USING THE
POOLING-OF-INTERESTS METHOD FOR BUSINESS COMBINATIONS)
 
     The following discussion should be read in conjunction with the Company's
Supplemental Consolidated Financial Statements and the notes thereto, included
elsewhere herein.
 
INTRODUCTION
 
     The Company has experienced significant growth, a substantial portion of
which has resulted from the acquisition of solid waste businesses. Since January
1, 1993, the Company has completed over 200 acquisitions. In 1997, the Company
acquired 63 businesses and subsequent to 1997 it has acquired 68 businesses. See
Note 2 to the Company's Supplemental Consolidated Financial Statements. The
Company's Supplemental Consolidated Financial Statements have been restated to
reflect the acquisition of companies accounted for using the
pooling-of-interests method for business combinations. The majority of the
acquisitions were accounted for under the purchase method for business
combinations and, accordingly, the results of operations for such acquired
businesses are included in the Company's financial statements only from the
applicable date of acquisition. As a result, the Company believes its historical
results of operations for the periods presented are not directly comparable.
 
     On December 30, 1996, the Company completed the acquisition of
substantially all of the non-hazardous solid waste management business conducted
by Laidlaw Inc. ("Laidlaw") in the United States and Canada (the "Laidlaw
Acquisition"), for total consideration of approximately $1.5 billion comprised
of $1.2 billion cash, 14.6 million shares of Common Stock, warrants to acquire
20.4 million shares of Common Stock (the "Warrant"), and two junior subordinated
debentures with an aggregate face amount of $318 million. The cash consideration
was financed from the proceeds of its $1.275 billion senior credit facility (the
"Bank Agreement") and the sale of $525 million of 10.25% senior subordinated
notes due 2006 (the "1996 Notes").
 
     In March 1997, pursuant to a Share Purchase Agreement with USA Waste
Services, Inc. ("USA Waste"), the Company sold to USA Waste all of the Canadian
non-hazardous solid waste management operations of the Company for approximately
$518 million (the "Canadian Sale"). The Company used the proceeds from the
Canadian Sale to pay down approximately $517 million in debt under the Bank
Agreement. The Company acquired the Canadian operations in connection with the
Laidlaw Acquisition.
 
     In May 1997, pursuant to a Securities Purchase Agreement (the "Laidlaw
Securities Purchase Agreement") with the Laidlaw Group and certain private
securities investment funds affiliated with either (i) Apollo Advisors II, L.P.
or (ii) the Blackstone Group, the Company repurchased from the Laidlaw Group the
Allied Debentures and the Warrant for an aggregate purchase price of $230
million in cash (the "Repurchase"). The net proceeds of $230 million related to
the $418 million face value 11.3% senior discount notes (the "Senior Discount
Notes") were used to fund the Repurchase. Also pursuant to the Laidlaw
Securities Purchase Agreement, the private securities investment funds purchased
all of the Common Stock of Allied held by Laidlaw.
 
     In June 1997, the Company completed a series of transactions with USA Waste
(the "USA Waste Transactions") pursuant to which the Company acquired eight
landfills (two of which were transferred to the Company in July 1997 after
completion of certain regulatory matters), eight collection operations, five
transfer stations and one recycling facility with an annual aggregate revenue of
$58.0 million for consideration of $87.5 million. Also pursuant to the USA Waste
Transactions, the Company sold to USA Waste one landfill, two collection
operations and one recycling facility with an aggregate of approximately $33.6
million in annual revenue for which it received consideration of approximately
$61.3 million.
 
                                        2
<PAGE>   3
 
     In November 1997, the Company completed a second series of transactions
with USA Waste pursuant to which the Company acquired three landfills, seven
collection operations, two transfer stations and one recycling facility with an
annual aggregate revenue of $66.9 million for consideration of $124.0 million.
Also pursuant to this transaction, the Company sold to USA Waste six landfills,
seventeen collection operations, three transfer stations and four recycling
facilities with an aggregate of approximately $81.4 million in annual revenue
for which it received consideration of approximately $133.9 million.
 
     In November 1997, the Company assumed ownership and operation of the active
solid waste disposal system for San Diego County, California. Allied acquired
operations of four landfills, one transfer station, and one material recovery
facility for approximately $163 million in cash.
 
     In December 1997, the Company acquired the ECDC landfill from Laidlaw
Environmental Services, Inc. for approximately $89 million in cash, notes and
assumed debt.
 
     In June 1998, the Company completed the acquisition of the Rabanco
Companies ("Rabanco") in a transaction accounted for using the
pooling-of-interests method for business combinations. Rabanco generates annual
revenue of approximately $160 million excluding the effects of the
internalization of waste volumes. Rabanco provides solid waste collection,
recycling, transportation and disposal services in the northwest through a
network of approximately 160 collection routes, 3 transfer stations, an
extensive intermodal rail transportation system and a major regional landfill.
 
     In August 1998, the Company acquired Illinois Recycling Services, Inc. and
its affiliates ("IRS") in a transaction accounted for using the
pooling-of-interests method for business combinations. IRS provides solid waste
collection, recycling and transportation services primarily in the Chicago metro
area and northern Indiana and generates annual revenue of approximately $80
million excluding the effects of the internalization of waste volumes.
 
     In October 1998, the Company acquired American Disposal Services, Inc.
("ADSI") in a transaction accounted for using the pooling-of-interests method
for business combinations. ADSI is a vertically integrated solid waste
management company providing collection, transfer, recycling and disposal
services to approximately 400,000 customers in 12 states, primarily in the
midwest and northeast United States. Under the terms of the agreement, ADSI
shareholders received 1.65 shares of Allied common stock for each share of ADSI
common stock.
 
GENERAL
 
     Revenues.  The Company's revenues are attributable primarily to fees
charged to customers for waste collection, transfer, recycling and disposal
services. The Company's collection services are generally provided under direct
agreements with its customers or pursuant to contracts with municipalities.
Commercial and municipal contract terms, where used, generally range from 1 to 5
years and commonly have automatic renewal options. The Company's landfill
operations include both Company-owned landfills and those operated for
municipalities for a fee. The Company is fully integrated in each geographic
region in which it is located as it provides collection, transfer and disposal
services. The tables below show for the periods indicated the percentage of the
Company's total reported revenues attributable to services provided and to
geographic region:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                        -------------------------
                                                        1995      1996      1997
                                                        -----     -----     -----
<S>                                                     <C>       <C>       <C>
Collection(1).........................................    65%       63%       57%
Transfer..............................................     6         6         7
Landfill(1)...........................................    22        24        26
Other.................................................     7         7        10
                                                         ---       ---       ---
     Total Revenues...................................   100%      100%      100%
                                                         ===       ===       ===
</TABLE>
 
                                        3
<PAGE>   4
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                        -------------------------
                                                        1995      1996      1997
                                                        -----     -----     -----
<S>                                                     <C>       <C>       <C>
Great Lakes...........................................    33%       30%       28%
Midwest...............................................     7        10        12
Northeast.............................................    10        11        19
Southeast.............................................    13        16         9
Southwest.............................................     2         2        10
West..................................................    35        31        22
                                                         ---       ---       ---
     Total Revenues...................................   100%      100%      100%
                                                         ===       ===       ===
</TABLE>
 
---------------
(1) The portion of collection revenues attributable to disposal charges for
    waste collected by the Company and disposed at the Company's landfills have
    been excluded from collection revenues and included in landfill revenues.
 
     The Company's strategy is to develop vertically integrated operations to
ensure internalization of the waste it collects and thus realize higher margins
from its operations. By disposing of waste at Company-owned and/or operated
landfills, the Company retains the margin generated through disposal operations
that would otherwise be earned by third-party landfills. Approximately 51% of
Company-collected waste is disposed of at Company-owned and/or operated
landfills as measured using disposal volumes in 1997. In addition, transfer
stations are an integral part of the disposal process. The Company locates its
transfer stations in areas where its landfills are outside of the population
centers in which it collects waste. Such waste is transferred to long-haul
trailers and economically transported to its landfills.
 
     Expenses.  Cost of operations includes labor, maintenance and repairs,
equipment and facility rent, utilities and taxes, the costs of ongoing
environmental compliance, safety and insurance, disposal costs and costs of
independent haulers transporting Company waste to the disposal site. Disposal
costs include certain landfill taxes, host community fees, payments under
agreements with respect to landfill sites that are not owned, landfill site
maintenance, fuel and other equipment operating expenses and accruals for
estimated closure and post-closure monitoring expenses anticipated to be
incurred in the future.
 
     Selling, general and administrative expenses include management, clerical
and administrative compensation and overhead, sales costs, community relations
expenses and provisions for estimated uncollectible accounts receivable and
potentially unrealizable acquisition costs.
 
     Depreciation and amortization expense includes depreciation of fixed assets
and amortization of landfill development costs (including capitalized interest),
goodwill and other intangible assets.
 
     In connection with potential acquisitions, the Company incurs and
capitalizes certain transaction and integration costs which include stock
registration, legal, accounting, consulting, engineering and other direct costs.
When an acquisition is completed and is accounted for using the
pooling-of-interests method for business combinations, these costs are charged
to the statement of operations as acquisition related costs. When a completed
acquisition is accounted for using the purchase method for business
combinations, these costs are capitalized. The Company routinely evaluates
capitalized transaction and integration costs and expenses those costs related
to acquisitions not likely to occur. Indirect acquisition costs, such as
executive salaries, general corporate overhead and other corporate services, are
expensed as incurred.
 
     Certain direct landfill development costs, such as engineering, upgrading,
construction and permitting costs, are capitalized and amortized based on
consumed airspace. The Company believes that the costs associated with
engineering, owning and operating landfills will increase in the future as a
result of federal, state and local regulation and a growing community awareness
of the landfill permitting process. Although there can be no assurance, the
Company believes that it will be able to implement price increases sufficient to
offset these increased expenses. All indirect landfill development costs, such
as executive salaries, general corporate overhead, public affairs and other
corporate services, are expensed as incurred.
 
                                        4
<PAGE>   5
 
     Accrued closure and post-closure costs represent an estimate of the current
value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Site specific closure and post-closure engineering cost
estimates are prepared annually for landfills owned and/or operated by the
Company for which it is responsible for closure and post-closure. The present
value of estimated future costs are accrued based on accepted tonnage as
landfill airspace is consumed. Discounting of future costs is applied where the
Company believes that both the amounts and timing of related payments are
reliably determinable. The Company periodically updates its estimates of future
closure and post-closure costs. The impact of changes which are determined to be
changes in estimates are accounted for on a prospective basis.
 
     The net present value of the closure and post-closure commitment is
calculated assuming inflation of 2.5% and a risk-free capital rate of 7.0%.
Discounted amounts previously recorded and not yet expended are accreted to
reflect the effects of the passage of time. The Company's current estimate of
total future payments for closure and post-closure is $1.3 billion while the
present value of such estimate is $326.7 million. At December 31, 1996 and 1997,
accruals for landfill closure and post-closure costs (including costs assumed
through acquisitions) were approximately $122.9 million and $162.0 million,
respectively. The accruals reflect relatively young landfills with estimated
remaining lives, based on current waste flows, that range from 1 to over 75
years, and an estimated average remaining life of greater than 30 years.
 
     Year 2000 Systems Modifications.  During 1997, Allied began modifying its
computer system programming to process transactions in the year 2000.
Anticipated spending for this modification will be expensed as incurred and is
not expected to have a significant impact on the Company's ongoing results of
operations.
 
  RESULTS OF OPERATIONS
 
     The following table sets forth the percentage relationship that the various
items bear to revenues and the percentage of change in dollar amounts for the
periods indicated. The statement of operations data have been restated to give
effect to acquisitions that were accounted for using the pooling-of-interests
method for business combinations. See Note 2 to the Company's Consolidated
Financial Statements.
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                              ---------------------------------------------------
                                                                   1996                   1997
                                                                 COMPARED               COMPARED
                                                                 TO 1995                TO 1996
                                                                 % CHANGE               % CHANGE
                                              1995     1996     IN AMOUNTS    1997     IN AMOUNTS
                                              -----    -----    ----------    -----    ----------
<S>                                           <C>      <C>      <C>           <C>      <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................  100.0%   100.0%        6.7%     100.0%       110.1%
Cost of operations..........................   63.2     62.3         5.2       57.4         93.6
Selling, general and administrative
  expenses..................................   16.7     16.5         5.5       13.0         65.2
Depreciation and amortization expense.......    9.5     10.9        22.4       12.0        130.3
Acquisition related costs...................    0.4     14.8     5,828.4        0.4        (94.5)
Unusual costs...............................     --      0.9       100.0         --       (100.0)
                                              -----    -----                  -----
Operating income (loss).....................   10.2     (5.4)     (155.5)      17.2        774.1
Interest expense, net.......................    3.4      3.0        (4.3)       8.0        451.8
Other income, net...........................     --       --          --       (0.1)       100.0
Income tax expense..........................    1.7      0.1        96.8        3.1     11,242.7
Extraordinary loss, net of income tax
  benefit...................................    0.2      2.2     1,429.4        4.1        283.1
                                              -----    -----                  -----
  Net income (loss).........................    4.9%   (10.7)%    (334.2)%      2.1%       141.3%
                                              =====    =====                  =====
</TABLE>
 
  YEARS ENDED DECEMBER 31, 1997 AND 1996
 
     Revenues.  Revenues in 1997 were $1,301.4 million compared to $619.5
million in 1996, an increase of 110.1%. Revenues of approximately $560.4 million
in 1997 were generated from companies acquired subsequent to the end of the same
period in the prior year, while increases in revenues attributable to existing
                                        5
<PAGE>   6
 
operations ("Internal Growth") amounted to $121.5 million. If the Laidlaw
Acquisition, net of the Canadian Sale, is included as of January 1996, Internal
Growth would have approximated 11.5% with 7.5% attributable to net volume
increases and 4.0% attributable to price increases.
 
     Cost of Operations.  Cost of operations in 1997 was $747.2 million compared
to $386.1 million in 1996, an increase of 93.6%. This increase in cost of
operations was primarily attributable to the increase in revenues described
above. As a percentage of revenues, cost of operations decreased to 57.4% in
1997 from 62.5% in 1996. The improvement in gross margin is due primarily to the
integration of the assets acquired from Laidlaw during 1996 and increased
landfill volume.
 
     Selling, General and Administrative Expenses.  SG&A expense in 1997 was
$169.2 million compared to $102.4 million in 1996, an increase of 65.2%. The
increase in SG&A expense resulted from expenses associated with acquired
companies and expenses incurred in connection with the Company's increase in
personnel and other expenses related to the growth of the Company. In addition,
SG&A expenses include a charge of approximately $3.4 million related to future
post employment executive compensation and a credit of approximately $3.0
million related to a favorable settlement of certain litigation. As a percentage
of revenues, SG&A decreased to 13.0% in 1997 from 16.5% in 1996. The decrease in
SG&A as a percentage of revenues is primarily due to the substantial increase in
the revenues of the Company resulting principally from the Laidlaw Acquisition,
while SG&A expenses have not increased proportionately.
 
     Depreciation and Amortization Expense.  Depreciation and amortization in
1997 was $156.2 million compared to $67.8 million in 1996, an increase of
130.3%. The increase in depreciation and amortization expense was due to
acquisitions and capital expenditures. Fixed assets have increased from $830.2
million in 1996, excluding the Laidlaw Acquisition on December 30, 1996, to $1.9
billion in 1997 and goodwill has increased to $1.1 billion at December 31, 1997
from $148.6 million at December 31, 1996, excluding the Laidlaw Acquisition on
December 30, 1996. As a percentage of revenues, depreciation and amortization
increased to 12.0% in 1997 from 10.9% in 1996. This is primarily the result of
an increase in amortization of goodwill as a percentage of revenues to 1.8% in
1997 from 0.7% in 1996 related to increased goodwill in connection with the
Laidlaw Acquisition.
 
     Acquisition Related Costs.  Acquisition related costs in 1997 were $5.0
million compared to $90.8 million in 1996, a decrease of 94.5%. During 1996, in
connection with the Laidlaw Acquisition, the Company incurred approximately
$84.6 million in charges primarily associated with the acquisition, which
include $51.5 million of environmental related matters, $18.4 million of asset
impairments and abandonments, and $14.7 million of acquisition liabilities.
 
     Unusual Items.  In December 1996 the Company recorded $5.7 million in
unusual items including $2.0 million in connection with the ongoing
investigation and remediation of the Company's Norfolk landfill and $3.7 million
of other non-recurring valuation adjustments.
 
     Other Income, Net.  The Company recorded approximately $1.1 million of
other income, comprised of a $5.6 million gain on sale of assets to USA Waste in
the fourth quarter of 1997, net of a charge of approximately $4.5 million in
connection with the abandonment of certain collection and transfer operations.
 
     Net Interest Expense.  Net interest expense was $104.1 million in 1997
compared to $18.9 million in 1996, an increase of 451.8%. The increase in
interest expense is due to the increase in debt from $422.7 million at December
31, 1996, excluding the Laidlaw Acquisition on December 30, 1996, compared to
$1.5 billion at December 31, 1997. This increase in debt outstanding is
primarily the result of debt incurred in connection with the Laidlaw Acquisition
net of the application of the net proceeds received in connection with the
Canadian Sale. Additionally, in connection with the construction and development
of the Company's landfills, Allied capitalized approximately $37.6 million of
interest in 1997 compared to $13.5 million in 1996. The increase is primarily
due to the increase in the base of assets under development which qualify for
capitalized interest (primarily landfill assets) as a result of the Laidlaw
Acquisition in late 1996 and other acquisitions made during 1997.
 
     Income Taxes.  Income taxes reflect a 33.2% effective income tax rate for
1997 which deviates from the federal statutory rate of 35%, this is primarily
due to the income tax accounting treatment of S-Corporations for acquisitions
accounted for using the pooling-of-interests method and the effects of
differences in the
 
                                        6
<PAGE>   7
 
treatment of goodwill for book and tax purposes, state income taxes, and other
permanent differences. See Note 10 to the Supplemental Consolidated Financial
Statements.
 
     Extraordinary Loss, Net.  In May 1997, the Company repurchased from the
Laidlaw Group two junior subordinated debentures with an aggregate face amount
of $318 million and the Warrant, used as partial consideration for the Laidlaw
Acquisition, for an aggregate purchase price of $230 million in cash. An
extraordinary charge to earnings related to the Repurchase of approximately
$65.7 million ($39.4 million net of income tax benefit) was recorded. In
addition, the Company replaced its $1.275 billion Bank Agreement with the $900
million senior credit facility (the "Credit Agreement") in June 1997 and
recognized an extraordinary charge of approximately $21.6 million ($13.0 million
net of income tax benefit).
 
     In September 1997, the Company sold 18.6 million shares of common stock
with net proceeds of approximately $327.4 million (the "Equity Offering"). In
October, the Company used $203 million of the net proceeds to retire a portion
of the term loan facility of the Credit Agreement, $71 million to repay the
entire amount outstanding on the revolving credit facility. As a result of the
early repayment of debt outstanding under the term loan facility, the Company
recognized an extraordinary charge in the third quarter of 1997 of approximately
$1.3 million ($0.8 million net of income tax benefit) for the write-off of
previously deferred debt issuance costs.
 
  YEARS ENDED DECEMBER 31, 1996 AND 1995
 
     Revenues.  Revenues in 1996 were $619.5 million compared to $580.8 million
in 1995, an increase of 6.7%. Approximately 1.8% of the increase in revenues is
attributable to acquisitions and 4.9% is attributable to internal growth.
Revenues of $10.6 million for 1996 were generated from companies acquired
subsequent to December 1994, while increases in revenue attributable to existing
operations amounted to $28.1 million. Average price increases as a percentage of
revenue were approximately 3.0% of revenue while the remainder of Internal
Growth was from volume.
 
     Cost of Operations.  Cost of operations in 1996 was $386.0 million compared
to $367.0 million in 1995, an increase of 5.2%. This increase in cost of
operations was primarily attributable to the increase in revenues described
above. As a percentage of revenues, cost of operations decreased to 62.3% in
1996 from 63.2% in 1995. Cost of operations were effected by an increase in
higher margin landfill volumes. This change in revenue mix had the effect of
decreasing the cost of disposal relative to revenues.
 
     Selling, General and Administrative Expenses.  SG&A expenses increased to
$102.4 million in 1996 compared to $97.0 million in 1995, an increase of 5.5%.
As a percentage of revenues, SG&A decreased to 16.5% in 1996 from 16.7% in 1995.
The increase in SG&A expense resulted from expenses associated with acquired
companies and expenses incurred in connection with the Company's increase in
personnel and other expenses related to the anticipated growth of the Company as
it continues to acquire companies.
 
     Depreciation and Amortization Expense.  Depreciation and amortization in
1996 was $67.8 million compared to $55.4 million in 1995, an increase of 22.4%.
The increase in depreciation and amortization expense is due to acquisitions and
capital expenditures. Before the Laidlaw Acquisition, fixed assets increased to
$830.2 million at December 31, 1996 from $694.0 million at December 31, 1995 and
goodwill increased to $148.0 million at December 31, 1996 from $114.8 million at
December 31, 1995. As a percentage of revenues, depreciation and amortization
increased to 10.9% in 1996 from 9.5% in 1995.
 
     Acquisition Related Costs.  During 1996 in connection with the Laidlaw
Acquisition, the Company incurred approximately $84.6 million in charges, which
include $51.5 million of environmental related matters, $18.4 million of asset
impairments and abandonments, and $14.7 million of acquisition liabilities, of
which $2.0 million relates to litigation matters, $5.4 million relates to
relocation and transition costs and bonuses, $3.8 million relates to taxes,
claims and assessments and other integration costs, and $3.5 million relates to
acquired accounts receivable considered uncollectible.
 
     In connection with the Laidlaw Acquisition, Allied engaged an independent
environmental consulting firm to assist in conducting an environmental
assessment of the real property owned by the acquired subsidiaries or
third-parties, and properties under the management of the acquired companies.
Several contaminated landfills and other properties were identified, two of
which are owned by subsidiaries of the Company, that would require those
subsidiaries to incur costs for incremental closure and post-closure
                                        7
<PAGE>   8
 
measures, remediation activities and litigation in the future. The costs of
performing the investigation, design, remediation and the allocation of
responsibility to the subsidiaries of Allied vary significantly between sites.
Based on information available to the Company, Allied recorded a provision of
$51.5 million for environmental matters, including closure and post-closure
costs, in the 1996 statement of operations and expects these amounts to be
disbursed over the next 30 years.
 
     As a result of the Laidlaw Acquisition, Allied increased its revenue base
by approximately 400% and entered into 14 new markets where it would execute its
operating strategy. In connection with the significant increase in size and the
redirection of its strategic operating emphasis, Allied determined that certain
asset values were impaired as they will provide no further benefit to the
Company. Included among the asset impairments are costs of $10.8 million related
to over 50 noncompetition agreements in several markets where the counterparty
no longer poses a significant threat, costs of $4.8 million for discontinued
facilities and costs of $2.8 million for market development activities no longer
being pursued.
 
     Costs of $6.2 million were incurred in 1996 compared to $1.5 million in
1995 for transaction and integration costs directly related to acquisitions
accounted for using the pooling-of-interests method for business combinations.
Transaction costs include, but are not limited to, stock registration, legal,
accounting, consulting, engineering and other direct third-party costs incurred
to complete the acquisitions. Integration costs include, but are not limited to,
uncollectible accounts receivable write-offs, employee termination and
relocation, write down of fixed assets and lease termination.
 
     Unusual Items.  In December 1996 the Company recorded $5.7 million in
unusual items including $2.0 million in connection with the ongoing
investigation and remediation of the Company's Norfolk landfill and $3.7 million
of other non-recurring valuation adjustments.
 
     Net Interest Expense.  Net interest expense was $18.9 million in 1996
compared to $19.7 million in 1995, a decrease of 4.3%. The decrease in net
interest expense is partially due to the conversion of subordinated debt into
Common Stock in the fourth quarter of 1995 which resulted in a reduction to
annual interest charges and the refinancing of the 1994 Notes (as defined
herein) on July 31, 1996, resulting in a decrease in the interest rate from 12%
to 7% for the months of August through December 1996. Also, interest capitalized
in 1996 was $13.5 million compared to $11.1 million in 1995.
 
     Conversion Fees.  A non-cash conversion fee of $2.2 million was incurred in
the fourth quarter of 1995 as a result of an inducement offered by the Company
to holders of certain convertible preferred stock and convertible subordinated
notes to exercise their conversion option to receive Common Stock. The
inducement fee consisted of payment of dividends or interest from the conversion
date through the first call or redemption date of each convertible security.
Approximately 7.8 million shares of Common Stock were issued for conversion and
approximately 285,000 were issued for the conversion fee.
 
     Income Taxes.  Income taxes reflect a 0.7% effective income tax rate for
1996 which deviates from the federal statutory rate of 35% due primarily to the
treatment of expenses for book purposes that, when recognized for tax purposes,
may produce tax goodwill in excess of book goodwill. Other items impacting the
Company's effective tax rate for both 1996 and 1995 include the differences in
the treatment of goodwill for book and tax purposes, state income taxes, and
other permanent differences. See Note 10 to the Consolidated Financial
Statements.
 
     Extraordinary Loss.  On July 31, 1996, Allied completed a tender offer (the
"Tender Offer") for substantially all of the 1994 Notes at the redemption price
of $1,157.50 per $1,000 note. An extraordinary charge related to the Tender
Offer of approximately $18.4 million ($11.0 million net of income tax benefit),
was charged to earnings in the third quarter of 1996. In connection with the
Laidlaw Acquisition, the Company refinanced its $300 million senior revolving
credit facility and recognized an extraordinary charge of approximately $4.0
million ($2.4 million net of income tax benefit) that was charged to earnings in
the fourth quarter of 1996.
 
     In June 1996, the Company recognized an extraordinary charge of
approximately $0.8 million ($476,000 net of income tax benefit) representing
unamortized deferred debt issuance costs related to refinanced obligations.
                                        8
<PAGE>   9
 
     In 1995, the Company recognized an extraordinary charge of approximately
$1.4 million ($908,000 net of income tax benefit) representing unamortized
deferred debt issuance costs related to refinanced obligations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Historically, the Company has satisfied its acquisition, capital
expenditure and working capital needs primarily through bank financing and
public offerings and private placements of debt and equity securities. Between
January 1, 1994 and December 31, 1997, the Company has completed debt and equity
financings in excess of $3 billion. Due to the acquisition driven and the
capital intensive nature of the Company's business strategy, the Company has
used, and believes that it will likely continue using amounts in excess of the
cash generated from operations to fund the growth component of its business
including acquisitions and capital expenditures. In connection with
acquisitions, the Company has assumed or incurred indebtedness with relatively
short-term repayment schedules, which have been refinanced under the Company's
revolving credit facility and operating equipment has been acquired using
financing leases which have medium-term maturities. Additionally, the Company
uses excess cash generated from operations to pay down amounts owed on its
revolving line of credit which is classified as long-term debt. As a result, the
Company has periodically had low levels of working capital or working capital
deficits.
 
     During the years ended December 31, 1995, 1996 and 1997, the Company's cash
flows from operating, investing and financing activities were as follows (in
millions):
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                             ---------------------------------
                                                              1995        1996         1997
                                                             -------    ---------    ---------
<S>                                                          <C>        <C>          <C>
OPERATING ACTIVITIES:
Net income (loss)..........................................  $  28.3    $   (66.3)   $    27.4
Extraordinary loss on early extinguishments of debt........      0.9         22.8         21.5
Acquisition related costs..................................      1.5         90.8           --
Unusual items..............................................       --          5.7           --
Non-cash operating expenses(1).............................     66.1         79.1        154.3
Loss (gain) on sale of assets..............................      0.1          1.8         (7.2)
Decrease (increase) in operating assets and liabilities,
  net......................................................     18.9        (62.4)       (75.7)
                                                             -------    ---------    ---------
  Cash provided by operating activities....................    115.8         71.5        120.3
                                                             -------    ---------    ---------
INVESTING ACTIVITIES:
Cost of acquisitions, net of cash acquired.................    (80.9)    (1,380.3)      (477.5)
Capital expenditures.......................................    (83.5)       (87.5)      (217.1)
Proceeds from sale of fixed assets.........................      2.5          0.9        530.1
Other......................................................     (0.7)        (0.3)        (7.8)
                                                             -------    ---------    ---------
  Cash used for investing activities.......................   (162.6)    (1,467.2)      (172.3)
                                                             -------    ---------    ---------
FINANCING ACTIVITIES:
Net proceeds from sale and redemption of preferred stock
  and common stock.........................................     30.6         48.1        329.0
Net proceeds from long-term debt...........................    105.8      1,881.3      1,298.7
Payments of long-term debt.................................    (74.1)      (487.9)    (1,799.3)
Other......................................................     (6.8)        (0.6)       185.9
                                                             -------    ---------    ---------
  Cash provided by financing activities....................     55.5      1,440.9         14.3
                                                             -------    ---------    ---------
Increase in cash...........................................  $   8.7    $    45.2    $   (37.7)
                                                             =======    =========    =========
</TABLE>
 
---------------
(1) Consists principally of provisions for depreciation and amortization,
    landfill closure and post-closure accruals, allowance for doubtful accounts,
    potentially unrealizable acquisition costs and deferred income taxes.
 
                                        9
<PAGE>   10
 
     As of December 31, 1997, the Company had cash and cash equivalents of $32.3
million. The Company's capital expenditure and working capital requirements have
increased significantly, reflecting the Company's rapid growth by acquisition
and development of revenue producing assets, and will likely increase further as
the Company continues to pursue its growth objectives. During 1997, the Company
acquired solid waste operations representing approximately $457.7 million in
annual revenues, and sold operations representing approximately $127.9 million
in annual revenue. Both acquisitions and sales included landfill assets. Net
consideration of approximately $911.0 million (including $10.5 million for
landfills under development) comprised of cash, notes and 9.4 million shares of
common stock, was paid in these transactions. Subsequent to December 31, 1997
through June 30, 1998, the Company acquired 47 operating solid waste businesses
for consideration of approximately $791.8 million, which includes approximately
26.0 million shares of Common Stock. For the calendar year 1998, the Company
expects to spend approximately $224.0 million for capital, closure and
post-closure, and remediation expenditures. As the Company continues to acquire
waste operations during 1998, additional capital amounts will be required to
fund the acquisition of businesses and the related capital expenditure
requirements.
 
     On December 31, 1997, the Company's debt structure consisted primarily of
$525 million of the 1996 Notes, $294 million outstanding under the term loan
facility of the Credit Agreement (the "Term Loan Facility"), and approximately
$255 million of the $418 million aggregate face amount of senior discount notes
(the "Senior Discount Notes"). As of December 31, 1997 there is aggregate
availability under the Revolving Credit Facility (as defined herein) of
approximately $550 million to be used for working capital, letters of credit,
acquisitions and other general corporate purposes. In October 1997, the Company
amended the Credit Agreement, increasing the amount of the Senior Credit
Facility from $900 million to $1.1 billion. In June 1998, the Company replaced
the amended Credit Agreement with a new Credit Agreement, consisting of a $300
million term loan (the "Term Loan"), which is fully drawn, and a $800 million
revolving credit facility. The revolving credit facility includes a $250 million
sublimit for the issuance of letters of credit. The indentures relating to the
1996 Notes, the Senior Discount Notes and the Credit Agreement contain financial
and operating covenants and restrictions on the ability of the Company to
complete acquisitions, pay dividends, incur indebtedness, make investments and
take certain other corporate actions. A substantial portion of the Company's
available cash will be required to be applied to service indebtedness, including
indebtedness incurred to finance the Laidlaw Acquisition. Currently, on an
annualized basis, this is expected to include approximately $146.7 million in
mandatory annual principal and interest payments.
 
     The Company is also required to provide financial assurances to
governmental agencies under applicable environmental regulations relating to its
landfill operations and collection contracts. These financial assurance
requirements are satisfied by the Company issuing performance bonds, letters of
credit, insurance policies or trust deposits to secure the Company's obligations
as they relate to landfill closure and post-closure costs and performance under
certain collection contracts. At December 31, 1997, the Company had outstanding
approximately $431.0 million in financial assurance instruments, represented by
$348.0 million of performance bonds, $5.8 million of letters of credit, $38.2
million of insurance policies and $39.0 million of trust deposits. During
calendar year 1998, the Company expects to be required to provide approximately
$342.9 million in financial assurance obligations relating to its landfill
operations and collection contracts. The Company expects that financial
assurance obligations will increase in the future as it acquires and expands its
landfill activities and that a greater percentage of the financial assurance
instruments will be comprised of performance bonds and insurance policies.
 
     The Company has lease facilities (the "Lease Facilities") that allow it to
enter into equipment leases at rates ranging from similar term treasury note
rates plus 1.5% to 3.5% for terms of 36 to 84 months. In addition to equipment
leases outstanding at December 31, 1996 and 1997 of $69.1 million and $74.1
million, respectively, the Company had available lease commitments of $11.9
million and $32.4 million, respectively. The Company intends to enter into
master equipment lease facilities relating to the financing of the acquisition
of trucks and containers.
 
     Subtitle D and other regulations that apply to the non-hazardous waste
disposal industry have required the Company, as well as others in the industry,
to alter operations and to modify or replace pre-Subtitle D landfills. Such
expenditures have been and will continue to be substantial. Further regulatory
changes could
                                       10
<PAGE>   11
 
accelerate expenditures for closure and post-closure monitoring and obligate the
Company to spend sums in addition to those presently reserved for such purposes.
These factors, together with the other factors discussed above, could
substantially increase the Company's operating costs and impair the Company's
ability to invest in its facilities.
 
     The Company's ability to meet future capital expenditure and working
capital requirements, to make scheduled payments of principal, to pay interest,
or to refinance its indebtedness, and to fund capital amounts required for the
acquisition of businesses and the expansion of existing businesses depends on
its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control. Based upon the current level of operations and anticipated
growth, management of the Company believes that available cash flow, together
with available borrowing under the Senior Credit Facility, the Lease Facilities
and other sources of liquidity, will be adequate to meet the Company's
anticipated future requirements for working capital, letters-of-credit, capital
expenditures, scheduled payments of principal and interest on debt incurred
under the Credit Agreement, interest on the 1996 Notes and the Senior Discount
Notes, and capital amounts required for acquisitions and expansion. However, the
principal payment at maturity on the 1996 Notes and the Senior Discount Notes
may require refinancing. There can be no assurance that the Company's business
will generate sufficient cash flow from operations or that future financings
will be available in an amount sufficient to enable the Company to service its
indebtedness or to make necessary capital expenditures, or that any refinancing
would be available on commercially reasonable terms if at all. Additionally,
depending on the timing, amount and structure of any future acquisitions and the
availability of funds under the Credit Agreement, the Company may need to raise
additional capital to fund the acquisition and integration of additional solid
waste businesses. The Company may raise such funds through additional bank
financings or public or private offerings of its debt and equity securities.
There can be no assurance that the Company will be able to secure such funding,
if necessary, on favorable terms, if at all. If the Company is not successful in
securing such funding, the Company's ability to pursue its business strategy may
be impaired and results of operations for future periods may be negatively
affected.
 
SIGNIFICANT FINANCING EVENTS
 
     In January 1994, the Company issued $100 million of 10.75% senior
subordinated notes (the "1994 Notes"). The net proceeds from the sale of the
1994 Notes after underwriting discounts and other expenses, were approximately
$95 million. In July 1996, the Company completed the Tender Offer and purchased
substantially all of its 1994 Notes at the redemption price of $1,157.50 per
$1,000 in principal amount. In connection with the Tender Offer, the Company
recognized an extraordinary charge of $18.4 million ($11.0 million net of income
tax benefit), in the third quarter of 1996. The Company also received a consent
from a majority of the holders of the 1994 Notes to eliminate all substantive
financial covenants associated with the remaining 1994 Notes.
 
     In January 1995, the Company obtained stockholder approval of the issuance
of 11.7 million shares of Common Stock to TPG Partners, L.P. and TPG Parallel I,
L.P., for $50 million (less approximately $5.0 million of direct offering costs
and other costs related to an amendment to the 1994 Notes). Such shares of
Common Stock were purchased by the Apollo/Blackstone Investors (as defined
herein) contemporaneously with the Repurchase.
 
     During 1995, the Company offered to holders of its Series D, 9% and $90
convertible preferred stock and its 6% Convertible Subordinated notes an
inducement to exercise their conversion option to receive Common Stock. The
inducement consisted of the payment of dividends and interest that the holders
of these securities would have received from the date of conversion through the
first call or redemption date of each security. In total, 7.8 million shares of
Common Stock were issued upon conversion. Accordingly, the Company's annual
dividend and interest requirements decreased by approximately $2.7 million and
$0.8 million, respectively. The inducement resulted in a 1996 conversion fee
charge of approximately $2.2 million paid in 285,000 shares of Common Stock.
 
     In January 1996, the Company completed a public offering of its Common
Stock. It issued 7.6 million shares for approximately $48 million net of $5.2
million in underwriter discounts, commissions and offering
 
                                       11
<PAGE>   12
 
costs. The net proceeds from the offering were used to repay amounts outstanding
under the Company's outstanding credit agreement and for other general corporate
purposes.
 
     In July 1996, in connection with the Tender Offer, the Company completed a
new $300 million revolving credit facility. This revolving credit facility was
extinguished in December 1996 in connection with the financing of the Laidlaw
Acquisition. The Company recognized an extraordinary charge of $4.0 million
($2.4 million net of income tax benefit), relating to the extinguishment in the
fourth quarter of 1996.
 
     In connection with the Laidlaw Acquisition, the Company issued a warrant to
Laidlaw for the purchase of 20.4 million shares of common stock of the Company
at an exercise price of $8.25 per share (the "Warrant"). The Warrant was retired
in connection with the Repurchase in May 1997.
 
     In December 1996, to partially finance the Laidlaw Acquisition, the Company
entered into a bank credit facility (the "1996 Bank Agreement") consisting of
(i) a $475 million five and one-half year amortizing senior secured term loan
facility, (ii) three amortizing senior secured term loan facilities in an
aggregate original principal amount of $500 million and with ultimate maturities
which ranged from six and one-half years to eight and one-half years, and (iii)
a $300 million five and one-half year senior secured revolving credit facility.
In connection with the closing of the Canadian Sale, an aggregate amount of
approximately $517 million was applied to prepayment of the 1996 Bank Agreement.
 
     In December 1996, Allied Waste North America ("AWNA") issued the 1996
Notes. Net proceeds from the sale of the 1996 Notes, after the underwriting
discount and other expenses, were approximately $509 million. The net proceeds
were used to pay a portion of the cash purchase price of the Laidlaw
Acquisition, repay amounts outstanding under the Company's previous $300 million
revolving credit facility, fund certain acquisitions and for general corporate
purposes. AWNA had an obligation to offer fully registered securities, pursuant
to an exchange offer, that are substantially identical to the 1996 Notes. AWNA
completed this exchange offer in July 1997. The 1996 Notes cannot be redeemed
until December 1, 2001, except under certain circumstances. Prior to December 1,
2001, the 1996 Notes are subject to redemption, at the option of AWNA, at the
greater of (i) 100% of the principal amount or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest thereon
discounted to maturity on a semi-annual basis at a comparable treasury yield
plus 75 basis points, plus in each case accrued and unpaid interest to the date
of redemption. At any time prior to December 1, 1999, up to 33% of principal
amount of 1996 Notes will be redeemable, at the option of AWNA, from the
proceeds of one or more public offerings of capital stock by the Company at a
redemption price of 110.25% of principal amount, plus accrued interest. The 1996
Notes are guaranteed by the Company and substantially all of AWNA's current and
future subsidiaries, the guarantees of which are expressly subordinated to the
guarantees of AWNA's Senior Credit Facility.
 
     In May 1997, the Company, pursuant to the Laidlaw Securities Purchase
Agreement with the Laidlaw Group and certain private securities investment funds
affiliated with either (i) Apollo Advisors II, L.P. or (ii) the Blackstone Group
(the "Apollo/Blackstone Investors"), repurchased from the Laidlaw Group the
Allied Debentures and the Warrant for an aggregate purchase price of $230
million in cash. Also pursuant to the Laidlaw Securities Purchase Agreement, the
Apollo/Blackstone Investors purchased all of the Common stock held by Laidlaw.
In connection with the Repurchase, Allied issued $418 million aggregate face
amount of the Senior Discount Notes in a private offering on May 15, 1997. The
net proceeds of $230 million realized from the sale of the Senior Discount Notes
were used to pay the cash consideration in the Repurchase. The Senior Discount
Notes were issued at a discount of principal amount and, unless certain
provisions are triggered, there will be no periodic cash payments of interest
before June 1, 2002. Thereafter, the Senior Discount Notes will accrue cash
interest at the rate of 11.30% per annum, payable semi-annually on June 1 and
December 1 of each year, commencing December 1, 2002. Allied had an obligation
to offer fully registered securities, pursuant to an exchange offer, that are
substantially identical to the Senior Discount Notes. Allied completed this
exchange offer on December 16, 1997. The Senior Discount Notes cannot be
redeemed until December 1, 2001, except under certain circumstances. Prior to
June 1, 2000, up to 33% of principal amount of Senior Discount Notes will be
redeemable, at the option of Allied, from the proceeds of one or more public
offerings of capital stock by Allied at a premium to their accreted value, plus
accrued interest.
 
                                       12
<PAGE>   13
 
     In June 1997, the Company repaid its senior credit facility and entered
into the Credit Agreement. The Credit Agreement provides a six and one-half year
senior secured $500 million term loan facility (the "Term Loan Facility") and a
six and one-half year senior secured $400 million revolving credit facility
together with the Term Loan Facility, the "Senior Credit Facility").
 
     On September 30, 1997, the Company repaid $203 million outstanding under
the Term Loan Facility and $71 million outstanding under the Revolving Credit
Facility of the Credit Agreement. In connection with this repayment, the Company
amended the Credit Agreement in October 1997, providing for a six and one-half
year senior secured $297 million funded term loan facility (the "Funded Term
Loan Facility"), a senior secured $200 million delayed draw term loan facility
to finance certain acquisitions prior to March 31, 1998 (the "Delayed Draw Term
Loan Facility"), and a senior secured $600 million revolving credit facility due
December 2003 (the "Revolving Credit Facility"). The Funded Term Loan Facility
is an amortizing senior secured term loan with annual principal payments
(payable quarterly) increasing from $6 million in 1997 to $60 million in each of
2000, 2001, 2002 and 2003. The Delayed Draw Term Loan Facility may be drawn in
multiple advances and at varying amounts until either (i) the full $200 million
has been drawn or (ii) March 31, 1998, whichever comes first. The Delayed Draw
Term Loan requires annual principal payments equal to a certain percentage of
the outstanding amount as of March 31, 1998. Principal payments begin in March
1999 at 10% of the original balance, increasing to 20% in the years 2000-2002,
and 30% in 2003. Principal under the Revolving Credit Facility is due upon
maturity.
 
     In addition to the scheduled principal payments above, the Company is also
required to make mandatory prepayments on the Senior Credit Facility equal to
100% of the net proceeds from certain asset sales, the issuance of new debt
securities and extraordinary amounts, which include tax refunds, pension plan
reversions and certain insurance proceeds, and 50% of the net cash proceeds from
new equity issuances. Furthermore, the Company is also required to make
mandatory prepayments on the Senior Credit Facility equal to 50% of the
Company's annual Excess Cash Flow, as defined in the Credit Agreement, unless
the Company's Senior Debt Ratio, as defined in the Credit Agreement, for the
relevant fiscal year end is less than 2.0 to 1.0. Mandatory prepayments are
applied first to the Term Loan Facility and the Delayed Draw Term Facility on a
pro rata basis against remaining scheduled principal payments, and second, to
the permanent reduction of the Revolving Credit Facility. In no event, however,
shall the Revolving Credit Facility be required to be reduced to an amount less
than $300 million in connection with any such mandatory prepayment.
 
     Borrowings under the Revolving Credit Facility may be used for
acquisitions, the issuance of letters of credit, working capital and other
general corporate purposes. Of the $600 million available under the Revolving
Credit Facility ($400 million prior to the Amendment), no more than $250 million
($175 million prior to the Amendment) may be used to support the issuance of
letters of credit.
 
     The Senior Credit Facility bears interest, at the Company's option, at the
lesser of (a) a Base Rate, or (b) a Eurodollar Rate, both terms as defined in
the Credit Agreement, plus, in either case, an agreed upon applicable margin.
The applicable margin will be adjusted from time to time pursuant to a pricing
grid based upon the Company's Total Debt to EBITDA ratio, as defined in the
Credit Agreement, and varies between zero percent and 0.75% for Base Rate loans,
and 0.75% and 1.75% for Eurodollar loans. In addition, if at any time, the
Company's Senior Debt Ratio is greater than 2.5 to 1.0, the applicable margin
for all loans will be increased by 0.25%.
 
     The Senior Credit Facility is guaranteed by substantially all of the
Company's present and future subsidiaries. In addition, the Senior Credit
Facility is secured by substantially all the personal property and a pledge of
the stock, of substantially all the Company's present and future subsidiaries.
 
     The Credit Agreement contains certain financial covenants including, but
not limited to, a Total Debt to EBITDA ratio, a Senior Debt to EBITDA ratio, a
Fixed Charge Coverage ratio and an Interest Expense Coverage ratio, all terms as
defined in the Credit Agreement. In addition, the Credit Agreement also limits
the Company's ability to make acquisitions, purchase fixed assets above certain
amounts, pay dividends, incur additional indebtedness and liens, make optional
prepayments on certain subordinated indebtedness, make investments, loans or
advances, enter into certain transactions with affiliates or enter into a
merger,
 
                                       13
<PAGE>   14
 
consolidation or sale of all or a substantial portion of the Company's assets.
The Company is in compliance with all applicable covenants at December 31, 1997.
 
     The Company has entered into interest rate protection agreements (the
"Agreements"), with commercial banks and investment banking institutions to
reduce its exposure to fluctuations in variable interest rates. A summary of the
Agreements outstanding as of December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
NOTIONAL AMOUNT   FIXED RATE                 PERIOD
---------------   ----------   -----------------------------------
 (IN MILLIONS)
<C>               <C>          <S>             <C>  <C>
     $130            6.27%     April 1997      --   May 1998
       50            6.08      September 1997  --   September 2000
       50            6.06      September 1997  --   March 2000
       50            5.97      October 1997    --   April 1999
       50            6.02      October 1997    --   October 1999
       50            5.90      November 1997   --   November 1999
       50            5.91      November 1997   --   November 1999
</TABLE>
 
     The Agreements effectively change the Company's interest rate paid on its
floating rate long-term debt to a weighted average fixed rate of approximately
6.07% plus applicable margins imposed by the terms of the Credit Agreement at
December 31, 1997.
 
     The Company has also entered into an additional interest rate protection
agreement with effective dates beginning in the future (the "Forward
Agreement"). This Forward Agreement provides continuing protection to
fluctuations in variable interest rates as existing Agreements expire and as
additional debt is drawn under the Delayed Draw Term Facility of the Senior
Credit Facility. A summary of the Forward Agreement is as follows:
 
<TABLE>
<CAPTION>
NOTIONAL AMOUNT   FIXED RATE           PERIOD
---------------   ----------   ----------------------
 (IN MILLIONS)
<S>               <C>          <C>
     $130           6.06%       May 1998 -- May 2001
</TABLE>
 
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
 
     This annual report includes 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 ("Forward Looking Statements"). All
statements other than statements of historical fact included in this report, are
Forward Looking Statements. Although the Company believes that the expectations
reflected in such Forward Looking Statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, number
of acquisitions and projected or anticipated benefits from acquisitions made by
or to be made by the Company, or projections involving anticipated revenues,
earnings, levels of capital expenditures or other aspects of operating results.
All phases of the Company operations are subject to a number of uncertainties,
risks and other influences, many of which are outside the control of the Company
and any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether Forward Looking Statements made
by the Company ultimately prove to be accurate. Such important factors
("Important Factors") that could cause actual results to differ materially from
the Company's expectations are disclosed in this section and elsewhere in this
report. All subsequent written and oral Forward Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Important Factors described below that could cause actual
results to differ from the Company's expectations.
 
     Competition.  The solid waste collection and disposal business is highly
competitive and requires substantial amounts of capital. The Company competes
with numerous waste management companies, a number of which have significantly
larger operations and greater resources than the Company. The Company also
competes with those counties and municipalities that maintain their own waste
collection and disposal
 
                                       14
<PAGE>   15
 
operations. Forward Looking Statements assume that the Company will be able to
effectively compete with the other waste management companies and
municipalities.
 
     Availability of Acquisition Targets.  The Company's ongoing acquisition
program is a key element of its expansion strategy. In addition, obtaining
landfill permits has become increasingly difficult, time consuming and
expensive. There can be no assurance that the Company will succeed in obtaining
landfill permits or locating appropriate acquisition candidates that can be
acquired at price levels that the Company considers appropriate and that
reflects historical prices. The Forward Looking Statements assume that a number
of acquisition candidates and landfill properties sufficient to meet the
Company's goals will be available for purchase and that the Company will be able
to complete the acquisition at prices that the Company has experienced in the
past two years.
 
     Integration.  The Company's financial position and results of operations
depend to a large extent on the integration of recently acquired businesses. The
Forward Looking Statements assume that integration of acquired companies,
including the internalization of waste, will require from three to nine months
from the date the acquisition closes. Failure to achieve effective integration
in the anticipated time period or at all could have an adverse effect on the
Company's future results of operations.
 
     Ongoing Capital Requirements.  To the extent that internally generated cash
and cash available under the Company's existing credit facilities are not
sufficient to provide the cash required for future operations, capital
expenditures, acquisitions, debt repayment obligations and/or financial
assurance obligations, the Company will require additional equity and/or debt
financing in order to provide such cash. The Company has incurred significant
debt obligations in the last two years, which entail substantial debt service
costs. The Forward Looking Statements assume that the Company will be able to
raise the capital necessary to finance such requirements at rates that are as
good as or better than those it is currently experiencing. There can be no
assurance, however, that such financing will be available or, if available, will
be available on terms satisfactory to the Company.
 
     Economic Conditions.  The Company's business is affected by general
economic conditions. The Forward Looking Statements assume that the Company will
be able to achieve internal volume and price growth which is not impacted by an
economic downturn. As revenue of the Company continues to grow it is likely that
the rates of internal growth will reflect growth rates which are less than those
experienced in 1997. There can be no assurance that an economic downturn will
not result in a reduction in the volume of waste being disposed of at the
Company's operations and/or the price that the Company can charge for its
services.
 
     Weather Conditions.  Protracted periods of inclement weather may adversely
affect the Company's operations by interfering with collection and landfill
operations, delaying the development of landfill capacity and/or reducing the
volume of waste generated by the Company's customers. In addition, particularly
harsh weather conditions may result in the temporary suspension of certain of
the Company's operations. The Forward Looking Statements do not assume that such
weather conditions will occur.
 
     Dependence on Senior Management.  The Company is highly dependent upon its
senior management team. In addition, as the Company continues to grow, its
requirements for operations management with waste industry experience will also
increase. The availability of such experienced management is not known. The
Forward Looking Statements assume that experienced management will be available
when needed by the Company at compensation levels that are within industry
norms. The loss of the services of any member of senior management or the
inability to hire experienced operations management could have a material
adverse effect on the Company.
 
     Influence of Government Regulation.  The Company's operations are subject
to and substantially affected by extensive federal, state and local laws,
regulations, orders and permits, which govern environmental protection, health
and safety, zoning and other matters. These regulations may impose restrictions
on operations that could adversely affect the Company's results, such as
limitations on the expansion of disposal facilities, limitations on or the
banning of disposal of out-of-state waste or certain categories of waste or
mandates regarding the disposal of solid waste. Because of heightened public
concern, companies in the waste management business may become subject to
judicial and administrative proceedings involving federal, state
 
                                       15
<PAGE>   16
 
or local agencies. These governmental agencies may seek to impose fines or to
revoke or deny renewal of operating permits or licenses for violations of
environmental laws or regulations or to require remediation of environmental
problems at sites or nearby properties, or resulting from transportation or
predecessors' transportation and collection operations, all of which could have
a material adverse effect on the Company. Liability may also arise from actions
brought by individuals or community groups in connection with the permitting or
licensing of operations, any alleged violations of such permits and licenses or
other matters. The Forward Looking Statements assume that there will be no
materially negative impact on the Company's operations due to government
regulation.
 
     Potential Environmental Liability.  The Company may incur liabilities for
the deterioration of the environment as a result of its operations. Any
substantial liability for environmental damage could materially adversely affect
the operating results and financial condition of the Company. Due to the limited
nature of the Company's insurance coverage of environmental liability, if the
Company were to incur liability for environmental damage, its business and
financial condition could be materially adversely affected. The Forward Looking
Statements assume that the Company will not incur any material environmental
liabilities other than those for which a provision has been recorded in the
consolidated financial statements and disclosed in the notes thereto.
 
INFLATION AND PREVAILING ECONOMIC CONDITIONS
 
     To date, inflation has not had a significant impact on the Company's
operations. Consistent with industry practice, most of the Company's contracts
provide for a pass through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company therefore believes it
should be able to implement price increases sufficient to offset most cost
increases resulting from inflation. However, competitive factors may require the
Company to absorb cost increases resulting from inflation. The Company is unable
to determine the future impact of a sustained economic slowdown.
 
SEASONALITY
 
     The Company believes that its collection and landfill operations can be
adversely affected by protracted periods of inclement weather which could delay
the development of landfill capacity or transfer of waste and/or reduce the
volume of waste generated.
 
                                       16
<PAGE>   17
 
ITEM 7.  SUPPLEMENTAL FINANCIAL STATEMENTS AND EXHIBITS
 
SUPPLEMENTAL FINANCIAL STATEMENTS INDEX
 
<TABLE>
<S>                                                           <C>
Report of Independent Public Accountants to Allied Waste
  Industries, Inc. .........................................   F-2
Supplemental Consolidated Balance Sheets of Allied Waste
  Industries, Inc. -- December 31, 1996 and 1997............   F-3
Supplemental Consolidated Statements of Operations of Allied
  Waste Industries, Inc. for the Three Years Ended December
  31, 1997..................................................   F-4
Supplemental Consolidated Statements of Stockholders' Equity
  of Allied Waste Industries, Inc. for the Three Years Ended
  December 31, 1997.........................................   F-5
Supplemental Consolidated Statements of Cash Flows of Allied
  Waste Industries, Inc. for the Three Years Ended December
  31, 1997..................................................   F-6
Notes to Supplemental Consolidated Financial Statements of
  Allied Waste Industries, Inc. ............................   F-7
Supplemental Condensed Consolidated Balance Sheets of Allied
  Waste Industries, Inc. -- December 31, 1997 and June 30,
  1998......................................................  F-30
Supplemental Condensed Consolidated Statements of Operations
  of Allied Waste Industries, Inc. for the Three Months and
  Six Months Ended June 30, 1997 and 1998...................  F-31
Supplemental Condensed Consolidated Statements of Cash Flows
  of Allied Waste Industries, Inc. for the Six Months Ended
  June 30, 1997 and 1998....................................  F-32
Notes to Supplemental Condensed Consolidated Financial
  Statements of Allied Waste Industries, Inc. ..............  F-33
</TABLE>
 
                                       F-1
<PAGE>   18
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Allied Waste Industries, Inc.:
 
     We have audited the accompanying supplemental consolidated balance sheets
of Allied Waste Industries, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related supplemental consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997 (restated for the 1998 business
combinations which have been accounted for as pooling-of-interests, as described
in Note 2). The supplemental consolidated financial statements give retroactive
effect to the merger with American Disposal Services, Inc. on October 15, 1998,
which has been accounted for as a pooling-of-interests as described in Note 2.
These supplemental consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audits. We did not
audit the financial statements of American Disposal Services, Inc. included in
the supplemental consolidated financial statements of Allied Waste Industries,
Inc., which statements reflect total assets and revenues constituting 12 percent
and 9 percent, respectively, in 1997, 5 percent and 9 percent, respectively, in
1996, and 15 percent and 5 percent, respectively, in 1995 of the related
supplemental consolidated totals. These statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for American
Disposal Services, Inc., is based solely upon the report of the other auditors.
 
     We conducted our audits 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 audits and the report of other auditors provide a reasonable
basis for our opinion.
 
     In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Allied Waste
Industries, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, after giving retroactive effect to the
merger with American Disposal Services, Inc. as described in Note 2, all in
conformity with generally accepted accounting principles.
 
                                                    ARTHUR ANDERSEN LLP
 
Phoenix, Arizona,
October 16, 1998.
 
                                       F-2
<PAGE>   19
 
                         ALLIED WASTE INDUSTRIES, INC.
 
                    SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 1996          1997
                                                              ----------    ----------
<S>                                                           <C>           <C>
ASSETS
Current Assets --
  Cash and cash equivalents.................................      70,015        32,298
  Accounts receivable, net of allowance of $8,391 and
     $8,992.................................................     139,842       195,297
  Prepaid and other current assets..........................      25,021        40,782
  Inventories...............................................       7,489         7,664
  Deferred income taxes.....................................       5,809         5,318
  Assets held for sale......................................     524,716            --
                                                              ----------    ----------
          Total current assets..............................     772,892       281,359
Property and equipment, net.................................     932,110     1,576,674
Goodwill, net...............................................     888,648     1,056,601
Other assets................................................      68,550       105,545
                                                              ----------    ----------
          Total assets......................................   2,662,200     3,020,179
                                                              ==========    ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities --
  Current portion of long-term debt.........................     562,706        61,565
  Accounts payable..........................................      88,777        91,752
  Accrued interest..........................................       4,910         8,050
  Other accrued liabilities.................................      74,045       109,471
  Unearned income...........................................      16,044        43,999
                                                              ----------    ----------
          Total current liabilities.........................     746,482       314,837
Long-term debt, less current portion........................   1,281,621     1,454,270
Convertible subordinated debt, net of discount, less current
  portion...................................................       1,706            --
Deferred income taxes.......................................      54,573        17,336
Accrued closure, post-closure and environmental costs.......     167,881       224,534
Other long-term obligations.................................      24,719        58,665
Commitments and contingencies
Stockholders' Equity --
  Preferred stock...........................................           1            --
  Common stock..............................................       1,501         1,752
  Additional paid-in capital................................     439,060       989,913
  Retained deficit..........................................     (55,344)      (41,128)
                                                              ----------    ----------
          Total stockholders' equity........................     385,218       950,537
                                                              ----------    ----------
          Total liabilities and stockholders' equity........   2,662,200     3,020,179
                                                              ==========    ==========
</TABLE>
 
    The accompanying Notes to Supplemental Consolidated Financial Statements
                 are an integral part of these balance sheets.
                                       F-3
<PAGE>   20
 
                         ALLIED WASTE INDUSTRIES, INC.
 
               SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
                  (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ----------------------------------
                                                              1995        1996         1997
                                                            --------    --------    ----------
<S>                                                         <C>         <C>         <C>
Revenues..................................................  $580,784    $619,548    $1,301,391
Cost of operations........................................   366,980     386,001       747,150
Selling, general and administrative expenses..............    97,031     102,416       169,219
Depreciation and amortization.............................    55,414      67,823       156,200
Acquisition related costs.................................     1,531      90,764         5,010
Unusual items.............................................        --       5,744            --
                                                            --------    --------    ----------
  Operating income (loss).................................    59,828     (33,200)      223,812
Interest income...........................................      (735)     (2,479)       (1,969)
Interest expense..........................................    20,443      21,347       106,092
Other income, net.........................................        --          --        (1,076)
                                                            --------    --------    ----------
  Income (loss) before income taxes.......................    40,120     (52,068)      120,765
Income tax expense........................................    10,904         354        40,153
                                                            --------    --------    ----------
  Income (loss) before extraordinary loss.................    29,216     (52,422)       80,612
Extraordinary loss due to early extinguishment of debt,
  net of income tax benefit...............................      (908)    (13,887)      (53,205)
                                                            --------    --------    ----------
  Net income (loss).......................................    28,308     (66,309)       27,407
Dividends on preferred stock..............................    (4,070)     (1,073)         (381)
Conversion fee on equity securities converted.............    (2,151)         --            --
                                                            --------    --------    ----------
  Net income (loss) available to common shareholders......  $ 22,087    $(67,382)   $   27,026
                                                            ========    ========    ==========
Basic EPS:
  Net income (loss) before extraordinary loss.............  $   0.21    $  (0.40)   $     0.51
  Extraordinary loss......................................     (0.01)      (0.11)        (0.34)
                                                            --------    --------    ----------
  Net income (loss).......................................  $   0.20    $  (0.51)   $     0.17
                                                            ========    ========    ==========
Weighted average common shares outstanding................   112,162     132,967       158,649
                                                            ========    ========    ==========
Diluted EPS:
  Net income (loss) before extraordinary loss.............  $   0.20    $  (0.40)   $     0.48
  Extraordinary loss......................................     (0.01)      (0.11)        (0.32)
                                                            --------    --------    ----------
  Net income (loss).......................................  $   0.19    $  (0.51)   $     0.16
                                                            ========    ========    ==========
Weighted average common and common equivalent shares
  outstanding.............................................   115,903     132,967       166,198
                                                            ========    ========    ==========
</TABLE>
 
    The accompanying Notes to Supplemental Consolidated Financial Statements
                   are an integral part of these statements.
                                       F-4
<PAGE>   21
 
                         ALLIED WASTE INDUSTRIES, INC.
 
          SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                            TOTAL
                                                                ADDITIONAL    RETAINED      STOCK-
                                         PREFERRED    COMMON     PAID-IN      EARNINGS     HOLDERS'
                                           STOCK      STOCK      CAPITAL      (DEFICIT)     EQUITY
                                         ---------    ------    ----------    ---------    --------
<S>                                      <C>          <C>       <C>           <C>          <C>
Balance December 31, 1994..............    $ 44       $1,005     $138,364     $ 17,701     $157,114
  Common stock issued, net.............      --          90        33,006           --       33,096
  Stock options and warrants
     exercised.........................      --           8         2,048           --        2,056
  Series C, Series D, 9% Cumulative
     Convertible, and $90 Cumulative
     Convertible preferred stock and
     convertible notes converted.......     (42)        124         6,523           --        6,605
  Dividends declared on preferred
     stock.............................      --          --            --       (4,070)      (4,070)
  Conversion fee on equity securities
     converted.........................      --          --            --       (2,151)      (2,151)
  Equity transactions of pooled
     companies.........................      --          --        16,153      (18,661)      (2,508)
  Net income...........................      --          --            --       28,308       28,308
                                           ----       ------     --------     --------     --------
Balance December 31, 1995..............       2       1,227       196,094       21,127      218,450
  Common stock issued, net.............      --         242       162,535           --      162,777
  Warrants issued......................      --          --        49,000           --       49,000
  Stock options and warrants
     exercised.........................      --          10         2,336           --        2,346
  9% Cumulative Convertible preferred
     stock and convertible notes
     converted.........................      (1)         21         5,465           --        5,485
  Dividends declared on preferred
     stock.............................      --          --        (1,073)          --       (1,073)
  Equity transactions of pooled
     companies.........................      --           1        24,703      (10,162)      14,542
  Net loss.............................      --          --            --      (66,309)     (66,309)
                                           ----       ------     --------     --------     --------
Balance December 31, 1996..............       1       1,501       439,060      (55,344)     385,218
  Common stock issued, net of issuance
     costs and cancellations...........      --         221       357,798           --      358,019
  Warrants repurchased.................      --          --       (49,000)          --      (49,000)
  Stock grant amortization.............      --          --           381           --          381
  Stock options and warrants
     exercised.........................      --          13         4,195           --        4,208
  9% Cumulative Convertible preferred
     stock and convertible notes
     converted.........................      (1)         17         2,174           --        2,190
  Dividends declared on preferred
     stock.............................      --          --          (381)          --         (381)
  Equity transactions of pooled
     companies.........................      --          --       235,686      (13,191)     222,495
  Net income...........................      --          --            --       27,407       27,407
                                           ----       ------     --------     --------     --------
Balance December 31, 1997..............    $ --       $1,752     $989,913     $(41,128)    $950,537
                                           ====       ======     ========     ========     ========
</TABLE>
 
    The accompanying Notes to Supplemental Consolidated Financial Statements
                   are an integral part of these statements.
                                       F-5
<PAGE>   22
 
                         ALLIED WASTE INDUSTRIES, INC.
 
               SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                         -------------------------------------
                                                           1995         1996          1997
                                                         ---------   -----------   -----------
<S>                                                      <C>         <C>           <C>
Operating Activities --
  Net income (loss)....................................  $  28,308   $   (66,309)  $    27,407
  Adjustments to reconcile net income (loss) to cash
     provided by operating activities --
  Extraordinary loss on early extinguishment of debt...        908        22,828        21,549
  Provisions for:
     Depreciation and amortization.....................     55,414        67,823       156,200
     Closure and post-closure..........................      2,469         6,660         9,102
     Acquisition related costs.........................      1,531        90,764            --
     Unusual items.....................................         --         5,744            --
     Doubtful accounts.................................      2,194         2,871         4,228
     Accretion of senior discount notes................         --            --        22,764
     Deferred income taxes.............................      5,817         1,760       (37,994)
     Loss (gain) on sale of assets.....................        109         1,769        (7,250)
     Write-off intangible assets.......................        237            --            --
  Change in operating assets and liabilities, excluding
     the effects of purchase acquisitions --
  Accounts receivable, prepaid expenses, inventories
     and other.........................................    (13,500)      (34,173)      (84,209)
  Accounts payable, accrued liabilities, unearned
     income and other..................................     33,331       (26,520)       23,819
  Closure and post-closure costs.......................       (979)       (1,681)      (15,367)
                                                         ---------   -----------   -----------
Cash provided by operating activities..................    115,839        71,536       120,249
                                                         ---------   -----------   -----------
Investing Activities --
  Cost of acquisitions, net of cash acquired...........    (80,916)   (1,380,299)     (477,540)
  Capital expenditures.................................    (72,421)      (74,051)     (179,506)
  Capitalized interest.................................    (11,088)      (13,451)      (37,568)
  Proceeds from sale of assets.........................      2,518           940       530,120
  Increase in cash value of life insurance policies....       (272)           --            --
  Change in deferred acquisition costs and notes
     receivable........................................       (456)         (352)       (7,807)
                                                         ---------   -----------   -----------
Cash used for investing activities.....................   (162,635)   (1,467,213)     (172,301)
                                                         ---------   -----------   -----------
Financing activities --
  Net proceeds from sale and redemption of preferred
     stock.............................................       (316)           --            --
  Net proceeds from sale of common stock, and exercise
     of stock options and warrants.....................     30,915        48,119       329,019
  Proceeds from long-term debt, net of issuance
     costs.............................................    105,810     1,881,300     1,298,691
  Repayments of long-term debt.........................    (74,084)     (487,868)   (1,799,276)
  Repurchase of warrant................................         --            --       (49,000)
  Other long-term obligations..........................      7,955       (13,555)       12,931
  Dividends paid.......................................    (12,236)       (1,634)         (525)
  Equity transactions of pooled companies..............     (2,508)       14,542       222,495
                                                         ---------   -----------   -----------
Cash provided by financing activities..................     55,536     1,440,904        14,335
                                                         ---------   -----------   -----------
Increase (decrease) in cash and cash equivalents.......      8,740        45,227       (37,717)
Cash and cash equivalents, beginning of period.........     16,048        24,788        70,015
                                                         ---------   -----------   -----------
Cash and cash equivalents, end of period...............  $  24,788   $    70,015   $    32,298
                                                         =========   ===========   ===========
</TABLE>
 
    The accompanying Notes to Supplemental Consolidated Financial Statements
                   are an integral part of these statements.
                                       F-6
<PAGE>   23
 
                         ALLIED WASTE INDUSTRIES, INC.
 
            NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Allied Waste Industries, Inc. ("Allied" or the "Company") is incorporated
under the laws of the State of Delaware. Allied is a solid waste management
company providing non-hazardous waste collection, transfer, recycling and
disposal services in selected markets.
 
  Principles of consolidation and presentation --
 
     The consolidated financial statements include the accounts of Allied and
its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. The consolidated financial statements and
accompanying notes have been restated to reflect the significant number of
acquisitions completed through June 30, 1998 accounted for as
poolings-of-interests (See Note 2).
 
     Certain reclassifications have been made to the prior period financial
statements to conform to the current presentation.
 
  Cash and cash equivalents --
 
     Cash equivalents are investments with original maturities of less than
ninety days and are stated at quoted market prices. The cash and cash
equivalents includes approximately $21.2 million of outstanding checks at
December 31, 1997.
 
  Concentration of credit risk --
 
     Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high quality
financial institutions and limits the amount of credit exposure to any one
financial institution.
 
     The Company provides services to commercial and residential customers in
the United States. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. The Company performs ongoing credit evaluations of its
customers, but does not require collateral to support customer receivables. The
Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends and other
information.
 
  Inventory --
 
     Inventory is stated at the lower of cost (first-in, first-out method) or
market and consists principally of equipment parts, materials and supplies.
 
  Property and equipment --
 
     Property and equipment are recorded at cost, which includes interest to
finance the acquisition and construction of major capital additions during the
development phase, primarily landfills and transfer stations, until they are
completed and ready for their intended use. Depreciation is provided on the
straight-line method over the estimated useful lives of buildings (30-40 years),
vehicles and equipment (3-15 years), containers and compactors (5-10 years) and
furniture and office equipment (3-8 years). The cost of landfill airspace,
including original acquisition cost and incurred and projected landfill
preparation costs, is amortized based on tonnage as landfill airspace is
consumed. Management periodically reviews the realizability of its investment in
operating landfills. Should events and circumstances indicate that any of the
Company's landfills be reviewed for possible impairment, such review for
recoverability will be made in accordance with Emerging Issues Task Force
Discussion Issue ("EITF") 95-23. The EITF outlines how cash flows for
environmental exit costs should be determined and measured.
 
                                       F-7
<PAGE>   24
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs which do not improve assets or extend
their useful lives are charged to expense as incurred. For the three years ended
December 31, 1997, maintenance and repair expenses charged to cost of operations
were $36,587,000, $35,277,000 and $78,689,000, respectively. When property is
retired, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized.
 
  Goodwill --
 
     Goodwill is the cost in excess of fair value of identifiable assets of
acquired businesses and is amortized on a straight-line basis over 40 years. The
Company continually evaluates whether events and circumstances have occurred
subsequent to its acquisition, that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business
segment's discounted future cash flows over the remaining life of the goodwill
in measuring whether the goodwill is recoverable. Goodwill amortization of
$5,916,000, $5,185,000 and $26,580,000 is included in depreciation and
amortization for the three years in the period ended December 31, 1997,
respectively. Accumulated goodwill amortization was $17,249,000 and $43,829,000
at December 31, 1996 and 1997, respectively.
 
  Other assets --
 
     Other assets includes notes receivable, landfill closure deposits, deferred
charges and miscellaneous non-current assets. Deferred charges include costs
incurred to acquire businesses and to obtain equity and debt financing. Upon
consummation of an acquisition, deferred costs relating to acquired businesses
accounted for as purchases are allocated to goodwill or landfill airspace while
costs relating to acquired businesses accounted for as poolings-of-interests are
expensed. Direct costs related to acquisitions under evaluation are capitalized
and reviewed for realization on a periodic basis. These costs are expensed when
management determines that the capitalized costs provide no future benefit. Upon
funding of equity and debt offerings, deferred costs are charged to additional
paid-in capital or are capitalized as debt issuance costs and amortized using
the interest method over the life of the related debt. Miscellaneous assets
include consulting and non-competition agreements which are being amortized in
accordance with the terms of the respective agreements and contracts, not
exceeding 5 years.
 
  Accrued closure and post-closure costs --
 
     Accrued closure and post-closure costs represent an estimate of the current
value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Site specific closure and post-closure engineering cost
estimates are prepared annually for landfills owned and/or operated by the
Company for which it is responsible for closure and post-closure. The present
value of estimated future costs are accrued based on accepted tonnage as
landfill airspace is consumed. Discounting of future costs is applied where the
Company believes that both the amounts and timing of related payments are
reliably determinable. The Company periodically updates its estimates of future
closure and post-closure costs. The impact of changes determined to be changes
in estimates are accounted for on a prospective basis.
 
  Environmental costs --
 
     Allied accrues for costs associated with environmental remediation
obligations when such costs are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental
 
                                       F-8
<PAGE>   25
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
remediation obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded when their
receipts are deemed probable.
 
  Other long-term obligations --
 
     Other long-term obligations include non-competition agreements with former
owners of acquired companies and deferred royalty obligations. Guaranteed
minimum royalty obligations are recorded upon acquisition of the related asset
whereas royalty obligations dependent upon future waste accepted at landfills
are expensed as earned.
 
  Revenue --
 
     Advance billings are recorded as unearned income, and revenue is recognized
as income when services are provided.
 
  Acquisition related costs --
 
     In connection with the 1996 acquisition of substantially all of the
non-hazardous solid waste management business conducted by Laidlaw Inc. (the
"Laidlaw Acquisition"), the Company incurred approximately $84.6 million in
charges primarily associated with the acquisition, which include approximately
$51.5 million of environmental related matters for incremental closure and
post-closure measures, remediation activities and litigation costs, expected to
be disbursed over the next 30 years, $18.4 million of asset impairments and
abandonments consisting of $10.8 million related to over 50 noncompetition
agreements in several markets where the counterparty no longer poses a
significant threat, $4.8 million for discontinued facilities and $2.8 million
for market development activities no longer being pursued, and $14.7 million of
acquisition liabilities.
 
     For the three years ended December 31, 1997, costs were $1.5 million, $6.2
million and $5.0 million, respectively, for transaction and integration costs
directly related to acquisitions accounted for using the pooling-of-interests
method for business combinations.
 
  Unusual items --
 
     In December 1996 the Company recorded $5.7 million in unusual charges
including $2.0 million in connection with the ongoing investigation and
remediation of the Company's Norfolk landfill and $3.7 million of other
non-recurring valuation adjustments.
 
  Other income, net --
 
     The Company recorded approximately $1.1 million of other income, comprised
of a $5.6 million gain on sale of assets to USA Waste in the fourth quarter of
1997, net of a charge of approximately $4.5 million in connection with the
abandonment of certain collection and transfer operations.
 
  Extraordinary loss --
 
1995:
 
     In 1995, the Company recognized an extraordinary charge of approximately
$1.4 million ($908,000 net of income tax benefit) representing unamortized
deferred debt issuance costs related to refinanced obligations.
 
1996:
 
     In May 1996, the Company recognized an extraordinary charge of
approximately $0.8 million ($476,000 net of income tax benefit) representing
unamortized deferred debt issuance costs related to refinanced obligations.
 
                                       F-9
<PAGE>   26
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In July 1996, the Company completed a tender offer (the "Tender Offer") and
purchased substantially all of its $100 million 12% Senior Subordinated Notes
due 2004 (the "1994 Notes") at the redemption price of $1,157.50 per $1,000
note. An extraordinary charge to earnings related to the Tender Offer of
approximately $18.4 million ($11.0 million net of income tax benefit) was
charged to earnings in the third quarter of 1996. The Company also received a
consent from a majority of the holders of the 1994 Notes to eliminate all
substantive financial covenants associated with the remaining 1994 Notes.
 
     In December 1996, the Company refinanced its $300 million senior revolving
credit facility with the proceeds from the senior credit facility related to the
Laidlaw Acquisition and recognized an extraordinary charge of approximately $4.0
million ($2.4 million net of income tax benefit).
 
1997:
 
     In May 1997, the Company repurchased (the "Repurchase") from Laidlaw Inc.
("Laidlaw") and Laidlaw Transportation, Inc. (collectively, the "Laidlaw Group")
for $230 million in cash, the $150 million 7% Junior Subordinated Debenture
($81.6 million book value), the $168.3 million Zero Coupon Debenture ($34.9
million book value, collectively the "Allied Debentures") and the warrant to
purchase 20.4 million shares of the Company's common stock, $0.01 par value (the
"Common Stock") ($49.0 million book value, the "Warrant"), issued as partial
consideration for the Laidlaw Acquisition. An extraordinary charge of
approximately $65.7 million ($39.4 million net of income tax benefit) related to
the Repurchase was recorded in the second quarter of 1997.
 
     During June 1997, the Company replaced its Credit Facility (see Note 5)
with the Credit Agreement (see Note 5) and recognized an extraordinary charge of
approximately $21.6 million ($13.0 million net of income tax benefit) related to
prepayment penalties and the write-off of previously deferred debt issuance
costs.
 
     In September 1997, the Company sold 18.6 million shares of common stock
with net proceeds of approximately $327.4 million (the "Equity Offering"). In
October, the Company used $203 million of the net proceeds to retire a portion
of the Term Loan Facility (see Note 5) of the Credit Agreement (see Note 5), $71
million to repay the entire amount outstanding on the Revolving Credit Facility
(see Note 5). As a result of the early repayment of debt outstanding under the
Term Loan Facility, the Company recognized an extraordinary charge of
approximately $1.3 million ($0.8 million net of income tax benefit) related to
the write-off of previously deferred debt issuance costs in the third quarter of
1997.
 
                                      F-10
<PAGE>   27
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Statements of cash flows --
 
     The supplemental cash flow disclosures and non-cash transactions for the
three years ended December 31, 1997 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      -------------------------------
                                                       1995        1996        1997
                                                      -------    --------    --------
<S>                                                   <C>        <C>         <C>
Supplemental Disclosures --
  Interest paid.....................................  $27,876    $ 36,392    $121,537
  Income taxes paid.................................    4,241       6,727      17,175
Non-Cash Transactions --
  Common stock, preferred stock or warrants issued
     in acquisitions, as commissions, or contributed
     to 401(k) plan.................................  $   754    $164,764    $ 73,570
  Capital leases....................................   21,659      19,094      38,693
  Debt and liabilities incurred or assumed in
     acquisitions...................................   14,434     214,451     207,806
  Debt converted to common stock....................    6,802       5,485       2,265
  Dividends and interest paid, and conversion fee on
     debt and equity securities converted paid in
     common stock...................................    3,490          --          --
  Non-cash purchase and sale of operating
     businesses.....................................       --          --     181,434
</TABLE>
 
  Use of estimates --
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Final settlement amounts could differ from those estimates.
 
  Interest rate protection agreements --
 
     Interest rate protection agreements are used to reduce interest rate risks
and interest costs of the Company's debt portfolio. The Company enters into
these agreements to change the fixed/variable interest rate mix of the portfolio
to reduce the Company's aggregate exposure to increases in interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. Hedge accounting treatment is applied to interest rate derivative
contracts that are designated as hedges of specified debt positions. Amounts
payable or receivable under interest rate swap agreements are recognized as
adjustments to interest expense in the periods in which they accrue. Net
premiums paid for derivative financial instruments are deferred and recognized
ratably over the life of the instruments. Under hedge accounting treatment,
current period income is not affected by the increase or decrease in the fair
market value of derivative instruments as interest rates change and these
instruments are not reflected in the financial statements at fair market value.
Early termination of a hedging instrument does not result in recognition of
immediate gain or loss except in those cases when the debt instruments to which
a contract is specifically linked is terminated.
 
  Fair value of financial instruments --
 
     The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value
of Financial Instruments". The Company's Financial Instruments as defined by
SFAS No. 107 include cash, money market funds, accounts receivable, accounts
payable and long-term debt. The estimated fair value amounts have been
determined by the Company at December 31, 1997 using available market
 
                                      F-11
<PAGE>   28
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
information and valuation methodologies described below. Considerable judgment
is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates may not be indicative of the amounts that could be
realized in a current market exchange. The use of different market assumptions
or valuation methodologies could have a material effect on the estimated fair
value amounts.
 
     The carrying value of cash, money market funds, accounts receivable and
accounts payable approximate fair values due to the short-term maturities of
these instruments.
 
  Stock-based compensation plans --
 
     The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, ("APB No. 25"). Effective in January
1, 1996, the Company adopted the disclosure option of SFAS No. 123, "Accounting
for Stock-based Compensation." SFAS No. 123 requires that companies, which do
not elect to account for stock-based compensation as prescribed by the
statement, disclose the pro forma effects on earnings and earnings per share as
if SFAS No. 123 had been adopted. Additionally, certain other disclosures with
respect to stock compensation and the related assumptions are used to determine
the pro forma effects of SFAS No. 123.
 
  Accounting pronouncements not yet required to be adopted --
 
     During 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information." The new statements are effective for fiscal
years beginning after December 15, 1997 and are not expected to have a material
impact on the Company's financial statements.
 
2.  BUSINESS COMBINATIONS
 
     Acquisitions accounted for as purchases are reflected in the results of
operations since the date of purchase in Allied's consolidated financial
statements. The results of operations for acquisitions accounted for as
poolings-of-interests are included in Allied's consolidated financial statements
for all periods presented. The final determination of the cost, and the
allocation thereof, of certain of the Company's acquisitions is subject to
resolution of certain contingencies. Once such contingencies are achieved, the
purchase price is adjusted. Certain shares issued in connection with business
acquisitions have been valued taking into consideration certain restrictions
placed on the stock.
 
     On December 30, 1996, the Company completed the acquisition of
substantially all of the non-hazardous solid waste management business conducted
by Laidlaw in the United States and Canada, for total consideration of
approximately $1.5 billion comprised of cash, common stock, a warrant to acquire
common stock, and subordinated debentures. The cash consideration was financed
from the proceeds of the Senior Credit Facility (see Note 5) and the sale of the
1996 Notes (see Note 5).
 
                                      F-12
<PAGE>   29
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table reflects the allocation of purchase price for the
Laidlaw Acquisition, giving effect to the Canadian Sale (see Note 3) (in
thousands):
 
<TABLE>
<S>                                                           <C>
Current assets..............................................  $  70,137
Property and equipment......................................    353,793
Goodwill....................................................    757,200
Non-current assets..........................................      2,550
Current liabilities.........................................    (88,759)
Long-term debt..............................................     (4,019)
Other long-term obligations.................................   (106,648)
                                                              ---------
          Total net assets..................................  $ 984,254
                                                              =========
</TABLE>
 
     The following table summarizes acquisitions for the three years ended
December 31, 1997, excluding the Laidlaw Acquisition:
 
<TABLE>
<CAPTION>
                                                    1995         1996          1997
                                                 ----------   ----------    -----------
<S>                                              <C>          <C>           <C>
Number of businesses acquired accounted for as:
  Poolings-of-interests........................           5            5              9
  Purchases....................................          16           32             54
Total consideration (in millions)..............  $     97.3   $    148.9    $     911.0
Shares of common stock issued:.................   4,000,040    8,924,374(1)   9,376,861(2)
</TABLE>
 
---------------
(1) Includes 774,794 shares of contingently issuable common stock.
 
(2) Includes 359,516 shares of contingently issuable common stock.
 
     Through October 15, 1998, the Company acquired fifteen companies in
transactions accounted for as pooling-of-interests. These supplemental financial
statements have been restated to include historical operating results of 13 of
these companies; the effect of the other two companies was not significant.
 
     American Disposal Services, Inc., acquired in 1998 and included in these
restated supplemental financial statements, has not been audited by Arthur
Andersen LLP for the years ended December 31, 1997, 1996 and 1995. This company
was audited by other auditors and reflects total assets and revenues
constituting 12 percent and 9 percent, respectively, in 1997, 5 percent and 9
percent, respectively, in 1996, and 15 percent and 5 percent, respectively, in
1995, of the related Supplemental Consolidated totals.
 
                                      F-13
<PAGE>   30
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Revenues and net income have been restated for acquisitions accounted for
as poolings-of-interests as presented in the following table (in thousands):
 
<TABLE>
<CAPTION>
                                           ALLIED
                                           BEFORE
                                          POOLING         1997        1998      ALLIED, AS
                                        ACQUISITIONS    POOLINGS    POOLINGS     RESTATED
                                        ------------    --------    --------    ----------
<S>                                     <C>             <C>         <C>         <C>
Year ended December 31, 1997
  Revenues............................    $841,513      $33,515     $426,363    $1,301,391
  Net income..........................         358           54       26,995        27,407
Year ended December 31, 1996
  Revenues............................     246,679       45,006      327,863       619,548
  Net income (loss)...................     (79,427)      (1,155)      14,273       (66,309)
Year ended December 31, 1995
  Revenues............................     217,544       44,699      318,541       580,784
  Net income..........................      12,381          749       15,178        28,308
</TABLE>
 
  Unaudited pro forma statement of operations data --
 
     The following table compares, for the year ended December 31, 1996 and
1997, reported consolidated results of operations to unaudited pro forma
consolidated data as if all of the companies acquired in 1996 and 1997 accounted
for using the purchase method for business combinations were acquired as of
January 1, 1996 (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                              1996                       1997
                                     ----------------------    ------------------------
                                     REPORTED    PRO FORMA      REPORTED     PRO FORMA
                                     --------    ----------    ----------    ----------
<S>                                  <C>         <C>           <C>           <C>
Revenues...........................  $619,548    $1,394,083    $1,301,391    $1,452,763
Operating income (loss)............   (33,200)       84,505       223,812       252,461
Net income (loss) before
  extraordinary loss...............   (52,422)      (54,886)       80,612        87,141
Net income (loss)..................   (66,309)      (68,773)       27,407        33,936
Net income (loss) to common
  shareholders.....................   (67,382)      (69,846)       27,026        33,555
Net income (loss) per common share
  before extraordinary
  loss -- basic....................     (0.40)        (0.37)         0.51          0.54
Net income (loss) per common share
  before extraordinary
  loss -- diluted..................     (0.40)        (0.37)         0.48          0.51
Net income (loss) per common
  share -- basic...................     (0.51)        (0.46)         0.17          0.21
Net income (loss) per common
  share -- diluted.................     (0.51)        (0.46)         0.16          0.20
</TABLE>
 
     This data does not purport to be indicative of the results of operations of
Allied that might have occurred nor which might occur in the future.
 
3.  ASSETS HELD FOR SALE
 
     During March 1997, the Company completed the sale of the Company's Canadian
non-hazardous solid waste management operations (the "Canadian Sale") for
approximately $518 million in cash and sold certain non-core medical waste
assets for approximately $6.7 million. No gain or loss was recorded on either
sale.
 
                                      F-14
<PAGE>   31
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During the period from January 1, 1997 through March 16, 1997, the date of
sale, the Company excluded from consolidated statements of operations and
included in net assets held for sale at December 31, 1996, is $5.8 million of
income from operations and $9.6 million of interest expense attributable to the
Canadian operations.
 
     At December 31, 1996, the net assets held for sale are classified as
current assets in the consolidated balance sheet and are summarized as follows
(in thousands):
 
<TABLE>
<S>                                                           <C>
Cash........................................................  $    628
Accounts receivable, net....................................    43,104
Other current assets........................................     6,402
Property and equipment, net.................................   165,622
Goodwill....................................................   349,192
Other long-term assets......................................    13,099
Current liabilities.........................................   (31,338)
Long-term liabilities.......................................   (21,993)
                                                              --------
Total net assets............................................  $524,716
                                                              ========
</TABLE>
 
4.  PROPERTY AND EQUIPMENT
 
     Property and equipment at December 31, 1996 and 1997 was as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                                1996          1997
                                                              ---------    ----------
<S>                                                           <C>          <C>
Land and improvements.......................................     54,792       128,986
Land held for permitting as landfills(1)....................     66,070        79,253
Landfills...................................................    432,329       918,179
Buildings and improvements..................................     88,219       143,714
Vehicles and equipment......................................    295,094       455,324
Containers and compactors...................................    226,651       190,947
Furniture and office equipment..............................     20,859        13,819
                                                              ---------    ----------
                                                              1,184,014     1,930,222
Accumulated depreciation and amortization...................   (251,904)     (353,548)
                                                              ---------    ----------
                                                                932,110     1,576,674
                                                              =========    ==========
</TABLE>
 
---------------
(1) These properties have been approved for use as landfills, and the Company is
    currently in the process of obtaining the necessary permits.
 
                                      F-15
<PAGE>   32
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5.  LONG-TERM DEBT
 
     Long-term debt at December 31, 1996 and 1997 consists of the following (in
thousands):
 
  To related parties --
 
<TABLE>
<CAPTION>
                                                                1996       1997
                                                              --------    -------
<S>                                                           <C>         <C>
Unsecured notes payable to former stockholders, net of
  discount, interest at an effective rate of 14%............  $110,747    $    --
Notes payable to former stockholders, interest only payments
  at rates ranging from 9% to the bank's prime rate plus 1%,
  due on demand.............................................     1,689      5,189
Unsecured notes to related parties, interest only payments
  at rates ranging from 5.74% to the bank's prime rate plus
  1%, due on demand.........................................     3,647      5,459
Unsecured notes payable to stockholders, interest at 12%....     1,862      1,726
                                                              --------    -------
                                                               117,945     12,374
     Current portion........................................       136        154
                                                              --------    -------
                                                              $117,809    $12,220
                                                              ========    =======
</TABLE>
 
     In connection with the Laidlaw Acquisition, a subsidiary of the Company
issued a $150 million 7% junior subordinated debenture and a $168.3 million zero
coupon debenture recorded at a net discounted amount of $77.5 million and $33.2
million, respectively, at December 31, 1996. The debentures were repaid during
1997 with the proceeds from the Senior Discount Notes.
 
     The $2.0 million notes payable to related parties were issued in April 1995
in accordance with an agreement to acquire certain real estate. This agreement
was executed by one of the Company's subsidiaries prior to the Company's
acquisition of the subsidiary. The agreement required the payment of an
aggregate of $5.6 million to the previous owners upon issuance of a permit to
operate a landfill. Subsequent to execution of this agreement, certain previous
owners became stockholders of the Company. These notes bear interest at 12% per
annum with monthly principal and interest payments through maturity in May 1999
and are guaranteed by the Company.
 
  To unrelated parties --
 
<TABLE>
<CAPTION>
                                                                 1996          1997
                                                              ----------    ----------
<S>                                                           <C>           <C>
Senior credit facilities, weighted average interest at
  10.03% and 7.5% at December 31, 1996 and 1997,
  respectively..............................................  $  975,000    $  438,000
Senior subordinated notes, interest at 10.25% at December
  31, 1996 and 1997, unsecured..............................     525,010       525,000
Senior discount notes, interest at 11.3%....................          --       254,690
Notes payable to banks, finance companies and individuals,
  weighted average interest rate of 7.5% and 8.6% at
  December 31, 1996 and 1997, respectively and principal
  payable through 2014, secured by vehicles, equipment, real
  estate, accounts receivable or stock of certain
  subsidiaries..............................................     146,583       184,523
Notes payable to individuals and a commercial company,
  interest at 5%-12%, principal and interest payable through
  2006, unsecured...........................................      12,383        30,247
Obligations under capital leases of vehicles and equipment,
  weighted average interest at 9.6% and 7.8% at December 31,
  1996, and 1997, respectively, payable monthly.............      67,350        71,001
                                                              ----------    ----------
                                                               1,726,326     1,503,461
     Current portion........................................     562,514        61,411
                                                              ----------    ----------
                                                              $1,163,812    $1,442,050
                                                              ==========    ==========
</TABLE>
 
                                      F-16
<PAGE>   33
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In connection with the Laidlaw Acquisition, the Company and Allied Waste
North America, Inc., a wholly owned subsidiary of the Company ("Allied NA"),
executed a $1.275 billion credit agreement (the "Credit Facility"). The Credit
Facility was comprised of (i) a $300 million revolving credit facility; (ii) a
$475 million 5.5 year senior term loan; (iii) a $100 million 6.5 year
Amortization Extended Term Loan AXEL(TM)A; (iv) a $200 million 7.5 year
AXEL(TM)B; and (v) a $200 million 8.5 year AXEL(TM)C. In connection with the
Canadian Sale, Allied paid approximately $517 million of the Credit Facility.
Payments were made on a pro rata basis between the term loan and each of the
AXEL traunches as provided by the Credit Facility.
 
     In June 1997, the Company repaid the Credit Facility and entered into an
Amended and Restated Credit Agreement (the "Credit Agreement"). The Credit
Agreement provides a six and one-half year senior secured $500 million term loan
facility (the "Term Loan Facility") and a six and one-half year senior secured
$400 million revolving credit facility (the "Revolving Credit Facility" and
together with the Term Loan Facility, the "Senior Credit Facility"). Principal
payments on the Term Loan Facility are payable quarterly, beginning in September
1997 and increase from $10 million to $100 million per annum through maturity in
December 2003. Principal under the Revolving Credit Facility is due upon
maturity. The Senior Credit Facility bears interest at the lesser of (a) a Base
Rate, or (b) a Eurodollar Rate, both terms as defined in the Credit Agreement,
plus, in either case, an applicable margin. The applicable margin will be
adjusted from time to time pursuant to a pricing grid based upon the Company's
Total Debt to EBITDA ratio, as defined in the Credit Agreement, and varies
between zero percent and 0.75% for Base Rate loans, and 0.75% and 1.75% for
Eurodollar loans. In addition, if at any time the Company's Senior Debt Ratio is
greater than 2.5 to 1.0, the applicable margin for all loans will be increased
by 0.25%.
 
     On September 30, 1997, the Company repaid $203 million on the Term Loan
Facility and $71 million outstanding on the Revolving Credit Facility. In
connection with this repayment, the Company amended the Credit Agreement (the
"Amendment") in October 1997. The Amendment expanded the Senior Credit Facility
to $1.1 billion from $900 million by increasing the Revolving Credit Facility
from $400 million to $600 million and by adding a $200 million delayed draw term
facility (the "Delayed Draw Term Facility"), after giving effect to the
repayment of $203 million on the Term Loan Facility on September 30, 1997. The
Revolving Credit Facility includes a $250 million sublimit for the issuance of
letters of credit (increased from $175 million at September 30, 1997). Interest
rates were not changed in connection with the Amendment.
 
     In connection with the Laidlaw Acquisition, Allied NA issued $525 million
of 10.25% Senior Subordinated Notes due 2006 (the "1996 Notes") in a Rule 144A
offering which was subsequently registered with the Securities and Exchange
Commission. Net proceeds from the sale of the 1996 Notes, after the underwriting
discounts and other expenses, were approximately $509 million. The net proceeds
were used to pay a portion of the cash purchase price of the Laidlaw
Acquisition, repay amounts outstanding under the Company's previous $300 million
credit facility, fund certain acquisitions and for general corporate purposes.
The 1996 Notes cannot be redeemed until December 1, 2001, except under certain
circumstances. Prior to December 1, 2001, the 1996 Notes are subject to
redemption, at the option of Allied NA, at prices specified in the indenture. At
any time prior to December 1, 1999, up to 33% of principal amount of the 1996
Notes will be redeemable, at the option of Allied NA, from the proceeds of one
or more public offerings of capital stock by the Company at a redemption price
of 110.25% of principal amount, plus accrued interest. The 1996 Notes are
guaranteed by the Company and substantially all of Allied NA's subsidiaries, the
guarantees of which are expressly subordinated to the guarantees of Allied NA's
Senior Credit Facility.
 
     In May 1997, Allied issued $418 million aggregate face amount of senior
discount notes in a private offering (the "Senior Discount Notes"). The Senior
Discount Notes were issued at a discount of principal amount and, unless certain
provisions are triggered, there will be no periodic cash payments of interest
before June 1, 2002. Thereafter, the Senior Discount Notes will accrue cash
interest at the rate of 11.30% per annum, payable semi-annually on June 1 and
December 1 of each year, commencing December 1, 2002. Allied
 
                                      F-17
<PAGE>   34
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
completed an exchange offer for the Senior Discount Notes on December 16, 1997.
The Senior Discount Notes cannot be redeemed until December 1, 2001, except
under certain circumstances. Prior to June 1, 2000, up to 33% of principal
amount of Senior Discount Notes will be redeemable, at the option of Allied,
from the proceeds of one or more public offerings of capital stock by Allied at
a redemption premium to their accreted value, plus accrued interest.
 
  Convertible subordinated debt --
 
<TABLE>
<CAPTION>
                                                               1996
                                                              ------
<S>                                                           <C>
Senior Convertible Subordinated Debentures, unsecured.......  $  975
Convertible note payable to an individual, unsecured........     787
                                                              ------
                                                               1,762
     Current portion........................................      56
                                                              ------
                                                              $1,706
                                                              ======
</TABLE>
 
     The Senior Convertible Subordinated Debentures bear interest at 8.5% per
annum payable semi-annually, with principal payable in 2002. The debentures are
convertible into Allied common shares at $6.00 per share. Warrants to purchase
195,000 common shares at $6.00 per share were issued in connection with the sale
of the debentures. In 1997, this debt was converted into 162,500 shares of
common stock.
 
     The 8% Convertible note payable to an individual was payable quarterly
through September 1996. Beginning October 1996, principal and interest was
payable in equal monthly installments through October 2006. The note is
convertible into Allied common stock at $10.00 per share during the period of
January 1997 to December 1998. In 1997, this debt was converted into 75,494
shares of common stock.
 
  Future maturities of long-term debt --
 
     Aggregate future maturities of long-term debt outstanding at December 31,
1997 (in thousands):
 
<TABLE>
<CAPTION>
                          MATURITY                               1997
                          --------                            ----------
<S>                                                           <C>
1998........................................................  $   61,565
1999........................................................      75,118
2000........................................................      89,242
2001........................................................      88,564
2002........................................................     106,912
Thereafter..................................................   1,094,434
                                                              ----------
                                                              $1,515,835
                                                              ==========
</TABLE>
 
                                      F-18
<PAGE>   35
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Future payments under capital leases, the principal amounts of which are
included above in future maturities of long-term debt, are as follows at
December 31, 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                              1997
                                                --------------------------------
                   MATURITY                     PRINCIPAL    INTEREST     TOTAL
                   --------                     ---------    --------    -------
<S>                                             <C>          <C>         <C>
1998..........................................   $17,239     $ 5,508     $22,747
1999..........................................    15,216       4,150      19,366
2000..........................................    11,902       3,015      14,917
2001..........................................    12,041       1,994      14,035
2002..........................................    12,775         881      13,656
Thereafter....................................     1,828         456       2,284
                                                 -------     -------     -------
                                                 $71,001     $16,004     $87,005
                                                 =======     =======     =======
</TABLE>
 
  Fair value of debt --
 
     The Company's 1996 Notes had a fair value of $548.6 million and $577.5
million at December 31, 1996 and 1997, respectively, based upon quoted market
prices. The convertible subordinated debt has a fair value of approximately $2.4
million based upon the conversion features of the related instruments and market
price of the Company's common stock at December 31, 1996. The fair value of the
Zero Coupon Debenture and 7% Debenture approximates book value at December 31,
1996 due to the short passage of time since their origination. The Company's
Senior Discount Notes had a value of $292.6 million at December 31, 1997 based
upon quoted market prices. Management believes the carrying value of all
remaining long-term debt approximates fair value.
 
  Interest rate protection agreements --
 
     The Company has entered into interest rate protection agreements (the
"Agreements"), with reputable national commercial banks and investment banking
institutions to reduce its exposure to fluctuations in variable interest rates.
A summary of the Agreements outstanding as of December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
NOTIONAL AMOUNT   FIXED RATE               PERIOD
---------------   ----------   -------------------------------
 (IN MILLIONS)
<S>               <C>          <C>
     $130            6.27%          April 1997-- May 1998
       50            6.08      September 1997-- September 2000
       50            6.06       September 1997-- March 2000
       50            5.97         October 1997-- April 1999
       50            6.02         October 1997-- October 1999
       50            5.90        November 1997-- November 1999
       50            5.91        November 1997-- November 1999
</TABLE>
 
     The Agreements effectively change the Company's interest rate paid on its
floating rate long-term debt to a weighted average fixed rate of approximately
6.07% plus applicable margins imposed by the terms of the Credit Agreement at
December 31, 1997. The fair value of the Agreements as of December 31, 1997 was
approximately $1.5 million, which reflects the estimated amounts that the
Company would pay to terminate the Agreements based on quoted market prices of
comparable contracts as of December 31, 1997.
 
     The Company has also entered into an additional interest rate protection
agreement with effective dates beginning in the future (the "Forward
Agreement"). This Forward Agreement provides continuing protection to
fluctuations in variable interest rates as existing Agreements expire and as
additional debt is drawn under
 
                                      F-19
<PAGE>   36
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the Delayed Draw Term Facility of the Senior Credit Facility. A summary of the
Forward Agreement is as follows:
 
<TABLE>
<CAPTION>
NOTIONAL AMOUNT   FIXED RATE           PERIOD
---------------   ----------   ----------------------
 (IN MILLIONS)
<S>               <C>          <C>
     $130            6.06%      May 1998 -- May 2001
</TABLE>
 
  Debt covenants --
 
     The Company's Senior Credit Facility, the 1996 Notes and the Senior
Discount Notes, contain warranties and covenants, requiring the maintenance of
certain tangible net worth, debt to equity, and cash flow to debt ratios.
Additionally, these covenants limit among other things, the ability of the
Company to incur additional secured indebtedness, make acquisitions and purchase
fixed assets above certain amounts, transfer or sell assets, pay dividends
except on certain preferred stock, make optional payments on certain
subordinated indebtedness or make certain other restricted payments, create
liens, enter into certain transactions with affiliates or consummate a merger,
consolidation or sale of all or substantially all of its assets. At December 31,
1997, Allied was in compliance with all applicable covenants.
 
     Substantially all subsidiaries of the Company are jointly and severally
liable for the obligations under the 1997 Notes and the Senior Credit Facility
through unconditional guarantees issued by the subsidiaries which are all,
except in one minor case, wholly-owned by the Company. No significant
restrictions exist regarding the ability of the subsidiary companies to pay
dividends or make loans or advances to Allied.
 
6.  CLOSURE, POST-CLOSURE AND ENVIRONMENTAL COSTS
 
  Closure and post-closure costs --
 
     The net present value of the closure and post-closure commitment is
calculated assuming inflation of 2.5% and a risk-free capital rate of 7.0%.
Discounted amounts previously recorded are accreted to reflect the effects of
the passage of time. The Company's current estimate of total future payments for
closure and post-closure, in accordance with Subtitle D, is $1.3 billion, as
shown below, while the present value of such estimate is $326.7 million. At
December 31, 1996 and 1997, accruals for landfill closure and post-closure costs
(including costs assumed through acquisitions) were approximately $122.9 million
and $162.0 million, respectively. The accruals reflect relatively young
landfills whose estimated remaining lives, based on current waste flows, range
from 1 to over 75 years, with an estimated average remaining life of greater
than 30 years.
 
     The Company's estimate of total future payments for closure and
post-closure liabilities for currently owned and operated landfills is as
follows (in thousands):
 
<TABLE>
<S>                                                <C>
1998.............................................  $   22,798
1999.............................................      18,937
2000.............................................      13,673
2001.............................................      16,272
2002.............................................      24,990
Thereafter.......................................   1,206,988
                                                   ----------
                                                   $1,303,658
                                                   ==========
</TABLE>
 
  Environmental costs --
 
     In connection with the Laidlaw Acquisition, Allied engaged an independent
environmental consulting firm to assist in conducting an environmental
assessment of the real property owned by subsidiaries acquired from Laidlaw or
other third-parties, and properties under the management of companies acquired
from
 
                                      F-20
<PAGE>   37
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Laidlaw. Several contaminated landfills and other properties were identified,
two of which are owned by subsidiaries of the Company, that would require those
subsidiaries to incur costs for incremental closure and post-closure measures,
remediation activities and litigation costs. The costs of performing the
investigation, design, remediation and the allocation of responsibility to the
subsidiaries of Allied vary significantly between sites. Based on information
available to the Company, Allied recorded a provision of $51.5 million for
environmental matters at sites acquired from Laidlaw, including closure and
post-closure costs, in the 1996 statement of operations and expects these
amounts to be disbursed over the next 30 years.
 
     The ultimate amounts for environmental liabilities cannot be determined and
estimates of such liabilities made by the Company, after consultation with its
independent environmental engineers, require assumptions about future events due
to a number of uncertainties including the extent of the contamination, the
appropriate remedy, the financial viability of other potentially responsible
parties and the final apportionment of responsibility among the potentially
responsible parties. Where the Company has concluded that its estimated share of
potential liabilities is probable, a provision has been made in the consolidated
financial statements. Since the ultimate outcome of these matters may differ
from the estimates used in the Company's assessment to date, the recorded
liabilities will be periodically evaluated as additional information becomes
available to ascertain that the accrued liabilities are adequate. The Company
has determined that the recorded liability for environmental matters as of
December 31, 1996 and 1997 of approximately $45.0 million and $62.5 million,
respectively, represents the most probable outcome of these contingent matters.
The Company does not expect that adjustments to estimates, which are reasonably
possible in the near term and that may result in changes to recorded amounts,
will have a material effect on the Company's consolidated liquidity, financial
positions or results of operations.
 
7.  STOCKHOLDERS' EQUITY
 
     The authorized, issued and outstanding shares of the Company's classes of
capital stock were as follows:
 
<TABLE>
<CAPTION>
                                                                  ISSUED AND OUTSTANDING
                                  LIQUIDATION                        AT DECEMBER 31,
                                  PREFERENCE     AUTHORIZED     --------------------------
                                   PER SHARE       SHARES          1996           1997
                                  -----------    -----------    -----------    -----------
<S>                               <C>            <C>            <C>            <C>
Preferred stock, $.10 par --
  Series C Convertible..........    $   10           800,000             --             --
  Series D Convertible..........        15           267,000             --             --
  Series E Convertible..........     5,000             3,000             --             --
  9% Cumulative Convertible.....     1,000            30,000             --             --
  $90 Cumulative Convertible....     1,000            20,000             --             --
  7% Cumulative Convertible.....     1,000           100,000          9,907             --
Common stock, $.01 par, net of
  570,048 treasury shares.......        --       200,000,000    150,064,494    175,167,134
</TABLE>
 
                                      F-21
<PAGE>   38
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Dividends declared and accrued on the Company's classes of preferred stock
were as follows:
 
<TABLE>
<CAPTION>
                                                 DIVIDENDS DECLARED         ACCRUED
                                                 FOR THE YEARS ENDED      DIVIDENDS AT
                                                    DECEMBER 31,          DECEMBER 31,
                                               -----------------------    ------------
                                                1995     1996     1997    1996    1997
                                               ------   ------    ----    ----    ----
<S>                                            <C>      <C>       <C>     <C>     <C>
Series D Convertible.........................  $  184   $    1    $ --    $ --    $ --
9% Cumulative Convertible....................   2,466      377      --      --      --
$90 Cumulative Convertible...................     560       --      --      --      --
7% Cumulative Convertible....................     698      695     381     144      --
Series E Cumulative Convertible..............     162       --      --      --      --
                                               ------   ------    ----    ----    ----
                                               $4,070   $1,073    $381    $144    $ --
                                               ======   ======    ====    ====    ====
</TABLE>
 
     During 1995, the Series E preferred stock, the Series C preferred stock and
$90 preferred stock was converted into Common Stock. During 1996, the Series D
preferred stock and 9% preferred stock was converted into Common Stock. During
1997, the 7% preferred stock was converted into Common Stock.
 
  Warrants to purchase common stock --
 
     Warrants to purchase common shares at December 31, 1996 and 1997 are
summarized as follows:
 
<TABLE>
<CAPTION>
                                                     1996              1997
                                                --------------    --------------
<S>                                             <C>               <C>
Number of shares..............................    22,645,166         858,942
Purchase price per share......................  $3.37 - $13.50    $4.60 - $7.00
Expiration dates..............................   1997 - 2008       1998 - 2005
</TABLE>
 
     In connection with the Laidlaw Acquisition, the Company issued a warrant to
Laidlaw for the purchase of 20,400,000 shares of Common Stock at an exercise
price of $8.25 per share. The Company repurchased this warrant from Laidlaw
during 1997.
 
8.  STOCK OPTION PLANS
 
     The 1991 Incentive Stock Plan ("1991 Plan"), the 1993 Incentive Stock Plan
("1993 Plan") and the 1994 Incentive Stock Plan ("1994 Plan") provide for the
grant of non-qualified stock options, incentive stock options, shares of
restricted stock, shares of phantom stock and stock bonuses. The maximum number
of shares which may be granted under the 1991 Plan may not exceed the greater of
750,000 common shares or 7.5% of the number of common shares outstanding at the
end of a preceding fiscal quarter (4,463,778 shares at December 31, 1997). An
additional 500,000 and 1,000,000 common shares may be granted under the 1993
Plan and the 1994 Plan, respectively. The exercise price, term and other
conditions applicable to each option granted are generally determined by the
Compensation Committee of the Board of Directors.
 
     The 1994 Amended and Restated Non-Employee Director Stock Option Plan
provides for the grant of non-qualified options to each member of the Board of
Directors, who is not also an employee of the Company, at a price equal to the
fair market value of a common share on the date of grant. The maximum number of
shares which may be granted under the plan is 750,000 common shares. All options
granted under the plan are fully vested and exercisable on the date of grant and
expire ten years from the grant date.
 
                                      F-22
<PAGE>   39
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997 and for the years then ended is presented in the table and
narrative below:
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                         --------------------------------------
                                                            1995          1996          1997
                                                         ----------    ----------    ----------
<S>                                                      <C>           <C>           <C>
Options outstanding, beginning of period...............   1,762,183     3,719,185     5,243,608
  Options granted......................................   2,176,642     1,815,820     3,630,510
  Options exercised....................................    (183,606)     (277,483)     (507,573)
  Options terminated...................................     (36,034)      (13,914)     (113,619)
                                                         ----------    ----------    ----------
Options outstanding, end of period.....................   3,719,185     5,243,608     8,252,926
                                                         ==========    ==========    ==========
Options exercisable, end of period.....................   1,879,679     2,604,639     4,119,183
Weighted average fair value of options granted.........  $     3.79    $     8.48    $     8.58
</TABLE>
 
     The Company accounts for its stock-based compensation plans under APB No.
25, under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to the fair value of the Company's
Common Stock upon the date of grant. In 1996, the Company adopted SFAS No. 123
for disclosure purposes and accordingly, the fair value of each option grant has
been estimated as of the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                                         FOR THE YEARS ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       1995            1996            1997
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Risk free interest rate..........................  6.0% to 7.6%    5.2% to 6.7%    5.8% to 7.6%
Expected life....................................       8 years       5-8 years         5 years
Dividend rate....................................            0%              0%              0%
Expected volatility..............................           51%             49%      25% to 50%
</TABLE>
 
     Using these assumptions, pro forma net income (loss) and net income (loss)
per share would reflect additional compensation expense recognized over the
vesting periods of the options. The pro forma income for 1997 includes the
impact of certain options that fully vested in 1997 due to a change in control.
The resulting pro forma net income (loss), in thousands, and pro forma net
income (loss) per share is as follows:
 
<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                                ---------------------------------
                                                                  1995        1996         1997
                                                                --------    ---------    --------
<S>                                              <C>            <C>         <C>          <C>
Net income (loss):                               As reported    $28,308     $(66,309)    $27,407
                                                   Pro forma     27,503      (68,283)     14,293
Net income (loss) per share:                     As reported    $  0.24     $  (0.50)    $  0.16
                                                   Pro forma       0.24        (0.51)       0.09
</TABLE>
 
                                      F-23
<PAGE>   40
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes information about stock options outstanding
at December 31, 1997 which are fully vested, partially vested and non-vested:
 
<TABLE>
<CAPTION>
                                                   FULLY           PARTIALLY            NON-
                                                  VESTED             VESTED            VESTED
                                              ---------------    --------------    ---------------
<S>                                           <C>                <C>               <C>
Options outstanding:
  Range of exercise prices..................  $3.00 to $16.88    $4.50 to $9.50    $4.27 to $15.88
  Number outstanding........................        2,908,073         1,642,243          2,350,040
  Weighted average remaining life...........          6 years           8 years            9 years
  Weighted average exercise price...........            $6.25             $8.81             $10.31
Options exercisable:
  Range of exercise prices..................  $3.00 to $16.88    $4.50 to $9.50                 --
  Number outstanding........................        2,908,073           590,525                 --
  Weighted average remaining life...........          6 years           8 years                 --
  Weighted average exercise price...........            $6.25             $8.71                 --
</TABLE>
 
9.  NET INCOME (LOSS) PER COMMON SHARE
 
     Net income (loss) per common share is calculated by dividing net income
(loss), less dividend requirements on preferred stock, by the weighted average
number of common shares and common share equivalents outstanding during each
period as restated to reflect acquisitions accounted for as poolings-of-
interests. The computation of basic earnings per share and diluted earnings per
share is as follows (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      --------------------------------
                                                        1995        1996        1997
                                                      --------    --------    --------
<S>                                                   <C>         <C>         <C>
BASIC EARNINGS PER SHARE COMPUTATION:
  Income (loss) before extraordinary items..........  $ 29,216    $(52,422)   $ 80,612
  Less: Preferred stock dividends...................    (4,070)     (1,073)       (381)
         Conversion fee on equity securities
           converted................................    (2,151)         --          --
                                                      --------    --------    --------
  Income (loss) before extraordinary items available
     to common shareholders.........................  $ 22,995    $(53,495)   $ 80,231
                                                      ========    ========    ========
  Weighted average common shares outstanding during
     the period.....................................   112,162     132,967     158,649
                                                      ========    ========    ========
  Basic earnings per share before extraordinary
     items..........................................  $   0.21    $  (0.40)   $   0.51
                                                      ========    ========    ========
DILUTED EARNINGS PER SHARE COMPUTATION:
  Income (loss) before extraordinary items..........  $ 29,216    $(52,422)   $ 80,612
  Less: Preferred stock dividends...................    (4,070)     (1,073)       (381)
       Conversion fee on equity securities
     converted......................................    (2,151)         --          --
  Interest savings upon conversion of convertible
     securities.....................................        --          --          39
                                                      --------    --------    --------
  Income (loss) before extraordinary items available
     to common shareholders.........................  $ 22,995    $(53,495)   $ 80,270
                                                      ========    ========    ========
</TABLE>
 
                                      F-24
<PAGE>   41
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      --------------------------------
                                                        1995        1996        1997
                                                      --------    --------    --------
<S>                                                   <C>         <C>         <C>
  Weighted average common shares outstanding during
     the period.....................................   112,162     132,967     158,649
  Effect of stock options and warrants, assumed
     exercisable....................................     1,790                   6,653
  Effect of Series C preferred stock, assumed
     converted......................................       234          --          --
  Effect of Series D preferred stock, assumed
     converted......................................        --          --          --
  Effect of 7% preferred stock, assumed converted...        --          --          --
  Effect of convertible notes, assumed converted....        --          --         128
  Effect of shares assumed issued pursuant to
     earn-out agreements............................     1,717          --         768
                                                      --------    --------    --------
  Total Shares......................................   115,903     132,967     166,198
                                                      ========    ========    ========
  Diluted earnings per share before extraordinary
     items..........................................  $   0.20    $  (0.40)   $   0.48
                                                      ========    ========    ========
</TABLE>
 
     Conversion has not been assumed for Series D preferred stock and 9%
preferred stock, as the effect would not be dilutive for 1995 and 1996.
Additionally, conversion has not been assumed for stock options and warrants in
1996, nor has conversion been assumed for 7% preferred stock and convertible
notes in 1995, 1996 and 1997, as the effects would not be dilutive.
 
     In 1997, the Company adopted SFAS No. 128 "Earnings per Share," effective
December 15, 1997. As a result, the Company's reported earnings for 1995 and
1996 were restated. The effect of this accounting change on previously reported
earnings per share data was as follows:
 
<TABLE>
<CAPTION>
                                                              1995      1996
                                                              -----    ------
<S>                                                           <C>      <C>
Per share amounts
Primary earnings per share..................................  $0.20    $(0.40)
Effect of SFAS No. 128......................................   0.01        --
                                                              -----    ------
Basic earnings per share as restated........................  $0.21    $(0.40)
                                                              =====    ======
Fully diluted earnings per share............................  $0.20    $(0.40)
Effect of SFAS No. 128......................................     --        --
                                                              -----    ------
Diluted earnings per share as restated......................  $0.20    $(0.40)
                                                              =====    ======
</TABLE>
 
10.  INCOME TAXES
 
     The Company accounts for income taxes using a balance sheet approach
whereby deferred tax assets and liabilities are determined based on the
differences in financial reporting and income tax basis of assets, other than
goodwill, and liabilities, and the differences are measured using the income tax
rate in effect in the year of measurement.
 
     The Company and its subsidiaries file a consolidated federal income tax
return. Subsidiaries acquired using the pooling-of-interests method, however,
are not included in the Company's consolidated federal income tax return until
the effective date of the acquisition. As of December 31, 1997, Allied had a net
operating loss carryforward ("NOLC") for federal income tax purposes of
approximately $14.2 million, which expires beginning in 2004. The utilization of
the NOLC is limited by future taxable earnings generated at the subsidiary
level. The Company recorded a valuation allowance to reflect uncertainty as to
the utilization of certain portions of the NOLC for financial reporting
purposes. The maximum annual utilization of certain portions of the NOLC are
limited under the Internal Revenue Code as a result of changes in ownership that
have occurred at the subsidiary level.
 
                                      F-25
<PAGE>   42
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The components of the income tax provision (benefit) consist of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                        1995       1996        1997
                                                       -------    -------    --------
<S>                                                    <C>        <C>        <C>
Current tax provision................................  $ 5,779    $ 1,600    $ 78,294
Deferred provision (benefit).........................    5,125     (1,246)    (38,141)
                                                       -------    -------    --------
Total................................................  $10,904    $   354    $ 40,153
                                                       =======    =======    ========
</TABLE>
 
     Reconciliation of the federal statutory tax rate to the Company's effective
rate is as follows:
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                               1995      1996     1997
                                                              ------    ------    -----
<S>                                                           <C>       <C>       <C>
Federal statutory tax rate..................................   35.0%    (35.0)%   35.0%
Consolidated state taxes, net of federal benefit............    5.0      (5.0)     3.1
Taxes of pooled companies...................................  (19.0)      2.0     (6.2)
Amortization of goodwill....................................    3.8       2.3      0.6
Potential tax goodwill greater than book goodwill...........     --      34.7       --
Other permanent differences.................................    2.4       1.7      0.7
                                                              -----     -----     ----
Effective tax rate..........................................   27.2%      0.7%    33.2%
                                                              =====     =====     ====
</TABLE>
 
     Tax benefits on the extraordinary items in 1995, 1996 and 1997 were based
on the Company's then ordinary combined federal and state rate of 34%, 40% and
40%, respectively.
 
     The net current deferred tax asset of $5.8 million and $5.3 million, as of
December 31, 1996 and 1997, respectively, consists of the current benefit
expected to be obtained from the utilization of the Company's NOLCs and its
alternative minimum tax credits. These amounts include a valuation allowance of
$1.3 million, as of December 31, 1996 and 1997 to reflect possible limitations
on the ability to use NOLCs for separate company federal and state filing
purposes.
 
     The components of the net long-term deferred tax liability are as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                1996          1997
                                                              ---------     ---------
<S>                                                           <C>           <C>
Deferred tax liability relating primarily to property
  consisting of landfill assets and debt basis
  differences...............................................   $82,164       $23,153
                                                               -------       -------
Deferred tax assets relating to:
  Closure and post-closure reserves.........................     2,304         1,194
  Other reserves and estimated expenses.....................    25,287         4,623
                                                               -------       -------
  Deferred tax assets.......................................    27,591         5,817
                                                               -------       -------
Net long-term deferred tax liability........................   $54,573       $17,336
                                                               =======       =======
</TABLE>
 
     The change in the long-term deferred tax liability includes deferred taxes
related to 1997 acquisitions where the financial basis of assets acquired
exceeded the tax basis of those assets.
 
11.  COMMITMENTS AND CONTINGENCIES
 
     The Company is subject to extensive and evolving laws and regulations and
has implemented its own environmental safeguards to respond to regulatory
requirements. In the normal course of conducting its operations, Allied may
become involved in certain legal and administrative proceedings. Some of these
actions may result in fines, penalties or judgements against the Company which
may have an impact on earnings for a
 
                                      F-26
<PAGE>   43
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
particular period. Management expects that such matters in process at December
31, 1997 which have not been accrued in the consolidated balance sheet will not
have a material adverse effect on the Company's consolidated liquidity,
financial position or results from operations.
 
     The consolidated federal income tax returns for the fiscal years ended
August 31, 1986, 1987 and 1988 of certain subsidiaries of the Company that were
acquired from Laidlaw in December 1996 (the "LSW Subsidiaries") have been under
audit by the Internal Revenue Service. In March 1994, the LSW Subsidiaries
received a Statutory Notice of Deficiency proposing that the LSW Subsidiaries
pay additional taxes relating to disallowed deductions in those income tax
returns (the "Tax Controversy"). The consolidated tax group of the LSW
Subsidiaries has also received notice that fiscal years 1992, 1993 and 1994 will
be examined regarding the Tax Controversy. The LSW Subsidiaries could be
directly liable for a substantial portion of any tax and interest assessed if
the disallowance of the deduction is sustained. In addition, under Treasury
Regulations promulgated under Section 1502 of the Internal Revenue Code ("IRC"),
each member of the consolidated tax group including each LSW Subsidiary, is or
could be severally liable for federal income tax liabilities of the entire
consolidated tax group, including any taxes due on the deemed sale of assets by
the LSW Subsidiaries pursuant to Section 338 of the IRC and all amounts at issue
in the Tax Controversy which are ultimately determined to be owed.
 
     Any amounts at issue in the Tax Controversy and for which any LSW
Subsidiary may ultimately be found liable, are included in and covered by the
indemnification of the Company by Laidlaw set forth in the Stock Purchase
Agreement by and between the Company and Laidlaw, among others, dated September
17, 1996 (the "Purchase Agreement"). The obligation of Laidlaw to indemnify the
Company in respect of amounts at issue in the Tax Controversy is a general,
unsecured obligation of Laidlaw. The ability of Laidlaw to pay and fulfill such
indemnification obligation will depend on the financial condition of Laidlaw at
the time of any required performance of such obligation.
 
     In connection with certain acquisitions, the Company has entered into
agreements to pay royalties based on waste tonnage disposed at specified
landfills. The royalties are generally payable quarterly and amounts earned but
not paid are accrued in the accompanying consolidated balance sheets.
 
     Allied has operating lease agreements for service facilities, office space
and equipment. Future minimum payments under non-cancelable operating leases
with terms in excess of one year are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                  DECEMBER 31,
                                                      1997
                                                  ------------
<S>                                               <C>
1998............................................    $ 8,205
1999............................................     13,725
2000............................................     11,627
2001............................................      9,657
2002............................................     11,638
Thereafter......................................     30,262
</TABLE>
 
     Rental expense under such operating leases was $5,463,000, $9,874,000 and
$12,315,000 for the three years ended December 31, 1997, respectively.
 
     The Company has entered into employment agreements with certain of its
executive officers for periods up to five years. The Company has agreed to
severance pay amounts equal to a multiple of defined compensation under certain
circumstances. In the event of a material change in control or termination of
all executive officers under such agreements, Allied would be required to make
payments of approximately $9.6 million.
 
     Allied carries a broad range of insurance coverage for protection of its
assets and operations from certain risks including environmental impairment
liability insurance for certain landfills.
 
                                      F-27
<PAGE>   44
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company has issued bank letters of credit, performance bonds and other
guarantees in the aggregate amount of approximately $431.0 million at December
31, 1997. These financial instruments are issued in the normal course of
business and are not reflected in the accompanying balance sheets. The
underlying obligations of the financial instruments are valued based on the
likelihood of performance being required. Management does not expect any
material losses to result from these off balance sheet instruments based on
historical results, and therefore, is of the opinion that the fair value of
these instruments is zero.
 
12.  RELATED PARTY TRANSACTIONS
 
     Transactions with related parties are entered into only upon approval by a
majority of the independent directors of the Company and only upon terms
comparable to those that would be available from unaffiliated parties.
 
     The Company leases certain properties and equipment in Illinois from
related parties resulting from prior year acquisitions. In connection with these
leases, payments of $69,000 and $45,000 for the years ended December 31, 1995
and 1996, respectively, were made to officers of the Company.
 
     The Company made a payment of $254,000 in 1995, on a life insurance policy
for a related party assumed in a 1994 acquisition. A trust of the related party
is the beneficiary of the policy.
 
     In connection with the receipt in April 1995 of all permits necessary to
develop a landfill on certain real estate acquired in July 1992, the Company was
obligated to pay $5.6 million to the previous owners of the real estate,
including current stockholders of the Company. During the years ended December
31, 1996 and 1997, the Company paid principal of $121,000 and $136,000,
respectively, to these stockholders. The Company has approximately $1.7 million
in promissory notes payable to these stockholders outstanding at December 31,
1997.
 
     In connection with the successful completion of certain market development
projects during 1997, Allied paid approximately $2.5 million to a former owner
of an acquired company and a director of the Company.
 
13.  SUMMARIZED FINANCIAL INFORMATION OF ALLIED WASTE NORTH AMERICA, INC.
 
     As discussed in Note 5, the 1996 Notes issued by Allied NA (a consolidated
subsidiary of the Company) are guaranteed by Allied. The separate complete
financial statements of Allied NA have not been included herein as management
has determined that such disclosure is not considered to be material. However,
summarized balance sheet information for Allied NA and subsidiaries as of
December 31, 1996 and 1997 is as follows (in thousands):
 
               SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,    DECEMBER 31,
                                                                 1996            1997
                                                             ------------    ------------
<S>                                                          <C>             <C>
Current assets.............................................   $  772,892      $  281,359
Property and equipment, net................................      932,110       1,576,674
Goodwill, net..............................................      888,648       1,056,601
Other non-current assets...................................       68,550         105,545
Current liabilities........................................      746,482         305,392
Long-term debt, net of current portion.....................    1,172,580       1,199,580
Due to parent..............................................      454,853       1,050,411
Due to Allied Canada Finance, Ltd. ........................      110,747         152,825
Other long-term obligations................................      247,173         305,809
Retained deficit...........................................      (69,635)          6,162
</TABLE>
 
                                      F-28
<PAGE>   45
                         ALLIED WASTE INDUSTRIES, INC.
 
     NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On November 25, 1996, substantially all of the operating assets and
liabilities of Allied were contributed from Allied to Allied NA. The results of
operations from inception to December 31, 1996 were not material except for the
acquisition related costs and unusual items (see Note 1).
 
                 SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                              DECEMBER 31, 1997
                                                              -----------------
<S>                                                           <C>
Total revenue...............................................     $1,301,391
Total operating costs and expenses..........................      1,077,579
Operating income............................................        223,812
Net income before extraordinary loss........................         89,628
Extraordinary loss, net.....................................         13,831
Net income..................................................         75,797
</TABLE>
 
14.  SUBSEQUENT EVENTS
 
     Subsequent to December 31, 1997, the Company acquired 68 operating solid
waste businesses for consideration of approximately $2.1 billion, of which $2.0
billion consists of approximately 76 million shares of common stock.
 
                                      F-29
<PAGE>   46
 
                         ALLIED WASTE INDUSTRIES, INC.
 
               SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,    JUNE 30,
                                                                  1997          1998
                                                              ------------   -----------
                                                                             (UNAUDITED)
<S>                                                           <C>            <C>
                                         ASSETS
Current Assets --
  Cash and cash equivalents.................................   $   32,298    $   40,190
  Accounts receivable, net of allowance of $8,992 and
     $9,486, respectively...................................      195,297       211,550
  Prepaid and other current assets..........................       40,782        69,993
  Inventories...............................................        7,664         8,547
  Deferred income taxes.....................................        5,318             9
                                                               ----------    ----------
          Total current assets..............................      281,359       330,289
Property and equipment, net.................................    1,576,674     1,653,946
Goodwill, net...............................................    1,056,601     1,211,975
Other assets................................................      105,545        97,912
                                                               ----------    ----------
          Total assets......................................   $3,020,179    $3,294,122
                                                               ==========    ==========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities --
  Current portion of long-term debt.........................   $   61,565    $   47,170
  Accounts payable..........................................       91,752        81,831
  Accrued liabilities.......................................      117,521       151,464
  Unearned income...........................................       43,999        48,931
                                                               ----------    ----------
          Total current liabilities.........................      314,837       329,396
Long-term debt, less current portion........................    1,454,270     1,510,617
Deferred income taxes.......................................       17,336        23,094
Accrued closure, post-closure and environmental costs.......      224,534       226,690
Other long-term obligations.................................       58,665        50,556
Commitments and contingencies...............................
  Stockholders' Equity......................................      950,537     1,153,769
                                                               ----------    ----------
          Total liabilities and stockholders' equity........   $3,020,179    $3,294,122
                                                               ==========    ==========
</TABLE>
 
    The accompanying Notes to Supplemental Condensed Consolidated Financial
            Statements are an integral part of these balance sheets.
                                      F-30
<PAGE>   47
 
                         ALLIED WASTE INDUSTRIES, INC.
 
          SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
             (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS; UNAUDITED)
 
<TABLE>
<CAPTION>
                                                    SIX MONTHS ENDED       THREE MONTHS ENDED
                                                        JUNE 30,                JUNE 30,
                                                  --------------------    --------------------
                                                    1997        1998        1997        1998
                                                  --------    --------    --------    --------
<S>                                               <C>         <C>         <C>         <C>
Revenues........................................  $610,230    $722,827    $326,292    $378,294
Cost of operations..............................   358,627     405,536     188,235     210,648
Selling, general and administrative expenses....    79,622      75,039      41,042      37,933
Depreciation and amortization...................    72,473      86,212      38,376      45,289
Acquisition related and non-recurring costs.....        --      45,143          --      42,687
                                                  --------    --------    --------    --------
  Operating income..............................    99,508     110,897      58,639      41,737
Interest income.................................    (1,464)     (2,039)       (698)     (1,278)
Interest expense................................    54,057      44,128      28,656      21,138
                                                  --------    --------    --------    --------
  Income before income taxes....................    46,915      68,808      30,681      21,877
  Income tax expense............................    15,513      33,155      10,606      18,065
                                                  --------    --------    --------    --------
Income (loss) before extraordinary items........    31,402      35,653      20,075       3,812
Extraordinary items, net of income tax
  benefit.......................................    52,412       3,093      52,412       3,093
                                                  --------    --------    --------    --------
  Net income (loss).............................   (21,010)     32,560     (32,337)        719
  Dividends on preferred stock..................      (337)         --        (166)         --
                                                  --------    --------    --------    --------
Net income (loss) to common shareholders........  $(21,347)   $ 32,560    $(32,503)   $    719
                                                  ========    ========    ========    ========
Basic earnings per share:
  Income (loss) before extraordinary items......  $   0.21    $   0.20    $   0.13    $   0.02
  Extraordinary items...........................     (0.35)      (0.01)      (0.34)      (0.02)
                                                  --------    --------    --------    --------
  Net income (loss).............................  $  (0.14)   $   0.19    $  (0.21)   $   0.00
                                                  ========    ========    ========    ========
Weighted average common shares outstanding......   151,507     175,819     152,394     176,028
                                                  ========    ========    ========    ========
Diluted earnings per share:
  Income (loss) before extraordinary items......  $   0.20    $   0.20    $   0.12    $   0.02
  Extraordinary items...........................     (0.33)      (0.02)      (0.32)      (0.02)
                                                  --------    --------    --------    --------
  Net income (loss).............................  $  (0.13)   $   0.18    $  (0.20)   $   0.00
                                                  ========    ========    ========    ========
Weighted average common and common equivalent
  shares outstanding............................   159,250     180,520     162,103     180,804
                                                  ========    ========    ========    ========
</TABLE>
 
    The accompanying Notes to Supplemental Condensed Consolidated Financial
              Statements are an integral part of these statements.
                                      F-31
<PAGE>   48
 
                         ALLIED WASTE INDUSTRIES, INC.
 
          SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (IN THOUSANDS; UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED
                                                                      JUNE 30,
                                                              ------------------------
                                                                 1997          1998
                                                              -----------    ---------
<S>                                                           <C>            <C>
Operating Activities --
  Net income (loss).........................................  $   (21,010)   $  32,560
  Adjustments to reconcile net income (loss) to cash
     provided by (used for) operating activities --
  Extraordinary items.......................................       17,252        5,103
  Provisions for:
     Depreciation and amortization..........................       72,473       86,212
     Closure and post-closure costs.........................        5,421        6,146
     Acquisition related and non-recurring costs............           --       26,288
     Doubtful accounts......................................        1,629          827
     Accretion of senior discount notes.....................        9,204       14,390
     Deferred income taxes..................................      (31,103)      11,067
     Gain on sale of fixed assets...........................         (574)        (909)
  Change in operating assets and liabilities, excluding the
     effects of purchase acquisitions --
     Accounts receivable, prepaid expenses, inventories and
      other.................................................      (59,098)     (39,307)
     Accounts payable, accrued liabilities and unearned
      income................................................       24,945        4,191
     Closure and post-closure costs and other...............      (11,163)      (8,425)
                                                              -----------    ---------
Cash provided by operating activities.......................        7,976      138,143
                                                              -----------    ---------
Investing Activities --
  Cash expenditures for acquisitions, net of cash
     acquired...............................................     (161,107)     (71,829)
  Capital expenditures, other than for acquisition..........      (87,657)     (82,097)
  Capitalized interest......................................      (15,308)     (31,033)
  Proceeds from sale of assets..............................      527,144        1,902
  Change in deferred acquisition costs and notes
     receivable.............................................      (22,707)       8,548
                                                              -----------    ---------
Cash provided by (used for) investing activities............      240,365     (174,509)
                                                              -----------    ---------
Financing activities --
  Net proceeds from sale of common stock, stock options and
     warrants...............................................        1,873          437
  Proceeds from long-term debt, net of issuance costs.......      966,292      627,105
  Repayments of long-term debt..............................   (1,271,219)    (623,526)
  Repurchase of warrant.....................................      (49,000)          --
  Change in other long-term obligations.....................        4,939      (12,281)
  Dividends paid............................................         (352)          --
  Equity transactions of pooled companies...................       64,422       52,523
                                                              -----------    ---------
Cash provided by (used for) financing activities............     (283,045)      44,258
                                                              -----------    ---------
Increase (decrease) in cash and cash equivalents............      (34,704)       7,892
Cash and cash equivalents, beginning of period..............       70,015       32,298
                                                              -----------    ---------
Cash and cash equivalents, end of period....................  $    35,311    $  40,190
                                                              ===========    =========
</TABLE>
 
    The accompanying Notes to Supplemental Condensed Consolidated Financial
              Statements are an integral part of these statements.
                                      F-32
<PAGE>   49
 
                         ALLIED WASTE INDUSTRIES, INC.
 
       NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Allied Waste Industries, Inc. ("Allied" or the "Company"), is incorporated
under the laws of the state of Delaware. Allied is a solid waste management
company providing non-hazardous waste collection, transfer, recycling and
disposal services in selected markets.
 
     The condensed consolidated financial statements include the accounts of
Allied and its subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. The condensed consolidated balance
sheet as of December 31, 1997, which has been derived from audited consolidated
financial statements, and the unaudited interim condensed consolidated financial
statements included herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). As applicable
under such regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes that
the presentations and disclosures herein are adequate to make the information
not misleading when read in conjunction with the Company's Annual Report on Form
10-K. The condensed consolidated financial statements as of June 30, 1998 and
for the three months and six months ended June 30, 1997 and 1998 reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly state the financial position and results of
operations for such periods. The condensed consolidated financial statements and
accompanying notes have also been restated to reflect acquisitions accounted for
as poolings-of-interests (See Note 2).
 
     Operating results for interim periods are not necessarily indicative of the
results for full years. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements of Allied for
the year ended December 31, 1997 and the related notes thereto included in the
Company's Annual Report on Form 10-K filed with the SEC on March 31, 1998.
 
     There have been no significant additions to or changes in accounting
policies of the Company since December 31, 1997. For a description of these
policies, see Note 1 of Notes to Consolidated Financial Statements for the year
ended December 31, 1997 in the Company's Annual Report on Form 10-K.
 
     Certain reclassifications have been made in prior period financial
statements to conform to the current presentation.
 
ACCOUNTING PRONOUNCEMENT NOT YET REQUIRED TO BE ADOPTED
 
     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"). Statement 133 establishes accounting,
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Statement 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
 
     Statement 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement Statement 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter).
 
     The Company has not yet quantified the impacts of adopting Statement 133 on
its financial statements and has not determined the timing or method of
adoption. However, Statement 133 could increase volatility in earnings and other
comprehensive income.
 
                                      F-33
<PAGE>   50
                         ALLIED WASTE INDUSTRIES, INC.
 
                  NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
                      FINANCIAL STATEMENTS -- (CONTINUED)
 
ACQUISITION RELATED AND NON-RECURRING COSTS
 
     Acquisition related and non-recurring costs of $45.1 million were incurred
in 1998 for transaction and integration costs directly related to acquisitions.
During the second quarter of 1998, the Company recorded a $42.7 million
acquisition related and non-recurring charge associated primarily with
acquisitions accounted for as poolings-of-interest. The charge is comprised of
$14.6 million of termination, severance and retention bonuses, $9.8 million of
asset impairments and abandonments, $8.3 million of transaction related costs,
$7.9 million of environmental and compliance related costs and $2.1 million of
other acquisition related costs.
 
EXTRAORDINARY ITEMS, NET
 
     In June 1998, the Company replaced its credit facility and recognized an
extraordinary charge of approximately $5.1 million ($3.1 million net of income
tax benefit) related to the write-off of previously deferred debt issuance
costs.
 
     On May 15, 1997, the Company repurchased (the "Repurchase") from the
Laidlaw Inc. ("Laidlaw") and Laidlaw Transportation, Inc. (collectively the
"Laidlaw Group") a $150 million 7% junior subordinated debenture ($81.6 million
book value), a $168.3 million zero coupon debenture ($34.9 million book value,
collectively the "Allied Debentures") and a warrant to purchase 20.4 million
shares of common stock ($49.0 million book value, the "Warrant"), used as
partial consideration for the purchase of Laidlaw's solid waste business in 1996
(the "Laidlaw Acquisition"), for an aggregate purchase price of $230 million in
cash. An extraordinary charge to earnings related to the Repurchase of
approximately $65.7 million ($39.4 million net of income tax benefit) was
recorded in the second quarter of 1997. In addition, the Company replaced its
$1.275 billion senior credit facility (the "Bank Agreement") with the $900
million senior credit facility on June 5, 1997 and recognized an extraordinary
charge of approximately $21.6 million ($13.0 million net of income tax benefit)
in the second quarter of 1997.
 
STATEMENTS OF CASH FLOWS
 
     The supplemental cash flow disclosures and non-cash transactions for the
six months ended June 30, 1997 and 1998 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED
                                                               JUNE 30,
                                                          -------------------
                                                           1997        1998
                                                          -------    --------
                                                              (UNAUDITED)
<S>                                                       <C>        <C>
Supplemental Disclosures:
  Interest paid.........................................  $61,394    $ 57,503
  Income taxes paid.....................................   10,083      20,981
Non Cash Transactions:
  Common stock issued in acquisitions accounted for as
     purchases..........................................  $12,730    $114,601
  Capital leases........................................    6,701       1,187
  Debt and liabilities incurred or assumed in
     acquisitions.......................................   54,849      22,321
  Debt converted to common sock.........................      535          --
  Non cash purchase and sale of operating assets........   61,300          --
</TABLE>
 
2.  BUSINESS COMBINATIONS AND DIVESTITURES
 
     Acquisitions accounted for as purchases are reflected in the results of
operations since the date of purchase in Allied's condensed consolidated
financial statements. The results of operations for acquisitions
 
                                      F-34
<PAGE>   51
                         ALLIED WASTE INDUSTRIES, INC.
 
                  NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
                      FINANCIAL STATEMENTS -- (CONTINUED)
 
accounted for as poolings-of-interests are included in Allied's condensed
consolidated financial statements for all periods presented. Often, the final
determination of the cost, and the allocation thereof, of certain of the
Company's acquisitions is subject to resolution of certain contingencies. Once
such contingencies are achieved, the purchase price is adjusted.
 
     The following table summarizes acquisitions for the six months ended June
30, 1997 and 1998. In March 1998, the Company acquired two collection companies
in transactions accounted for as a poolings-of-interests. As the effect of these
two business combinations was not significant, prior period financial statements
were not restated to include historical operating results of the acquired
companies. In the first six months of 1998, the Company acquired nine collection
companies in transactions accounted for as a poolings-of-interests. Prior period
financial statements have been restated to include historical operating results
of these nine companies acquired in the first half of 1998 that were accounted
for as a pooling-of-interests.
 
<TABLE>
<CAPTION>
                                                         SIX MONTHS ENDED
                                                             JUNE 30,
                                                    --------------------------
                                                      1997            1998
                                                    ---------      -----------
                                                           (UNAUDITED)
<S>                                                 <C>            <C>
Number of businesses acquired and accounted for
  as:
  Poolings-of-interests...........................          1               11
  Purchases.......................................         20               36
Total consideration (in millions).................     $292.4           $791.8
Shares of common stock issued.....................  1,675,470(1)    26,014,643(2)
</TABLE>
 
---------------
(1) Includes 288,505 shares of contingently issuable common stock.
 
(2) Includes 875,120 shares of contingently issuable common stock.
 
     The following table presents revenues and net income restated from amounts
originally reported for the cumulative effect of acquisitions accounted for as
poolings-of-interest, (in thousands; unaudited):
 
<TABLE>
<CAPTION>
                                                            BEFORE                     AFTER
                                                           POOLING      EFFECT OF     POOLING
                                                           EFFECTS      POOLINGS      EFFECTS
                                                          ----------    ---------    ----------
<S>                                                       <C>           <C>          <C>
Three months ended June 30, 1998
  Revenues..............................................  $  246,825    $131,469     $  378,294
  Net income (loss).....................................     (16,220)     16,939            719
Six months ended June 30, 1998
  Revenues..............................................     468,553     254,274        722,827
  Net income............................................         624      31,936         32,560
Three months ended June 30, 1997
  Revenues..............................................     222,279     104,013        326,292
  Net loss..............................................     (38,997)      6,660        (32,337)
Six months ended June 30, 1997
  Revenues..............................................     417,141     193,089        610,230
  Net loss..............................................      32,606     (53,616)       (21,010)
Year ended December 31, 1997
  Revenues..............................................     841,513     459,878      1,301,391
  Net income............................................         358      27,049         27,407
</TABLE>
 
                                      F-35
<PAGE>   52
                         ALLIED WASTE INDUSTRIES, INC.
 
                  NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
                      FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                            BEFORE                     AFTER
                                                           POOLING      EFFECT OF     POOLING
                                                           EFFECTS      POOLINGS      EFFECTS
                                                          ----------    ---------    ----------
<S>                                                       <C>           <C>          <C>
Year ended December 31, 1996
  Revenues..............................................     246,679     372,869        619,548
  Net loss..............................................     (79,427)     13,118        (66,309)
Year ended December 31, 1995
  Revenues..............................................     217,544     363,240        580,784
  Net income............................................      12,381      15,927         28,308
</TABLE>
 
UNAUDITED PRO FORMA INCOME STATEMENT DATA
 
     The following unaudited pro forma consolidated data for the year ended
December 31, 1997 and the six months ended June 30, 1998 presents the results of
operations of Allied as if the companies purchased and sold in 1997 and through
June 30, 1998, had all occurred as of January 1, 1997 (in thousands, except per
share data). This data does not purport to be indicative of the results of
operations of Allied that might have occurred nor which might occur in the
future.
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31, 1997
                                                              ------------------------
                                                               REPORTED      PROFORMA
                                                              ----------    ----------
                                                                    (UNAUDITED)
<S>                                                           <C>           <C>
Revenues....................................................  $1,301,391    $1,372,669
Operating income............................................     223,812       230,571
Net income before extraordinary items.......................      80,612        77,919
Net income before extraordinary items to common
  shareholders..............................................      80,231        77,538
Net income before extraordinary items per common
  share -- basic............................................        0.51          0.45
Net income before extraordinary items per common
  share -- diluted..........................................        0.48          0.43
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 JUNE 30, 1998
                                                              --------------------
                                                              REPORTED    PROFORMA
                                                              --------    --------
                                                                  (UNAUDITED)
<S>                                                           <C>         <C>
Revenues....................................................  $722,827    $726,271
Operating income............................................   110,897     111,316
Net income before extraordinary items.......................    35,653      40,676
Net income before extraordinary items to common
  shareholders..............................................    35,653      40,676
Net income before extraordinary items per common
  share -- basic............................................      0.20        0.23
Net income before extraordinary items per common
  share -- diluted..........................................      0.20        0.23
</TABLE>
 
                                      F-36
<PAGE>   53
                         ALLIED WASTE INDUSTRIES, INC.
 
                  NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
                      FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  PROPERTY AND EQUIPMENT
 
     Property and equipment at December 31, 1997 and June 30, 1998 was as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                         1997          1998
                                                      ----------    -----------
                                                                    (UNAUDITED)
<S>                                                   <C>           <C>
Land and improvements...............................  $  128,986    $  113,960
Land held for permitting as landfills(1)............      79,253        85,768
Landfills...........................................     918,179       853,778
Buildings and improvements..........................     143,714       129,715
Vehicles and equipment..............................     455,324       633,803
Containers and compactors...........................     190,947       206,391
Furniture and office equipment......................      13,819        16,204
                                                      ----------    ----------
                                                       1,930,222     2,039,619
Accumulated depreciation and amortization...........    (353,548)     (385,673)
                                                      ----------    ----------
                                                      $1,576,674    $1,653,946
                                                      ==========    ==========
</TABLE>
 
---------------
(1) These properties have been approved for use as landfills, and the Company is
    currently in the process of obtaining permits.
 
4.  NET INCOME (LOSS) PER COMMON SHARE
 
     Net income (loss) per common share is calculated by dividing net income
(loss) less dividend requirements on preferred stock by the weighted average
number of common shares and common share equivalents outstanding during each
period, as restated to reflect acquisitions accounted for as poolings-of-
interests. The computation of basic earnings per share and diluted earnings per
share is as follows (in thousands, except per share data; unaudited):
 
<TABLE>
<CAPTION>
                                                    SIX MONTHS ENDED       THREE MONTHS ENDED
                                                        JUNE 30,                JUNE 30,
                                                  --------------------    --------------------
                                                    1997        1998        1997        1998
                                                  --------    --------    --------    --------
<S>                                               <C>         <C>         <C>         <C>
BASIC EARNINGS (LOSS) PER SHARE COMPUTATION:
  Net income (loss) before extraordinary
     items......................................  $ 31,402    $ 35,653    $ 20,075    $  3,812
  Less: Preferred stock dividends...............      (337)         --        (166)         --
                                                  --------    --------    --------    --------
  Income (loss) before extraordinary items
     available to common shareholders...........  $ 31,065    $ 35,653    $ 19,909    $  3,812
                                                  ========    ========    ========    ========
     Weighted average common shares
       outstanding..............................   151,507     175,819     152,394     176,028
                                                  ========    ========    ========    ========
  Basic earnings (loss) per share before
     extraordinary items........................  $   0.21    $   0.20    $   0.13    $   0.02
                                                  ========    ========    ========    ========
</TABLE>
 
                                      F-37
<PAGE>   54
                         ALLIED WASTE INDUSTRIES, INC.
 
                  NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
                      FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                    SIX MONTHS ENDED       THREE MONTHS ENDED
                                                        JUNE 30,                JUNE 30,
                                                  --------------------    --------------------
                                                    1997        1998        1997        1998
                                                  --------    --------    --------    --------
<S>                                               <C>         <C>         <C>         <C>
DILUTED EARNINGS (LOSS) PER SHARE COMPUTATION:
  Net income (loss) before extraordinary
     items......................................  $ 31,402    $ 35,653    $ 20,075    $  3,812
  Less: Preferred stock dividends...............      (337)         --        (166)         --
  Interest savings upon conversion of
     convertible securities.....................        --          --         184          --
                                                  --------    --------    --------    --------
  Income (loss) before extraordinary items
     available to common shareholders...........  $ 31,065    $ 35,653    $ 20,093    $  3,812
                                                  ========    ========    ========    ========
  Weighted average common shares outstanding....   151,507     175,819     152,394     176,028
  Effect of stock options and warrants, assumed
     exercisable................................     6,300       3,807       6,670       3,861
  Assumed conversions:
     7% cumulative convertible preferred........        --          --       1,357          --
     Convertible notes..........................        --          --         239          --
  Effect of shares assumed issued pursuant to
     earn-out agreements........................     1,443         894       1,443         915
                                                  --------    --------    --------    --------
  Weighted average common and common equivalent
     shares outstanding.........................   159,250     180,520     162,103     180,804
                                                  ========    ========    ========    ========
  Diluted earnings (loss) per share before
     extraordinary items........................  $   0.20    $   0.20    $   0.12    $   0.02
                                                  ========    ========    ========    ========
</TABLE>
 
     Conversion has not been assumed for 7% preferred stock for the six months
ended June 30, 1997, as the effects would not be dilutive.
 
     In 1997, the Company adopted SFAS No. 128 "Earnings per Share," which
required restatement of the prior period earnings per share amounts. The effect
of this accounting change on previously reported earnings per share data for the
three months and six months ended June 30, 1997 was as follows:
 
<TABLE>
<CAPTION>
                                            SIX MONTHS ENDED    THREE MONTHS ENDED
                                             JUNE 30, 1997        JUNE 30, 1997
                                            ----------------    ------------------
<S>                                         <C>                 <C>
Per share amounts:
Primary earnings per share................       $0.18                $0.11
Effect of SFAS No. 128....................        0.03                 0.02
                                                 -----                -----
Basic earnings per share..................       $0.21                $0.13
                                                 =====                =====
Fully diluted earnings per share..........       $0.17                $0.11
Effect of SFAS No. 128....................        0.03                 0.01
                                                 -----                -----
Diluted earnings per share................       $0.20                $0.12
                                                 =====                =====
</TABLE>
 
5.  SUMMARIZED FINANCIAL INFORMATION OF ALLIED WASTE NORTH AMERICA, INC.
 
     As discussed in Note 5 of the Company's Annual Report on Form 10-K, the
$525 million of 10.25% senior subordinated notes due 2006 (the "1996 Notes")
issued by Allied Waste North America, Inc. ("Allied NA"; a wholly owned,
consolidated subsidiary of the Company) are guaranteed by Allied and
substantially all subsidiaries of the Company. The separate complete financial
statements of Allied NA have not been included herein as management has
determined that such disclosure is not material. However, summarized financial
 
                                      F-38
<PAGE>   55
                         ALLIED WASTE INDUSTRIES, INC.
 
                  NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED
                      FINANCIAL STATEMENTS -- (CONTINUED)
 
information for Allied NA and subsidiaries as of December 31, 1997 and June 30,
1998 is as follows (in thousands):
 
               SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION
 
<TABLE>
<CAPTION>
                                                 DECEMBER 31, 1997    JUNE 30, 1998
                                                 -----------------    -------------
                                                                       (UNAUDITED)
<S>                                              <C>                  <C>
Current assets.................................     $  281,359         $  330,289
Property and equipment, net....................      1,576,674          1,653,946
Goodwill, net..................................      1,056,601          1,211,975
Other non-current assets.......................        105,545             97,912
Current liabilities............................        305,392            320,051
Long-term debt, net of current portion.........      1,199,580          1,255,927
Due to parent..................................      1,050,411          1,379,727
Due to Allied Canada Finance, Ltd. ............        152,825                 --
Other long-term obligations....................        305,809            306,747
Retained earnings (deficit)....................          6,162             31,670
</TABLE>
 
                 SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
 
<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED
                                                               JUNE 30,
                                                         --------------------
                                                           1997        1998
                                                         --------    --------
                                                             (UNAUDITED)
<S>                                                      <C>         <C>
Revenue................................................  $610,230    $722,827
Operating costs and expenses...........................   510,722     611,930
Operating income.......................................    99,508     110,897
Income before extraordinary items......................    33,371      44,449
Extraordinary items, net of income tax benefit.........    52,412       3,093
Net income (loss)......................................   (19,041)     41,356
</TABLE>
 
6.  SUBSEQUENT EVENTS
 
     On August 7, 1998 the Company acquired Illinois Recycling Services, Inc.
and its affiliates ("IRS"). IRS generates approximately $80 million in annual
revenue. These Chicago-based operations provide solid waste collection,
recycling, and transportation services primarily in the Chicago metro area and
northern Indiana. The transaction will be accounted for using the
pooling-of-interests method of business combinations.
 
     On October 15, 1998, the Company acquired American Disposal Services, Inc.
("ADSI"). Under the terms of the agreement, ADSI shareholders will receive 1.65
shares of Allied common stock for each share of ADSI common stock or
approximately 40.7 million shares. The merger will be accounted for as a
pooling-of-interest.
 
                                      F-39
<PAGE>   56
 
ITEM 7.  EXHIBITS
 
     (a) Exhibits
 
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                            DESCRIPTION
  -------                           -----------
  <C>       <S>
  10.1      Financial Statements together with Independent Auditor's
            Report for ADSI for 1997, 1996 and 1995 are incorporated
            herein by reference from the Company's Current Report on
            Form 8-K/A dated August 28, 1998.
  23.1      Consent of Arthur Andersen LLP.
  27.1      Restated financial data schedule for the year ended December
            31, 1997.
  27.2      Restated financial data schedule for the year ended December
            31, 1996.
  27.3      Restated financial data schedule for the year ended December
            31, 1995.
</TABLE>
<PAGE>   57
 
                                   SIGNATURE
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant, Allied Waste Industries, Inc., has caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
 
                                          ALLIED WASTE INDUSTRIES, INC.
 
                                          By: /s/ PETER S. HATHAWAY
                                            ------------------------------------
                                            Peter S. Hathaway
                                            Vice President and
                                            Chief Accounting Officer
 
Date: October 29, 1998
<PAGE>   58
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                            DESCRIPTION
  -------                           -----------
  <C>       <S>
  10.1      Financial Statements together with Independent Auditor's
            Report for ADSI for 1997, 1996 and 1995 are incorporated
            herein by reference from the Company's Current Report on
            Form 8-K/A dated August 28, 1998.
  23.1      Consent of Arthur Andersen LLP.
  27.1      Restated financial data schedule for the year ended December
            31, 1997.
  27.2      Restated financial data schedule for the year ended December
            31, 1996.
  27.3      Restated financial data schedule for the year ended December
            31, 1995.
</TABLE>