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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-K



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(Mark One)

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



For the fiscal year ended December 31, 2003



OR



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



For the transition period from
to



Commission file number 0-22417



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WASTE INDUSTRIES USA, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|NORTH CAROLINA                                                 |  | 56-0954929                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



3301 BENSON DRIVE,
SUITE 601

RALEIGH, NORTH CAROLINA 27609

(Address of principal executive offices) (Zip Code)



REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (919) 325-3000



SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None



SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

common stock (no par value per share)



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



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



Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x



The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing price of the common stock on
June 30, 2003, on the NASDAQ National Market System was approximately $39,057,220 as of such date. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination of affiliate status may not be conclusive for other purposes.



As of March 30, 2004, the registrant had outstanding 13,492,876 shares of common stock.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Companys Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated herein by reference into Part
III.



NOTE RELATING TO FORWARD-LOOKING STATEMENTS



Statements in this Annual Report on Form 10-K that are not descriptions
of historical facts are forward-looking statements that are subject to risks and uncertainties. These statements and other statements made elsewhere by us or our representatives, which are identified or qualified by words such as likely,
will, suggests, expects, may, believe, could, should, would, anticipates, plans or similar expressions, are based on a number of
assumptions. Actual events or results could differ materially from those currently anticipated due to a number of factors, including those set forth herein and in our other SEC filings and including, in particular: weather conditions; economic
conditions; our ability to manage growth; the availability and integration of acquisition targets; competition; geographic concentration; and government regulation. You are urged to consider these factors carefully in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this report and we undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.



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PART I



ITEM 1. BUSINESS



INTRODUCTION



Our
website address is www.waste-ind.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.



Waste Industries USA, Inc. is a regional, vertically integrated solid waste services company. We provide solid waste collection, transfer, disposal and
recycling services to commercial, industrial and residential customer locations in North Carolina, South Carolina, Virginia, Tennessee, Mississippi, Georgia and Florida. Our principal operations as of December 31, 2003 consisted of 36 collection
operations, 28 transfer stations, approximately 90 county convenience drop-off centers, five recycling facilities and 11 landfills, serving more than 500,000 municipal, residential, commercial and industrial service locations.



Our Chairman of the Board of Directors founded our company in 1970 and,
together with our Chief Executive Officer, are recognized for their leadership roles throughout the solid waste management industry and trade organizations. Our management team collectively has over 166 years of experience in the solid waste
industry and over 107 years with our company.



Industry Overview



In the last 10 years, the solid waste collection and
disposal industry has undergone a period of significant consolidation and integration. We believe that this consolidation and integration has been caused primarily by:



| |  | increasingly stringent environmental regulation and enforcement resulting in increased capital requirements for collection companies and landfill operators;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the ability of larger integrated operators to achieve certain economies of scale;
| | - | ---------------------------------------------------------------------------------



| |  | the increased integration of collection, transfer, disposal and recycling capabilities; and
| | - | -------------------------------------------------------------------------------------------



| |  | the continued privatization of solid waste collection and disposal services by municipalities and other governmental bodies and authorities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



Despite the considerable consolidation and integration that has occurred in
the solid waste industry in recent years, we believe, based on our experience in the industry, that the industry remains primarily regional in nature due to the localized nature of collecting and disposing of waste and highly fragmented due to the
many small competitors in many markets.



The increasingly
stringent industry regulations, such as the Subtitle D regulations, have resulted in rising operating and capital costs and have caused the consolidation and acquisition activities in the solid waste collection and disposal industry in the last 10
years. Many of the smaller industry participants have found these costs difficult to bear and have decided to either close their operations or sell them to larger operators. In addition, Subtitle D requires more stringent engineering of solid waste
landfills including liners, leachate collection and monitoring and gas collection and monitoring. These ongoing costs are coupled with increased financial reserves from solid waste landfill operators for closure and post-closure monitoring. As a
result, we believe, based on our market research, the number of solid waste landfills is declining while the size of solid waste landfills is increasing.



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In many markets in which we operate or intend to expand, competitive pressures are forcing operators to
become more efficient by establishing an integrated network of solid waste collection operations and transfer stations, through which we secure solid waste streams for disposal. Operators have adopted a variety of disposal strategies, including
owning landfills, establishing strategic relationships to secure access to landfills, or by otherwise capturing significant waste stream volumes to gain leverage in negotiating lower landfill fees and securing long-term contracts with high capacity
landfills on most favored pricing terms.



In the Southeastern
U.S. solid waste market, which is our market, city and county governments have historically provided a variety of solid waste services using their own personnel. Over time, many municipalities have opted to privatize or contract out their collection
and disposal services to the private sector. Landfills, transfer stations and incinerators located in our market area are predominantly municipally owned. The Southeastern market has been and is currently undergoing significant economic and
population growth. Certain states in the Southeastern U.S. exceed the national average in terms of economic growth as measured by gains in jobs, personal income and population.



There is an increasing trend at the state and local levels to encourage waste reduction at the source and to prohibit the
disposal of certain types of wastes, such as yard wastes and recyclable materials, at landfills. For example, North Carolina, South Carolina and Virginia have each established quantifiable goals and time frames to reduce the solid waste disposed of
in their respective landfills. We believe, based on our experience in the industry that these trends and laws have created significant opportunities for solid waste services companies to provide additional recycling services to generators of solid
waste who are not otherwise able to dispose of such waste.



Strategy



Our objective is to build the premier solid waste
services company in the Southeastern U.S. by expanding our operations and capitalizing on our strong market presence. Our strategy for achieving this objective is:



| |  | to generate internal growth by adding customers and services to our existing operations;
| | - | ----------------------------------------------------------------------------------------



| |  | to acquire solid waste collection companies, customers and, under appropriate circumstances, landfills in existing and new areas of our target market; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | to increase operating efficiencies and enhance profitability in our existing and acquired operations.
| | - | -----------------------------------------------------------------------------------------------------



We intend to implement this strategy primarily through internal growth supplemented by tuck-in acquisitions in our existing
markets. We continue to examine opportunities to expand our presence in new and existing markets in the Southeastern U.S. There can be no assurance that we will be able to identify suitable acquisition candidates or, if identified, successfully
negotiate their acquisition. If we fail to implement successfully our acquisition strategy, our growth potential will be limited.



Internal Growth



In order to continue to achieve internal growth, we will focus on increasing sales penetration in current and adjacent market areas, marketing upgrades or
additional services (such as on-site solid waste compaction) to existing customers and implementing selective price increases. We strive to be the first or second largest provider, in terms of market share, of waste services in the majority of the
markets in which we operate. Current levels of population growth and economic development in the Southeastern U.S. and our strong market presence should provide an opportunity for us to increase revenues and market share in our region. As customers
are added in existing markets, our density is improved, which should increase our collection efficiencies and profitability. At December 31, 2003, we had an approximately 57-person sales force dedicated to maintaining and increasing our sales to new
and existing commercial, industrial, municipal and residential customers.



An important part of our internal growth strategy is to operate transfer stations strategically located throughout our geographic area to improve our consolidation of collected solid waste and permit us to deliver the
collected solid waste to landfills where we have negotiated favorable volume rates with landfill operators or to dispose of it at sites we own. At December 31, 2003, we operated 28 transfer stations, eight of which we own. By operating transfer
stations, we engage in direct communication with municipalities that own the transfer stations regarding waste disposal services, better positioning us to gain additional business in our markets in the event any of these municipalities privatize
their solid waste operations. To the extent we are unable to operate existing transfer stations owned by municipalities, we would consider constructing our own transfer station.



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Expansion Through Acquisitions



Our strategy for growth includes:



| |  | tuck-in and other acquisitions of solid waste collection companies and customers in existing and adjacent markets;
| | - | --------------------------------------------------------------------------------------------------------------------



| |  | the acquisition of solid waste collection companies and customers in new markets; and
| | - | -------------------------------------------------------------------------------------



| |  | the acquisition of landfills in certain circumstances.
| | - | ------------------------------------------------------



We seek to acquire companies with a significant market presence, high service standards and an experienced management team willing to remain with our
company.



Based on our market research, we believe that
numerous tuck-in acquisition opportunities exist within our current market area. A tuck-in acquisition refers to an acquisition in which we acquire a solid waste collection company, a division of a company or customers of a
company located in our existing market area, and integrate the acquired operations or customers into the operations of one of our existing branch facilities. These acquisitions have become an integral part of the industry competitive model due to
the efficiencies involved. Such acquisitions, if consummated, provide us with opportunities to improve market share and route density.



As we enter new markets through acquisitions, we intend to continue to implement a regional expansion strategy. The regional expansion strategy provides
us with a base of operations to grow internally through price increases, providing additional services to existing customers, adding new private and public customers as well as tuck-in acquisitions. We can then expand our presence in the targeted
region by adding solid waste collection and transfer operations in regional markets adjacent to or contiguous with the new location. Because our goal is to increase the scale of our operations through internal growth and through the acquisition of
other solid waste businesses, we might experience periods of rapid growth with significantly increased staffing requirements. Such growth, if it were to occur, could place a significant strain on our management and on our operational, financial and
other resources. Our ability to maintain and manage our growth effectively will require us to expand our management information systems capabilities and improve our operational and financial systems and controls. Moreover, we will need to attract,
train, motivate, retain and manage our senior managers, technical professionals and other employees. Any failure to expand our management information systems capabilities and our operational and financial systems and controls or to recruit
appropriate additional personnel in an efficient manner at a pace consistent with any business growth we may experience would have a material adverse effect on our operations.



The consolidation and integration activity in the solid waste industry, which peaked in the 1990s, as well as the
difficulties, uncertainties and expenses relating to the development and permitting of solid waste landfills and transfer stations, has increased competition for the acquisition of existing solid waste collection, transfer and disposal operations.
Increased competition for acquisition candidates as well as less advantageous acquisition terms, including increased purchase prices might result in fewer acquisition opportunities being made available to us. These circumstances might increase
acquisition costs to levels beyond our financial capability or pricing parameters. Such circumstances might have an adverse effect on our results of operations. Many of our competitors for acquisitions are larger, better known companies that possess
significantly greater resources than we have. We also believe, based on our experience, that a significant factor in our ability to consummate acquisitions will be the relative attractiveness of shares of our common stock as an investment instrument
to potential acquisition candidates. This attractiveness will, in large part, be dependent upon the relative market price and capital appreciation prospects of our common stock compared to the equity securities of our competitors.



In the past several years, we have been and expect to continue to be actively
engaged in identifying solid waste landfill acquisition candidates in the Southeastern U.S., although the number of candidates is limited in our current market area. Based on our experience in the industry, we believe that the successful acquisition
of landfills will provide us with opportunities to integrate vertically our collection, transfer and disposal operations while improving operating margins. Generally, we will evaluate a landfill target by determining, among other things, whether
access to the landfill is economically feasible from our existing market areas either directly or through strategically located transfer stations, expected landfill life, the potential for landfill expansion, and current disposal costs compared with
the cost to acquire the landfill. In addition, where the acquisition of a landfill site is either not available or not economically feasible, we seek to enter into long-term disposal contracts with facilities that are located in proximity to our
market areas.



Acquisition Program



From 1990 through December 31, 2003, we acquired, either by merger or asset
purchase, 75 solid waste collection or disposal operations, with six being acquired in 2003, eight being acquired in 2002 and three being acquired in 2001. We have developed a set of financial, geographic and management criteria designed to assist
management in the evaluation of acquisition candidates engaged in solid waste collection and disposal. These criteria evaluate a variety of factors, including, but not limited to:



| |  | historical and projected financial performance;
| | - | -----------------------------------------------



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| |  | internal rate of return, return on assets and return on revenue;
| | - | ----------------------------------------------------------------



| |  | experience and reputation of the candidates management and customer service reputation and relationships with the local communities;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | composition and size of the candidates customer base;
| | - | ------------------------------------------------------



| |  | whether the geographic location of the candidate will enhance or expand our market area or ability to attract other acquisition candidates;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | whether the acquisition will augment or increase our market share or help protect our existing customer base;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | any synergies gained by combining the acquisition candidate with our existing operations; and
| | - | ---------------------------------------------------------------------------------------------



| |  | actual and contingent liabilities of the candidate.
| | - | ---------------------------------------------------



We have an established integration procedure for newly acquired companies designed to effect a prompt and efficient integration of the acquired business
while minimizing disruption to our ongoing business and that of the acquired business. Once a solid waste collection operation is acquired, programs designed to improve collection and disposal routing, equipment maintenance and utilization, employee
productivity, operating efficiencies and overall profitability are implemented. To improve an acquired business operational productivity, administrative efficiency and profitability, we apply the same benchmarking programs and systems to the
acquired business as are employed at our existing operations. We also solicit new commercial, industrial and residential customers in areas within and surrounding the markets served by the acquired collection operations as a means of further
improving operating efficiencies and increasing the volumes of solid waste collected by the acquired operation. We typically attempt to retain the acquired companys management and key employees and consolidate administrative and management
information systems through our corporate offices.



Prior to
completing an acquisition, we perform extensive environmental, operational, engineering, legal, human resource and financial due diligence. All acquisitions are subject to initial evaluation and approval by our management before being recommended to
our Board of Directors.



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2003 Acquisitions



|                                                   |  |               |  |                                                   |  |                          |  |                 
|-------------------------------------------------- |  | ------------- |  | ------------------------------------------------- |  | ------------------------ |  | ----------------
|Company                                            |  | Year Acquired |  | Principal Business                                |  | Location                 |  | Market Area     
|Patriot Waste Systems                              |  | 2003          |  | Commercial and Industrial Collection              |  | Greensboro andGraham, NC |  | Western NC      
|                                                   |  |               |  |                                                  
|Kleen Way Sanitation                               |  | 2003          |  | Residential Collection                            |  | Wilson, NC               |  | Eastern NC      
|                                                   |  |               |  |                                                  
|All American Waste Management                      |  | 2003          |  | Residential Collection                            |  | Atlanta, GA              |  | Metro Atlanta GA
|                                                   |  |               |  |                                                  
|Collection operations from Allied Waste Industries |  | 2003          |  | Commercial and Industrial Collection              |  | Norfolk, VA              |  | Eastern VA      
|                                                   |  |               | 
|                                                   |  |               |  |                                                  
|Collection operations from Allied Waste Industries |  | 2003          |  | Commercial, Industrial and Residential Collection |  | Clarksville, TN          |  | Central TN      
|                                                   |  |               | 
|                                                   |  |               |  |                                                  
|Waste Watchers                                     |  | 2003          |  | Commercial, Industrial and Residential Collection |  | Summerville, SC          |  | Eastern SC      



Effective January 1,
2003, we acquired Patriot Waste Systems for approximately $4.8 million in cash and stock. This tuck-in acquisition provides commercial and industrial waste collection services to existing operations in the Greensboro and Graham, North Carolina
markets.



On June 1, 2003, we purchased Kleen Way Sanitation
for approximately $204,000 in cash. This tuck-in acquisition of residential routes expands our customer base in our existing Wilson, North Carolina market.



On June 30, 2003, we acquired All American Waste Management, Inc. for approximately $695,000 in cash. This acquisition of residential services is a
tuck-in to our existing operations in the northern Metro Atlanta market.



On August 1, 2003, we acquired collection operations in Norfolk, Virginia and Clarkesville, Tennessee for approximately $32.2 million in cash from Allied Waste Industries. This acquisition is a tuck-in to existing
operations in Norfolk, Virginia and is a new market entrance in Clarksville, Tennessee. Simultaneously, we sold to Allied Waste Industries collection operations in Charlotte, North Carolina, Sumter, South Carolina, Mobile, Alabama and Biloxi,
Mississippi for $16.3 million in cash.



On August 21, 2003, we
acquired Waste Watchers for approximately $2.6 million in cash. This acquisition is a tuck-in to our existing operations in Summerville, South Carolina and provides commercial, industrial and residential waste collection services.



During 2003 we primarily funded these acquisitions with proceeds from
borrowings under our senior credit facility and the issuance of shares of our common stock with a fair value of approximately $0.7 million.



Operating Enhancements



We have implemented advanced management information systems, financial controls, shared support services and benchmarking systems designed to improve the
productivity, efficiency and profitability of our existing and acquired operations. Each branch facility has on-line real time access to our financial, operating, cost and customer information. This access enables our managers to evaluate
continuously our performance record and to establish benchmarks in all phases of our operations. Management utilizes these systems to:



| |  | improve collection and transportation efficiencies;
| | - | ---------------------------------------------------



| |  | enhance equipment and personnel utilization;
| | - | --------------------------------------------



| |  | reduce equipment acquisition and maintenance costs;
| | - | ---------------------------------------------------



| |  | reduce disposal costs by maximizing waste streams directed to lower cost landfills;
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| |  | monitor and collect customer accounts on a timely basis; and
| | - | ------------------------------------------------------------



| |  | provide current information to our sales force to ensure properly structured pricing for new customers.
| | - | -------------------------------------------------------------------------------------------------------



Through the utilization of our systems and controls, we will continue to manage our landfill disposal costs and to negotiate
long-term disposal contracts with Subtitle D landfill operators. In addition, we have developed an extensive network of transfer stations that we use to consolidate waste streams to gain greater leverage in negotiating landfill disposal fees. As of
December 31, 2003, approximately 36.0% of our waste volume was directed through transfer stations owned or operated by us.



Contracts Program



We currently have 241 municipal contracts that represent approximately $81.0 million of revenue on an annualized basis. We believe that opportunities for
gaining new contracts are increasing due to shrinking state and local government coffers resulting from the economic downturn. In most cases, only larger disposal services companies such as us are financially acceptable to the municipality.
Historically, in the Southeastern U.S., city and county governments have provided a variety of solid waste services using their own personnel. Over time, many municipalities have opted to privatize or contract out their collection and disposal
services to the private sector. Typically, these contracts are competitively bid and have initial terms of one to five years. In bidding for large contracts, our management team draws on its experience in the waste industry and its knowledge of
local service areas in existing and target markets. We engage in extensive due diligence using our advanced management information systems and productivity and cost modeling analyses to respond to requests for proposals to provide services. Our
regional managers are responsible for managing the relationships with local governmental officials within their respective service area and sales representatives may be assigned specific municipalities for coverage. We may be required to bid for
renewal of a contract previously awarded to us, or in certain cases to renegotiate the contract as a result of changed market conditions. During 2003, we retained approximately 98.0% of our municipal contracts that were up for bid or renewal. No
single customer of ours accounted for more than 4.0% of our revenues in 2003. We do not believe that the loss of any single customer would have a material adverse effect on our results of operations.



Services



Commercial, Industrial and Residential Waste Services



We provide commercial and industrial collection and disposal services under
one-year to five-year service agreements. Fees are determined by such factors as collection frequency, level of service, route density, the type, volume and weight of the waste collected, the type of equipment and containers furnished, the distance
to the disposal or processing facility, the cost of disposal or processing and prices charged in our markets for similar service. Collection of larger volumes associated with commercial and industrial waste streams generally helps improve our
operating efficiencies and, through consolidation of these volumes, we can negotiate more favorable disposal prices. Our commercial and industrial customers utilize portable containers for storage thereby enabling us to service many customers with
fewer collection vehicles. Commercial and industrial collection vehicles normally require one operator. We provide two to eight cubic yard containers to commercial customers and 10 to 42 cubic yard containers to industrial customers. As a part of
the services we provide for an additional fee under our waste services contract, we install stationary compactors that compact waste prior to collection on the premises of a substantial number of large volume customers. No single commercial or
industrial contract is individually material to our results of operations.



Our residential solid waste collection and disposal services are performed either on a subscription basis with individual households, or under contracts with municipalities, homeowners associations, apartment owners
or mobile home park operators. Municipal contracts grant us the right to service all or a portion of the residences in a specified community or to provide a central repository for residential waste drop-off. Municipal contracts in our market areas
are typically awarded on a competitive bid basis and thereafter on a bid or negotiated basis and usually range in duration from one to five years. Residential contract fees are based primarily on route density, the frequency and level of service,
the distance to the disposal or processing facility, the cost of disposal or processing and prices charged in its markets for similar service. Municipal collection fees are paid either by the municipalities from tax revenues or through direct
service charges to the residents receiving the service. We had approximately 241 municipal contracts in place as of December 31, 2003. No single municipal or other residential contract is individually material to our results of operations.



At December 31, 2003, we operated 11 solid waste landfills in
Florida, Georgia, Mississippi, North Carolina and Tennessee. Our landfill facilities are designed and operated to meet federal, state and local regulations in all material respects and we believe each of our landfill sites are in compliance with
current applicable state and federal Subtitle D regulations in all material respects. None of our landfills are permitted to accept hazardous waste.



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Transfer Station Services



The 28 transfer stations we operated at December 31, 2003 receive, compact and transfer solid waste to larger vehicles for
transport to landfills. We believe that transfer stations benefit us by:



| |  | providing access to multiple landfills;
| | - | ---------------------------------------



| |  | improving utilization of collection personnel and equipment;
| | - | ------------------------------------------------------------



| |  | concentrating the waste stream to gain leverage in negotiating more favorable disposal rates; and
| | - | -------------------------------------------------------------------------------------------------



| |  | building relationships with municipalities that can lead to opportunities for additional business in the future.
| | - | ----------------------------------------------------------------------------------------------------------------



Depending on the location, size and local regulatory environment, transfer
stations can be constructed for as little as $150,000 for a small rural facility or as much as $1.0 million for larger sites. We believe that we have obtained all permits and authorizations necessary to operate our existing transfer stations and
that each of our existing transfer stations has been operated in compliance in all material respects with applicable environmental regulations.



At December 31, 2003, we owned eight of the transfer stations we operate, and operate the remaining 20 transfer stations pursuant to operating agreements.
We generally receive a fixed monthly operating fee for our services under these agreements, together with a variable fee based upon the number of hauls made by us from the station. At December 31, 2003, approximately 61% of waste directed to the
transfer stations we operated was delivered by third parties, who pay us a fee based on the tonnage delivered. Control of these third-party waste streams coupled with our waste stream adds to our bargaining power in our negotiations for favorable
solid waste disposal rates with landfill operators.



In 2003,
we outsourced the majority of our transportation services related to transfer station operations. We believe outsourcing these operations will reduce capital expenditures, improve maintenance capacity for other core services, reduce ownership costs,
such as insurance, fuel, labor and maintenance costs, and improve the aging of our remaining transfer fleet.



Recycling Services



Recycling involves the removal of reusable materials from the waste stream for processing and sale in various applications. Based on our experience in the
industry, we believe that recycling will continue to be an important component of local and state solid waste management plans as a result of the publics increasing environmental awareness and expanding regulations mandating or encouraging
waste recycling. We offer commercial, industrial and residential customers recycling for office paper, cardboard, newspaper, aluminum and steel cans, plastic, glass, pallets and yard waste. At December 31, 2003, we operated approximately 90
convenience sites where residents can dispose of recyclables. At December 31, 2003, less than 2.0% of our revenues represented recycling services.



Through a centralized effort, we resell recycled waste products using commercially reasonable practices and seek to manage commodity-pricing risk by
spreading the risk among our customers. These commodities are delivered either to third-party processing facilities in exchange for a fee or to one of five facilities operated by us for processing prior to resale. The resale prices of, and demand
for, recyclable commodities, particularly wastepaper, can be volatile and subject to changing market conditions.



Convenience Sites and Other Specialized Services



In 1982, we developed the concept of a convenience site in response to increasing volumes of waste dumped randomly in rural areas. Each site typically
consists of a ramp for easy disposal access, a trash compactor and trash and recycling containers. Most sites have posted operating hours during which our personnel assist residents with the deposit of waste and recyclables while monitoring the
types of waste deposited at the sites. Because these convenience sites reduce the amount of trash dumped along roads and in recreational areas, we believe that county and local governments will contract for these sites to be strategically located.
At December 31, 2003, we operated approximately 90 convenience sites located in 13 counties in our market area.



In addition, we have increased our efforts to win additional contracts to manage comprehensive disposal services for large corporations and
municipalities. For example, after thorough review and evaluation, we might provide a lump sum quote for handling all the waste in a companys facility. This would include separating at the source various wastes into commodities for resale and
non-recyclables for disposal. The process of sorting at the source, processing through a compaction system and scheduling waste and recyclable removals only when the containers are full reduces our cost and increases our operating efficiency.
Furthermore, confidential documents can be controlled throughout the process and destroyed to the customers satisfaction.



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Operations



Branch Facility Structure



Based on our experience in the industry, we believe that a branch facilities structure retains decision-making authority close to the customer, which
enables us to identify customers needs quickly and implement cost-effective solutions. Furthermore, we believe that it provides a low-overhead, highly efficient operational structure that allows us to branch into geographically contiguous
markets and operate in small communities that larger competitors might not find attractive. Based on our experience in the industry, we believe that branch facilities and decentralized management of operations provide us with a strategic competitive
advantage given the relatively rural nature of the Southeastern U.S.



We deliver our waste services from branch locations in contiguous service areas, which permits our branch facilities to provide back-up services and support to one another. Each manager of a branch facility has autonomous service and
decision-making authority for the local market area. Each designated division is overseen by a division manager and a division controller, who is typically located at one of our branch facilities. Effective January 1, 2004, the branch network was
divided into four divisions set forth below:



COLLECTION
OPERATIONS



|                 |  |                        |  |                    |  |                  
|---------------- |  | ---------------------- |  | ------------------ |  | -----------------
|Central Division |  | South Division         |  | East Division      |  | Landfill Division
|Durham, NC       |  | Bolivia, NC            |  | Elizabeth City, NC |  | Durham, NC       
|Garner, NC       |  | Conway, SC             |  | Goldsboro, NC      |  | Holly Springs, NC
|Graham, NC       |  | Hope Mills, NC         |  | Greenville, NC     |  | Roseboro, NC     
|Greensboro, NC   |  | Summerville, SC        |  | Jacksonville, NC   |  | Jacksonville, FL 
|Henderson, NC    |  | Wilmington, NC         |  | Kinston, NC        |  | Fairburn, GA     
|Oxford, NC       |  | Albany, GA             |  | Newport, NC        |  | Moss Point, MS   
|Wytheville, VA   |  | Americus, GA           |  | Norfolk, VA        |  | Gulfport, MS     
|Crossville, TN   |  | Atlanta, GA            |  | Rocky Mount, NC    |  | Olive Branch, MS 
|Clarksville, TN  |  | Dawson, GA             |  | Wilson, NC         |  | Greycourt, SC    
|Moss Point, MS   |  | Douglas, GA            |  |                    |  | Bath Springs, TN 
|Nashville, TN    |  | Easley, SC             |  |                    |  | Douglas, TN      
|Olive Branch, MS |  | Lilburn, GA            |  |                    |  |                  
|                 |  | Moultrie, GA           |  |                    |  |                  
|                 |  | Oglethorpe, GA         |  |                    |  |                  
|                 |  | Warner Robbins AFB, GA |  |                    |  |                  



Our managerial
philosophy centers on the principle that customers needs can best be served at the local level by a staff of well-trained personnel led by a branch manager. Each branch manager is responsible for implementing sales programs, maintaining
service quality, promoting safety in the branchs operations and overseeing the day-to-day operations for the branch, including contract administration. Branch managers also assist division managers in identifying potential acquisition
candidates. Frequently, the branch manager is also the branch facilitys sales manager; but in larger market areas, branch facilities will have one or more sales persons. Branch managers are compensated based on the performance of their branch.
Each branch manager reports to a division vice president, who reports to our chief operating officer.



In addition to delivering our services, branch staff responsibilities include setting up customer accounts, answering customer questions, processing
accounts payable and maintaining payroll and personnel information. Maintenance support for collection equipment is also provided at the branch facility. The facility size, number of maintenance personnel and capabilities are determined by the
number of vehicles operated and the type of services provided within the branch facilitys market area.



On a monthly basis, the corporate and/or division officers meet with each branch manager to discuss and evaluate the branch operations. This evaluation is
conducted through the use of flash reports on a weekly basis at the branch and division levels. Flash reports highlight key operating data such as employee-hours, overtime hours, truck hours, revenues and extraordinary costs. These meetings are
oriented to identifying trends, opportunities and strategies in the branch facilitys proximate geographic area. Using a decentralized approach, but with strong division and corporate monitoring and strict budgetary and operating guidelines and
quality control standards, each branch manager has the authority to exercise discretion in business decisions. Our management information systems provide corporate management timely oversight of branch performance.



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Information Technologies



A cornerstone of our desire to deliver responsive and cost-effective waste services is our management information systems
network. Many of our information systems, controls and services are designed to assist branch facilities personnel in making decisions based upon centralized information. Financial control is maintained through personnel, fiscal and accounting
policies that are established at the corporate level for implementation at the branch locations. Our systems allow for centralized billing and collection through a lock-box system, thus enhancing cash management. An internal audit program monitors
compliance with our policies and the benchmarks are monitored continuously using an advanced management information system. This information system links our IBM AS/400 computer to each branch using the Internet which allows each branch on-line,
real-time financial, productivity, maintenance and customer information.



Support Services



Our Support Services Teams provide our branch operations with significant assistance in maintaining existing customers, winning new customers and integrating newly acquired operations. These services consist of:



Risk Management Services:



| |  | Claims Management
| | - | -----------------



| |  | Safety Policy and Procedures Manual
| | - | -----------------------------------



| |  | Safety Training Programs
| | - | ------------------------



| |  | Facility Inspection
| | - | -------------------



| |  | Accident Investigation
| | - | ----------------------



| |  | Safety Award Programs
| | - | ---------------------



| |  | Site Specific Safety Awareness Programs
| | - | ---------------------------------------



| |  | Heads up the Corporate Safety Committee
| | - | ---------------------------------------



| |  | Emergency Task Force for Natural Disaster Response
| | - | --------------------------------------------------



Productivity Improvement Services:



| |  | Route Optimization Tools
| | - | ------------------------



| |  | Global Information System Routing Tools
| | - | ---------------------------------------



| |  | Route Planning Protocol that maximize truck utilization
| | - | -------------------------------------------------------



Centralized Purchasing and Asset Control for:



| |  | Collection and Support Vehicles
| | - | -------------------------------



| |  | Containers
| | - | ----------



| |  | Licensing
| | - | ---------



Centralized Purchasing Negotiations for:



| |  | Tires
| | - | -----



| |  | Lubricants
| | - | ----------



| |  | High Volume Parts and Supplies
| | - | ------------------------------



| |  | Office & Shop Supplies
| | - | ----------------------



| |  | Disposal Price
| | - | --------------



Acquisition Due Diligence and Integration Support:



| |  | Data Management and Customer Account Data Integration
| | - | -----------------------------------------------------



| |  | Maintenance and Corporate Identity Program Implementation
| | - | ---------------------------------------------------------



| |  | Route Integration
| | - | -----------------



| |  | Employee Benefits & Related Human Resource Services
| | - | ---------------------------------------------------



| |  | Customer Account Profitability Analysis
| | - | ---------------------------------------



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Centralized Maintenance Support in order to:



| |  | Standardize Vehicle and Heavy Equipment Maintenance Procedure
| | - | -------------------------------------------------------------



| |  | Establish Standards for Truck & Heavy Equipment Rebuilds
| | - | --------------------------------------------------------



| |  | Provide Guidance and Approval for Truck & Heavy Equipment Rebuilds
| | - | ------------------------------------------------------------------



| |  | Manage Our Compactor Rebuild Facility
| | - | -------------------------------------



| |  | Head up the Corporate Maintenance Council that establishes and rolls out Best Maintenance Practices.
| | - | ------------------------------------------------------------------------------------------------------



Disposal Management



We manage our disposal cost by maximizing the use of our own disposal sites
whenever economically viable, by negotiating favorable disposal rates with third parties based on volume commitments, by a network of transfer stations that provide us with more final disposal options and a disciplined transfer station and landfill
development program designed to improve our future internalization rates and reduce our cost of disposal.



We use our network of transfer stations to consolidate waste from local collection vehicles and ship the consolidated waste in tractor/trailer loads to
our landfills, thereby internalizing the waste. In some markets, our transfer stations ship to third party disposal facilities, but generally only when we have either negotiated favorable long-term disposal rates with these facilities or the
disposal rates generally are the same for all users.



In
general, there is no shortage of landfill space in the Southeast. There is, however, a need for additional landfill disposal capacity in some very specific Southeast markets. To address these opportunities, we may acquire existing landfills, we may
develop landfills, or we may partner with an experienced landfill operator for the acquisition, development or assumption of the operation of additional landfills. Generally, we would pursue such arrangements in our market area if we believe that
ownership or operation of a landfill would provide cost benefits and create shareholder value.



Most Southeast markets have surplus landfill capacity. In these markets, landfill operators are aggressively soliciting solid waste volumes to ensure cash flows sufficient to support ongoing landfill operating and
construction cost. In these markets, we will continue to use our traditional system of consolidating waste and negotiating favorable disposal rates unless we believe that ownership or operation of a landfill would provide cost benefits and create
shareholder value.



In some of our markets, we rely on
municipally owned waste-to-energy plants for the disposal of our solid waste. In these markets, disposal cost is the same for all users; as a result, no one has a competitive edge when it comes to the cost of disposal.



Recycling, composting and waste reduction continue to play a role as
alternate disposal methods. State and local governments have mandated specific rules and regulations for the recycling of construction and demolition waste, residential recyclables, used tires and yard waste. In some jurisdictions, materials such as
yard waste and cardboard have been banned for landfill disposal, and yard waste must be disposed of at a composting or yard waste facility and cardboard at a recycling center. Where applicable, we have adjusted our collection and disposal operations
to be in compliance.



Landfill Capping, Closure and Post-Closure Costs



We have financial obligations relating to capping,
closure and post-closure costs for the landfill sites we own and operate. Our obligations for these costs will increase if we decide to develop or acquire additional landfill sites in the future.



Landfill capping, closure and post-closure costs include estimated costs to
be incurred for final closure of landfills and estimated costs for providing required post-closure monitoring and maintenance of landfills. We estimate these future cost requirements based on our interpretation of the technical standards of the
Environmental Protection Agencys Subtitle D Regulations. While the precise amounts of these future obligations cannot be determined, at December 31, 2003, we estimate total costs of approximately $90.0 million for capping, final closure of our
operating facilities and post-closure monitoring costs. Our estimate of these costs considers when the costs would actually be paid and factor in inflation and discount rates. We had accrued approximately $4.0 million and $6.2 million for such
projected costs at December 31, 2002 and 2003, respectively. From these accruals, we paid approximately $0.4 million and $1.3 million for the years ended December 31, 2002 and 2003, respectively. We provide accruals for these future costs (generally
for a term of 30 years after final closure of any landfill), and will provide additional accruals for these and other landfills we might acquire or develop in the future, based on engineering estimates of consumption of airspace over the useful
lives of such facilities. There can be no assurance that our ultimate financial obligations for actual closure or post-closure costs will not exceed the amount accrued and reserved or amounts otherwise receivable pursuant to insurance policies or
trust funds. Such a circumstance could have a material adverse effect on our financial condition and results of operation.



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Marketing and Sales



We market our services locally through our regional and branch managers and approximately 57 direct sales representatives who focus on commercial,
industrial and residential customers. In addition to traditional methods of obtaining customers through cold calls, referrals, yellow page and other local market print advertising and overall market reputation, we focus on new account sales through
an integrated prospect data base system which targets new account development. Some branch locations have dedicated sales representatives that market residential services. We engage in direct mail campaigns and door-to-door marketing and work with
real estate agents and developers to sell services to new developments. Additionally, we attend and make presentations at municipal and state conferences and advertise in governmental associations membership publications.



Our sales representatives visit customers on a regular basis and make sales
calls to potential new customers. These sales representatives receive a significant portion of their compensation based upon certain incentive formulas. We emphasize providing quality services, customer satisfaction and retention, and believe that
this focus on quality service will help retain existing customers as well as attract additional customers. Maintenance of a local presence and identity is an important aspect of our marketing plan. In order to accomplish these objectives, many of
our managers are involved in local governmental, civic and business organizations.



No single customer of ours accounted for more than 4.0% of our revenues in 2003. We do not believe that the loss of any single customer would have a material adverse effect on our results of operations.



Competition



The solid waste management industry is highly competitive, very fragmented and requires substantial labor and capital
resources. Intense competition exists within the industry not only for collection, transportation and disposal volume, but also for acquisition candidates. The industry includes three large national waste companies: Waste Management, Inc.; Allied
Waste Industries, Inc.; and Republic Services, Inc. There are several other public companies in the industry with annual revenue in excess of $100 million, including Casella Waste Systems, Inc. and Waste Connections, Inc. We compete with a number of
these and other regional and local companies, including publicly or privately owned providers of incineration services.



We also compete with certain municipalities that operate their own solid waste collection and disposal facilities. These municipalities may have certain
advantages over us due to the availability of tax revenues and tax-exempt financing.



We compete for collection and recycling accounts primarily on the basis of price and quality of our services. From time to time, competitors may reduce the price of their services in an effort to expand market share
or to win a competitively bid municipal contract. These practices may also lead to reduced pricing for our services or the loss of business.



Competitive Bid Contracts



We provide a substantial portion of our residential collection services under municipal contracts and, at December 31, 2003, approximately 29% of our
revenues came from municipal contracts. As is generally the case in the industry, municipal contracts are subject to periodic competitive bidding. The balance of our residential services are provided on a subscription basis. However, no single
customer of any type accounted for more than 4% of our revenues in 2003. At December 31, 2003, we had not lost, nor do we reasonably expect to lose, a contract that would have a material adverse effect on our financial condition or results of
operations because the contract either was or is not material. Our inability to compete with larger and better capitalized companies, or to replace a significant number of municipal contracts lost through the competitive bidding process with
comparable contracts or other revenue sources within a reasonable time period, could have a material adverse effect on our results of operations.



Employees



At December 31, 2003, we employed approximately 1,700 full-time employees. None of our employees are represented by unions and we believe that our
employee relations are good. We are highly dependent upon the services of the members of our management team, the loss of any of whom might have an adverse effect on our operations.



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Risk Management, Insurance and Performance Bonds



We actively maintain environmental and other risk management programs appropriate for our business. Our environmental risk
management program includes evaluating both existing facilities, as well as potential acquisitions, for environmental law compliance and operating procedures. We also maintain a worker safety program that encourages safe practices in the workplace.
Operating practices at all of our existing operations stress minimizing the possibility of environmental contamination and litigation.



We carry a range of insurance intended to protect our assets and operations, including a commercial general liability policy and a property damage policy.
If a partially or completely uninsured claim were made against us (including liabilities associated with cleanup or remediation at our own facilities) and it was successful and of sufficient magnitude, it could have a material adverse effect on our
results of operations or financial condition. Any future difficulty in obtaining insurance could also impair our ability to secure future contracts, which might be conditioned upon the availability of adequate insurance coverage.



Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. We have not experienced difficulty in obtaining performance bonds or letters of credit for our current operations. At December 31, 2003, we had provided customers and various
regulatory authorities with bonds and letters of credit of approximately $36.6 million to secure our obligations. If we were unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, we may be precluded from
entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits.



Regulation



Introduction



We are subject to extensive and evolving federal, state and local environmental laws and regulations that have been enacted in response to technological
advances and increased concern over environmental issues. These regulations not only strictly regulate the conduct of our operations but also are related directly to the demand for many of the services we offer.



The regulations affecting us are administered by the EPA and various other
federal, state and local environmental, zoning, health and safety agencies. We believe that we are currently in substantial compliance with applicable federal, state and local laws, permits, orders and regulations, and we do not currently anticipate
any material environmental costs (although there can be no assurance in this regard). We anticipate there will continue to be increased regulation, legislation and regulatory enforcement actions related to the solid waste services industry. As a
result, we attempt to anticipate future regulatory requirements and to plan accordingly to remain in compliance with the regulatory framework.



In order to transport waste, we must have one or more permits from state or local agencies. These permits also must be periodically renewed and are
subject to modification and revocation by the issuing agency. None of our permits has ever been revoked.



In order to develop, own or operate a landfill, a transfer station or other solid waste facilities, we are required to go through several governmental
review processes and obtain one or more permits and often zoning or other land use approvals. Obtaining these permits and zoning or land use approvals is difficult, time consuming and expensive. In addition, this process is often opposed by various
local elected officials and citizens groups. Once obtained, operating permits generally must be periodically renewed and are subject to modification and revocation by the issuing agency.



Our facilities are subject to a variety of operational, monitoring, site
maintenance, closure, post-closure and financial assurance obligations which change from time to time and which could give rise to increased capital expenditures and operating costs. We do not expect to make material capital expenditures for
environmental control facilities in 2004. In connection with any such landfills, it is often necessary to expend considerable time, effort and money in complying with the governmental review and permitting process necessary to maintain or increase
the capacity of these landfills. Governmental authorities have broad power to enforce compliance with these laws and regulations and to obtain injunctions or impose civil or criminal penalties in the case of violations.



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The principal federal, state and local statutes and regulations applicable to our various operations are
as follows:



The Resource Conservation and Recovery Act
of 1976 (RCRA)



RCRA regulates the
generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. RCRA divides solid waste into two groups, hazardous and non-hazardous. Wastes
are generally classified as hazardous if they either are specifically included on a list of hazardous wastes or exhibit certain hazardous characteristics and are not specifically designated as non-hazardous. Wastes classified as hazardous under RCRA
are subject to much stricter regulation than wastes classified as non-hazardous.



Among the wastes that are specifically designated as non-hazardous waste are household waste and special waste, including items such as petroleum contaminated soils, asbestos, foundry sand, shredder fluff
and most non-hazardous industrial waste products.



Although we
currently are not involved with transportation or disposal of hazardous substances, we transported hazardous substances in the past and might become involved with hazardous substance transportation and disposal in the future. The EPA regulations
issued under Subtitle C of RCRA impose a comprehensive cradle to grave system for tracking the generation, transportation, treatment, storage and disposal of hazardous wastes. The Subtitle C Regulations provide standards for generators,
transporters and disposers of hazardous wastes, and for the issuance of permits for sites where such material is treated, stored or disposed. Subtitle C imposes detailed operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and reporting, facility closure, post-closure and financial responsibilities.



In October 1991, the EPA adopted the Subtitle D Regulations governing solid waste landfills. Because we own and operate landfills, we must comply with
these regulations.



The Subtitle D Regulations, which generally
became effective in October 1993, include location restrictions, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D Regulations require that new landfill sites meet more stringent liner design criteria (typically, composite soil and synthetic liners or two or more synthetic liners) designed
to keep leachate out of groundwater and have extensive collection systems to carry away leachate for treatment prior to disposal. Groundwater monitoring wells must also be installed at virtually all landfills to monitor groundwater quality and,
indirectly, the leachate collection system operation. The Subtitle D Regulations also require, where threshold test levels are present, that methane gas generated at landfills be controlled in a manner that protects human health and the environment.
We are not aware of any problem with methane gas at any of our facilities. Each state is required to revise its landfill regulations to meet these requirements or such requirements will be automatically imposed upon it by the EPA. Each state is also
required to adopt and implement a permit program or other appropriate system to ensure that landfills within the state comply with the Subtitle D Regulations criteria. Various states in which we operate now or might in the future have adopted
regulations or programs as stringent as, or more stringent than, the Subtitle D Regulations. Failure to comply with these regulations could require us to undertake investigatory or remedial activities, to curtail operations or to close a landfill
temporarily or permanently. Future changes in these regulations might require us to modify, supplement or replace equipment or facilities at costs that might be substantial. The failure of regulatory agencies to enforce these regulations vigorously
or consistently might give an advantage to our competitors whose facilities do not comply with the Subtitle D Regulations or its state counterparts. Our ultimate financial obligations related to any failure to comply with these regulations could
have a material adverse effect on our operations and financial condition.



The Federal Water Pollution Control Act of 1972



The Federal Water Pollution Control Act of 1972, known as the Clean Water Act, establishes rules regulating the discharge of pollutants from a variety of sources, including solid waste disposal sites and transfer
stations, into waters of the U.S. Because we own and operate landfills and transfer stations, we must comply with this Act. For example, if run-off or collected leachate from our transfer stations or from our owned or operated landfills is
discharged into streams, rivers or other surface waters, the Clean Water Act would require us to apply for and obtain a discharge permit, conduct sampling and monitoring and possibly reduce the quantity of pollutants in such discharge. Also,
virtually all landfills are required to comply with the EPAs storm water regulations issued in November 1990. Such regulations are designed to prevent possibly contaminated landfill storm water runoff from flowing into surface waters. We
believe that our facilities are in compliance in all material respects with Clean Water Act requirements, including these state requirements. Various states in which we operate now or might in the future have delegated authority to implement the
Clean Water Act permitting requirements, and some of these states have adopted regulations that are more stringent than the federal requirements.



The Comprehensive Environmental Response, Compensation and Liability Act of 1980



The Comprehensive Environmental Response, Compensation and Liability Act of
1980, also known as CERCLA, established a regulatory and remedial program intended to provide for the investigation and cleanup of facilities from which there has been, or is threatened, a release of any hazardous substance into the environment.
CERCLAs primary mechanism for remedying such problems



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is to impose strict joint and several liability for cleanup of facilities on current owners and operators of the site,
former owners and operators of the site at the time of the disposal of the hazardous substances, as well as the generators of the hazardous substances and the transporters who arranged for disposal or transportation of the hazardous substances. The
costs of CERCLA investigation and cleanup can be very substantial. Liability under CERCLA does not depend upon the existence or disposal of hazardous waste as defined by RCRA, but can also be founded upon the existence of even very small
amounts of the more than 700 hazardous substances listed by the EPA, many of which can be found in household waste.



We currently do not handle hazardous waste as defined by RCRA, but because we own and operate landfills and transfer stations, we might be subject to
CERCLA. If we were to be found to be a responsible party for a CERCLA cleanup, the enforcing agency could hold us, or any other generator, transporter or the owner or operator of the facility, completely responsible for all investigative and
remedial costs even if others might also be liable. CERCLA also authorizes the imposition of a lien in favor of the U.S. upon all real property subject to, or affected by, a remedial action for all costs for which a party is liable. CERCLA provides
a responsible party with the right to bring legal action against other responsible parties for their allocable share of investigative and remedial costs. Our ability to get others to reimburse us for their allocable share of such costs would be
limited by our ability to find other responsible parties and prove the extent of their responsibility and by the financial resources of such other parties.



The Clean Air Act



The Clean Air Act provides for regulation, through state implementation of federal requirements, of the emission of air pollutants from certain landfills
based upon the date of the landfill construction and volume per year of emissions of regulated pollutants. Because we own and operate landfills, we must comply with this Act. We believe we are in compliance with this Act. The EPA has proposed new
source performance standards regulating air emissions of certain regulated pollutants (methane and non-methane organic compounds) from municipal solid waste landfills. Landfills located in areas with air pollution problems might be subject to even
more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the disposal of asbestos-containing materials. Some of the federal statutes described above contain provisions authorizing the
institution of lawsuits by private citizens to enforce the provisions of the statutes.



The Occupational Safety and Health Act of 1970



OSHA establishes employer responsibilities and authorizes the promulgation by the Occupational Safety and Health Administration of occupational health and safety standards, including the obligation to maintain a
workplace free of recognized hazards likely to cause death or serious injury, to comply with worker protection standards established by OSHA, to maintain records, to provide workers with required disclosures and to implement health and safety
training programs. Various of those promulgated standards might apply to our operations, including those standards concerning notices of hazards, safety in excavation and demolition work, the handling of asbestos and asbestos-containing materials,
and worker training and emergency response programs. Our employees are trained to respond appropriately in the event there is an accidental spill or release of packaged asbestos-containing materials or other regulated substances during
transportation or landfill disposal.



State and Local
Regulations



Each state in which we now operate or
might operate in the future has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure
and post-closure maintenance of landfills and transfer stations. Because of our business, we must comply with these laws and regulations. In addition, many states have adopted Superfund statutes comparable to, and in some cases more stringent than,
CERCLA. These statutes impose requirements for investigation and cleanup of contaminated sites and liability for costs and damages associated with such sites, and some provide for the imposition of liens on property owned by responsible parties.
Furthermore, many municipalities also have ordinances, local laws and regulations affecting our operations. These include zoning and health measures that limit solid waste management activities to specified sites or activities, flow control
provisions that direct the delivery of solid wastes to specific facilities, laws that grant the right to establish franchises for collection services and then put out for bid the right to provide collection services, and bans or other restrictions
on the movement of solid wastes into a municipality.



Permits
and approvals may limit the types of waste that may be accepted at a landfill or the quantity of waste that may be accepted at a landfill during a given time period. In addition, permits and approvals, as well as some state and local regulations,
might limit a landfill to accepting waste that originates from specified geographic areas or seek to restrict the importation of out-of-state waste or otherwise discriminate against out-of-state waste. Generally, restrictions on the importation of
out-of-state waste have not withstood judicial challenge. However, from time to time federal legislation is proposed which would allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that
could be imported for disposal and would require states to reduce the amounts of waste exported to other states. Although Congress has not yet passed such legislation, if this or



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similar legislation is enacted, states in which we operate landfills could act to limit or prohibit the importation of
out-of-state waste. Such state actions could materially adversely affect landfills within those states that receive a significant portion of waste originating from out-of-state.



In addition, some states and localities may for economic or other reasons restrict the exportation of waste from their
jurisdiction or require that a specified amount of waste be disposed of at facilities within their jurisdiction. In 1994, the U.S. Supreme Court held unconstitutional, and therefore invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, some state and local jurisdictions continue to seek to enforce such restrictions and, in certain cases, we might elect not to challenge such restrictions based upon various considerations. In addition, the
aforementioned proposed federal legislation would allow states and localities to impose certain flow control restrictions.



These restrictions could result in the volume of waste going to landfills being reduced in some areas, which might materially adversely affect our ability
to operate our landfills at their full capacity and/or affect the prices that can be charged for landfill disposal services. These restrictions might also result in higher disposal costs for our collection operations. If we were unable to pass such
higher costs through to our customers, our business, financial condition and results of operations could be materially adversely affected.



There has been an increasing trend at the state and local level to mandate and encourage waste reduction at the source and waste recycling, and to
prohibit or restrict the disposal of some types of solid wastes, such as yard wastes, leaves and tires, in landfills. The enactment of regulations reducing the volume and types of wastes available for transport to and disposal in landfills could
affect our ability to operate our facilities at their full capacity.



ITEM
2. PROPERTY AND EQUIPMENT



Our principal executive offices
are located at 3301 Benson Drive, Raleigh, North Carolina, where we currently lease approximately 25,000 square feet of office space. Our principal property and equipment consists of land (primarily transfer stations, bases for collection operations
and landfill sites), buildings, and vehicles and equipment. Our land and buildings are located in North Carolina, South Carolina, Virginia, Tennessee, Mississippi, Georgia and Florida. We also lease real property in the states in which we do
business. At December 31, 2003, we operated 36 collection operations, 28 transfer stations, five, recycling facilities and 11 landfills aggregating approximately 2,450 acres. All our property and equipment are used in our one industry segment, which
includes collection, transfer, recycling, processing and disposal of municipal solid and industrial waste.



Containers



Some type of container is used in almost every service we provide, and we therefore have an extensive inventory on-hand or on-site at customers
locations throughout North Carolina, South Carolina, Virginia, Tennessee, Mississippi, Georgia and Florida. We own all of our containers and centrally manage our inventory located at the branch facility level. We also own a significant number of
on-site compaction containers, which provide efficiency for high-volume solid waste generators. Container life is dependent on the location of the container, the type of waste that is deposited into the container and how the container is maintained.
Proper maintenance of commercial and industrial front loader and roll-off containers consists of regular repainting, scheduled repairs and switch-outs, quality cleaning, sanding and priming and monitoring of the container by our employees to check
for needed repairs. Residential collection containers require minor maintenance.



Collection Vehicles



We use a fleet of specialized collection vehicles to collect and transport waste and to provide recycling and convenience site services. We have implemented an aggressive and reliable maintenance program to extend the useful lives of our
equipment. Preventative and long-term maintenance is performed on regularly scheduled cycles that are more frequent than most manufacturers suggested schedules. Preventative maintenance is performed on collection vehicles after every 150 to
250 hours of operation depending on their class, and long-term maintenance (reconstruction of engines, transmissions, etc.) is performed every four to six years. Additionally, cosmetic repairs (painting, interior upholstery repairs) are performed as
needed. The majority of the maintenance program is done by our personnel located in branch facilities.



ITEM 3. LEGAL PROCEEDINGS



We are not a party to any material pending legal proceedings. In the normal course of our business and as a result of the extensive governmental regulation of the waste industry, we might periodically become subject to various judicial and
administrative



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proceedings involving federal, state or local agencies. In these proceedings, an agency might seek to impose fines on us
or to revoke, or to deny renewal of, an operating permit held by us. In addition, we might become party to various claims and suits pending for alleged damages to persons and property, alleged violation of certain laws and for alleged liabilities
arising out of matters occurring during the normal operation of the waste management business.



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



No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2003.



EXECUTIVE OFFICERS



As of December 31, 2003, our executive officers were as follows:



|                     |  |     |  |                                                 
|-------------------- |  | --- |  | ------------------------------------------------
|Name                 |  | Age |  | Position(s)                                     
|Jim W, Perry.        |  | 59  |  | President, Chief Executive Officer and Director 
|Harry M. Habets      |  | 54  |  | Chief Operating Officer                         
|D. Stephen Grissom   |  | 51  |  | Chief Financial Officer, Secretary and Treasurer
|William J. Hanley    |  | 50  |  | Vice President, Sales and Marketing             
|Lonnie C. Poole, III |  | 42  |  | Vice President, Corporate Development           



JIM W. PERRY joined
our company in 1971 and was named Chief Executive Officer in 2002 and has served as President since 1987 and as a director since 1974. Prior to that, Mr. Perry served as Chief Operating Officer from 1987 until 2002. Mr. Perry holds a B.S. in
Agricultural and Biological Engineering from North Carolina State University and an M.S. in Systems Management from the University of Southern California. Mr. Perry has more than 33 years experience in the solid waste industry and has received the
Distinguished Service Award from the NSWMA. In addition, Mr. Perry has served in the Carolinas Chapter of NSWMA as Chairman and on the Membership Committee. Mr. Perry was inducted into the EIA Hall of Fame in 1997.



HARRY M. HABETS joined our company in 2002 as Vice President and Chief
Operating Officer. From 1985 to 1999, Mr. Habets held various management positions with Waste Management, Inc., including VP of International Operations and Regional VP/Manager for collection, recycling and landfill disposal services in the
Southeast. Mr. Habets holds a B.S. in Business Administration from Rochester Institute of Technology. Mr. Habets has 15 years of experience in the solid waste industry.



D. STEPHEN GRISSOM joined our company in 2001 as Chief Financial Officer and Vice President of Finance. Prior to that, Mr.
Grissom was Chief Financial Officer for Austin Quality Foods from 1982 to 2000 and has more than 25 years of controllership and CFO experience. He is a certified public accountant and holds a B.A. in accounting from North Carolina State University.



WILLIAM J. HANLEY joined our company in 2001 as Vice President
of Sales and Marketing. Prior to that, Mr. Hanley served as Sales Manager, General Sales Manager and Regional Sales Manager with Waste Management, Inc. from 1995 to 2001. He holds a B.S. in Business Administration from Clarion University. Mr. Hanley
has 10 years of experience in the solid waste industry.



LONNIE
C. POOLE, III was named Vice President of Corporate Development in 2002. Prior to that, Mr. Poole served as our Vice President, Director of Support Services since 1995. From 1990 to 1995, he served as our Risk Management Director. Mr. Poole holds a
B.S. in Aerospace Engineering from North Carolina State University. Mr. Poole is the son of Lonnie C. Poole, Jr., Chairman of the Board. Mr. Poole has more than 13 years experience in the solid waste industry.



OTHER KEY EMPLOYEES



The following table sets forth certain information concerning our other key
employees as of January 1, 2004:



|                   |  |     |  |                                 
|------------------ |  | --- |  | --------------------------------
|Name               |  | Age |  | Position(s)                     
|Harrell J. Auten   |  | 55  |  | Vice PresidentSouth Division   
|E Franklin Lorick  |  | 50  |  | Vice PresidentCentral Division 
|Thomas A. Winstead |  | 49  |  | Vice PresidentEast Division    
|Jerry W. Johnson   |  | 53  |  | Vice PresidentLandfill Division



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HARRELL J. AUTEN has served as Vice President of our company since 1998 and has served as our South
Division Manager since 1993. Prior to that, Mr. Auten owned and operated his own company. Mr. Auten holds a B.S. in Business Administration from the University of North Carolina at Chapel Hill and has more than 33 years experience in the solid waste
industry.



E. FRANKLIN LORICK was named Vice President of our
company in 2002. Mr. Lorick joined us in 1989 and has held various positions including Operations Manager and Branch Manager. He attended Midlands Community College in Columbia, South Carolina and has over 15 years experience in the solid waste
industry



THOMAS A. WINSTEAD has served as a Vice President of
our company since March 1998. He joined us 1985 as a Branch Manager and has also served as East Regional Operations Manager from 1990 to 1997. He is a graduate of Atlantic Christian College with a B.S. in Health and Physical Education. Mr. Winstead
has more than 19 years of experience in the solid waste industry.



JERRY W. JOHNSON joined our company in 1991 and has served in various capacities which included developing our first Recycling Division and managing Field Support Services until his departure in 1995. Mr. Johnson then joined Atlantic Waste
Disposal and served in various roles from transportation to General Management of Atlantic Waste of Virginia and New York until 1999. He then rejoined our company as the North Carolina Landfill Division Manager. Mr. Johnson currently serves as Vice
President of our Landfill Division and oversees all of our landfill operations. Mr. Johnson attended Wake Community College and has over 25 years in the solid waste industry.



None of our executive officers, directors or other key employees is related to any other executive officer, director or
other key employee, except that Lonnie C. Poole, Jr., Chairman of the Board of Directors, and Lonnie C. Poole, III are father and son.



PART II



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



Market information.Our common stock trades on the Nasdaq National Market under the symbol WWIN. The following sets forth the quarterly
high and low bid prices for the years indicated as reported by Nasdaq. These prices are based on quotations between dealers, which do not reflect retail mark-up, mark-down or commissions and might not reflect actual transactions.



|               |  |      |        |     |   |      
|-------------- |  | ---- | ------ | --- | - | -----
|               |  | High |        | Low
|2002           |  |      |        |     |   |      
|First quarter  |  | $    | 7.200  |     | $ | 5.780
|Second quarter |  | $    | 7.921  |     | $ | 6.200
|Third quarter  |  | $    | 7.750  |     | $ | 5.750
|Fourth quarter |  | $    | 8.020  |     | $ | 5.400
|               |  |     
|2003           |  |      |        |     |   |      
|First quarter  |  | $    | 8.100  |     | $ | 6.110
|Second quarter |  | $    | 7.200  |     | $ | 6.310
|Third quarter  |  | $    | 9.500  |     | $ | 7.130
|Fourth quarter |  | $    | 11.500 |     | $ | 8.250



As of December 31,
2003, the number of record holders of our common stock was 127 and we believe that the number of beneficial owners was more than 1,500.



Dividends.On November 4, 2003, our Board of Directors declared a semi-annual cash dividend of $0.08 per share to shareholders of record on
November 21, 2003. Payment of the cash dividend was made on December 19, 2003. We expect to pay dividends provided we have sufficient cash available to effect the dividend without impairing our ability to pay our debts as they become due in the
usual course of business and without reducing total assets below the sum of our total liabilities plus any amount that would be needed if we were dissolved as of the payment date to satisfy all preferential rights upon distribution and to satisfy
any preferential rights that are superior to those receiving the dividend.



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##### Table of Contents

Under our current revolving bank facility, we are limited in the amount we may pay in cash dividends in
any year. In addition, we cannot pay any cash dividend if after the payment of such dividend our fixed charge coverage ratio, as defined in the facility, is less than 1.10 to 1.0 for the year in which the dividend was paid. Further, we must meet
financial covenants contained in the facility, including covenants relating to minimum net worth, minimum net income and maximum levels of capital expenditures and indebtedness. If we were not in compliance with these covenants, or were otherwise in
default under the facility, we would not be able to pay cash dividends.



Sale of Unregistered Stock.On January 31, 2003, we issued an aggregate of 100,000 shares of our common stock, which shares were not registered under the Securities Act of 1933. These shares were issued in a private placement to an
entity in exchange for assets that we integrated into our operations. The private placement was made pursuant to the exemption available under Section 3(a)(10) of the Securities Act of 1933.



Equity Compensation Plans.The following table provides information as
of December 31, 2003 for our one equity-based compensation plan, which is our 1997 Stock Plan.



|                                                            |  |                                                                                            |  |                                                                             |      |                                                                                              |          
|----------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------- | ---------
|Plan Category                                               |  | Number of securities to be issuedupon exercise of outstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and
rights |      | Number of securities remaining available for future issuance under equity compensation plans
|Equity compensation plans approved by our shareholders:     |  |                                                                                            |  |                                                                             |      |                                                                                              |          
|1997 Stock Plan                                             |  | 613,136                                                                                    |  | $                                                                           | 8.97 |                                                                                              | 1,186,864
|Equity compensation plans not approved by our shareholders: |  |                                                                                            |  |                                                                             |      |                                                                                              |          
|None                                                        |  |                                                                                           |  |                                                                             |     |                                                                                              |         
|                                                            |  |                                                                                            |  |                                                                             |      |                                                                                              |          
|Total                                                       |  | 613,136                                                                                    |  | $                                                                           | 8.97 |                                                                                              | 1,186,864
|                                                            |  |                                                                                            |  |                                                                             |      |                                                                                              |          



ITEM 6. SELECTED FINANCIAL DATA



The following selected financial data should be read in
conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report. The consolidated statement of operations data set forth below with respect to the years ended December 31, 2001, 2002 and 2003 and the
consolidated balance sheet data as of December 31, 2002 and 2003 are derived from, and are referenced to, our audited consolidated financial statements included elsewhere in this report. The consolidated statement of operations data set forth below
with respect to the years ended December 31, 1999 and 2000 and the consolidated balance sheet data as of December 31, 1999, 2000 and 2001 are derived from financial statements not included in this report. Historical results are not necessarily
indicative of future results.



19



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##### Table of Contents

|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                             |  | YEAR ENDED DECEMBER 31                |        
|                                                                                             |  | 1999                                  |         |   | 2000 |   |         | 2001 |  |   | 2002(1) |   |  | 2003 |        
|                                                                                             |  | (IN THOUSANDS, EXCEPT PER SHARE DATA) |        
|Statement of Operations Data:                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Service revenues                                                                             |  | $                                     | 213,384 |   |      | $ | 240,733 |      |  | $ | 248,074 |   |  | $    | 250,543 |   |  | $ | 269,208 |  
|Equipment sales                                                                              |  |                                       | 1,335   |   |      |   | 1,701   |      |  |   | 1,221   |   |  |      | 1,285   |   |  |   | 1,257   |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total revenues                                                                               |  |                                       | 214,719 |   |      |   | 242,434 |      |  |   | 249,295 |   |  |      | 251,828 |   |  |   | 270,465 |  
|Cost of service operations                                                                   |  |                                       | 133,878 |   |      |   | 149,267 |      |  |   | 157,980 |   |  |      | 161,165 |   |  |   | 176,160 |  
|Cost of equipment sales                                                                      |  |                                       | 575     |   |      |   | 830     |      |  |   | 580     |   |  |      | 842     |   |  |   | 1,130   |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total cost of operations                                                                     |  |                                       | 134,453 |   |      |   | 150,097 |      |  |   | 158,560 |   |  |      | 162,007 |   |  |   | 177,290 |  
|Selling, general and administrative                                                          |  |                                       | 31,621  |   |      |   | 39,143  |      |  |   | 37,123  |   |  |      | 33,832  |   |  |   | 38,114  |  
|Depreciation and amortization (1)                                                            |  |                                       | 22,061  |   |      |   | 26,349  |      |  |   | 28,858  |   |  |      | 27,697  |   |  |   | 30,549  |  
|Loss (gain) on sale of collection and hauling assets                                         |  |                                       |        |   |      |   | 1,049   |      |  |   | 359     |   |  |      | 121     |   |  |   | (720    | )
|Impairment of property and equipment                                                         |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      | 316     |   |  |   | 517     |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Operating income                                                                             |  |                                       | 26,584  |   |      |   | 25,796  |      |  |   | 24,395  |   |  |      | 27,855  |   |  |   | 24,715  |  
|Interest expense                                                                             |  |                                       | 8,890   |   |      |   | 14,690  |      |  |   | 14,259  |   |  |      | 11,377  |   |  |   | 9,891   |  
|Interest income                                                                              |  |                                       | (1,287  | ) |      |   | (1,634  | )    |  |   | (1,276  | ) |  |      | (213    | ) |  |   | (141    | )
|Other income                                                                                 |  |                                       | (143    | ) |      |   | (32     | )    |  |   | (214    | ) |  |      | (588    | ) |  |   | (96     | )
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before income taxes and cumulative effect of a change in accounting principle         |  |                                       | 19,124  |   |      |   | 12,772  |      |  |   | 11,626  |   |  |      | 17,279  |   |  |   | 15,061  |  
|Income tax expense                                                                           |  |                                       | 7,100   |   |      |   | 5,113   |      |  |   | 4,244   |   |  |      | 6,317   |   |  |   | 6,171   |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before cumulative effect of a change in accounting principle                          |  |                                       | 12,024  |   |      |   | 7,659   |      |  |   | 7,382   |   |  |      | 10,962  |   |  |   | 8,890   |  
|Cumulative effect of a change in accounting principle, net of income tax benefit of $614 (2) |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | (1,067  | )
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Income                                                                                   |  | $                                     | 12,024  |   |      | $ | 7,659   |      |  | $ | 7,382   |   |  | $    | 10,962  |   |  | $ | 7,823   |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Earnings per share                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic:                                                                                       |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Before cumulative effect of a change in accounting principle                                 |  | $                                     | 0.88    |   |      | $ | 0.56    |      |  | $ | 0.56    |   |  | $    | 0.82    |   |  | $ | 0.66    |  
|Cumulative effect of a change in accounting principle (2)                                    |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | (0.08   | )
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Income                                                                                   |  | $                                     | 0.88    |   |      | $ | 0.56    |      |  | $ | 0.56    |   |  | $    | 0.82    |   |  | $ | 0.58    |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Diluted:                                                                                     |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Before cumulative effect of a change in accounting principle                                 |  | $                                     | 0.86    |   |      | $ | 0.56    |      |  | $ | 0.55    |   |  | $    | 0.82    |   |  | $ | 0.66    |  
|Cumulative effect of a change in accounting principle (2)                                    |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | (0.08   | )
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Income                                                                                   |  | $                                     | 0.86    |   |      | $ | 0.56    |      |  | $ | 0.55    |   |  | $    | 0.82    |   |  | $ | 0.58    |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Weighted-average shares outstanding:                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                                                        |  |                                       | 13,707  |   |      |   | 13,615  |      |  |   | 13,286  |   |  |      | 13,336  |   |  |   | 13,439  |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Diluted                                                                                      |  |                                       | 14,051  |   |      |   | 13,729  |      |  |   | 13,342  |   |  |      | 13,351  |   |  |   | 13,558  |  
|                                                                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                                             |  |                                       |         |   |     
|Cash dividend paid per common share                                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  | $ | 0.08    |  
|                                                                                             |  |                                       |         |   |     
|Other Operating Data:                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net cash provided by operating activities                                                    |  | $                                     | 27,625  |   |      | $ | 36,711  |      |  | $ | 41,187  |   |  | $    | 40,893  |   |  | $ | 39,076  |  
|Net cash used in investing activities                                                        |  |                                       | (67,682 | ) |      |   | (75,450 | )    |  |   | (31,116 | ) |  |      | (22,298 | ) |  |   | (48,924 | )
|Net cash provided by (used in) financing activities                                          |  |                                       | 39,947  |   |      |   | 42,964  |      |  |   | (15,585 | ) |  |      | (18,748 | ) |  |   | 12,241  |  
|Balance Sheet Data:                                                                          |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                                                                    |  | $                                     | 3,176   |   |      | $ | 7,401   |      |  | $ | 1,887   |   |  | $    | 1,734   |   |  | $ | 4,127   |  
|Working capital                                                                              |  |                                       | 7,522   |   |      |   | 15,750  |      |  |   | 3,406   |   |  |      | 1,470   |   |  |   | (305    | )
|Property and equipment, net                                                                  |  |                                       | 138,628 |   |      |   | 193,386 |      |  |   | 198,931 |   |  |      | 189,954 |   |  |   | 190,871 |  
|Total assets                                                                                 |  |                                       | 249,520 |   |      |   | 308,804 |      |  |   | 302,864 |   |  |      | 298,573 |   |  |   | 330,528 |  
|Long-term debt and capital lease obligations, net of current maturities                      |  |                                       | 139,700 |   |      |   | 194,609 |      |  |   | 163,237 |   |  |      | 140,875 |   |  |   | 157,657 |  
|Shareholders equity                                                                         |  |                                       | 70,377  |   |      |   | 67,927  |      |  |   | 87,612  |   |  |      | 96,970  |   |  |   | 106,959 |  

---

|(1) | Pursuant to our adoption of SFAS No. 142, Accounting for Goodwill and Other Intangible Assets,the amortization of goodwill ceased on January 1, 2002. Goodwill amortization
was $1.6 million, $1.5 million and $1.6 million for each of the three years in the period ended December 31, 2001, respectively, and is included in depreciation and amortization expense.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As required, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations, on January 1, 2003. In connection with the adoption of SFAS No. 143, we recorded a charge
of approximately $1.1 million (net of taxes of $614,000), or $0.08 per share, for the cumulative effect of a change in accounting principle.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto included in this report for the years ended December 31, 2002 and 2003.



Overview



We are a regional, vertically integrated provider of solid waste services. We were founded by the Chairman of the Board of Directors in 1970. We operate
primarily in North Carolina, South Carolina, Virginia, Tennessee, Mississippi, Georgia and Florida, providing solid waste collection, transfer, recycling, processing and disposal services for commercial, industrial, municipal and residential
customers. At December 31, 2003, we operated 36 collection operations, 28 transfer stations, approximately 90 county convenience drop-off centers, five recycling facilities and 11 landfills in the southeastern U.S. We had revenues of $251.8 million
and operating income of $27.9 million in the year ended December 31, 2002, and revenues of $270.5 million and operating income of $24.7 million in the year ended December 31, 2003.



From 1990 through 2003, we acquired, either by merger or asset purchase, 75 solid waste collection or disposal operations.
Seventy-one of these acquisitions were accounted for as purchases. Accordingly, the results of operations of these acquired businesses have been included in our financial statements only from the respective dates of acquisition and have affected
period-to-period comparisons of our operating results. During the year ended December 31, 2003, we did not have any significant acquisitions requiring historical or pro forma financial statements to be presented. We anticipate that a significant
part of our future growth will come from acquiring additional solid waste collection, transfer and disposal businesses and, therefore, we expect that additional acquisitions could continue to affect period-to-period comparisons of our operating
results. Current levels of population growth and economic development in the Southeastern U.S. and our strong market presence in the region should provide an opportunity to increase our revenues and market share. As we add customers in existing
markets, our density should improve, which we expect will increase our collection efficiencies and profitability.



Executive Overview



In 2003 we rolled out five initiatives for achieving positive results and improving our performance. They are:



| |  | Identify and capture specific growth opportunities;
| | - | ---------------------------------------------------



| |  | Take an aggressive pricing posture;
| | - | -----------------------------------



| |  | Strengthen our workforce at every level;
| | - | ----------------------------------------



| |  | Work to retain our profitable customers;
| | - | ----------------------------------------



| |  | Institutionalize and follow proven disciplined operating practices.
| | - | -------------------------------------------------------------------



Our performance for 2003 was impacted to a significant extent by conditions or circumstances beyond our control. While the first and second quarters had
heavy rainfall throughout the southeast resulting in higher disposal cost, the last two quarters included the effects of Hurricane Isabel where 50% of our company and 500 of our employees were in the track of this powerful storm, resulting in lost
revenues, impaired productivity and extensive recovery and assistance cost for our operations. The combination of a sluggish economy and excess hauling capacity within many of our markets translated to a price pushback from existing customers and
less than desired margins for new customers.



Despite these
challenges, our revenues increased 7.4%, our workforce actually declined and our revenues per man-hour improved by nearly 6.0%. In addition, our fleet count is also down from two years ago by approximately 50 units. These statistics indicate that we
have continued to look for and find ways to improve our efficiency and productivity. We implemented a pricing strategy to adjust pricing on accounts that were not meeting standards and in some cases we chose to give up accounts that refused
reasonable price increases. This pricing strategy resulted in pricing growth for each quarter of 2003.



Internal volume growth was negative for the first two quarters of 2003 as a result of the loss of a municipal transfer hauling contract at the beginning
of the year, but was positive 1.1% for the total year with the last two quarters averaging approximately 2.6% over the prior year. This growth was primarily the result of increased landfill tonnage from a third party contract starting in the third
quarter and strong national accounts growth in the fourth quarter.



Acquisition growth was 5.0% for 2003 in which we completed six acquisitions and exited four markets. The third quarter acquisition in our existing Norfolk, Virginia market is our largest single acquisition to date. We strive to be number
one or number two in our markets and if this is not achievable in the near future, our strategy is to eventually exit those markets. Most acquisitions in 2003 were tuck-ins and a continuation of our acquisition plan to expand in selected markets in
order to achieve better route density and leverage our overhead cost structure.



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We have experienced, as have others in this industry sector, increased operating costs which include
higher fuel costs, health benefits costs, property and casualty insurance premiums, and higher professional fees required to meet legal and accounting compliance standards brought about by the Sarbanes-Oxley Act of 2002. These increases have
affected our profit margins and bottom line. To achieve our 2004 goals, we use route optimization tools such as Route Smart and Route Balance to focus on route productivity and optimization. In addition we have increased employee training and
centered our efforts on fleet maintenance, data management, and customer pricing. In 2004, we believe these efforts will better position our company as the economy moves toward recovery.



Our 2003 capital expenditures of approximately $29.6 million increased by $11.4 million over the prior year due primarily to
a major expansion at our Sampson County, North Carolina landfill. Despite higher capital spending and our largest acquisition to date, the debt to total capitalization ratio of 61.2% at December 31, 2003 was consistent with the prior year. Our
$175.0 million revolver credit facility was amended in the third quarter of 2003 and matures in February 2007. We believe this facility provides sufficient capital in combination with our cash flow from operating activities to fund our near term
growth strategy and capital expenditures. Finally, as a result of our consistent positive cash flow, our Board of Directors implemented an $0.08 per share semi-annual dividend which was paid in December 2003.



Results of Operations



General



Our branch waste collection operations generate revenues from fees collected from commercial, industrial and residential collection and transfer station
customers. We derive a substantial portion of our collection revenues from commercial and industrial services that are performed under one-year to five-year service agreements. Our residential collection services are performed either on a
subscription basis with individual households, or under contracts with municipalities, apartment owners, homeowners associations or mobile home park operators. Residential customers on a subscription basis are billed quarterly in advance and provide
us with a stable source of revenues. A liability for future service is recorded upon billing and revenues are recognized at the end of each month in which services are actually provided. Municipal contracts in our existing markets are typically
awarded, at least initially, on a competitive bid basis and thereafter on a bid or negotiated basis and usually range in duration from one to five years. Municipal contracts provide consistent cash flow during the terms of the contracts.



Our prices for our solid waste services are typically determined by the
collection frequency and level of service, route density, volume, weight and type of waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices
charged in our markets for similar services.



Our ability to
pass on cost increases is sometimes limited by the terms of our contracts. Long-term solid waste collection contracts typically contain a formula, generally based on a predetermined published price index, for automatic adjustment of fees to cover
increases in some, but not all, operating costs.



At December
31, 2003, we operated approximately 90 convenience sites under contract with 13 counties in order to consolidate waste in rural areas. These contracts, which are usually competitively bid, generally have terms of one to five years and provide
consistent cash flow during the term of the contract since we are paid regularly by the local government. At December 31, 2003, we also operated eight recycling processing facilities as part of our collection and transfer operations where we
collect, process, sort and recycle paper products, aluminum and steel cans, pallets, plastics, glass and other items. Our recycling facilities generate revenues from the collection, processing and resale of recycled commodities, particularly
recycled wastepaper. Through a centralized effort, we resell recycled commodities using commercially reasonable practices and seek to manage commodity-pricing risk by spreading the risk among our customers. We also operate curbside residential
recycling programs in connection with our residential collection operations in most of the communities we serve.



Operating expenses for our collection operations include labor, fuel, equipment maintenance and tipping fees paid to landfills. At December 31, 2003, we
operated or transferred from 28 transfer stations that reduce our costs by improving our utilization of collection personnel and equipment and by consolidating the waste stream to gain more favorable disposal rates. At December 31, 2003, we owned or
operated 11 landfills. Operating expenses for these landfill operations include labor, equipment, legal and administrative, ongoing environmental compliance, host community fees, site maintenance and accruals for closure and post-closure
maintenance. Cost of equipment sales primarily consists of our cost to purchase the disposal compactors and containers that we resell.



We capitalize certain expenditures related to pending acquisitions or development projects. Indirect acquisition and project development costs, such as
executive and corporate overhead, public relations and other corporate services, are expensed as incurred.



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Our policy is to charge against net income any unamortized capitalized expenditures and advances (net of any portion
thereof that we estimate to be recoverable, through sale or otherwise) relating to any operation that is permanently shut down, any acquisition that is not consummated and any landfill development project that is not expected to be successfully
completed. Engineering, legal, permitting, construction and other costs directly associated with the acquisition or development of a landfill, together with associated interest, are capitalized.



Selling, general and administrative, or SG&A, expenses include management
salaries, clerical and administrative overhead, professional services, costs associated with our marketing and sales force and community relations expense.



Property and equipment is depreciated over the estimated useful life of the assets using the straight-line method.



Other income has not historically been material to our results of operations.



To date, inflation has not had a significant impact on our
operations.



Critical Accounting Policies



We have established various accounting policies that govern the application
of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in Note 1 to the consolidated financial statements. We consider our
critical accounting policies to be those accounting policies that require us to make significant estimates and assumptions that have a material impact on the carrying value of our assets and liabilities. The estimates and assumptions we use are
based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions that could have a material impact on the carrying value of
our assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.



We believe the following are critical accounting policies that require the most significant estimates and assumptions that are particularly susceptible to
a significant change in the future:



Allowance For Doubtful Accounts



We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required payments. Based on our collection history, we determined a percentage based on the age of the receivable that we deem collectible. The allowance is then calculated by
applying the appropriate percentage to each of our receivables. The allowance for doubtful accounts was $2.2 million and $2.6 million at December 31, 2002 and 2003, respectively. If the financial condition of our customers was to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances may be required.



Self-Insurance Reserves



We assume the risks for medical and dental insurance exposures up to certain loss thresholds set forth in separate insurance contracts. We have established self-insurance reserves for these risks, which are estimated based on evaluations
performed by independent third parties.



Adoption of SFAS No. 143,
Accounting for Asset Retirement Obligations



Effective
January 1, 2003, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement costs.



In connection with the adoption of SFAS No. 143, we recorded approximately $1.1 million, net of income taxes, or $0.08 per diluted share, in the first quarter of 2003 as a charge to cumulative effect of a change in
accounting principle. The effect of applying the provisions of SFAS No. 143 was a reduction in income before cumulative effect of a change in accounting principle for the year ended December 31, 2003 of approximately $1.0 million, net of income
taxes, or $0.08 per diluted share.



Effective January 1, 2003,
our method of accounting for landfill closure and post-closure, as well as landfill final capping, changed as a result of our adoption of SFAS No. 143. SFAS No. 143 does not change the basic landfill accounting that we and others in the industry
have followed historically. Through December 31, 2002, the waste industry generally recognized expenses associated with (1) amortization of capitalized and future landfill asset costs and (2) future closure and post-closure obligations on a units-of



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consumption basis as airspace was consumed over the life of the related landfill. This practice, referred to as life
cycle accounting within the waste industry, continues to be followed. For further explanation, see Note 1. l.A brief explanation of final capping, closure and post-closure is as follows:



Final Capping Costs  We are required to estimate the cost of
each final capping event which involves covering the landfill with a flexible membrane and geosynthetic clay liner, compacted soil layers and topsoil and provide drainage for the areas of the landfill where total airspace capacity has been consumed.
The estimates also consider when these costs would be paid and factor in inflation and discount rates. For each final capping event we quantify the landfill capacity associated with each final capping event and the final capping costs and amortize
it over the related capacity associated with the event as waste is disposed at the landfill.



Closure-Post-Closure Costs Closure costs include the last final capping event, the construction of the methane gas collection system, demobilization and routine maintenance costs incurred after the site
ceases to accept waste, but prior to being certified as closed. Post-closure activities which include final landfill retirement activities once regulatory requirements are met, consist of routine maintenance of the landfill after it has closed,
monitoring the ground and surface water, gas emissions and air quality. Estimates for future closure and post-closure costs are based on costs that would actually be paid and factor in inflation and discount rates. The possibility of changes to
legal and regulatory requirements makes our estimates and assumptions uncertain.



We amortize landfill retirement costs arising from closure and post-closure obligations using our historical landfill accounting practices. We amortize landfill retirement costs arising from final capping obligations
on a units-of-consumption basis over the number of tons of waste that each final capping event covers.



Landfill Accounting



We have material financial commitments for final capping, closure and post-closure obligations with respect to our landfills. We develop our estimates of final capping, closure and post-closure obligations using input from our third-party
engineers and internal accounting. Our estimates are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. Absent quoted market prices, the estimate of fair value should be
based on the best available information, including the results of present value techniques in accordance with Statement of Financial Accounting Concepts, or SFAC, No. 7, Using Cash Flow and Present Value in Accounting Measurements. In
general, we rely on third parties to fulfill most of our obligations for final capping, closure and post-closure. Accordingly, the fair market value of these obligations is based upon quoted and actual prices paid for similar work. We intend to
perform some of these capping, closure and post-closure obligations using internal resources. Where internal resources are expected to be used to fulfill an asset retirement obligation, we have added a profit margin onto the estimated cost of such
services to better reflect their fair market value as required by SFAS No. 143. When we then perform these services internally, the added profit margin is recognized as a component of operating income in the period earned. SFAC No. 7 further states
that an estimate of fair value should include the price that marketplace participants are able to receive for bearing the uncertainties in cash flows. However, when utilizing discounted cash flow techniques, reliable estimates of market premiums may
not be obtainable. In this situation, SFAC No. 7 indicates that it is not necessary to consider a market risk premium in the determination of expected cash flows. In the waste industry, there is not an active market that can be utilized to determine
the fair value of these activities as there is no market that exists for selling the responsibility for final capping, closure and post-closure obligations independent of selling the landfill in its entirety. Accordingly, we believe that it is not
possible to develop a methodology to reliably estimate a market risk premium and have excluded a market risk premium from our determination of expected cash flows for landfill asset retirement obligations in accordance with SFAC No. 7.



Once we have determined the estimates of final capping, closure and
post-closure obligations, we then inflate those costs to the expected time of payment and discount those expected future costs back to present value. We are currently inflating these costs in current dollars until expected time of payment using an
inflation rate of 2.5% and are discounting these costs to present value using a credit-adjusted, risk-free discount rate of 8.0%. The credit-adjusted, risk-free rate is based on the risk-free interest rate adjusted for our credit standing.
Management reviews these estimates at least once per year. Significant changes in future final capping, closure and post-closure cost estimates and inflation rates typically result in both (1) a current adjustment to the recorded liability (and
corresponding adjustment to the landfill asset), based on the landfills capacity that has been consumed, and (2) a change in liability and asset amounts to be recorded prospectively over the remaining capacity of the landfill. Any change
related to the capitalized and future cost of the landfill asset is then recognized in amortization expense prospectively over the remaining capacity of the landfill. Changes in our credit-adjusted, risk-free rate do not change recorded liabilities,
but subsequently recognized obligations are measured using the revised credit-adjusted risk-free rate.



We record the estimated fair value of final capping, closure and post-closure obligations for our landfills based on the landfills capacity that has
been consumed through the current period. This liability and corresponding asset is accrued on a per-ton basis. The estimated fair value of each final capping event will be fully accrued when the tons associated with such capping event have been
disposed in the landfill. Additionally, the estimated fair value of total final capping, closure and post-closure costs will be fully



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accrued for each landfill at the time the site discontinues accepting waste and is closed. Closure and post-closure
accruals consider estimates for methane gas control, leachate management and ground-water monitoring and other operational and maintenance costs to be incurred after the site discontinues accepting waste, which is generally expected to be for a
period of up to 30 years after final site closure. Daily maintenance activities, which include many of these costs, are incurred during the operating life of the landfill and are expensed as incurred. Daily maintenance activities include leachate
disposal; surface water, groundwater, and methane gas monitoring and maintenance; other pollution control activities; mowing and fertilizing the landfill cap; fence and road maintenance; and third party inspection and reporting costs. For purchased
disposal sites, we assess and record present value-based final capping, closure and post-closure obligations at the time we assume such responsibilities. Such liabilities are based on the estimated final capping, closure and post-closure costs and
the percentage of airspace consumed related to such obligations as of the date we assumed the responsibility. Thereafter, we account for the landfill and related final capping, closure and post-closure obligations consistent with the policy
described above.



Interest accretion on final capping, closure
and post-closure obligations is recorded using the effective interest method and is recorded as final capping, closure and post-closure expense, which is included in operating costs on the income statement.



In the United States, the closure and post-closure obligations are
established by the Environmental Protection Agencys Subtitles C and D Regulations, as implemented and applied on a state-by-state basis. The costs to comply with these obligations could increase in the future as a result of legislation or
regulation.



We routinely review our investment in operating
landfills to determine whether the costs of these investments are realizable. Judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions and operational performance of our landfills. Future events
could cause us to conclude that impairment indicators exist and that our landfill carrying costs are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.



While the precise amounts of these future obligations cannot be determined,
at December 31, 2003, we estimate our total landfill closure and post-closure costs to be approximately $90.0 million. We provide accruals for these estimated costs as the remaining permitted airspace of landfills is consumed. Our estimate of these
costs considers when the costs would actually be paid and factor in inflation and discount rates. At December 31, 2002 and 2003, we had accrued approximately $4.0 million and $6.2 million, respectively, for such costs. Significant revisions in the
estimated lives of our landfills or significant increases in our estimates of landfill closure and post closure costs could have a material adverse impact on our financial condition and results of operations.



Derivative Financial Instruments



We formally document our hedge relationships, including identifying the
hedge instruments and hedged items, as well as our risk management objectives and strategies for entering into the hedge transaction. Our derivative instruments qualify for hedge accounting treatment under SFAS No. 133. In order to qualify for hedge
accounting, criteria must be met, including a requirement that both at inception of the hedge, and on an ongoing basis, the hedging relationship is expected to be highly effective in offsetting cash flows attributable to the hedged risk during the
term of the hedge. When it is determined that a derivative ceases to be a highly effective hedge, we discontinue hedge accounting, and any gains or losses on the derivative instrument are recognized in earnings.



Allocation of Acquisition Purchase Price



Acquisition purchase price is allocated to identified intangible assets and
tangible assets acquired and liabilities assumed based on our estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. The purchase price allocations are considered preliminary until we are no longer
waiting for information that we have arranged to obtain and that is known to be available or obtainable. Although the time required to obtain the necessary information will vary with circumstances specific to an individual acquisition, the
allocation period for finalizing purchase price allocations generally does not exceed one year from the consummation of a business combination.



We often consummate single acquisitions of solid waste collection or disposal operations. For each separately identified solid waste collection or
disposal operation acquired in a single acquisition, we perform an initial allocation of total purchase price to the acquired operation based on our relative fair value. Following this initial allocation of total purchase price to the acquired
operation, we further allocate the identified intangible assets and tangible assets acquired and liabilities assumed for each solid waste collection or disposal operation based on our estimated fair value at the dates of acquisition, with any
residual amounts allocated to either goodwill or landfill site costs, as discussed above.



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We accrue the payment of contingent purchase price if the events surrounding the contingency are deemed
assured beyond a reasonable doubt. Contingent purchase price related to solid waste collection or disposal operations is allocated to goodwill.



Goodwill



In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we discontinued amortization of goodwill effective January 1, 2002. On an
ongoing basis, we perform an annual impairment test. At least quarterly, we analyze whether an event has occurred that would more likely than not reduce its enterprise fair value below its carrying amount and, if necessary, will perform a goodwill
impairment test between annual dates. Impairment adjustment after adoption, if any, will be recognized as an operating expense. We adopted July 31 as our annual assessment date. We completed our annual impairment test July 31, 2003 and determined
that there was no goodwill impairment.



Long-lived Assets



In accordance with SFAS No. 144, Accounting For
The Impairment of Long-lived Assets, we review long-lived assets for impairment on a market-by-market basis whenever events or changes in the circumstances indicate that the carrying amount of an asset might not be recoverable. If an evaluation
is required, the projected future net cash flows on an undiscounted basis attributable to each market would be compared to the carrying value of the long-lived assets (including an allocation of goodwill, if appropriate) of that market. If an
impairment is indicated, the amount of the impairment is measured based on the fair value of the asset. We also evaluate the remaining useful lives to determine whether events and circumstances warrant revised estimates of such lives. Any resulting
impairment loss could have a material adverse impact on our financial condition and results of operations.



Results of Operations



The following table sets forth for the periods indicated the percentage of revenues represented by the individual line items reflected in our statements of operations (some items have been reclassified for presentation purposes only):



|                                                                    |  |                         |   |  |      |   |  |      |  
|------------------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                    |  | YEAR ENDED DECEMBER 31, |  
|                                                                    |  | 2001                    |   |  | 2002 |   |  | 2003 |  
|Total revenues                                                      |  | 100                     | % |  | 100  | % |  | 100  | %
|Service revenues                                                    |  | 99.5                    |   |  | 99.5 |   |  | 99.5 |  
|Equipment sales                                                     |  | 0.5                     |   |  | 0.5  |   |  | 0.5  |  
|                                                                    |  |                         |   |  |      |   |  |      |  
|Total cost of operations                                            |  | 63.6                    |   |  | 64.3 |   |  | 65.5 |  
|Selling, general and administrative                                 |  | 14.9                    |   |  | 13.4 |   |  | 14.1 |  
|Depreciation and amortization                                       |  | 11.6                    |   |  | 11.0 |   |  | 11.3 |  
|Loss (gain) on sale of collection and hauling operations            |  | 0.1                     |   |  | 0.1  |   |  | (0.3 | )
|Impairment of fixed assets                                          |  |                        |   |  | 0.1  |   |  | 0.2  |  
|                                                                    |  |                         |   |  |      |   |  |      |  
|Operating income                                                    |  | 9.8                     |   |  | 11.1 |   |  | 9.2  |  
|Interest expense, net of interest income                            |  | 5.2                     |   |  | 4.4  |   |  | 3.6  |  
|Other income                                                        |  | (0.1                    | ) |  | (0.2 | ) |  |     |  
|                                                                    |  |                         |   |  |      |   |  |      |  
|Income before income tax expense                                    |  | 4.7                     |   |  | 6.9  |   |  | 5.6  |  
|Income tax expense                                                  |  | 1.7                     |   |  | 2.5  |   |  | 2.3  |  
|                                                                    |  |                         |   |  |      |   |  |      |  
|Income before cumulative effect of a change in accounting principle |  | 3.0                     |   |  | 4.4  |   |  | 3.3  |  
|                                                                    |  |                         |   |  |      |   |  |      |  
|Cumulative effect of a change in accounting principle               |  |                        |   |  |     |   |  | 0.4  |  
|                                                                    |  |                         |   |  |      |   |  |      |  
|Net Income                                                          |  | 3.0                     | % |  | 4.4  | % |  | 2.9  | %
|                                                                    |  |                         |   |  |      |   |  |      |  



Year Ended December 31, 2003
Compared To Year Ended December 31, 2002



Revenues.Total revenues increased $18.6 million, or 7.4%, to $270.5 million in 2003, from $251.8 million in 2002. This increase was attributable primarily to the effect of six businesses acquired during the year ended December 31, 2003 and eight
businesses and contracts acquired during the year ended December 31, 2002, offset by the disposition of four businesses resulting in a net increase of $12.7 million. Also contributing to the increase in revenues were an increase of approximately
$1.1 million in



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industrial revenue, an increase of approximately $1.5 million in residential service revenue, an increase of
approximately $4.8 million in landfill, disposal and special waste revenue, an increase in annexation fees, fuel surcharges and other miscellaneous revenue of approximately $2.5 million. These increases were offset by a decrease of approximately
$4.0 million in transfer station revenue due to the loss of a municipal contract, compared to the same period in 2002.



Our revenue growth of 7.4% was comprised of 5.0% of acquisition growth and 2.4% of internal growth. We were more effective in initiating price increases
in 2003 due to a disciplined approach towards customer profitability analysis and utilizing our pricing optimization software. Pricing increased 0.7%, or $1.7 million, and energy related surcharges increased 0.6%, or $1.4 million, versus 2002.
Internal volume was up 1.1%, primarily from year-over-year growth in landfill tonnage.



Total Cost of Operations.Total cost of operations increased $15.3 million, or 9.4%, to $177.3 million in 2003 from $162.0 million in 2002. This increase was primarily attributed to the effect of six businesses
acquired during the year ended December 31, 2003 and eight businesses and contracts acquired during the year ended December 31, 2002, offset by the disposition of four businesses during 2003 resulting in an increase in disposal and transfer expenses
of $11.6 million, increased casualty and workers compensation insurance of approximately $2.8 million and increased labor costs and associated expenses of approximately $0.9 million. Total cost of operations as a percentage of revenues increased
from 64.3% to 65.5% for 2002 and 2003, respectively.



SG&A.SG&A increased $4.3 million, or 12.7%, to $38.1 million in 2003 from $33.8 million in 2002. This increase was attributable primarily to a charge of approximately $1.8 million related to the restructuring of officer
split-dollar insurance arrangements and related expenses as a result of the impact of the Sarbanes-Oxley Act and recent tax law changes on the funding requirements of these arrangements, increased labor expenses of $0.8 million, increased bad debt
expense of $0.7 million, increased outsourcing of services of $0.6 million and increased professional fees of $0.4 million. SG&A as a percentage of revenues increased to 14.1% in 2003 from 13.4% in 2002.



Depreciation and Amortization.Depreciation and amortization increased
$2.9 million, or 10.3%, to $30.5 million in 2003 from $27.7 million in 2002. Depreciation and amortization, as a percentage of revenues, increased to 11.3% in 2003 from 11.0% in 2002. Of this increase, $2.5 million related to higher amortization
resulting from the adoption of SFAS No. 143. An additional $0.4 million of increased amortization was due to higher disposal volume. In accordance with SFAS No. 143, effective January 1, 2003, landfill assets are amortized to depreciation and
amortization expense as airspace is consumed over the life of the specific final capping event or the life of the landfill for closure and post-closure.



Gain on Sale of Collection and Hauling Operations.We recognized a gain on sale of collection and hauling operations totaling approximately
$720,000 and a loss of approximately $121,000 at December 31, 2003 and 2002, respectively. These sales were a divestiture of assets in certain markets that did not meet our profitability goals.



Interest Expense (net of interest income).Interest expense (net of
interest income) decreased $1.4 million, or 12.7%, to $9.8 million in 2003 from $11.2 million in 2002. This decrease was primarily attributable to lower average debt levels and interest rates during the majority of 2003, compared to 2002. Debt
increased in the third quarter of 2003 by $15.3 million due to acquisition activity and landfill expansion in the third and fourth quarters of 2003.



Income Tax Expense.Income tax expense decreased $146,000, or 2.3%, to $6.2 million in 2003 from $6.3 million in 2002. This decrease was
attributable to a decrease in income before taxes, offset by an increase in the income tax rate to 41.0% in 2003 from 36.7% in 2002 due to the sale of certain collection and hauling operations.



Cumulative Effect of a Change in Accounting Principle.Effective
January 1, 2003, we adopted the provisions of SFAS No. 143, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. As a result, for
the year ended December 31, 2003, we recognized a cumulative effect of a change in accounting principle of $1.1 million (net of tax benefit of $0.6 million). For a discussion of SFAS No. 143, see Critical Accounting Policies.



Net Income.Net income decreased $3.1 million, or 28.6%, to $7.8
million in 2003 from $11.0 million in 2002. This decrease was primarily attributable to increased cost of operations, SG&A costs, depreciation and amortization expense and a charge for a cumulative effect of a change in accounting principle,
which offset our total revenue growth.



Year Ended December 31, 2002
Compared To Year Ended December 31, 2001



Revenues.Total revenues increased $2.5 million, or 1.0%, to $251.8 million in 2002, from $249.3 million in 2001. This increase was attributable primarily to the effect of three businesses acquired during the year ended December 31, 2001 and eight
businesses and contracts acquired during the year ended December 31, 2002, resulting in a $2.8 million increase, offset by the decrease in revenues associated with collection operations and hauling assets sold of $1.1 million and the effect of
prices and collection volumes resulting from new municipal and commercial contracts and residential subscriptions, resulting in an increase of $0.8 million.



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Total Cost of Operations.Total cost of operations increased $3.4 million, or 2.2%, to $162.0
million in 2002 from $158.6 million in 2001. This increase was attributable primarily to increased casualty and worker compensation insurance of approximately $2.3 million, increased fleet maintenance costs of approximately $1.2 million, increased
labor costs and associated expenses of approximately $1.1 million, increased landfill maintenance expense of approximately $0.9 million, offset by decreased landfill and disposal fees of approximately $2.1 million due to increased internalization.
Total cost of operations as a percentage of revenues increased from 63.6% to 64.3% for 2001 and 2002, respectively. These increases in operations were primarily the result of the pervasive increase in insurance costs facing all industries, including
the waste industry, coupled with the expansion of our existing operations through acquisitions.



SG&A.SG&A decreased $3.3 million, or 8.9%, to $33.8 million in 2002 from $37.1 million in 2001. This decrease was attributable primarily
to enhanced productivity and cost containment strategies employed during the year. These initiatives resulted in decreased labor costs and related expenses of approximately $1.8 million, lower bad debt provisions of approximately $0.6 million and
decreased postage fees of $0.3 million. We also incurred organizational costs of approximately $0.6 million for 2001, which were primarily related to our holding company reorganization. The reorganization enabled us to simplify our organizational
structure, segregate for operational and liability purposes our distinct business activities and those of our subsidiaries, allow greater autonomy to companies currently owned or to be acquired by us in the future, and make it easier to implement
future secured credit facilities at reduced costs of implementation. We did not incur these costs in 2002. SG&A as a percentage of revenues decreased to 13.4% in 2002 from 14.9% in 2001 as a result of synergies achieved through acquisitions and
enhanced productivity.



Depreciation and Amortization.Depreciation and amortization decreased $1.2 million, or 4.0%, to $27.7 million in 2002 from $28.9 million in 2001. Depreciation and amortization, as a percentage of revenues, decreased to 11.0% in 2002 from 11.6% in 2001. The primary component
of this decrease was the adoption of SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with SFAS No. 142, we ceased amortizing goodwill effective January 1, 2002.



Loss on Disposal of Collection and Hauling Assets.We recognized a loss on sale of business units totaling
approximately $0.4 million and $0.1 million at December 31, 2001 and 2002, respectively. These sales were a divestiture of assets in certain markets that did not meet our profitability goals.



Interest Expense (net of interest income).Interest expense (net of
interest income) decreased $1.8 million, or 14.0%, to $11.2 million in 2002 from $13.0 million in 2001. This decrease was primarily attributable to lower interest rates in 2002 and lower average debt of $152.6 million in 2002, compared to $170.3
million in 2001.



Income Tax Expense.Income tax expense
increased $2.1 million, or 48.8%, to $6.3 million in 2002 from $4.2 million in 2001. This increase was attributable to an increase in income before taxes.



Net Income.Net income increased $3.6 million, or 48.5%, to $11.0 million in 2002 from $7.4 million in 2001. This increase was primarily
attributable to increased total revenues, decreased SG&A costs, depreciation and amortization expense and interest expense (net of interest income), offset by increased total operating costs and income tax expense.



Liquidity and Capital Resources



Our working capital at December 31, 2003 was $(0.3) million and $1.5 million
at December 31, 2002. Our strategy in managing our working capital has been to apply the cash generated from operations that remains available after satisfying our working capital and capital expenditure requirements to reduce indebtedness under our
bank revolving credit facility and to minimize our cash balances. We generally finance our working capital requirements from internally generated funds and bank borrowings. In addition to internally generated funds, we have in place financing
arrangements to satisfy our currently anticipated working capital needs in 2004. Prior to 2000, we had fully drawn our three $25 million term loan facilities with Prudential Insurance Company of America. In 2000, we began principal repayments on the
first $25 million term facility. The Prudential facilities require us to maintain financial ratios, such as minimum net worth, net income, and limits on capital expenditures and indebtedness. Interest on the three Prudential facilities is paid
quarterly, based on fixed rates for the three facilities of 7.53%, 7.21% and 7.09%, respectively, and the facilities mature as follows: $10.7 million in April 2006, $17.9 million in June 2008 and $21.4 million in February 2009, subject to renewal.



On August 27, 2003, we amended and extended our revolving
credit agreement with a syndicate of lending institutions for which Fleet National Bank acts as agent. This Fleet credit facility provides up to $175 million through February 2007. Virtually all of our assets, and those of our subsidiaries,
including our interest in the equity securities of our subsidiaries, secure our obligations under the Fleet credit facility. Pursuant to an intercreditor agreement with Fleet, Prudential shares in the collateral pledged under the Fleet credit
facility. In addition, our subsidiaries have guaranteed our obligations under the Prudential term loan facilities. The Fleet credit facility



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bears interest at a rate per annum equal to, at our option, either a Fleet base rate or at the Eurodollar rate (based on
Eurodollar interbank market rates) plus, in each case, a percentage rate that fluctuates, based on the ratio of our funded debt to EBITDA (income before income taxes plus interest expense and depreciation and amortization), from 0.25% to 1.25% for
base rate borrowings and 1.75% to 2.75% for Euro rate borrowings. The Fleet credit facility requires us to maintain financial ratios and satisfy other requirements, such as minimum net worth, net income, and limits on capital expenditures and
indebtedness. It also requires the lenders approval of acquisitions in some circumstances. As of December 31, 2003, $78.0 million was outstanding under the Fleet credit facility, and the average interest rate on outstanding borrowings was
approximately 3.4%.



On September 10, 2003, we entered into a
$9.5 million income tax exempt variable rate demand bond with Sampson County, North Carolina for the funding of expansion at our landfill in that county. This bond is in addition to our existing $30.9 million Sampson bond outstanding at December 31,
2003. Both bonds are backed by a letter of credit issued by Wachovia Bank & Trust as a participating lender under our Fleet syndication. The average interest rate on outstanding borrowings under both Sampson bonds was approximately 3.4% at
December 31, 2003.



As of December 31, 2003, we were in
compliance with all covenants and restrictions related to all outstanding borrowings.



As of December 31, 2003, we had the following contractual obligations and commercial commitments (in thousands):



PAYMENTS DUE BY PERIOD



|                                   |  |       |         |                  |   |              |  |              |        |              |   |        |  |   |        
|---------------------------------- |  | ----- | ------- | ---------------- | - | ------------ |  | ------------ | ------ | ------------ | - | ------ |  | - | -------
|Contractual Obligations            |  | Total |         | Less Than 1 Year |   | 1 to 3 Years |  | 4 to 5 Years |        | Over 5 Years
|Long-term debt (1)                 |  |       | 168,380 |                  | $ | 10,723       |  | $            | 21,445 |              | $ | 92,286 |  | $ | 43,926 
|Expected landfill liabilities (2)  |  |       | 90,828  |                  |   | 816          |  |              | 4,370  |              |   | 263    |  |   | 85,379 
|Disposal agreements                |  |       | 2,481   |                  |   | 1,226        |  |              | 1,255  |              |   |        |  |   |        
|Capital expenditures               |  |       | 1,154   |                  |   | 1,154        |  |              |        |              |   |        |  |   |        
|Operating leases                   |  |       | 7,057   |                  |   | 1,275        |  |              | 2,838  |              |   | 2,049  |  |   | 895    
|Capital leases                     |  |       | 160     |                  |   | 160          |  |              |       |              |   |       |  |   |       
|                                   |  |       |         |                  |   |              |  |              |        |              |   |        |  |   |        
|Total contractual cash Obligations |  | $     | 270,060 |                  | $ | 15,354       |  | $            | 29,908 |              | $ | 94,598 |  | $ | 130,200
|                                   |  |       |         |                  |   |              |  |              |        |              |   |        |  |   |        

---

|(1) | Includes amounts outstanding as of December 31, 2003 of $78.0 million under our Fleet credit facility, $50.0 million under the Prudential term facilities, and $40.4 million under
the Sampson bond facilities. Our Fleet credit facility allows us to borrow up to $175 million provided we are in compliance with loan covenants. Availability under the Fleet facility was approximately $45.0 million at December 31, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Landfill liabilities are based on current costs and include capping, closure, post closure and environmental remediation costs. These costs represent the total expected landfill
liabilities we will incur over the life of our landfills. We recognize these liabilities as airspace which is consumed in each landfill.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



AMOUNT OF COMMITMENT EXPIRATION PER PERIOD



|                             |  |                        |        |                  |   |              |  |              |   |              |   |   |  |   |  
|---------------------------- |  | ---------------------- | ------ | ---------------- | - | ------------ |  | ------------ | - | ------------ | - | - |  | - | -
|Commercial Commitments       |  | Total AmountsCommitted |        | Less Than 1 Year |   | 1 to 3 Years |  | 4 to 5 Years |   | Over 5 Years
|Standby letters of credit    |  | $                      | 16,177 |                  | $ | 16,177       |  | $            |  |              | $ |  |  | $ | 
|Performance bonds            |  |                        | 20,458 |                  |   | 20,455       |  |              | 3 |              |   |  |  |   | 
|                             |  |                        |        |                  |   |              |  |              |   |              |   |   |  |   |  
|Total commercial Commitments |  | $                      | 36,635 |                  | $ | 36,632       |  | $            | 3 |              | $ |  |  | $ | 
|                             |  |                        |        |                  |   |              |  |              |   |              |   |   |  |   |  



Net cash provided by
operating activities totaled $39.1 million for the year ended December 31, 2003 and consisted primarily of net income of $7.8 million plus non-cash adjustments (e.g. depreciation and amortization, etc.) of $29.5 million and decreased working capital
of $1.8 million.



For the year ended December 31, 2003, net
cash used in investing activities was $48.9 million. Of this, $39.8 million was used to fund the cash portion of acquisitions, offset by $16.3 provided from the sale of collection and hauling operations, $1.7 million was



29



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##### Table of Contents

used for acquisition related liabilities and $29.6 million was used for capital expenditures, of which $11.8 million was
for landfill expansion, with the balance primarily for investments in equipment, consisting primarily of trucks and containers. Cash inflows from investing activities included $2.5 million received from the sale of property and equipment.



Capital expenditures were $29.6 million for 2003 compared to
$18.2 million in 2002. In 2004, we expect to spend approximately $25.3 million on capital expenditures, including $8.5 million for vehicle and equipment additions and replacements, approximately $4.8 million for landfill site improvements,
approximately $9.0 million for support equipment and approximately $3.0 million for facilities, additions and improvements. We expect to fund our planned 2004 capital expenditures principally through internally generated funds and borrowings under
existing credit facilities. As an owner and potential acquirer of additional new landfill disposal facilities, we might also be required to make significant expenditures to bring newly acquired disposal facilities into compliance with regulatory
requirements. We might also be required to make significant expenditures to obtain permits for newly acquired disposal facilities or expand the available disposal capacity at any newly acquired disposal facilities. The amount of these expenditures
cannot be currently determined because they will depend on the nature and extent of any acquired landfill disposal facilities, the condition of any facilities acquired and the permitting status of any acquired sites. We expect we would fund any
capital expenditures to acquire solid waste collection and disposal businesses and any regulatory expenses for newly acquired disposal facilities, to the extent we could not fund such acquisitions with our common stock, and any regulatory expenses
for newly acquired disposal facilities through borrowings under our existing credit facilities.



We have financial obligations relating to closure and post-closure costs, or long-term care of disposal facilities that we operate or for which we are or
might become responsible. Landfill closure and post-closure costs include estimated costs to be incurred for final closure of landfills and estimated costs for providing required post-closure monitoring and maintenance of landfills. We estimate
these future cost requirements based on our interpretation of the technical standards of the EPAs Subtitle D Regulations.



While we cannot determine the precise amounts of these future obligations, at December 31, 2003, we estimate the total costs to be approximately $90.0
million for capping, final closure of our operating facilities and post-closure monitoring costs. Our estimate of these costs considers when the costs would actually be paid and factor in inflation and discount rates. We provide accruals for these
future costs (generally for a term of 30 years after final closure of any landfill), and will provide additional accruals for these and other landfills we might acquire or develop in the future, based on engineering estimates of consumption of
airspace over the useful lives of such facilities. Due to the inherent uncertainties related to the total costs for capping, final closure of our operating facilities and post-closure monitoring costs, there can be no assurance that our ultimate
financial obligations for actual closure or post-closure costs will not exceed the amount accrued and reserved or amounts otherwise receivable pursuant to insurance policies or trust funds. Such a circumstance could have a material adverse effect on
our financial condition and results of operations.



For the
year ended December 31, 2003, net cash provided by financing activities was $13.4 million, which included net borrowings under long-term debt (including capital leases) of $15.8 million and proceeds from exercised options of $0.3 million, offset by
cash used for financing cost of $1.2 million, dividends paid of $1.1 million and capital lease payments of $0.4 million.



At December 31, 2003, we had approximately $168.4 million of long-term and short-term borrowings outstanding (including capital leases) and approximately
$36.6 million in letters of credit including performance bonds. The ratio of our total debt (including capital leases) to total capitalization was 61.2%, compared to 61.2% for the years ended December 31, 2003 and 2002, respectively.



Off-Balance Sheet Arrangements



At December 31, 2003, we had no off-balance sheet arrangements.



Newly Adopted Accounting Pronouncements



Effective January 1, 2003, we adopted the provisions of SFAS No. 143,
Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that
the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 required us to change our method of accounting for landfill closure and post-closure, as well as final capping, obligations. See Notes 1. (k)and 10 to the consolidated financial statements for a
discussion of our adoption of SFAS No. 143.



In April 2002, the
FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary
items only if they meet the criteria in Accounting Principles Board Opinion No. 30. Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entitys recurring operations from those that are unusual and
infrequent and meet the criteria for classification as an extraordinary item. SFAS No. 145 was effective for us beginning January 1, 2003. The adoption of SFAS No. 145 had no impact on our financial condition or results of operations.



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In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructurings, involuntarily terminating employees, and consolidating facilities initiated after December 31,
2002. The adoption of SFAS No. 146 had no impact on our financial condition or results of operations.



Effective September 27, 2002, we adopted the provisions of SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an
amendment of SFAS No. 123, Accounting for Stock-Based Compensation. This statement was issued to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the
method used on reported results (see Note 1. p). The amendments to SFAS No. 123 were effective for financial statements for fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 did not have an impact on our financial
condition or results of operations.



In November 2002, the FASB
issued FASB Interpretation, or FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. It clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering
events or conditions occur. The objective of the initial measurement of the liability is the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of FIN 45 are effective for us on a prospective
basis to guarantees issued or amended after December 31, 2002. We will record the fair value of future material guarantees, if any. The adoption of FIN 45 had no significant impact on our financial condition or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB issued a FASB Staff Position delaying the effective date for
certain instruments and entities. SFAS No. 150 had no impact on our financial condition and results of operations.



New Accounting Pronouncements Not Yet Adopted



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 which addresses consolidation by business enterprises
of variable interest entities (VIEs) (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be
applied no later than the Companys first quarter of 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. Special Purpose Entities (SPEs) created prior to February 1, 2003 may be
accounted for under the original or Revised Interpretations provisions no later than December 31, 2003. Non-SPEs created prior to February 1, 2003, should be accounted for under the Revised Interpretations provisions no later than the
Companys first quarter of 2004. The Company has not entered into any arrangements with VIEs created after January 31, 2003 nor had the Company created any SPEs prior to February 1, 2003. Additionally, the Company had not entered into any VIEs,
prior to February 1, 2003, therefore the adoption of FIN 46 had no impact on its results of operations and financial condition.



Seasonality



Our results of operations tend to vary seasonally, with the first quarter typically generating the least amount of revenues, higher revenues in the second
and third quarters, and a decline in the fourth quarter. This seasonality reflects the lower volume of waste during the fall and winter months primarily due to lower construction activities. Also, operating and fixed costs remain relatively constant
throughout the calendar year, which, when offset by these revenues, results in a similar seasonality of operating income.



31



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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK



Quantitative Disclosures. We entered into an interest rate swap
agreement effective January 1, 2002 to modify the interest characteristics of our outstanding long-term debt and have designated the qualitative instrument as a cash flow hedge. Under the terms of the agreement, the interest rate swap has a notional
value of $50.0 million with a fixed rate of 4.2%. The agreement expires November 2004.



Our results of operations are impacted by fluctuations in commodity pricing. To reduce our risk to market fluctuations, we entered into two commodity swap contracts with Waste Management Trading, LLC effective January
1, 2003 and June 1, 2003, respectively, to hedge our recycling revenue received for old corrugated cardboard (OCC), the pricing of which was volatile in 2003, and have designated the qualifying instruments as cash flow hedges. The
contracts each hedge 18,000 tons of OCC at $70.00 a ton for a term of five years. The notional amounts hedged under these agreements represent approximately 25% of our current OCC volume.



We have used heating oil option agreements to manage a portion of our exposure to fluctuation in diesel fuel oil prices. To
date, such agreements have not been significant to our financial condition and results of operations. There were no open option agreements at December 31, 2003.



The following table below presents principal cash flows and related weighted average interest rates of our long-term debt at December 31, 2003 by
expected maturity dates. Fair values have been determined based on quoted market prices as of December 31, 2003.



Our market risk exposure has not changed materially during the 12 months ended December 31, 2003.



|              |  |                |        |      |   |        |  |      |        |      |   |            |  |                      |       |                  |   |        |  |   |         |  |   |        
|------------- |  | -------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | -------------------- | ----- | ---------------- | - | ------ |  | - | ------- |  | - | -------
|              |  | 2004           |        | 2005 |   | 2006   |  | 2007 |        | 2008 |   | Thereafter |  | Total Carrying Value |       | Total Fair Value
|              |  | (In thousands)
|Fixed Rate    |  |                |        |      |   |        |  |      |        |      |   |            |  |                      |       |                  |   |        |  |   |         |  |   |        
|7.53%         |  | $              | 3,572  |      | $ | 3,571  |  | $    | 3,571  |      | $ |           |  | $                    |      |                  | $ |       |  | $ | 10,714  |  | $ | 11,661 
|7.21%         |  |                | 3,572  |      |   | 3,572  |  |      | 3,572  |      |   | 3,571      |  |                      | 3,571 |                  |   |       |  |   | 17,858  |  |   | 20,649 
|7.09%         |  |                | 3,572  |      |   | 3,572  |  |      | 3,572  |      |   | 3,571      |  |                      | 3,571 |                  |   | 3,571  |  |   | 21,429  |  |   | 25,064 
|7.00%         |  |                | 8      |      |   | 8      |  |      | 8      |      |   |           |  |                      |      |                  |   |       |  |   | 24      |  |   | 25     
|Variable Rate |  |                |        |      |   |        |  |      |        |      |   |            |  |                      |       |                  |   |        |  |   |         |  |   |        
|3.44%         |  |                |       |      |   |       |  |      |       |      |   | 78,000     |  |                      |      |                  |   |       |  |   | 78,000  |  |   | 78,000 
|1.16%         |  |                |       |      |   |       |  |      |       |      |   |           |  |                      |      |                  |   | 40,355 |  |   | 40,355  |  |   | 40,355 
|              |  |                |        |      |   |        |  |      |        |      |   |            |  |                      |       |                  |   |        |  |   |         |  |   |        
|              |  | $              | 10,724 |      | $ | 10,723 |  | $    | 10,723 |      | $ | 85,142     |  | $                    | 7,142 |                  | $ | 43,926 |  | $ | 168,380 |  | $ | 175,754
|              |  |                |        |      |   |        |  |      |        |      |   |            |  |                      |       |                  |   |        |  |   |         |  |   |        



Qualitative Disclosures. Our
primary exposure relates to:



| |  | interest rate risk on long-term and short-term borrowings;
| | - | ----------------------------------------------------------



| |  | the impact of interest rate movements on our ability to meet interest expense requirements and exceed financial covenants; and
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  | the impact of interest rate movements on our ability to obtain adequate financing to fund future acquisitions.
| | - | --------------------------------------------------------------------------------------------------------------



We manage interest rate risk on outstanding long-term and short-term debt
through the use of fixed and variable rate debt. While we cannot predict the impact interest rate movements will have on existing debt, we continue to evaluate our financial position on an ongoing basis.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



See the Consolidated Financial Statements beginning on page F-1 of this
report.



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



Not applicable.



ITEM 9A. CONTROLS AND PROCEDURES



| | (a) | Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the disclosure controls and
procedures were effective to provide reasonable assurance that our disclosure controls and procedures meet their objective.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Internal Control Over Financial Reporting. No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PART III



Some information required by Part III is omitted from this report because we will file a definitive proxy statement for our 2004 Annual Meeting of Shareholders within 120 days after the end of our fiscal year pursuant to Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended, and the information included therein is incorporated herein by reference to the extent provided below.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The information required by Item 10 of Form 10-K concerning our executive officers is set forth under the heading
Executive Officers located at the end of Part I of this Form 10-K.



The other information required by Item 10 of Form 10-K is incorporated by reference to the information under the heading Election of Directors, Report of the Audit Committee and Section
16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement.



Our Board of Directors has adopted a Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer or Controller or other persons performing similar functions. The Code of
Ethics is an appendix to our Code of Business Conduct, which is applicable to all of our directors and employees and that has been adopted by our Board of Directors. The Code of Business Conduct, including the Code of Ethics, is posted on our
website at www.waste-ind.com.



ITEM 11. EXECUTIVE COMPENSATION



The information required by Item 11 of Form 10-K is
incorporated by reference to the information under the heading Proposal No. 1  Election of Directors  Information Concerning the Board of Directors and Its Committees, Other Information  Compensation of Executive
Officers,   Compensation of Directors,   Report of the Compensation Committee on Executive Compensation,   Compensation Committee Interlocks and Insider Participation and  
Performance Graph in the Proxy Statement.



ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The
information required by Item 12 of Form 10-K regarding beneficial ownership of our common stock is incorporated by reference to the information under the heading Other Information  Principal Shareholders in the Proxy Statement. The
information required by Item 12 of Form 10-K regarding our one equity compensation plan is found in Item 5 of this report under the heading Equity Compensation Plan Information.



33



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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by Item 13 of Form 10-K is incorporated by
reference to the information under the heading Other Information  Certain Transactions in the Proxy Statement.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by Item 14 of Form 10-K is incorporated by reference to the information under the heading Proposal No. 2 
Ratification of Independent Auditors in the Proxy Statement.



PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K



| | (a) | The following Financial Statements, Financial Statement Schedules and Exhibits are filed as part of this report or incorporated herein by reference:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------



1. Financial Statements. See Index to Consolidated Financial Statements on
page F-1.



2. Financial Statement Schedules.



Report of Independent Auditors on page S-1.



Schedule II  Valuation and Qualifying Accounts on page
S-2.



The financial statement schedule should
be read in conjunction with the consolidated financial statements. The financial statement schedules not included in this annual report on Form 10-K have been omitted because they are not applicable or the required information is shown in the
financial statements or included in the notes thereto.



| | (b) | Reports on Form 8-K
| | --- | -------------------



During the fourth quarter of the fiscal year ended December 31, 2003, we filed the following Current Reports on Form 8-K:



Form 8-K filed on October 29, 2003 to report our operating and financial
results for the quarter ended September 30, 2003; and



Form
8-K filed on November 12, 2003 to report the declaration of a semi-annual cash dividend.



| | (c) | Exhibits.
| | --- | ---------



The exhibits filed as part of this Report are listed.



|            |  |                                                                                                                                                                                                                                 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                     
|2.2(a)      |  | Agreement and Plan of Merger dated as of September 9, 1998, by and among the Registrant, TWS Merger Corporation, TransWaste Services, Inc., the shareholders of TransWaste Services, Inc.,
Thomas C. Cannon and James F. Taylor.
|            | 
|3.1(b)      |  | Articles of Incorporation, as currently in effect.                                                                                                                                                                              
|            | 
|3.2(b)      |  | Bylaws.                                                                                                                                                                                                                         
|            | 
|10.1(c)     |  | 1997 Stock Plan, as amended on August 4, 2003.                                                                                                                                                                                  
|            | 
|10.2(b)     |  | Credit Agreement with Branch Banking and Trust Company dated April 3, 1996.                                                                                                                                                     



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|         |  |                                                                                                                                                                                                                                                                                                            
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3(b)  |  | Note Purchase and Private Shelf Agreement with The Prudential Insurance Company of America dated April 3, 1996.                                                                                                                                                                                            
|         | 
|10.4(d)  |  | Note Purchase and Private Shelf Agreement with The Prudential Insurance Company of America dated as of June 30, 1998.                                                                                                                                                                                      
|         | 
|10.5(e)  |  | Senior Subordinated Loan and Security Agreement dated February 2, 1999 between Liberty Waste Lending Company, LLC, a subsidiary of the Registrant, and Liberty Waste Services, LLC and its
direct and indirect subsidiaries.                                                                               
|         | 
|10.6(e)  |  | Option Agreement dated February 2, 1999 between the Registrant and Liberty Waste Services, LLC.                                                                                                                                                                                                            
|         | 
|10.7(f)  |  | Revolving Credit Agreement dated as of November 9, 1999 by and among the Registrant and its subsidiaries, the lending institutions party thereto, BankBoston, N.A., as Administrative Agent,
BancBoston Robertson Stephens Inc., as Arranger, and Branch Banking and Trust Company, as Documentation Agent.
|         | 
|10.8(g)  |  | First Amendment to Credit Agreement dated February 10, 2000.                                                                                                                                                                                                                                               
|         | 
|10.9(g)  |  | Second Amendment to Credit Agreement dated June 14, 2000.                                                                                                                                                                                                                                                  
|         | 
|10.10(g) |  | Third Amendment to Credit Agreement dated October 31, 2000.                                                                                                                                                                                                                                                
|         | 
|10.11(g) |  | Fourth Amendment to Credit Agreement dated November 2000.                                                                                                                                                                                                                                                  
|         | 
|10.12(h) |  | Fifth Amendment to Credit Agreement dated March 31, 2001.                                                                                                                                                                                                                                                  
|         | 
|10.13(h) |  | Sixth Amendment to Credit Agreement dated March 29, 2002.                                                                                                                                                                                                                                                  
|         | 
|10.14(i) |  | Change in Control Agreement dated October 30, 2001 between the Registrant and D. Stephen Grissom.                                                                                                                                                                                                          
|         | 
|10.15    |  | Amended and Restated Note Purchase Agreement dated March 31, 2001 among the Company and The Prudential Insurance Company of America and Affiliates.                                                                                                                                                        
|         | 
|10.16    |  | Amended and Restated Note Purchase and Private Shelf Agreement dated March 31, 2001 among the Company and The Prudential Insurance Company of America and Affiliates.                                                                                                                                      
|         | 
|10.17    |  | Amendment and Consent dated August 27, 2003 among the Company and Prudential Insurance Company and Affiliates, amending the Amended and Restated Note Agreement and the Amended and Restated
Note Purchase and Private Shelf Agreement dated March 31, 2001.                                               
|         | 
|10.18    |  | Amended and Restated Revolving Credit Agreement dated August 27, 2003 among the Company and Fleet National Bank, Wachovia Bank, Branch Banking and Trust Company and other
lenders.                                                                                                                        
|         | 
|21       |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                      
|         | 
|23.1     |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                           
|         | 
|31.1     |  | Certification of the Chief Executive Officer pursuant to rule 15d-14 (a) under the Securities Exchange Act . of 1934.                                                                                                                                                                                      
|         | 
|31.2     |  | Certification of the Chief Financial Officer pursuant to rule 15d-14 (a) under the Securities Exchange Act . of 1934.                                                                                                                                                                                      
|         | 
|32.1     |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                              
|         | 
|32.2     |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                              

---

|(a) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Current Report on Form 8-K dated September 25, 1998.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(b) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Registration Statement on Form S-1 (File No. 333-25631).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(c) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Annual Report on Form 10-K for the year ended December 31, 1998.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



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|(f) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Annual Report on Form 10-K for the year ended December 31, 2000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(h) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Annual Report on Form 10-K for the year ended December 31, 2001.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | Incorporated by reference to the similarly numbered Exhibit to the Registrants Annual Report on Form 10-K for the year ended December 31, 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                     |  |                            |  |                                      
|-------------------- |  | -------------------------- |  | -------------------------------------
|                     |  | WASTE INDUSTRIES USA, INC.
|                     |  |                           
|Date: March 30, 2004 |  | By:                        |  | /s/ Jim W. Perry                     
|                     |  |                            |  | JIM W. PERRY                         
|                     |  |                            |  | PRESIDENT AND CHIEF EXECUTIVE OFFICER



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



|                                             |  |                                                                               |  |               
|-------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|SIGNATURE                                    |  | CAPACITY                                                                      |  | DATE          
|/s/ Jim W. PerryJIM W. PERRY                 |  | Director, President and Chief Executive Officer (Principal Executive Officer) |  | March 30, 2004
|                                             |  |                                                                              
|/s/ D. Stephen GrissomD. STEPHEN GRISSOM     |  | Chief Financial Officer (Principal Financial and Accounting Officer)          |  | March 30, 2004
|                                             |  |                                                                              
|/s/ Lonnie C. Poole, Jr.LONNIE C. POOLE, JR. |  | Chairman                                                                      |  | March 30, 2004
|                                             |  |                                                                              
|/s/ Paul L. BrunswickPAUL L. BRUNSWICK       |  | Director                                                                      |  | March 30, 2004
|                                             |  |                                                                              
|/s/ Paul F. HardimanPAUL F. HARDIMAN         |  | Director                                                                      |  | March 30, 2004
|                                             |  |                                                                              
|/s/ Thomas C. CannonTHOMAS C. CANNON         |  | Director                                                                      |  | March 30, 2004
|                                             |  |                                                                              
|/s/ Glenn E. FutrellGLENN E. FUTRELL         |  | Director                                                                      |  | March 30, 2004
|                                             |  |                                                                              
|/s/ James R. TaltonJAMES R. TALTON           |  | Director                                                                      |  | March 30, 2004



37



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



INDEX TO FINANCIAL STATEMENTS



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Independent Auditors Report                                                                         |  | F-2 
|Consolidated Balance Sheets as of December 31, 2002 and 2003                                         |  | F-3 
|Consolidated Statements of Operations for the Years Ended December 31, 2001, 2002, and 2003          |  | F-4 
|Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2001, 2002 and 2003 |  | F-5 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003           |  | F-6 
|Notes to Consolidated Financial Statements                                                           |  | F-8 



F-1



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##### Table of Contents

INDEPENDENT AUDITORS REPORT



To The Board of Directors and Shareholders of

Waste Industries USA, Inc. and Subsidiaries

Raleigh, North Carolina



We have audited the accompanying consolidated balance sheets of Waste Industries USA, Inc. and subsidiaries (the Company) as of December 31,
2002 and 2003, and the related consolidated statements of operations, shareholders equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Waste Industries USA, Inc. and subsidiaries at December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the United States of America.



As discussed in Notes 1.e and 4 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.As discussed in Notes 1 (k) and 10 to the consolidated financial statements, effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations.



/S/ DELOITTE & TOUCHE LLP

RALEIGH, NORTH CAROLINA

MARCH 30, 2004



F-2



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (In Thousands)



|                                                                                                                             |  |                   |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                             |  | December 31, 2002 |         |   | December 31,2003 |  
|ASSETS                                                                                                                       |  |                   |         |   |                  |   |         |  
|CURRENT ASSETS:                                                                                                              |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                    |  | $                 | 1,734   |   |                  | $ | 4,127   |  
|Accounts receivable - trade, less allowance for uncollectible accounts (2002 - $2,237; 2003 - $2,608)                        |  |                   | 28,200  |   |                  |   | 31,235  |  
|Accounts receivable - other                                                                                                  |  |                   | 1,395   |   |                  |   | 1,182   |  
|Income taxes receivable (Note 15)                                                                                            |  |                   | 919     |   |                  |   |        |  
|Inventories                                                                                                                  |  |                   | 1,552   |   |                  |   | 1,427   |  
|Prepaid insurance                                                                                                            |  |                   | 494     |   |                  |   | 602     |  
|Deferred income taxes (Note 15)                                                                                              |  |                   | 759     |   |                  |   | 1,350   |  
|Prepaid expenses and other current assets                                                                                    |  |                   | 2,257   |   |                  |   | 1,836   |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                         |  |                   | 37,310  |   |                  |   | 41,759  |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|PROPERTY AND EQUIPMENT, net (Notes 2, 3 and 6)                                                                               |  |                   | 189,954 |   |                  |   | 190,871 |  
|INTANGIBLE ASSETS, net (Notes 2 and 4)                                                                                       |  |                   | 67,791  |   |                  |   | 90,122  |  
|RESTRICTED CASH - BONDS                                                                                                      |  |                   |        |   |                  |   | 822     |  
|DEFERRED FINANCING COSTS                                                                                                     |  |                   | 1,662   |   |                  |   | 2,834   |  
|OTHER NONCURRENT ASSETS                                                                                                      |  |                   | 1,856   |   |                  |   | 4,120   |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                                 |  | $                 | 298,573 |   |                  | $ | 330,528 |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                         |  |                   |         |   |                  |   |         |  
|CURRENT LIABILITIES:                                                                                                         |  |                   |         |   |                  |   |         |  
|Current maturities of long-term debt (Note 5)                                                                                |  | $                 | 11,710  |   |                  | $ | 10,723  |  
|Current maturities of capital lease obligations (Note 6)                                                                     |  |                   | 439     |   |                  |   | 160     |  
|Accounts payable - trade                                                                                                     |  |                   | 10,501  |   |                  |   | 13,299  |  
|Acquisition related obligations                                                                                              |  |                   | 305     |   |                  |   | 1,949   |  
|Accrued interest payable                                                                                                     |  |                   | 1,321   |   |                  |   | 1,408   |  
|Accrued wages and benefits payable                                                                                           |  |                   | 3,860   |   |                  |   | 4,294   |  
|Income taxes payable (Note 15)                                                                                               |  |                   |        |   |                  |   | 841     |  
|Accrued expenses and other liabilities                                                                                       |  |                   | 5,253   |   |                  |   | 4,941   |  
|Closure/post-closure liabilities (Note 10)                                                                                   |  |                   | 454     |   |                  |   | 816     |  
|Derivative liabilities (Note 8)                                                                                              |  |                   |        |   |                  |   | 1,212   |  
|Deferred revenue                                                                                                             |  |                   | 1,997   |   |                  |   | 2,421   |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                    |  |                   | 35,840  |   |                  |   | 42,064  |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|LONG-TERM DEBT, net of current maturities (Note 5)                                                                           |  |                   | 140,875 |   |                  |   | 157,657 |  
|LONG-TERM CAPITAL LEASE OBLIGATIONS, net of maturities (Note 6)                                                              |  |                   | 160     |   |                  |   |        |  
|NONCURRENT DEFERRED INCOME TAXES (Note 15)                                                                                   |  |                   | 18,941  |   |                  |   | 18,240  |  
|CLOSURE/POSTCLOSURE LIABILITIES (Note 10)                                                                                    |  |                   | 3,568   |   |                  |   | 5,348   |  
|DERIVATIVE LIABILITIES (Note 8)                                                                                              |  |                   | 2,219   |   |                  |   | 260     |  
|COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 8, 9, 12 and 14)                                                                  |  |                   |        |   |                  |   |        |  
|SHAREHOLDERS EQUITY (Notes 7, 8, 9 and 14):                                                                                 |  |                   |         |   |                  |   |         |  
|Common stock, no par value, shares authorized 80,000,000 shares issued and outstanding: 2002 - 13,338,005; 2003 - 13,492,402 |  |                   | 38,116  |   |                  |   | 39,139  |  
|Paid-in capital                                                                                                              |  |                   | 7,245   |   |                  |   | 7,342   |  
|Retained earnings                                                                                                            |  |                   | 54,623  |   |                  |   | 61,369  |  
|Accumulated other comprehensive loss                                                                                         |  |                   | (1,366  | ) |                  |   | (891    | )
|Shareholders loans                                                                                                          |  |                   | (1,648  | ) |                  |   |        |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Total shareholders equity                                                                                                   |  |                   | 96,970  |   |                  |   | 106,959 |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                   |  | $                 | 298,573 |   |                  | $ | 330,528 |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  



See Notes to
Consolidated Financial Statements.



F-3



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2001, 2002 and 2003



(In Thousands, Except Per Share Data)



|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                     |  | 2001 |         |   | 2002 |   |         | 2003 | 
|REVENUES:                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Service revenues                                                                     |  | $    | 248,074 |   |      | $ | 250,543 |      |  | $ | 269,208 |  
|Equipment sales                                                                      |  |      | 1,221   |   |      |   | 1,285   |      |  |   | 1,257   |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                                       |  |      | 249,295 |   |      |   | 251,828 |      |  |   | 270,465 |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|OPERATING COSTS AND EXPENSES:                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Operations                                                                           |  |      | 157,980 |   |      |   | 161,165 |      |  |   | 176,160 |  
|Equipment sales                                                                      |  |      | 580     |   |      |   | 842     |      |  |   | 1,130   |  
|Selling, general and administrative (Notes 6, 9, and 12)                             |  |      | 37,123  |   |      |   | 33,832  |      |  |   | 38,114  |  
|Depreciation and amortization (Notes 3, 4 and 10)                                    |  |      | 28,858  |   |      |   | 27,697  |      |  |   | 30,549  |  
|Loss (gain) of sale of collection and hauling assets (Note 2)                        |  |      | 359     |   |      |   | 121     |      |  |   | (720    | )
|Impairment of property and equipment (Note 3)                                        |  |      |        |   |      |   | 316     |      |  |   | 517     |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Total operating costs and expenses                                                   |  |      | 224,900 |   |      |   | 223,973 |      |  |   | 245,750 |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|OPERATING INCOME                                                                     |  |      | 24,395  |   |      |   | 27,855  |      |  |   | 24,715  |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Interest expense (Note 5)                                                            |  |      | 14,259  |   |      |   | 11,377  |      |  |   | 9,891   |  
|Interest income                                                                      |  |      | (1,276  | ) |      |   | (213    | )    |  |   | (141    | )
|Other                                                                                |  |      | (214    | ) |      |   | (588    | )    |  |   | (96     | )
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Total other expense, net                                                             |  |      | 12,769  |   |      |   | 10,576  |      |  |   | 9,654   |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE |  |      | 11,626  |   |      |   | 17,279  |      |  |   | 15,061  |  
|INCOME TAX EXPENSE (Note 15)                                                         |  |      | 4,244   |   |      |   | 6,317   |      |  |   | 6,171   |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE                  |  |      | 7,382   |   |      |   | 10,962  |      |  |   | 8,890   |  
|CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX BENEFIT OF $614    |  |      |        |   |      |   |        |      |  |   | (1,067  | )
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|NET INCOME                                                                           |  | $    | 7,382   |   |      | $ | 10,962  |      |  | $ | 7,823   |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|EARNINGS PER SHARE                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Basic:                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Before cumulative effect of a change in accounting principle                         |  | $    | 0.56    |   |      | $ | 0.82    |      |  | $ | 0.66    |  
|Cumulative effect of a change in accounting principle                                |  |      |        |   |      |   |        |      |  |   | (0.08   | )
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|NET INCOME                                                                           |  | $    | 0.56    |   |      | $ | 0.82    |      |  | $ | 0.58    |  
|Diluted:                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Before cumulative effect of a change in accounting principle                         |  | $    | 0.55    |   |      | $ | 0.82    |      |  | $ | 0.66    |  
|Cumulative effect of a change in accounting principle                                |  |      |        |   |      |   |        |      |  |   | (0.08   | )
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|NET INCOME                                                                           |  | $    | 0.55    |   |      | $ | 0.82    |      |  | $ | 0.58    |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING (Note 7)                               |  |      |         |   |      |   |         |      |  |   |         |  
|Basic                                                                                |  |      | 13,286  |   |      |   | 13,336  |      |  |   | 13,439  |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Diluted                                                                              |  |      | 13,342  |   |      |   | 13,351  |      |  |   | 13,558  |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|CASH DIVIDENDS                                                                       |  | $    |        |   |      | $ |        |      |  | $ | 1,077   |  
|                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  



|                                               |  |          
|---------------------------------------------- |  | ---------
|See Notes to
Consolidated Financial Statements |  | Continued



F-4



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##### Table of Contents

Continued



|                                                                                                                                       |  |      |       |      |   |        |  |   |      
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------ |  | - | -----
|                                                                                                                                       |  | 2001 |       | 2002 |   | 2003  
|Pro forma income and earnings per common share assuming changes in accounting principle described in Note 10 are applied
retroactively |  |      |       |      |   |        |  |   |      
|Income before cumulative effect of a change in accounting principle                                                                    |  | $    | 6,898 |      | $ | 10,262 |  | $ | 7,823
|                                                                                                                                       |  |      |       |      |   |        |  |   |      
|Earnings per common share before cumulative effect of a change in accounting principle                                                 |  |      |       |      |   |        |  |   |      
|Basic and Diluted                                                                                                                      |  | $    | 0.52  |      | $ | 0.77   |  | $ | 0.58 
|                                                                                                                                       |  |      |       |      |   |        |  |   |      



F-5



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Years Ended December 31, 2001, 2002 and 2003

(In Thousands)



|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------- | ---------- | ------ | ----------- | ------ | ------------ |  | - | --------------- | - | ----------------- | - | ----- | ----------------------------- | - | ------ | ------------------- |  | - | ------------------------------------ | - |  | -------------------------- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                        |            | SHARES |             |        | COMMON STOCK |  |   | PAID-IN CAPITAL |   | RETAINED EARNINGS |   |       | NOTE RECEIVABLE LIBERTY WASTE |   |        | SHAREHOLDERS LOANS |  |   | OTHER ACCUMULATED COMPREHENSIVE LOSS |   |  | TOTAL SHAREHOLDERS EQUITY |       
|                                                                        | AUTHORIZED |        | OUTSTANDING |        |              |  |   |                 |   |                   |  
|Balance, January 1, 2001                                                |            | 80,000 |             | 13,119 |              |  | $ | 37,037          |   |                   | $ | 7,245 |                               | $ | 36,279 |                     |  | $ | (11,538                              | ) |  | $                          | (1,096 | ) |  | $ |       |   |  | $ | 67,927  |  
|Net income                                                              |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   | 7,382  |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 7,382   |  
|Issuances of stock                                                      |            |       |             | 4      |              |  |   | 24              |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 24      |  
|Stock repurchases                                                       |            |       |             |        |              |  |   |                 |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   |        |  
|Exercise of stock options                                               |            |       |             | 216    |              |  |   | 1,109           |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 1,109   |  
|Cancellation of shares                                                  |            |       |             | (5     | )            |  |   | (82             | ) |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | (82     | )
|Collection of note receivable from Liberty Waste                        |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   | 11,538                               |   |  |                            |       |   |  |   |       |   |  |   | 11,538  |  
|Increase in shareholders loans                                         |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            | (286   | ) |  |   |       |   |  |   | (286    | )
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2001                                              |            | 80,000 |             | 13,334 |              |  |   | 38,088          |   |                   |   | 7,245 |                               |   | 43,661 |                     |  |   |                                     |   |  |                            | (1,382 | ) |  |   |       |   |  |   | 87,612  |  
|Net income                                                              |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   | 10,962 |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 10,962  |  
|Other comprehensive loss, net of taxes of $853                          |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Unrealized loss on cash flow hedges, net of reclassification adjustment |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   | (1,366 | ) |  |   | (1,366  | )
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Other comprehensive loss                                                |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | (1,366  | )
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Comprehensive income                                                    |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 9,596   |  
|Issuances of stock                                                      |            |       |             | 4      |              |  |   | 28              |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 28      |  
|Increase in shareholders loans                                         |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            | (266   | ) |  |   |       |   |  |   | (266    | )
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2002                                              |            | 80,000 |             | 13,338 |              |  |   | 38,116          |   |                   |   | 7,245 |                               |   | 54,623 |                     |  |   |                                     |   |  |                            | (1,648 | ) |  |   | (1,366 | ) |  |   | 96,970  |  
|Net income                                                              |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   | 7,823  |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 7,823   |  
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Income tax benefit from stock options                                   |            |       |             |       |              |  |   |                |   |                   |   | 97    |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 97      |  
|Other comprehensive income, net of taxes of ($272)                      |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Unrealized gain on cash flow hedges, net of reclassification adjustment |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   | 475    |   |  |   | 475     |  
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Other comprehensive income                                              |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 475     |  
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Comprehensive income                                                    |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 8,298   |  
|Issuances of stock                                                      |            |       |             | 103    |              |  |   | 688             |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 688     |  
|Exercise of stock options                                               |            |       |             | 51     |              |  |   | 335             |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | 335     |  
|Decrease in shareholders loans                                         |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   |       |                     |  |   |                                     |   |  |                            | 1,648  |   |  |   |       |   |  |   | 1,648   |  
|Cash dividends                                                          |            |       |             |       |              |  |   |                |   |                   |   |      |                               |   | (1,077 | )                   |  |   |                                     |   |  |                            |       |   |  |   |       |   |  |   | (1,077  | )
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2003                                              |            | 80,000 |             | 13,492 |              |  | $ | 39,139          |   |                   | $ | 7,342 |                               | $ | 61,369 |                     |  | $ |                                     |   |  | $                          |       |   |  | $ | (891   | ) |  | $ | 106,959 |  
|                                                                        |            |        |             |        |              |  |   |                 |   |                   |   |       |                               |   |        |                     |  |   |                                      |   |  |                            |        |   |  |   |        |   |  |   |         |  



See Notes to
Consolidated Financial Statements.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2001, 2002 and 2003

(In Thousands)



|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                    |  | 2001 |         |   | 2002 |   |         | 2003 | 
|OPERATING ACTIVITIES:                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                                          |  | $    | 7,382   |   |      | $ | 10,962  |      |  | $ | 7,823   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                                                       |  |      | 28,858  |   |      |   | 27,697  |      |  |   | 30,549  |  
|(Gain) loss on sale of property and equipment                                                                       |  |      | (225    | ) |      |   | (49     | )    |  |   | 350     |  
|Impairment of property and equipment                                                                                |  |      |        |   |      |   | 316     |      |  |   | 517     |  
|Loss (gain) on sale of collection and hauling assets                                                                |  |      | 359     |   |      |   | 121     |      |  |   | (720    | )
|Cumulative effect of accounting change and accounting principle                                                     |  |      |        |   |      |   |        |      |  |   | 1,067   |  
|Stock compensation expense                                                                                          |  |      | 24      |   |      |   | 28      |      |  |   | 120     |  
|Provision (benefit) for deferred income taxes                                                                       |  |      | 1,061   |   |      |   | 4,304   |      |  |   | (1,564  | )
|Forgiveness of officer loans                                                                                        |  |      |        |   |      |   |        |      |  |   | 1,118   |  
|Changes in operating assets and liabilities, net of effects from acquisition and disposition of related businesses: |  |      |         |   |      |   |         |      |  |   |         |  
|Current operating assets and liabilities (excluding cash and cash equivalents)                                      |  |      | 3,904   |   |      |   | (4,111  | )    |  |   | 2,827   |  
|Other noncurrent assets                                                                                             |  |      | (1,213  | ) |      |   | 513     |      |  |   | (3,334  | )
|Closure/postclosure liabilities                                                                                     |  |      | 1,037   |   |      |   | 1,112   |      |  |   | 323     |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                                           |  |      | 41,187  |   |      |   | 40,893  |      |  |   | 39,076  |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|INVESTING ACTIVITIES:                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Proceeds from sale of property and equipment                                                                        |  |      | 712     |   |      |   | 1,925   |      |  |   | 2,510   |  
|Proceeds from sale of collection and hauling operations                                                             |  |      | 426     |   |      |   |        |      |  |   | 16,302  |  
|Purchases of property and equipment                                                                                 |  |      | (25,012 | ) |      |   | (18,178 | )    |  |   | (29,557 | )
|Acquisition liabilities                                                                                             |  |      | (247    | ) |      |   | 48      |      |  |   | 1,644   |  
|Acquisitions of related business, net of cash acquired                                                              |  |      | (6,995  | ) |      |   | (6,093  | )    |  |   | (39,823 | )
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                                               |  |      | (31,116 | ) |      |   | (22,298 | )    |  |   | (48,924 | )
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|FINANCING ACTIVITIES:                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of long term debt                                                                            |  |      | 57,750  |   |      |   | 4,009   |      |  |   | 40,176  |  
|Principal payments of long-term debt                                                                                |  |      | (84,802 | ) |      |   | (21,762 | )    |  |   | (24,381 | )
|Principal payments of capital lease obligations                                                                     |  |      | (894    | ) |      |   | (729    | )    |  |   | (439    | )
|Financing costs                                                                                                     |  |      |        |   |      |   |        |      |  |   | (2,373  | )
|Dividends paid                                                                                                      |  |      |        |   |      |   |        |      |  |   | (1,077  | )
|Increase in advances under shareholders loans                                                                      |  |      | (286    | ) |      |   | (266    | )    |  |   |        |  
|Net proceeds from exercised options                                                                                 |  |      | 1,109   |   |      |   |        |      |  |   | 335     |  
|Repayment of Liberty Waste note                                                                                     |  |      | 11,538  |   |      |   |        |      |  |   |        |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by financing activities                                                                 |  |      | (15,585 | ) |      |   | (18,748 | )    |  |   | 12,241  |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|(DECREASE) INCREASE                                                                                                 |  |      | (5,514  | ) |      |   | (153    | )    |  |   | 2,393   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                                        |  |      | 7,401   |   |      |   | 1,887   |      |  |   | 1,734   |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                                                              |  | $    | 1,887   |   |      | $ | 1,734   |      |  | $ | 4,127   |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Cash paid for interest                                                                                              |  | $    | 15,342  |   |      | $ | 10,283  |      |  | $ | 9,347   |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Cash paid for taxes                                                                                                 |  | $    | 3,281   |   |      | $ | 3,200   |      |  | $ | 5,513   |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  



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##### Table of Contents

Supplemental Schedule of Noncash Transactions



During 2001, the Company cancelled 5,136 shares of common stock with a fair value of $82,176 as settlement of obligations
incurred for certain business acquisitions.



See Notes to
Consolidated Financial Statements.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS



Years Ended
December 31, 2001, 2002 and 2003



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES
|-- | ---------------------------------------------



Business OperationsWaste Industries USA, Inc. (the
Company) is a regional solid waste services company providing solid waste collection, transfer, recycling, processing and disposal services to customers in North Carolina, South Carolina, Georgia, Mississippi, Tennessee, Virginia and
Florida.



Basis of PresentationThe Companys
consolidated financial statements include its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.



Significant Accounting PoliciesThe significant accounting policies are summarized below:



a. Use of Estimates The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term
relate to the determination of the allowance for uncollectible accounts, self-insurance reserves, fair value of derivative financial instruments and closure/post closure liabilities. Actual results could differ from these estimates.



b. Cash and Cash EquivalentsFor the purposes
of presentation in the financial statements, cash equivalents include highly liquid investments with original maturities of three months or less.



c. InventoriesInventories consist of operating materials and supplies held for use and are stated at the lower of
cost or market (less costs to sell) using the specific-identification method.



d. Property and EquipmentProperty and equipment are stated at cost. Depreciation and amortization expense are calculated on the straight-line method. Estimated useful lives are as follows:



|                                 |  |              
|-------------------------------- |  | -------------
|Machinery and equipment          |  | 5 to 12 years
|Furniture, fixtures and vehicles |  | 5 to 10 years
|Building                         |  | 30 years     



Landfill permitting, acquisition and preparation costs are amortized using a units-of-production method as permitted airspace of the landfill is consumed. Landfill permitting and preparation costs represent only direct costs related to
these activities, including legal, engineering and construction. Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the installation of leak detection and leachate collection systems.
Interest is capitalized on landfill permitting and construction projects and other projects under development while the assets are undergoing activities to ready them for their intended use. The interest capitalization rate is based on the
Companys weighted average cost of indebtedness. Interest capitalized for the years ended December 31, 2001, 2002 and 2003 was $541,000, $161,000 and $235,000, respectively. In determining the amortization rate for a landfill, preparation costs
include the total estimated costs to complete construction of the landfills permitted and probable to be permitted capacity. Units-of-production amortization rates are determined annually. The rates are determined by management based on
estimates provided by the Companys internal and third party engineers, and consider the information provided by surveys which are performed at least annually.



Management routinely reviews its investment in operating landfills to determine whether the costs of these
investments are realizable. Judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions and operational performance of the Companys landfills.



e. Intangible AssetsIntangible assets
primarily consist of goodwill, customer lists and noncompete agreements acquired in business combinations.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



Effective January 1, 2002, the Company discontinued
amortization of goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.The Company completed its transitional goodwill impairment test using the provisions of
SFAS No. 142 as of January 1, 2002 and determined that there was no goodwill impairment. The Company determined it operates in one reporting unit based on the current reporting structure and, accordingly, has assigned goodwill at the enterprise
level.



On an ongoing basis, the Company
performs an annual impairment test. At least quarterly, the Company analyzes whether an event has occurred that would more likely than not reduce its enterprise fair value below its carrying amount and, if necessary, will perform a goodwill
impairment test between annual dates. Impairment adjustment after adoption, if any, will be recognized as an operating expense. The Company adopted July 31 as its annual assessment date. The Company completed its annual impairment test July 31, 2003
and determined that there was no goodwill impairment.



f. Restricted Cash Restricted cash consists principally of funds held in trust for the construction of the Sampson County landfill.



g. Deferred Financing CostsIncluded in other noncurrent assets are debt issue costs
relating to borrowings (see Note 5). Debt issue costs are amortized to interest expense using the straight-line method over the life of the related debt.



h. Other Noncurrent Assets Included in other noncurrent assets is capitalized software which is amortized over the estimated
useful life of five years. Software amortization expense was $182,000, $169,000 and $194,000 for the years ended December 31, 2001, 2002 and 2003, respectively. Other noncurrent assets also include costs related to pending acquisitions and certain
development activities that management believes are probable of occurring at each balance sheet date. Other noncurrent assets consisted of the following as of December 31, 2002 and 2003 (in thousands):



|                        |  |                      |       |                          |   |                    |  |   |      
|----------------------- |  | -------------------- | ----- | ------------------------ | - | ------------------ |  | - | -----
|                        |  | 2002                
|                        |  | Gross Carrying Value |       | Accumulated Amortization |   | Net Carrying Value
|Software                |  | $                    | 1,145 |                          | $ | 682                |  | $ | 463  
|Other noncurrent assets |  |                      | 1,393 |                          |   |                   |  |   | 1,393
|                        |  |                      |       |                          |   |                    |  |   |      
|                        |  | $                    | 2,538 |                          | $ | 682                |  | $ | 1,856
|                        |  |                      |       |                          |   |                    |  |   |      
|                        | 
|                        |  | 2003                
|                        |  | Gross Carrying Value |       | Accumulated Amortization |   | Net Carrying Value
|Software                |  | $                    | 1,288 |                          | $ | 850                |  | $ | 438  
|Other noncurrent assets |  |                      | 3,682 |                          |   |                   |  |   | 3,682
|                        |  |                      |       |                          |   |                    |  |   |      
|                        |  | $                    | 4,970 |                          | $ | 850                |  | $ | 4,120
|                        |  |                      |       |                          |   |                    |  |   |      



i. Derivative Financial Instruments and Other Comprehensive Income(Loss)The Company formally documents its hedge relationships, including identifying the hedge instruments and hedged items, as well as its risk management
objectives and strategies for entering into a hedge transaction. The Companys derivative instruments qualify for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,as
amended. In order to qualify for hedge accounting, criteria must be met, including a requirement that both at inception of the hedge, and on an ongoing basis, the hedging relationship is expected to be highly effective in offsetting changes
in fair value of cash flows attributable to the hedged risk during the term of the hedge. The Company currently utilizes only cash flow hedges. Under accounting for cash flow hedges, any gains or losses on the hedge instruments are recognized as a
separate component of other comprehensive income (loss). When it is determined that a hedge is no longer highly effective, the Company discontinues hedge accounting, and any gains or losses on the hedge instrument are recognized in earnings.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



j. Asset ImpairmentLong-lived assets
consist primarily of property and equipment, goodwill and other intangible assets. Property and equipment and other intangible assets are carried on the Companys financial statements based on their cost less accumulated depreciation or
amortization. The recoverability of these assets is tested whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Typical indicators that an asset may be impaired include:



-A significant decrease in the market price of an asset or asset group;



-A significant adverse change in the extent or manner in
which an asset or asset group is being used or in its physical condition;



-A significant adverse change in legal factors or in the business climate that could affect the value of an asset or asset group, including an adverse action or assessment by a regulator;



-An accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset;



-Current period operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or



-A current expectation that, more likely than not, a
long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.



If any of these or other indicators occur, the asset is reviewed to determine whether there has been an impairment. An impairment loss is
recorded as the difference between the carrying amount and fair value of the asset. See Note 3 for further discussion on asset impairments.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



k. Adoption of SFAS No. 143 Effective
January 1, 2003, the Company adopted the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. Substantially all of this charge was related to changes in accounting for landfill final capping, closure and post-closure costs. The application of SFAS No. 143 reduced income before cumulative effect of a
change in accounting principle for the year ended December 31, 2003 by approximately $1.1 million, net of tax benefit, or $0.08 per diluted share. The following table summarizes the balance sheet impact of the Companys initial adoption of SFAS
No. 143 and the Companys landfill liabilities as of January 1, 2002 computed on a pro forma basis as if the provisions of SFAS No. 143 had been applied during all periods affected (in thousands):



|                                                             |  |                              |        |   |        |   |        |                            |  |   |                                      |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------- | ------ | - | ------ | - | ------ | -------------------------- |  | - | ------------------------------------ | - |  | - | ------- | -
|                                                             |  | Balance at December 31, 2002 |        |   | Change |   |        | Balance at January 1, 2003 |  |   | Pro Forma Balance at January 1, 2002 |  
|Landfill assets                                              |  | $                            | 78,300 |   |        | $ | 3,632  |                            |  | $ | 81,932                               |   |  | $ | 80,408  |  
|Accumulated landfill airspace amortization                   |  |                              | (7,953 | ) |        |   | (5,425 | )                          |  |   | (13,378                              | ) |  |   | (11,585 | )
|                                                             |  |                              |        |   |        |   |        |                            |  |   |                                      |   |  |   |         |  
|Net landfill assets                                          |  | $                            | 70,347 |   |        | $ | (1,793 | )                          |  | $ | 68,554                               |   |  | $ | 68,823  |  
|                                                             |  |                              |        |   |        |   |        |                            |  |   |                                      |   |  |   |         |  
|Current landfill liabilities                                 |  | $                            | (454   | ) |        | $ | 44     |                            |  | $ | (410                                 | ) |  | $ | (57     | )
|Current environmental remediation liabilities                |  |                              |       |   |        |   |       |                            |  |   |                                     |   |  |   |        |  
|                                                             |  |                              |        |   |        |   |        |                            |  |   |                                      |   |  |   |         |  
|Current landfill and environmental remediation liabilities   |  | $                            | (454   | ) |        | $ | 44     |                            |  | $ | (410                                 | ) |  | $ | (57     | )
|                                                             |  |                              |        |  
|Long-term landfill liabilities                               |  | $                            | (3,568 | ) |        | $ | 68     |                            |  | $ | (3,500                               | ) |  | $ | (3,295  | )
|Long-term environmental remediation liabilities              |  |                              |       |   |        |   |       |                            |  |   |                                     |   |  |   |        |  
|                                                             |  |                              |        |   |        |   |        |                            |  |   |                                      |   |  |   |         |  
|Long-term landfill and environmental remediation liabilities |  | $                            | (3,568 | ) |        | $ | 68     |                            |  | $ | (3,500                               | ) |  | $ | (3,295  | )
|                                                             |  |                              |        |  
|Total landfill and environmental remediation liabilities     |  | $                            | (4,022 | ) |        | $ | 112    |                            |  | $ | (3,910                               | ) |  | $ | (3,352  | )
|                                                             |  |                              |        |   |        |   |        |                            |  |   |                                      |   |  |   |         |  



See
further discussion related to the impact of the adoption of SFAS No. 143 on the Companys accounting policies under Landfill Accounting below.



l. Landfill Accounting  Effective January 1, 2003, the Companys method of accounting for landfill closure and
post-closure as well as landfill final capping, changed as a result of its adoption of SFAS No. 143. SFAS No. 143 does not change the basic landfill accounting that the Company and others in the industry have followed historically. Through December
31, 2002, the waste industry generally recognized expenses associated with (1) amortization of capitalized and future landfill asset costs and (2) future closure and post-closure obligations on a units-of-consumption basis as airspace was consumed
over the life of the related landfill.



This
practice, referred to as lifecycle accounting within the waste industry, continues to be followed. The table below compares the Companys historical practices and current practices of accounting for landfill final capping, closure and
post-closure activities.



|              |  |                                                                                                                                                                                                                                           |  |                                                                                                            
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------
|Description   |  | Historical Practice                                                                                                                                                                                                                       |  | Current Practice (Effective January 1, 2003)                                                               
|Definitions:  |  |                                                                                                                                                                                                                                           |  |                                                                                                            
|              |  |                                                                                                                                                                                                                                          
|Final Capping |  | Capital asset related to installation of flexible membrane and geosynthetic clay liners, drainage and compacted soil layers and topsoil constructed over areas of landfill where total airspace
capacity has been consumed                |  | Reflected as an asset retirement obligation, on a discounted basis, rather than a capital asset            
|              |  |                                                                                                                                                                                                                                          
|Closure       |  | Includes last final capping event, final portion of methane gas collection system to be constructed, demobilization, and the routine maintenance costs incurred after site ceases to accept waste,
but prior to being certified as closed |  | No change, except that last final capping event of each landfill will be treated as a part of final capping



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



|                                       |  |                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Description                            |  | Historical Practice                                                                                                                                                                                                                                                  |  | Current Practice (Effective January 1, 2003)                                                                                                                                                                                                                                                                                                                                                                            
|Post-closure                           |  | Includes routine monitoring and maintenance of a landfill after it has closed, ceased to accept waste and been certified as closed by the applicable state regulatory agency                                                                                         |  | No change                                                                                                                                                                                                                                                                                                                                                                                                               
|                                       |  |                                                                                                                                                                                                                                                                     
|Discount Rate:                         |  | Landfill final capping, closure and post-closure obligations were not discounted                                                                                                                                                                                     |  | Obligations discounted at a credit-adjusted, risk-free rate (8.0% at January 1, 2003)                                                                                                                                                                                                                                                                                                                                   
|                                       |  |                                                                                                                                                                                                                                                                     
|Cost Estimates:                        |  | Costs were estimated based on performance, principally by third parties, with a small portion performed by the Company                                                                                                                                               |  | No change, except that the cost of any activities performed internally must be increased to represent an estimate of the amount a third party would charge to perform such
activity                                                                                                                                                                                                                                     
|                                       |  |                                                                                                                                                                                                                                                                     
|Inflation:                             |  | Landfill final capping, closure and post-closure liabilities were not inflated to period of performance                                                                                                                                                              |  | Inflation rate of 2.5% effective January 1, 2003                                                                                                                                                                                                                                                                                                                                                                        
|                                       |  |                                                                                                                                                                                                                                                                     
|Recognition of Assets and Liabilities: |  |                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                       |  |                                                                                                                                                                                                                                                                     
|Final Capping                          |  | Costs were capitalized as spent, except for the last final capping event that occurs after the landfill closes, which was accounted for as part of closure; spending was included in capital
expenditures within investing activities in the statement of cash flows |  | All final capping is recorded as a liability and asset as airspace is consumed; the discounted cash flow associated with each final capping event is recorded to the accrued liability with a
corresponding increase to landfill assets as airspace is consumed related to the specific final capping event; spending is reflected as a change in liabilities within operating activities in the statement of cash flows
|                                       |  |                                                                                                                                                                                                                                                                     
|Statement of Operations Expense:       |  |                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                       |  |                                                                                                                                                                                                                                                                     
|Liability accrual                      |  | Expense charged to cost of operations at same amount accrued to liability                                                                                                                                                                                            |  | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                          
|                                       |  |                                                                                                                                                                                                                                                                     
|Landfill asset amortization            |  | Not applicable for landfill closure and post-closure obligations                                                                                                                                                                                                     |  | Landfill asset is amortized to depreciation and amortization expense as airspace is consumed over life of specific final capping event or life of landfill for closure and
post-closure                                                                                                                                                                                                                                 
|                                       |  |                                                                                                                                                                                                                                                                     
|Accretion                              |  | Not applicable as landfill final capping, closure and post-closure obligations were not discounted                                                                                                                                                                   |  | Expense, charged to cost of operations, is accreted at credit-adjusted, risk-free rate (8.0%) under the effective interest method                                                                                                                                                                                                                                                                                       



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



m. Self Insurance
ReservesThe Company assumes the risks for medical and dental insurance exposures up to certain loss thresholds set forth in separate insurance contracts. The Company has established self-insurance reserves for these risks, which are
estimated based on evaluations performed by independent third parties.



n. Earnings Per ShareBasic earnings per share computations are based on the weighted-average common stock outstanding. Diluted earnings per share include the dilutive effect of stock options using
the treasury stock method. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the combined weighted average number of
common shares and common share equivalents outstanding that include, where appropriate, the assumed exercise of employee stock options. In computing diluted earnings per share, the Company utilizes the treasury stock method.



Earnings per share is calculated as follows (in thousands, except per share
amounts):



|                                                                                                 |  |                         |        |      |   |        |  |   |       
|------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                                                 |  | Year Ended December 31,
|                                                                                                 |  | 2001                    |        | 2002 |   | 2003  
|Numerator:                                                                                       |  |                         |        |      |   |        |  |   |       
|Net income                                                                                       |  | $                       | 7,382  |      | $ | 10,962 |  | $ | 7,823 
|                                                                                                 |  |                         |        |      |   |        |  |   |       
|Denominator:                                                                                     |  |                         |        |      |   |        |  |   |       
|Denominator for basic earnings per share                                                         |  |                         | 13,286 |      |   | 13,336 |  |   | 13,439
|Effect of dilutive securities - option to purchase common stock                                  |  |                         | 56     |      |   | 15     |  |   | 119   
|                                                                                                 |  |                         |        |      |   |        |  |   |       
|Denominator for diluted earnings per share                                                       |  |                         | 13,342 |      |   | 13,351 |  |   | 13,558
|                                                                                                 |  |                         |        |      |   |        |  |   |       
|Basic earnings per share                                                                         |  | $                       | 0.56   |      | $ | 0.82   |  | $ | 0.58  
|                                                                                                 |  |                         |        |      |   |        |  |   |       
|Diluted earnings per share                                                                       |  | $                       | 0.55   |      | $ | 0.82   |  | $ | 0.58  
|                                                                                                 |  |                         |        |      |   |        |  |   |       
|Antidulitive options to purchase common stock not included in the earnings per share calculation |  |                         | 348    |      |   | 365    |  |   | 183   
|                                                                                                 |  |                         |        |      |   |        |  |   |       



o. DividendsThe Company declared its first semi-annual cash dividend in 2003 and intends to pay dividends based on sufficient cash available to effect the dividend without impeding the Companys ability to pay its
debts as they become due in the usual course of business.



p.Stock Option PlanThe Company accounts for employee stock compensation in accordance with APB No. 25, Accounting For Stock Issued To Employees. Under APB No. 25, the total compensation
expense, which is recognized over the vesting period of the award, is equal to the intrinsic value at the measurement date, which is the first date that both the exercise price and number of shares to be issued is known.



SFAS No. 123, Accounting For Stock-based
Compensation, requires disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the options awarded. Companies are, however, permitted
to continue to apply APB No. 25. The Company discloses the information required by SFAS No. 123 (see Note 14).



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



Had compensation cost for the Companys stock been
determined based on the fair value at the grant dates for awards under the stock plan consistent with the method of SFAS No. 123, the Companys net income and earnings per share for the years ended December 31, 2001, 2002 and 2003 would have
been reduced to the pro forma amounts indicated below (in thousands, except per share data):



|                                                                                              |  |      |       |      |   |        |  |   |      
|--------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------ |  | - | -----
|                                                                                              |  | 2001 |       | 2002 |   | 2003  
|Net Income:                                                                                   |  |      |       |      |   |        |  |   |      
|As reported                                                                                   |  | $    | 7,382 |      | $ | 10,962 |  | $ | 7,823
|Deducttotal stock based compensation determined under fair value based method for all awards |  |      | 598   |      |   | 755    |  |   | 542  
|                                                                                              |  |      |       |      |   |        |  |   |      
|Pro forma  for SFAS No. 123                                                                  |  | $    | 6,784 |      | $ | 10,207 |  | $ | 7,281
|                                                                                              |  |      |       |      |   |        |  |   |      
|Earnings Per Share:                                                                           |  |      |       |      |   |        |  |   |      
|Basic:                                                                                        |  |      |       |      |   |        |  |   |      
|As reported                                                                                   |  | $    | 0.56  |      | $ | 0.82   |  | $ | 0.58 
|Pro forma  for SFAS No. 123                                                                  |  | $    | 0.51  |      | $ | 0.77   |  | $ | 0.54 
|                                                                                              |  |      |      
|Diluted:                                                                                      |  |      |       |      |   |        |  |   |      
|As reported                                                                                   |  | $    | 0.55  |      | $ | 0.82   |  | $ | 0.58 
|Pro forma  for SFAS No. 123                                                                  |  | $    | 0.51  |      | $ | 0.76   |  | $ | 0.54 



The
fair value of options granted under the Companys stock plan during 2001, 2002 and 2003 was estimated on the Black-Scholes option-pricing model using the following assumptions:



|                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                          |  | 2001 |       |   | 2002 |   |       | 2003 | 
|Weighted-average grant-date fair value of options granted |  | $    | 3.18  |   |      | $ | 3.19  |      |  | $ | 6.71  |  
|Weighted- average expected lives (years)                  |  |      | 5.00  |   |      |   | 5.00  |      |  |   | 5.00  |  
|Risk-free interest rate                                   |  |      | 4.64  | % |      |   | 4.58  | %    |  |   | 2.98  | %
|Volatility                                                |  |      | 50.58 | % |      |   | 50.91 | %    |  |   | 48.30 | %



q. Revenue Recognition and Deferred RevenueThe Company recognizes collection, transfer, recycle and disposal revenues as the services are provided. Certain customers are billed in advance and, accordingly, recognition of
the related revenues is deferred until the services are provided. Revenues from the sale of recycled materials and finished products are recognized upon shipment.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



r. Segment InformationThe Company
identifies its operating segments based on geographical location. The Company considers each of its four divisions that report stand-alone financial information and have division managers that report to the Companys Chief Operating Officer to
be an operating segment; however, all operating segments have been aggregated together and are reported as a single segment consisting of the collection, transfer, recycling and disposal of non-hazardous solid waste primarily in the Southeastern
United States. At December 31, 2003, the Company has 241 municipal contracts which approximate $81.0 million of annualized revenue. Percentages of our total revenue attributable to services provided are as follows:



|                      |  |                         |   |  |      |   |  |      |  
|--------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                      |  | Year Ended December 31, |  
|                      |  | 2001                    |   |  | 2002 |   |  | 2003 |  
|Collection:           |  |                         |   |  |      |   |  |      |  
|Residential           |  | 23                      | % |  | 23   | % |  | 22   | %
|Commercial            |  | 26                      | % |  | 27   | % |  | 27   | %
|Industrial            |  | 30                      | % |  | 29   | % |  | 31   | %
|Disposal and transfer |  | 15                      | % |  | 16   | % |  | 15   | %
|Recycling             |  | 1                       | % |  | 1    | % |  | 1    | %
|Other                 |  | 5                       | % |  | 4    | % |  | 4    | %
|                      |  |                         |   |  |      |   |  |      |  
|Total service revenue |  | 100                     | % |  | 100  | % |  | 100  | %
|                      |  |                         |   |  |      |   |  |      |  



s. Income Taxes In accordance with the provisions of SFAS No. 109, Accounting For Income Taxes, deferred income taxes (benefits) are provided on temporary differences between financial statement carrying values
and the tax basis of assets and liabilities.



t. New Accounting PronouncementsIn June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which was adopted by the Company on January 1, 2003. See Note 1 (k).



Effective January 1, 2002, the Company adopted the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and Accounting
Principles Board (APB) No. 30, Reporting the Results of OperationReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived assets and how the results of a discontinued operation are to be measured and presented. The adoption of SFAS No. 144 did not have an impact on the Companys
financial condition or results of operations.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in APB Opinion No. 30. Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entitys recurring operations from those that are unusual and
infrequent and meet the criteria for classification as an extraordinary item. SFAS No. 145 was effective for the Company beginning January 1, 2003. The adoption of SFAS No. 145 had no impact on the Companys financial condition or results of
operations.



In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities, such as restructurings, involuntarily terminating
employees, and consolidating facilities initiated after December 31, 2002. The adoption of SFAS No. 146 had no impact on the Companys financial condition or results of operations.



Effective September 27, 2002, the Company adopted the provisions of SFAS No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation. This statement was issued to provide alternative methods of transition for a voluntary change to the fair
value based method of



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



accounting for stock-based compensation. In addition, this statement amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results
(see Note 1.p.). The amendments to the disclosure requirements of SFAS No. 123 were effective for financial statements for fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 did not have an impact on the Companys
financial condition or results of operations.



In November 2002, the FASB issued FASB Interpretation (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. It clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The objective of the initial measurement of the liability is the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of FIN 45
are effective for the Company on a prospective basis to guarantees issued or amended after December 31, 2002. The Company will record the fair value of future material guarantees, if any. The adoption of FIN 45 had no significant impact on the
Companys financial condition or results of operations.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.The statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15,
2003. In November 2003, the FASB issued a FASB Staff Position delaying the effective date for certain instruments and entities. SFAS No. 150 had no impact on the Companys financial condition and results of operations.



u. New Accounting Pronouncements Not Yet
Adopted In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 addresses consolidation by business enterprises of variable interest entities (VIEs) (1) that do not have sufficient
equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but
prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the Companys first quarter of 2004. VIEs
created after January 1, 2004 must be accounted for under the Revised Interpretations. Special Purpose Entities (SPEs) created prior to February 1, 2003 may be accounted for under the original or Revised Interpretations provisions
no later than December 31, 2003. Non-SPEs created prior to February 1, 2003, should be accounted for under the Revised Interpretations provisions no later than the Companys first quarter of 2004. The Company has not entered into any
arrangements with VIEs created after January 31, 2003 nor had the Company created any SPEs prior to February 1, 2003. Additionally, the Company had not entered into any VIEs, prior to February 1, 2003, therefore the adoption of FIN 46 had no impact
on its results of operations and financial condition.



v. PresentationCertain 2001 and 2002 financial statement amounts have been reclassified to conform with the 2003 presentation.



w. Concentrations of Credit RiskFinancial instruments that potentially subject the Company to
concentrations of credit risks consist primarily of accounts receivable. The Company does not require collateral on its trade receivables. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the
Companys customer base. The Company establishes an allowance for doubtful accounts based on payment performance factors, historical trends and other information.



x. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents,
receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of these instruments. The fair value of the Companys fixed rate facilities with Prudential Insurance Company of America using an estimate of
interest rates currently available to the Company is $57.4 million at December 31, 2003. The carrying value of the secured notes is $50.0 million at December 31, 2003. The carrying amounts of the Companys remaining bank facility, bonds and
other installment notes payable approximate fair value because interest rates are primarily variable and, accordingly, approximate current market rates.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES(Continued)
|-- | ---------------------------------------------------------



y. Allocation of Acquisition Purchase Price 
Acquisition purchase price is allocated to identified intangible assets and tangible assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. The
purchase price allocations are considered preliminary until the Company is no longer waiting for information that it has arranged to obtain and that is known to be available or obtainable. Although the time required to obtain the necessary
information will vary with circumstances specific to an individual acquisition, the allocation period for finalizing purchase price allocations generally does not exceed one year from the consummation of a business combination.



- The Company often consummates single acquisitions of solid
waste collection or disposal operations. For each separately identified solid waste collection or disposal operation acquired in a single acquisition, the Company performs an initial allocation of total purchase price to the acquired operation based
on its relative fair value. Following this initial allocation of total purchase price to the acquired operation, the Company further allocates the identified intangible assets and tangible assets acquired and liabilities assumed for each solid waste
collection or disposal operation based on its estimated fair value at the dates of acquisition, with any residual amounts allocated to either goodwill or landfill site costs, as discussed above.



- The Company accrues the payment of contingent purchase price if the events
surrounding the contingency are deemed assured beyond a reasonable doubt. Contingent purchase price related to solid waste collection or disposal operations is allocated to goodwill.



|2. | BUSINESS ACQUISITIONS AND DISPOSITION
|-- | -------------------------------------



Purchase Transactions During 2002 and 2003 the Company acquired eight and six waste collection
and disposal service businesses, respectively, to expand its operations. The assets acquired and liabilities assumed were accounted for by the purchase method of accounting and included the following (in thousands):



|                                            |  |      |       |   |      |   |        |  
|------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|                                            |  | 2002 |       |   | 2003 |  
|Tangible Net Assets Acquired at Fair Value: |  |      |       |   |      |   |        |  
|Accounts receivable                         |  | $    | 45    |   |      | $ | 2,735  |  
|Property and equipment                      |  |      | 2,363 |   |      |   | 9,646  |  
|Liabilities assumed                         |  |      | (150  | ) |      |   | (3,354 | )
|                                            |  |      |       |   |      |   |        |  
|Total net tangible assets acquired          |  |      | 2,258 |   |      |   | 9,027  |  
|                                            |  |     
|Intangible Assets Acquired at Fair Value:   |  |      |       |   |      |   |        |  
|Customer lists                              |  |      | 710   |   |      |   | 3,907  |  
|Contracts                                   |  |      | 13    |   |      |   | 15     |  
|Goodwill                                    |  |      | 3,112 |   |      |   | 27,540 |  
|                                            |  |      |       |   |      |   |        |  
|Total net assets acquired at fair value     |  | $    | 6,093 |   |      | $ | 40,489 |  
|                                            |  |      |       |   |      |   |        |  



On
April 1, 2002, the Company acquired commercial routes and related assets from Hudgins Disposal, Inc. for approximately $400,000 in cash. This tuck-in acquisition further expands the Companys existing operations in the Nashville, Tennessee
market.



On April 16, 2002, the Company
acquired the assets of Georgia Waste and Recycling Service, LLC and GWS Waste Services, Inc. for approximately $2.4 million in cash. This tuck-in acquisition to the Companys existing Atlanta operations provides residential curbside and
recycling service to the east and northeast counties of the metro Atlanta area.



On April 17, 2002, the Company acquired the assets of American Disposal Service, LLC, related to its roll-off construction business
located in the Memphis, Tennessee area, for approximately $300,000 in cash. This acquisition of hauling services is a tuck-in to existing operations in the Memphis, Tennessee market.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|2. | BUSINESS ACQUISITIONS AND DISPOSITION (Continued)
|-- | --------------------------------------------------



On May 1, 2002, the Company acquired the assets of North and
South Sanitation for approximately $100,000 in cash. This tuck-in acquisition provides rural residential routes to the Companys existing Raleigh and Wilson, North Carolina operations.



On June 19, 2002, the Company acquired the assets of Pelican
Container Service, LLC for approximately $100,000 in cash. This tuck-in acquisition, which provides industrial hauling service in the southern coastal counties of North Carolina, expands the Companys customer base in the Companys
existing operations in the Wilmington, North Carolina market.



On October 31, 2002, the Company acquired the assets of Hammock Sanitation for approximately $100,000 in cash. This acquisition of residential and commercial routes is a tuck-in to the Companys existing
Crossville, Tennessee operations.



On December
1, 2002, the Company acquired the assets of S & W Sanitation, located in eastern North Carolina, for approximately $50,000 in cash. This tuck-in of residential routes will add density to the Companys existing operations in Wilson, North
Carolina.



On December 3, 2002, the Company
acquired the assets of Kelletts Garbage, Inc., located in the Greenville, South Carolina area, for approximately $2.7 million in cash. This acquisition of residential, recycling and commercial services expands existing services in the
Companys Easley, South Carolina operations.



Effective January 1, 2003, the Company acquired Patriot Waste Systems for approximately $4.8 million in cash and stock. This tuck-in acquisition provides commercial and industrial waste collection services to the Companys existing
operations in the Greensboro and Graham, North Carolina markets.



On June 1, 2003, the Company purchased Kleen Way Sanitation for approximately $204,000 in cash. This tuck-in acquisition of residential routes expands the Companys customer base in the Companys existing
Wilson, North Carolina operations.



On June
30, 2003, the Company acquired All American Waste Management, Inc. for approximately $695,000 in cash. This acquisition of residential services is a tuck-in to the Companys existing operations in the northern Metro Atlanta market.



On August 1, 2003, the Company acquired collection
operations in Norfolk, Virginia and Clarkesville, Tennessee for approximately $32.2 million in cash from Allied Waste Industries. This acquisition is a tuck-in to existing operations in Norfolk, Virginia and is a new market entrance in Clarksville,
Tennessee. Simultaneously, the Company sold to Allied Waste Industries collection operations in Charlotte, North Carolina, Sumter, South Carolina, Mobile, Alabama and Biloxi, Mississippi for $16.3 million in cash.



On August 21, 2003, the Company acquired Waste Watchers for
approximately $2.6 million in cash. This acquisition is a tuck-in to the Companys existing operations in Summerville, South Carolina and provides commercial, industrial and residential waste collection services.



These acquisitions were funded with proceeds from borrowings
under the Companys senior credit facility and the issuance of Company common stock with a fair value of approximately $0.7 million.



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|2. | BUSINESS ACQUISITIONS AND DISPOSITION (Continued)
|-- | --------------------------------------------------



The following unaudited pro forma results of operations
assume the transactions described above occurred as of January 1, 2001 after giving effect to certain adjustments, including the amortization of the excess of cost over the underlying assets (in thousands except per share data):



|                                                                    |  |                                       |         |      |   |         |  |   |        
|------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                                    |  | 2001                                  |         | 2002 |   | 2003   
|                                                                    |  | (In Thousands, Except Per Share Data)
|Total revenues                                                      |  | $                                     | 273,283 |      | $ | 273,569 |  | $ | 283,193
|Operating income                                                    |  |                                       | 32,905  |      |   | 33,328  |  |   | 27,802 
|Income before cumulative effect of a change in accounting principle |  |                                       | 11,793  |      |   | 13,612  |  |   | 10,324 
|Cumulative effect of a change in accounting principle               |  |                                       |        |      |   |        |  |   | 1,067  
|                                                                    |  |                                       |         |      |   |         |  |   |        
|Net income                                                          |  | $                                     | 11,793  |      | $ | 13,612  |  | $ | 9,257  
|Earnings per common share:                                          |  |                                       |         |      |   |         |  |   |        
|Basic:                                                              |  |                                       |         |      |   |         |  |   |        
|Before cumulative effect of a change in accounting principle        |  | $                                     | 0.89    |      | $ | 1.02    |  | $ | 0.77   
|Cumulative effect of a change in accounting principle               |  |                                       |        |      |   |        |  |   | 0.08   
|                                                                    |  |                                       |         |      |   |         |  |   |        
|Net income                                                          |  | $                                     | 0.89    |      | $ | 1.02    |  | $ | 0.69   
|Diluted:                                                            |  |                                       |         |      |   |         |  |   |        
|Before cumulative effect of a change in accounting principle        |  | $                                     | 0.88    |      | $ | 1.02    |  | $ | 0.76   
|Cumulative effect of a change in accounting principle               |  |                                       |        |      |   |        |  |   | 0.08   
|                                                                    |  |                                       |         |      |   |         |  |   |        
|Net income                                                          |  | $                                     | 0.88    |      | $ | 1.02    |  | $ | 0.68   



The
pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transactions taken place at the beginning of the periods presented or of future operating results.



|3. | PROPERTY AND EQUIPMENT
|-- | ----------------------



Property and equipment consisted of the following at December 31, 2002 and 2003 (in thousands):



|                                      |  |      |         |      |   |        
|------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                      |  | 2002 |         | 2003
|Land, land improvements and buildings |  | $    | 37,809  |      | $ | 39,183 
|Landfills and associated land         |  |      | 78,300  |      |   | 95,870 
|Machinery and equipment               |  |      | 212,193 |      |   | 213,256
|Furniture, fixtures and vehicles      |  |      | 5,496   |      |   | 5,538  
|In-process equipment                  |  |      | 26      |      |   | 544    
|                                      |  |      |         |      |   |        
|Total property and equipment          |  |      | 333,824 |      |   | 354,391
|Less accumulated depreciation         |  |      | 143,870 |      |   | 163,520
|                                      |  |      |         |      |   |        
|Property and equipment, net           |  | $    | 189,954 |      | $ | 190,871
|                                      |  |      |         |      |   |        



In-process equipment
includes equipment not placed in service at year end.



Depreciation expense for the years ended December 31, 2001, 2002 and 2003 was approximately $23,818,000, $24,322,000 and $23,944,000, respectively. Landfill amortization expense was approximately $2,141,000, $3,020,000 and $5,850,000 for
the years ended December 31, 2001, 2002 and 2003, respectively.



Pursuant to the provisions of SFAS No. 144, the Company recorded an impairment charge of approximately $316,000 and $517,000 at December 31, 2002 and 2003, respectively, related to certain excess equipment and
vehicles that have been temporarily taken out of service. The Company determined fair value based on comparable equipment with similar lives.



Landfill costs include land held for development, representing various landfill properties with an aggregate cost of approximately $6.3
million for both periods ended December 31, 2002 and 2003, which is not being amortized.



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|4. | INTANGIBLE ASSETS
|-- | -----------------



Intangible assets primarily consist of goodwill, customer lists and noncompete agreements acquired in business combination. Intangible
assets are net of accumulated amortization. The following table shows the activity related to goodwill as of December 31, 2002 and 2003 (in thousands):



|                                             |  |      |        |   |      |   |         |  
|-------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                                             |  | 2002 |        |   | 2003 |  
|Beginning balance as of January 1,           |  | $    | 66,276 |   |      | $ | 66,985  |  
|Acquisitions                                 |  |      | 3,112  |   |      |   | 27,540  |  
|Post-closure purchase accounting adjustments |  |      | (2,403 | ) |      |   | 1,693   |  
|Dispositions                                 |  |      |        |   |      |   | (10,261 | )
|                                             |  |      |        |   |      |   |         |  
|Ending balance as of December 31,            |  | $    | 66,985 |   |      | $ | 85,957  |  
|                                             |  |      |        |   |      |   |         |  



In addition, other
intangible assets consisted of the following as of December 31, 2002 and 2003 (in thousands):



|               |  |                      |       |                          |   |                    |  |   |      
|-------------- |  | -------------------- | ----- | ------------------------ | - | ------------------ |  | - | -----
|               |  | 2002                
|               |  | Gross Carrying Value |       | Accumulated Amortization |   | Net CarryingValue 
|Customer lists |  | $                    | 710   |                          | $ | 39                 |  | $ | 671  
|Noncompete     |  |                      | 1,165 |                          |   | 1,030              |  |   | 135  
|               |  |                      |       |                          |   |                    |  |   |      
|               |  | $                    | 1,875 |                          | $ | 1,069              |  | $ | 806  
|               |  |                      |       |                          |   |                    |  |   |      
|               | 
|               |  | 2003                
|               |  | Gross Carrying Value |       | Accumulated Amortization |   | Net Carrying Value
|Customer lists |  | $                    | 4,617 |                          | $ | 501                |  | $ | 4,116
|Noncompete     |  |                      | 1,165 |                          |   | 1,116              |  |   | 49   
|               |  |                      |       |                          |   |                    |  |   |      
|               |  | $                    | 5,782 |                          | $ | 1,617              |  | $ | 4,165
|               |  |                      |       |                          |   |                    |  |   |      



Amortization expense for other intangible assets was $171,000, $186,000 and $561,000 for each of the years ended 2001, 2002 and 2003, respectively. The weighted average amortization period for customer lists and noncompete agreements is 5
years.



Estimated future amortization expense
associated with customer lists and noncompete agreements at December 31, 2003 is as follows (in thousands):



|           |  |                      |      
|---------- |  | -------------------- | -----
|Year       |  | Amortization Expense
|2004       |  | $                    | 729  
|2005       |  |                      | 722  
|2006       |  |                      | 721  
|2007       |  |                      | 678  
|2008       |  |                      | 398  
|Thereafter |  |                      | 917  
|           |  |                      |      
|Total      |  | $                    | 4,165
|           |  |                      |      



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|4. | INTANGIBLE ASSETS (Continued)
|-- | ------------------------------



In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of previously reported
net income and per share amounts adjusted for the exclusion of goodwill net of the related income tax effect is as follows (in thousands, except per share amounts):



|                                                                |  |                         |       |      |   |        |  |   |      
|--------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------ |  | - | -----
|                                                                |  | YEAR ENDED DECEMBER 31,
|                                                                |  | 2001                    |       | 2002 |   | 2003  
|Reported net income                                             |  | $                       | 7,382 |      | $ | 10,962 |  | $ | 7,823
|Add back goodwill amortization, net of income taxes of $958,000 |  |                         | 1,588 |      |   |       |  |   |     
|                                                                |  |                         |       |      |   |        |  |   |      
|Adjusted net income                                             |  | $                       | 8,970 |      | $ | 10,962 |  | $ | 7,823
|                                                                |  |                         |       |      |   |        |  |   |      
|Basic Earnings Per Common Share:                                |  |                         |       |      |   |        |  |   |      
|Reported net income                                             |  | $                       | 0.56  |      | $ | 0.82   |  | $ | 0.58 
|Add back goodwill amortization, net of taxes                    |  |                         | 0.12  |      |   |       |  |   |     
|                                                                |  |                         |       |      |   |        |  |   |      
|Adjusted net income                                             |  | $                       | 0.68  |      | $ | 0.82   |  | $ | 0.58 
|                                                                |  |                         |       |      |   |        |  |   |      
|Diluted Earnings Per Common Share:                              |  |                         |       |      |   |        |  |   |      
|Reported net income                                             |  | $                       | 0.55  |      | $ | 0.82   |  | $ | 0.58 
|Add back goodwill amortization, net of taxes                    |  |                         | 0.12  |      |   |       |  |   |     
|                                                                |  |                         |       |      |   |        |  |   |      
|Adjusted net income                                             |  | $                       | 0.67  |      | $ | 0.82   |  | $ | 0.58 
|                                                                |  |                         |       |      |   |        |  |   |      



|5. | LONG-TERM DEBT
|-- | --------------



Long-term debt consisted of the following at December 31, 2002 and 2003 (in thousands):



|                                                                                                                                          |  |      |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                          |  | 2002 |         | 2003
|Credit Facilities:                                                                                                                        |  |      |         |      |   |        
|Term facility                                                                                                                             |  | $    | 60,714  |      | $ | 50,000 
|Revolving credit facility                                                                                                                 |  |      | 60,000  |      |   | 78,000 
|Bonds                                                                                                                                     |  |      | 30,855  |      |   | 40,355 
|Other installment notes payable, interest ranging from 1% to 7%                                                                           |  |      | 980     |      |   |       
|Present value of noncompete agreement liabilities with the former shareholders of businesses acquired due in various monthly
installments |  |      | 36      |      |   | 25     
|                                                                                                                                          |  |      |         |      |   |        
|Total                                                                                                                                     |  |      | 152,585 |      |   | 168,380
|Less current portion                                                                                                                      |  |      | 11,710  |      |   | 10,723 
|                                                                                                                                          |  |      |         |      |   |        
|Long-term portion                                                                                                                         |  | $    | 140,875 |      | $ | 157,657
|                                                                                                                                          |  |      |         |      |   |        



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|5. | LONG-TERM DEBT  (Continued)
|-- | ----------------------------



The Company and all of its subsidiaries are co-borrowers on a revolving credit agreement with a syndicate of
lending institutions for which Fleet National Bank, N.A. (Fleet) acts as agent. On August 27, 2003, the Company amended and extended this credit facility which provides up to $175 million through February 2007. Virtually all of the
assets of the Company and its subsidiaries, including the Companys ownership interest in the equity securities of its subsidiaries, secure the Companys obligations under the Fleet credit facility. Pursuant to an intercreditor agreement
with Fleet, Prudential Insurance Company of America (Prudential) shares in the collateral pledged under the Fleet credit facility. The Fleet credit facility bears interest at a rate per annum equal to, at the Companys option,
either a Fleet base rate or at the Eurodollar rate (based on Eurodollar interbank market rates) plus, in each case, a percentage rate that fluctuates, based on the ratio of the Companys funded debt to EBITDA (income before income taxes plus
interest expense and depreciation and amortization), from 0.25% to 1.25% for base rate borrowings and 1.75% to 2.75% for Eurodollar rate borrowings. The Fleet facility requires the Company to maintain certain financial ratios and satisfy other
predetermined requirements, such as minimum net worth, net income, and limits on capital expenditures and indebtedness. It also requires the lenders approval of acquisitions in some circumstances. As of December 31, 2003, $78.0 million was
outstanding under the Fleet credit facility, and the average interest rate on outstanding borrowings was approximately 3.4%.



The Prudential term loan facility consists of three term loans of $25 million each. As of December 31, 2003, the Company had fully drawn
three of the Prudential $25 million term facilities. In 2000 the Company began principal repayments on the first $25 million term facility. The Prudential credit facilities require the Company to maintain certain financial ratios, such as debt to
earnings and fixed charges to earnings, and satisfy other predetermined requirements, such as minimum net worth and net income. In addition, the Companys subsidiaries have guaranteed the Companys obligations under the Prudential term
loan facilities. Interest on the three Prudential term facilities is paid quarterly, based on fixed rates of 7.53%, 7.21% and 7.09%, respectively. Of the Companys Prudential facilities, $10.7 million fully mature by April 2006, $17.9 million
fully mature by June 2008, and $21.4 million fully mature by February 2009, subject to renewal.



The Company entered into a $9.5 million variable rate demand bond with Sampson County, North Carolina on September 10, 2003 for the
funding of expansion at its landfill in that county which expires in 2023. This issue is in addition to the Companys existing $30.9 million Sampson facility outstanding at December 31, 2003 and expires in 2021. Both bonds are backed by a
letter of credit issued by Wachovia Bank & Trust as a participating lender under our Fleet syndication. The average interest rate on outstanding borrowings under both Sampson facilities was approximately 3.8% and 3.4% at December 31, 2002 and
2003, respectively.



As of December 31, 2003,
the Company was in compliance with all covenants and restrictions relating to all outstanding borrowings.



Annual aggregate principal maturities at December 31, 2003 were as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 10,723 
|2005       |  |   | 10,722 
|2006       |  |   | 10,723 
|2007       |  |   | 85,143 
|2008       |  |   | 7,143  
|Thereafter |  |   | 43,926 
|           |  |   |        
|Total      |  | $ | 168,380
|           |  |   |        



Based
on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of long-term debt was $160.9 million and $175.8 million at December 31, 2002 and 2003, respectively.



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|6. | LEASES
|-- | ------



The Company leases certain property and equipment under both capital and operating leases. Gross property and equipment recorded under
capital leases was approximately $3.8 million and $1.5 million at December 31, 2002 and 2003, respectively. The related accumulated amortization was approximately $2.1 million and $873,000 at December 31, 2002 and 2003, respectively.



Future minimum lease payments as of December 31, 2003 for
capital and operating leases that have initial or remaining terms in excess of one year are as follows (in thousands):



|                                                                  |  |                |     |                  |   |       |  |   |      
|----------------------------------------------------------------- |  | -------------- | --- | ---------------- | - | ----- |  | - | -----
|                                                                  |  | Capital Leases |     | Operating Leases |   | Total
|2004                                                              |  | $              | 169 |                  | $ | 1,673 |  | $ | 1,842
|2005                                                              |  |                |    |                  |   | 1,454 |  |   | 1,454
|2006                                                              |  |                |    |                  |   | 1,296 |  |   | 1,296
|2007                                                              |  |                |    |                  |   | 1,134 |  |   | 1,134
|2008                                                              |  |                |    |                  |   | 832   |  |   | 832  
|Thereafter                                                        |  |                |    |                  |   | 890   |  |   | 890  
|                                                                  |  |                |     |                  |   |       |  |   |      
|Total minimum lease payments                                      |  | $              | 169 |                  | $ | 7,279 |  | $ | 7,448
|                                                                  |  |                |     |                  |   |       |  |   |      
|Less amount representating interest (ranging from 5.25% to 6.96%) |  |                | 9   |                  |   |       |  |   |      
|                                                                  |  |                |     |                  |   |       |  |   |      
|                                                                  |  |                | 160 |                  |   |       |  |   |      
|Less current portion                                              |  |                | 160 |                  |   |       |  |   |      
|                                                                  |  |                |     |                  |   |       |  |   |      
|Long term capital lease obligation                                |  | $              |    |                  |   |       |  |   |      
|                                                                  |  |                |     |                  |   |       |  |   |      



The
total rental expense for all operating leases for the years ended December 31, 2001, 2002 and 2003 is as follows (in thousands):



|                     |  |      |       |      |   |       |  |   |      
|-------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                     |  | 2001 |       | 2002 |   | 2003 
|Buildings and sites  |  | $    | 1,901 |      | $ | 1,973 |  | $ | 1,700
|Trucks and equipment |  |      | 687   |      |   | 1,126 |  |   | 1,225
|                     |  |      |       |      |   |       |  |   |      
|Total                |  | $    | 2,588 |      | $ | 3,099 |  | $ | 2,925
|                     |  |      |       |      |   |       |  |   |      



|7. | SHAREHOLDERS EQUITY
|-- | --------------------



During 2001, 2002 and 2003, the Company issued 3,722 shares, 3,944 shares and 2,725 shares, respectively, of Company common stock with a
fair value of approximately $24,000, $28,000 and $23,000, respectively, as partial compensation paid to Directors.



F-24



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|7. | SHAREHOLDERS EQUITY  (Continued)
|-- | ----------------------------------



During 2001 and 2003, stock options totaling 216,304 and 51,672 were exercised with net proceeds of approximately $1.1 million and
$335,000, respectively. No stock options were exercised during 2002. In connection with the exercise of 2003 stock options, the Company recorded an income tax benefit of approximately $97,000 as an increase to paid in capital.



In connection with the January 1, 2003 acquisition of
Patriot Waste Systems, 100,000 shares of Company common stock were issued with a fair value of approximately $666,000 as partial consideration of the total $4.8 million purchase price.



On November 4, 2003, the Board of Directors of the Company declared a semi-annual cash dividend of $0.08 per
share, or approximately $1.1 million, to shareholders of record on November 21, 2003. The dividend was paid on December 19, 2003. The Company will pay dividends based on sufficient cash available to effect the dividend without impairing the
Companys ability to pay its debts as they become due in the usual course of business.



See Note 9 regarding shareholder loans.



|8. | DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER COMPREHENSIVE INCOME
(LOSS)
|-- | ----------------------------------------------------------------------



The
Company formally documents its hedge relationships, including identifying the hedge instruments and hedged items, as well as its risk management objectives and strategies for entering into a hedge transaction. The Companys derivative
instruments qualify for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,as amended. In order to qualify for hedge accounting, criteria must be met, including a requirement that both
at inception of the hedge, and on an ongoing basis, the hedging relationship is expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk during the term of the hedge. Under cash flow hedge
accounting, any gains or losses on the derivative instrument are recognized as a separate component of other comprehensive income (loss). When it is determined that a cash flow hedge ceases to be a highly effective hedge, the Company discontinues
hedge accounting, and any gains or losses on the cash flow hedge are recognized in earnings. The Company does not enter into derivative instruments for trading purposes.



Interest Rate Swap



The Company entered into an interest rate swap with Fleet National Bank effective January 1, 2002 to modify the interest characteristics
of its outstanding long-term debt and has designated the qualifying instrument as a cash flow hedge. Under the agreement, the interest rate swap has a notional value of $50.0 million with a fixed interest rate of 4.2%. This agreement expires in
November 2004.



The Company measures
effectiveness of the interest rate swap by its ability to offset cash flows associated with changes in the variable LIBOR rate associated with the Companys Fleet credit facility using the hypothetical derivative method. To the extent the
interest rate swap is considered to be effective, changes in fair value are recorded, net of tax, in shareholders equity as a component of accumulated other comprehensive income (loss). To the extent the instrument is considered ineffective,
any changes in fair value relating to the ineffective portion are immediately recognized in earnings as interest expense. The Fleet interest rate swap was fully effective during the twelve-month period ended December 31, 2003.



The fair value of the Companys interest rate swap is
obtained from a dealer quote. This value represents the estimated amount the Company would receive or pay to terminate the interest rate swap agreement taking into consideration the difference between the contract rate of interest and rates
currently quoted for an agreement of similar term and maturity. The fair value of the interest rate swap agreement was a liability of approximately $2.2 million and $1.2 million at December 31, 2002 and 2003, respectively.



Commodity Swaps



The Company entered into two commodity swap contracts with
Waste Management Trading, LLC effective January 1, 2003 and June 1, 2003, respectively, to hedge its recycling revenue received for old corrugated cardboard (OCC), the pricing of which was volatile in 2003, and has designated the
qualifying instruments as cash flow hedges. The contracts each hedge 18,000 tons of OCC at $70 a ton for a term of five years. The notional amounts hedged under these agreements represent approximately 25% of the Companys OCC volume at
December 31, 2003.



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|8. | DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER COMPREHENSIVE INCOME
(LOSS)  (Continued)
|-- | ------------------------------------------------------------------------------------



The
Company measures effectiveness of the commodity swaps by its ability to offset cash flows associated with changes in the rates received for its monthly OCC volumes. To the extent the commodity swaps are considered to be effective, changes in fair
value of the obligation are recorded, net of tax, in shareholders equity as a component of accumulated other comprehensive income (loss). To the extent the instrument is considered ineffective, any changes in fair value relating to the
ineffective portion are immediately recognized in earnings as a reduction of recycled commodity revenue. The commodity swaps were fully effective for the twelve-month period ended December 31, 2003.



The fair value of the Companys commodity swap contracts was obtained
from a dealer quote. This value represents the estimated amount the Company would receive or pay to terminate the commodity swap contracts taking into consideration the difference between the contract value of the OCC volume and values currently
quoted for agreements of similar term and maturity. The fair value of the commodity swap agreement was a liability of approximately $260,000 at December 31, 2003.



The components of comprehensive income (loss), net of related taxes, are as follows (in thousands):



|                                                                                                                                                       |  |                                  |        |   |      |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ---- | - | ----- | -
|                                                                                                                                                       |  | Twelve Months Ended December 31, |       
|                                                                                                                                                       |  | 2002                             |        |   | 2003 |  
|Net income                                                                                                                                             |  | $                                | 10,962 |   |      | $ | 7,823 |  
|Other comprehensive income -                                                                                                                           |  |                                  |        |   |      |   |       |  
|Unrealized (losses) gains on cash flow hedges, net of deferred income taxes of $853 and ($272) for the twelve months ended 2002 and 2003,
respectively |  |                                  | (1,366 | ) |      |   | 475   |  
|                                                                                                                                                       |  |                                  |        |   |      |   |       |  
|Comprehensive income                                                                                                                                   |  | $                                | 9,596  |   |      | $ | 8,298 |  
|                                                                                                                                                       |  |                                  |        |   |      |   |       |  
|                                                                                                                                                       | 
|                                                                                                                                                       |  | Twelve Months Ended December 31, |       
|                                                                                                                                                       |  | 2002                             |        |   | 2003 |  
|Change in unrealized (losses) gains on cash flow hedges                                                                                                |  | $                                | (842   | ) |      | $ | 1,306 |  
|Less: reclassification adjustment for gains included in net income                                                                                     |  |                                  | (524   | ) |      |   | (831  | )
|                                                                                                                                                       |  |                                  |        |   |      |   |       |  
|Net change in unrealized (losses) gains on qualifying cash flow hedges                                                                                 |  | $                                | (1,366 | ) |      | $ | 475   |  
|                                                                                                                                                       |  |                                  |        |   |      |   |       |  



Changes in the fair
value of derivatives are presented as a component of net cash provided by operating activities in the accompanying consolidated statement of cash flows. The Company estimates that it will reclassify into earnings during 2004 approximately $730,000
in losses on cash flow hedges within net operating results in its 2004 consolidated statements of operations.



|9. | RELATED PARTY TRANSACTIONS
|-- | --------------------------



From December 1999 through April 2002, the Company made loans in each of those years to Lonnie C. Poole, Jr. and Jim W. Perry. The
aggregate principal amount of Mr. Pooles loans is $1,418,000, and the aggregate principal amount of Mr. Perrys loans is $230,000. These loans were made as advances to pay premiums on life insurance policies purchased by Mr. Poole and Mr.
Perry. As a result of the impact of the Sarbanes-Oxley Act and recent tax law changes on the funding requirements of these types of arrangements, on December 31, 2003, the Company entered into an agreement with each of Mr. Poole and Mr. Perry
whereby each officer assigned to the Company his respective insurance policy as partial repayment of his loan and the Company forgave the remainder. As partial repayment, the officers assigned the insurance policies to the Company with cash
surrender values totaling



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|9. | RELATED PARTY TRANSACTIONS  (Continued)
|-- | ----------------------------------------



approximately $530,000. The net forgiveness of approximately $1.1 million is included in selling, general and administrative
expenses in the accompanying consolidated statements of operations, and the cash surrender value realized is included in other noncurrent assets in the accompanying consolidated balance sheets.



In 1998, the Company was offered the opportunity to purchase
two tracts of land that had potential as a regional solid waste disposal facility. The Company had been seeking for a landfill site and this land was one of several sites it was considering. The owners of the land were unwilling to extend a long
enough purchase option period to enable the Company to determine the feasibility of the site as a regional solid waste disposal facility and to obtain the necessary franchise and operating permits. The Companys policy is not to acquire
property that has not received the necessary permits for operation. Rather than forego this potential opportunity, management determined that it was in the Companys best interest for an unrelated third party to purchase and hold the land until
such time as it was able to obtain a franchise and permits to build the landfill. After management was unable to identify a third party willing to undertake this endeavor in the very little time available, a limited liability company, or LLC, owned
by a trust controlled by Lonnie C. Poole, III, the Companys Vice President, and Scott J. Poole, sons of Lonnie C. Poole, Jr., purchased the land in December 1998. As is customary for the Company when evaluating disposal sites, it has incurred
normal engineering, legal, marketing, consulting and other due diligence expenses to determine site feasibility, but the Company has no obligation to purchase the site. The costs of acquiring and carrying the site have been borne entirely by the
LLC. If the Company is able to obtain a franchise and all permits necessary to operate the facility, it will have the option to purchase the site from the LLC upon negotiated terms, which terms would be reviewed and approved by a majority of the
Companys disinterested directors and, if deemed necessary, by a majority of disinterested shareholders voting on the transaction, as a condition to any purchase.



In 1998, the Company purchased TransWaste Services, Inc. from Thomas C. Cannon. Mr. Cannon remained
President of TransWaste, one of its wholly-owned subsidiaries, until his resignation effective October 1, 2002. Mr. Cannon was elected to the Companys Board in 2000. At the time of the Companys acquisition of TransWaste from Mr. Cannon,
he owned, and still owns, a 50% interest in a company that is developing a construction and demolition solid waste, or C&D, landfill. Simultaneously with the Companys purchase of TransWaste, and in order for the Company to position
themselves to realize the potential benefit of that future landfill, TransWaste entered into an agreement with Mr. Cannons company where, upon the satisfaction of certain requirements, Mr. Cannons company has the option to sell the
landfill to TransWaste for $8,000,000 or to accept C&D waste from TransWaste or any affiliate, at a per ton rate that is favorable to TransWaste, for ten years or until there is no longer any capacity at the proposed landfill. None of these
requirements have been satisfied, therefore TransWaste has neither acquired, nor is it disposing of waste at, the proposed landfill. If the requirements are met, the terms of this transaction would be reviewed and would require approval by a
majority of the Companys disinterested directors and, if deemed necessary, by a majority of disinterested shareholders voting on the transaction, as a condition to the purchase.



Lonnie C. Poole, III is a member of a limited liability company that owns the building in Raleigh, North
Carolina in which the Company leases its headquarters office space. The lease was entered into in June of 1999 with a term of 10 years. Rental expense related to this lease was approximately $478,000, $487,000 and $497,000 in 2001, 2002 and 2003,
respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The lease is on terms comparable to those with third parties.



|10. | LANDFILLS
|--- | ---------



The Company has material financial commitments for final capping, closure and post-closure obligations with respect to its landfills. The
Company developed its estimates of final capping, closure and post-closure obligations using input from its third party engineers and internal accounting. The Companys estimates are based on its interpretation of current requirements and
proposed regulatory changes and are intended to approximate fair value. Absent quoted market prices, the estimate of fair value should be based on the best available information, including the results of present value techniques in accordance with
Statement of Financial Accounting Concepts, or SFAC, No. 7, Using Cash Flow and Present Value in Accounting Measurements. In general, the Company relies on third parties to fulfill most of its obligations for final capping, closure and
post-closure. Accordingly, the fair market value of these obligations is based upon quoted and actual prices paid for similar work. The Company intends to perform some of these capping, closure and post-closure obligations using internal resources.
Where internal resources are expected to be used to fulfill an asset retirement obligation, the Company has added a profit margin onto the



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|10. | LANDFILLS  (Continued)
|--- | -----------------------



estimated cost of such services to better reflect its fair market value as required by SFAS No. 143. When the Company then performs these services
internally, the added profit margin is recognized as a component of operating income in the period earned. SFAC No. 7 further states that an estimate of fair value should include the price that marketplace participants are able to receive for
bearing the uncertainties in cash flows. However, when utilizing discounted cash flow techniques, reliable estimates of market premiums may not be obtainable. In this situation, SFAC No. 7 indicates that it is not necessary to consider a market risk
premium in the determination of expected cash flows. In the waste industry, there is not an active market that can be utilized to determine the fair value of these activities, as there is no market that exists for selling the responsibility for
final capping, closure and post-closure obligations independent of selling the landfill in its entirety. Accordingly, the Company believes that it is not possible to develop a methodology to reliably estimate a market risk premium and has excluded a
market risk premium from the Companys determination of expected cash flows for landfill asset retirement obligations in accordance with SFAC No. 7.



Once the Company has determined the estimates of final capping, closure and post-closure obligations, the Company then inflates those
costs to the expected time of payment and discounts those expected future costs back to present value. The Company is currently inflating these costs in current dollars until expected time of payment using an inflation rate of 2.5% and is
discounting these costs to present value using a credit-adjusted, risk-free discount rate of 8.0%. The credit-adjusted, risk-free rate is based on the risk-free interest rate adjusted for the Companys credit standing. Management reviews these
estimates at least once per year. Significant changes in future final capping, closure and post-closure cost estimates and inflation rates typically result in both (1) a current adjustment to the recorded liability (and corresponding adjustment to
the landfill asset), based on the landfills capacity that has been consumed, and (2) a change in liability and asset amounts to be recorded prospectively over the remaining capacity of the landfill. Any change related to the capitalized and
future cost of the landfill asset is then recognized in amortization expense prospectively over the remaining capacity of the landfill. Changes in the Companys credit-adjusted, risk-free rate do not change recorded liabilities, but
subsequently recognized obligations are measured using the revised credit-adjusted risk-free rate.



The Company records the estimated fair value of final capping, closure and post-closure obligations for its landfills based on the
landfills capacity that has been consumed through the current period. This liability and corresponding asset is accrued on a per-ton basis. The estimated fair value of each final capping event will be fully accrued when the tons associated
with such capping event have been disposed in the landfill. Additionally, the estimated fair value of total final capping, closure and post-closure costs will be fully accrued for each landfill at the time the site discontinues accepting waste and
is closed. Closure and post-closure accruals consider estimates for methane gas control, leachate management and ground-water monitoring and other operational and maintenance costs to be incurred after the site discontinues accepting waste, which is
generally expected to be for a period of up to 30 years after final site closure. Daily maintenance activities, which include many of these costs, are incurred during the operating life of the landfill and are expensed as incurred. Daily maintenance
activities include leachate disposal; surface water, groundwater, and methane gas monitoring and maintenance; other pollution control activities; mowing and fertilizing the landfill cap; fence and road maintenance; and third party inspection and
reporting costs. For purchased disposal sites, the Company assesses and records present value-based final capping, closure and post-closure obligations at the time the Company assumes such responsibilities. Such liabilities are based on the
estimated final capping, closure and post-closure costs and the percentage of airspace consumed related to such obligations as of the date the Company assumed the responsibility. Thereafter, the Company accounts for the landfill and related final
capping, closure and post-closure obligations consistent with the policy described above.



Interest accretion on final capping, closure and post-closure obligations is recorded using the effective interest method and is recorded
as final capping, closure and post-closure expense, which is included as a component of operating costs in the accompanying consolidated statement of operations.



In the United States, the closure and post-closure obligations are established by the Environmental
Protection Agencys Subtitles C and D regulations, as implemented and applied on a state-by-state basis. The costs to comply with these obligations could increase in the future as a result of legislation or regulation.



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|10. | LANDFILLS  (Continued)
|--- | -----------------------



Assets and liabilities associated with final capping, closure and post-closure costs consisted of the following at the dates presented (in
thousands):



|                                           |  |                   |        |   |                   |   |         |  
|------------------------------------------ |  | ----------------- | ------ | - | ----------------- | - | ------- | -
|                                           |  | December 31,2002  |        |   | December 31,2003  |  
|Landfill assets                            |  | $                 | 78,300 |   |                   | $ | 95,870  |  
|Accumulated landfill airspace amortization |  |                   | (7,953 | ) |                   |   | (19,229 | )
|                                           |  |                   |        |   |                   |   |         |  
|Net landfill assets                        |  | $                 | 70,347 |   |                   | $ | 76,641  |  
|                                           |  |                   |        |   |                   |   |         |  
|                                           |  |                  
|                                           |  | December 31, 2002 |        |   | December 31, 2003 |  
|Final capping                              |  | $                 | 2,716  |   |                   | $ | 5,715   |  
|Closure/post-closure                       |  |                   | 1,306  |   |                   |   | 449     |  
|                                           |  |                   |        |   |                   |   |         |  
|Total liabilities                          |  | $                 | 4,022  |   |                   | $ | 6,164   |  
|                                           |  |                   |        |   |                   |   |         |  
|Current portion                            |  | $                 | 454    |   |                   | $ | 816     |  
|Long term                                  |  |                   | 3,568  |   |                   |   | 5,348   |  
|                                           |  |                   |        |   |                   |   |         |  
|Total liabilities                          |  | $                 | 4,022  |   |                   | $ | 6,164   |  
|                                           |  |                   |        |   |                   |   |         |  



The
changes to landfill liabilities were as follows for the periods presented (in thousands):



|                                                    |  |                                  |       |   |      |   |        |  
|--------------------------------------------------- |  | -------------------------------- | ----- | - | ---- | - | ------ | -
|                                                    |  | Twelve Months Ended December 31, |      
|                                                    |  | 2002                             |       |   | 2003 |  
|Beginning balance                                   |  | $                                | 3,090 |   |      | $ | 4,022  |  
|Cumulative effect of change in accounting principle |  |                                  |      |   |      |   | (112   | )
|Obligations incurred                                |  |                                  | 1,306 |   |      |   | 2,051  |  
|Obligations settled                                 |  |                                  | (361  | ) |      |   | (1,281 | )
|Interest accretion                                  |  |                                  |      |   |      |   | 1,061  |  
|Change in estimate                                  |  |                                  | (13   | ) |      |   | 423    |  
|                                                    |  |                                  |       |   |      |   |        |  
|Ending balance                                      |  | $                                | 4,022 |   |      | $ | 6,164  |  
|                                                    |  |                                  |       |   |      |   |        |  



|11. | BENEFIT PLANS
|--- | -------------



401(k) Profit Sharing And Retirement PlanThe Company has a 401(k) Savings and Retirement Plan and Trust for the benefit of
its full-time employees who have more than one year of service and are over 21 years of age. Employees make contributions to this retirement plan under a 401(k) pre-tax contribution plan and by the Company through 401(k) matching contributions. The
Companys matching contributions to the 401(k) plan were approximately $738,000, $733,000 and $716,000 for the years ended December 31, 2001, 2002 and 2003, respectively. Contributions by the Company are included in operating costs and expenses
in the accompanying consolidated statements of operations.



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|11. | BENEFIT PLANS  (Continued)
|--- | ---------------------------



Self-insured Medical and Dental PlanThe Company has a self-insured plan for employee medical and dental benefits. The plan
covers all full-time employees of the Company beginning on the 91st day of employment. The Company pays a portion of the expenses for its employees and dependents and withholds from employees wages additional amounts to reduce the
Companys expense. As claims are processed, the insurer requests reimbursement funds from the Company. The Company maintains stop loss coverage for the plan at $150,000 per claim, per year. The Companys expense relating to the plan for
2001, 2002 and 2003 was approximately $241,000, $349,000 and $506,000, respectively.



Deferred Compensation PlanThe Company has a deferred compensation plan available for key employees designated by its
Compensation Committee to participate in the plan. A participant may elect to defer up to $20,000 of his annual cash compensation. The Company will match 65% of the amount deferred, up to a maximum of 6% of the participants cash compensation.
The company also may make discretionary contributions. A participant is immediately vested in his contribution. Vesting for the Company contributions begins after the first year and occurs at the rate of 20% annually thereafter. Vesting is not
accelerated by an employees death or the termination of the plan. The Company invests all contributions on behalf of the participant. In connection with this plan, the Company has entered into a split dollar insurance arrangement with the
participants whereby the Company has advanced premiums on a life insurance policy owned by each participant for his benefit. A portion of each premium is treated as an advance to the participant to be repaid from the policy cash values or proceeds
upon termination of the arrangement. The Company has recorded cash surrender values for these policies of approximately $117,000 and $232,000 as a non-current asset and a deferred compensation liability of approximately $174,000 and $256,000 as an
accrued liability at December 31, 2002 and 2003, respectively. The Companys expense relating to the deferred compensation plan for 2001 and 2002 was $39,000 and $57,000, respectively. In 2003, the net cash surrender value of the policies
exceeded the expense by $33,000.



|12. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------



Certain claims and lawsuits arising in the ordinary course of business have been filed or are pending against the Company. In the opinion
of management, all such matters have been adequately provided for, are adequately covered by insurance, or are of such kind that if disposed of unfavorably, would not have a material adverse effect on the Companys financial position or results
of operations.



Landfill 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 by the Company. Closure and post-closure monitoring and
maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. Accruals for closure and post-closure monitoring and maintenance requirements in the United States
consider final capping of the site, site inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operating and maintenance costs to be incurred during the period after the facility closes. Certain of these
environmental costs, principally capping and methane gas control costs, are also incurred during the operating life of the site in accordance with the landfill operation requirements of Subtitle D and the air emissions standards. Reviews of the
future cost requirements for closure and post-closure monitoring and maintenance for the Companys operating landfills by the Companys personnel and consultants are performed at least annually. The impact of changes determined to be
changes in estimates, based on the annual update, are accounted for on a prospective basis.



While the precise amounts of these future obligations cannot be determined, at December 31, 2003, the Company estimates the total landfill
closure and post-closure costs to range from $89.9 million to $91.7 million. The Company provides accruals for these estimated costs as the remaining permitted airspace of landfills is consumed. The Companys estimate of these costs considers
when the costs would actually be paid and factors in inflation and discount rates. At December 31, 2002 and 2003, the Company had accrued approximately $4.0 million and $6.2 million for such costs. Significant revisions in estimated lives of the
Companys landfills or significant increases in our estimates of landfill closure and post closure costs could have a material adverse impact on the Companys financial condition and results of operations.



The Company has an unconditional purchase obligation to
acquire certain fixed assets during 2004 of approximately $1.2 million.



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|13. | LETTERS OF CREDIT
|--- | -----------------



At December 31, 2002 and 2003, the Company had entered into irrevocable letters of credit including performance bonds with available
credit totaling approximately $28.3 million and $36.6 million, respectively. According to the terms of the $175 million Fleet facility, the availability of funds on that facility are reduced by the lesser of outstanding letters of credit or $60
million (See Note 5). At December 31, 2002 and 2003, no amounts have been drawn under the outstanding letters of credit.



|14. | STOCK OPTION PLAN
|--- | -----------------



The Company has a stock plan (the Stock Plan) whereby a total of 1,800,000 shares of common stock are reserved for issuance
under the Stock Plan. The Stock Plan provides for grants of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the Code), to employees (including officers and employee
directors), and the Stock Plan provides for grants of non-qualified options to directors, employees and consultants. The Stock Plan also allows for the grant of stock purchase rights. The Stock Plan is administered by the Compensation Committee of
the Board of Directors. The Stock Plan will terminate in April 2007, unless sooner terminated by the Board of Directors. A summary of the status of the Stock Plan as of December 31, 2001, 2002 and 2003 and changes during the years ending on those
dates is as follows:



OPTION PLAN



|                           |  |          |   |  |                                |      
|-------------------------- |  | -------- | - |  | ------------------------------ | -----
|                           |  | Shares   |   |  | Weighted AverageExercise Price
|Balance, January 1, 2001   |  | 586,067  |   |  | $                              | 11.88
|Granted                    |  | 217,178  |   |  |                                | 6.36 
|Forfeitures                |  | (101,104 | ) |  |                                | 10.25
|Exercised                  |  | (216,304 | ) |  |                                | 5.13 
|                           |  |          |   |  |                                |      
|Balance, December 31 2001  |  | 485,837  |   |  |                                | 12.76
|Granted                    |  | 145,077  |   |  |                                | 6.43 
|Forfeitures                |  | (12,346  | ) |  |                                | 8.28 
|                           |  |          |   |  |                                |      
|Balance, December 31, 2002 |  | 618,568  |   |  |                                | 11.51
|Granted                    |  | 200,388  |   |  |                                | 6.63 
|Forfeitures                |  | (154,148 | ) |  |                                | 16.65
|Exercised                  |  | (51,672  | ) |  |                                | 6.48 
|                           |  |          |   |  |                                |      
|Balance, December 31, 2003 |  | 613,136  |   |  | $                              | 8.95 
|                           |  |          |   |  |                                |      



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|14. | STOCK OPTION PLAN  (Continued)
|--- | -------------------------------



The following table summarizes information about the Companys Stock Plan at December 31, 2003:



|                         |  |                              |  |                                                        |  |                                |       |             |         |  |   |      
|------------------------ |  | ---------------------------- |  | ------------------------------------------------------ |  | ------------------------------ | ----- | ----------- | ------- |  | - | -----
|Range of Exercise
Prices |  | Number of Shares Outstanding |  | Weighted Average Remaining Contractual Life (In Years) |  | WeightedAverage Exercise Price |       | Exercisable
|                         |  |                              |  | Number of Shares                                       |  | WeightedAverageExercise Prices
|$6.10 - $6.94            |  | 385,859                      |  | 3.31                                                   |  | $                              | 6.48  |             | 135,198 |  | $ | 6.43 
|$7.21 - $8.25            |  | 49,381                       |  | 4.14                                                   |  | $                              | 7.37  |             | 7,823   |  | $ | 8.07 
|$11.00 - $12.10          |  | 70,809                       |  | 1.25                                                   |  | $                              | 11.17 |             | 66,634  |  | $ | 11.17
|$15.25 - $16.78          |  | 57,087                       |  | 0.89                                                   |  | $                              | 16.64 |             | 57,087  |  | $ | 16.64
|$17.88                   |  | 50,000                       |  | 5.50                                                   |  | $                              | 17.88 |             | 50,000  |  | $ | 17.88
|                         |  |                              |  |                                                        |  |                                |       |             |         |  |   |      
|                         |  | 613,136                      |  |                                                        |  |                                |       |             | 316,742 |  |   |      
|                         |  |                              |  |                                                        |  |                                |       |             |         |  |   |      



|15. | INCOME TAXES
|--- | ------------



Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to temporary differences between financial statement carrying values and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.



The balance of
deferred income tax assets and liabilities at December 31, 2002 and 2003 are as follows (in thousands):



|                                                               |  |      |         |   |      |   |         |  
|-------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                               |  | 2002 |         |   | 2003 |  
|Current deferred income tax assets (liabilities) relate to:    |  |      |         |   |      |   |         |  
|Allowance for bad debts                                        |  | $    | 835     |   |      | $ | 996     |  
|Accrued vacation                                               |  |      | 254     |   |      |   | 337     |  
|Interest rate swap                                             |  |      |        |   |      |   | 442     |  
|Other accruals not currently deductible                        |  |      | 8       |   |      |   | 10      |  
|Prepaid expenses                                               |  |      | (339    | ) |      |   | (511    | )
|Other                                                          |  |      | 1       |   |      |   | 76      |  
|                                                               |  |      |         |   |      |   |         |  
|Net current deferred tax assets                                |  | $    | 759     |   |      | $ | 1,350   |  
|                                                               |  |      |         |   |      |   |         |  
|Noncurrent deferred income tax assets (liabilities) relate to: |  |      |         |   |      |   |         |  
|Basis and depreciation differences                             |  | $    | (20,275 | ) |      | $ | (19,759 | )
|State loss carryforward                                        |  |      | 379     |   |      |   |        |  
|Other                                                          |  |      | 1,334   |   |      |   | 1,519   |  
|Valuation allowance                                            |  |      | (379    | ) |      |   |        |  
|                                                               |  |      |         |   |      |   |         |  
|Net noncurrent deferred tax liabilities                        |  | $    | (18,941 | ) |      | $ | (18,240 | )
|                                                               |  |      |         |   |      |   |         |  



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|15. | INCOME TAXES(Continued)
|--- | ------------------------



The components of income tax expense for the years ended December 31, 2001, 2002 and 2003 are as follows (in thousands):



|                           |  |      |       |      |   |       |  |   |        |  
|-------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ------ | -
|                           |  | 2001 |       | 2002 |   | 2003  | 
|Current income taxes:      |  |      |       |      |   |       |  |   |        |  
|Federal                    |  | $    | 2,769 |      | $ | 1,685 |  | $ | 6,973  |  
|State                      |  |      | 414   |      |   | 328   |  |   | 762    |  
|                           |  |      |       |      |   |       |  |   |        |  
|Total current income taxes |  |      | 3,183 |      |   | 2,013 |  |   | 7,735  |  
|Deferred income taxes      |  |      | 1,061 |      |   | 4,304 |  |   | (1,564 | )
|                           |  |      |       |      |   |       |  |   |        |  
|Total                      |  | $    | 4,244 |      | $ | 6,317 |  | $ | 6,171  |  
|                           |  |      |       |      |   |       |  |   |        |  



The following is a
reconciliation of income taxes at the Federal statutory rate (34%) to actual taxes provided for each of the three years in the period ended December 31, 2003 (in thousands):



|                                               |  |      |       |   |      |   |       |  |   |       |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|                                               |  | 2001 |       |   | 2002 |   | 2003  | 
|Federal tax at the statutory rate              |  | $    | 3,953 |   |      | $ | 5,875 |  | $ | 5,121 |  
|State income taxes, net of federal tax benefit |  |      | 389   |   |      |   | 320   |  |   | 227   |  
|Non-deductible goodwill                        |  |      |      |   |      |   |      |  |   | 1,767 |  
|Change in valuation allowance (1)              |  |      |      |   |      |   |      |  |   | (379  | )
|Change in tax rate                             |  |      |      |   |      |   |      |  |   | (602  | )
|Other permant items, net                       |  |      | (98   | ) |      |   | 122   |  |   | 37    |  
|                                               |  |      |       |   |      |   |       |  |   |       |  
|Total                                          |  | $    | 4,244 |   |      | $ | 6,317 |  | $ | 6,171 |  
|                                               |  |      |       |   |      |   |       |  |   |       |  

---

|(1) | The Companys valuation allowance was reduced by $379,000 in 2003 due to the utilization of losses in various jurisdictions.
|--- | ----------------------------------------------------------------------------------------------------------------------------



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WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS(Continued)



|16. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|--- | -------------------------------------------



The following table summarizes the unaudited consolidated quarterly results of operations for the fiscal years 2002 and
2003:



|                                                                                 |  |          |  |                                       |              |                |   |               |  |                |              |  |   |             
|-------------------------------------------------------------------------------- |  | -------- |  | ------------------------------------- | ------------ | -------------- | - | ------------- |  | -------------- | ------------ |  | - | ------------
|                                                                                 |  |          |  | FIRST QUARTER                         |              | SECOND QUARTER |   | THIRD QUARTER |  | FOURTH QUARTER
|                                                                                 |  |          |  | (In thousands, except per share data)
|Total revenues                                                                   |  | 20022003 |  | $                                     | 59,97762,933 |                | $ | 63,64065,785  |  | $              | 65,02770,801 |  | $ | 63,18470,946
|Gross profit                                                                     |  | 20022003 |  |                                       | 21,67622,439 |                |   | 22,52323,217  |  |                | 23,31623,897 |  |   | 22,30623,622
|Income before cumulative effect of a change in                                   |  |          |  |                                       |              |                |   |               |  |                |              |  |   |             
|accounting principle                                                             |  | 20022003 |  |                                       | 2,3212,187   |                |   | 2,6962,721    |  |                | 3,1763,074   |  |   | 2,769908    
|Earnings per share before cumulative effect of a change in accounting principle: |  |          |  |                                       |              |                |   |               |  |                |              |  |   |             
|Basic                                                                            |  | 20022003 |  | $                                     | 0.170.16     |                | $ | 0.200.20      |  | $              | 0.240.23     |  | $ | 0.210.07    
|Diluted                                                                          |  | 20022003 |  | $                                     | 0.170.16     |                | $ | 0.200.20      |  | $              | 0.240.23     |  | $ | 0.210.07    
|Net income                                                                       |  | 20022003 |  |                                       | 2,3211,120   |                |   | 2,6962,721    |  |                | 3,1763,074   |  |   | 2,769908    
|Earnings per share:                                                              |  |          |  |                                       |              |                |   |               |  |                |              |  |   |             
|Basic                                                                            |  | 20022003 |  | $                                     | 0.170.08     |                | $ | 0.200.20      |  | $              | 0.240.23     |  | $ | 0.210.07    
|Diluted                                                                          |  | 20022003 |  | $                                     | 0.170.08     |                | $ | 0.200.20      |  | $              | 0.240.23     |  | $ | 0.210.07    
|Weighted average number of shares outstanding:                                   |  |          |  |                                       |              |                |   |               |  |                |              |  |   |             
|Basic                                                                            |  | 20022003 |  |                                       | 13,33413,405 |                |   | 13,33513,440  |  |                | 13,33613,442 |  |   | 13,33713,468
|Diluted                                                                          |  | 20022003 |  |                                       | 13,33913,418 |                |   | 13,35413,465  |  |                | 13,34713,540 |  |   | 13,35513,636



Pursuant to the
Companys adoption of SFAS No. 142, Accounting for Goodwill and Other Intangible Assets,the amortization of goodwill ceased on January 1, 2002. See Note 4.



Effective January 1, 2003, the Company adopted the provisions of SFAS No. 143, Accounting for Asset Retirement
Obligations.See Note 1.k.



In the fourth quarter
of 2003, the Company forgave loans to certain officers in connection with discontinuing a life insurance program, as a result of the Sarbanes-Oxley Act. See Note 9.



The Companys effective tax rate increased from approximately 36.7% to 63.5% in the fourth quarter of 2003 due to the
higher income tax incurred upon the sale of a hauling operation with non-deductible goodwill.



* * * * * * * * * *



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INDEPENDENT AUDITORS REPORT



To the Board of Directors and Shareholders of

Waste Industries USA, Inc. and Subsidiaries

Raleigh, North Carolina



We have audited the consolidated financial statements of Waste Industries USA, Inc. and subsidiaries (the Company) as of December 31, 2002 and
2003, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated March 30, 2004 (which report includes an explanatory paragraph as to the adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002 and the adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations,effective January 1, 2003); such report is
included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of Waste Industries USA, Inc. and subsidiaries, listed in Item 15. This financial statement schedule is the responsibility of the Companys
management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



\s\ DELOITTE & TOUCHE LLP

RALEIGH, NORTH CAROLINA

MARCH 30, 2004



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##### Table of Contents

WASTE INDUSTRIES USA, INC. AND SUBSIDIARIES



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

(In Thousands)



|                                       |  |                   |       |                   |   |                     |  |   |                   |   |  |   |      
|-------------------------------------- |  | ----------------- | ----- | ----------------- | - | ------------------- |  | - | ----------------- | - |  | - | -----
|                                       |  | Balance12/31/2000 |       | Charges toExpense |   | Write-offs/Payments |  |   | Balance12/31/2001
|Allowance for doubtful accounts        |  | $                 | 1,957 |                   | $ | 2,017               |  | $ | (1,878            | ) |  | $ | 2,096
|Accrued closure and post-closure costs |  |                   | 2,069 |                   |   | 1,244               |  |   | (223              | ) |  |   | 3,090
|                                       |  |                   |       |                  
|                                       |  | Balance12/31/2001 |       | Charges toExpense |   | Write-offs/Payments |  |   | Balance12/31/2002
|Allowance for doubtful accounts        |  | $                 | 2,096 |                   | $ | 1,530               |  | $ | (1,388            | ) |  | $ | 2,237
|Accrued closure and post-closure costs |  |                   | 3,090 |                   |   | 1,306               |  |   | (374              | ) |  |   | 4,022
|                                       |  |                   |       |                  
|                                       |  | Balance12/31/2002 |       | Charges toExpense |   | Write-offs/Payments |  |   | Balance12/31/2003
|Allowance for doubtful accounts        |  | $                 | 2,237 |                   | $ | 2,219               |  | $ | (1,848            | ) |  | $ | 2,608
|Accrued closure and post-closure costs |  |                   | 4,022 |                   |   | 3,423               |  |   | (1,281            | ) |  |   | 6,164



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