<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 --------------


                                    FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

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

                         COMMISSION FILE NUMBER 0-19385

                          ALLIED WASTE INDUSTRIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                 --------------

                DELAWARE                                         88-0228636
     (STATE OR OTHER JURISDICTION OF                         (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                      IDENTIFICATION  NUMBER)

     15880 NORTH GREENWAY-HAYDEN LOOP, SUITE 100
               SCOTTSDALE, ARIZONA                                  85260
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                     (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 423-2946
                                 --------------


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

    TITLE OF EACH CLASS           NAME OF EACH EXCHANGE ON WHICH REGISTERED
    -------------------           -----------------------------------------

Common Stock, $.01 par value                           NASDAQ/NMS

         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 and 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 [ ].

         Indicated 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. [ ]

         The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant was $274,537,542 as of March 24, 1997.

         The number of shares of the Company's common stock, $.01 par value,
outstanding at March 24, 1997 was 75,648,107.

         The registrant's proxy statement is to be filed in connection with the
registrant's 1996 annual meeting of stockholders and is incorporated by
reference into Part III of this report.


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                                     PART I

ITEM 1.  BUSINESS

         Allied Waste Industries, Inc., a Delaware corporation ("Allied" or the
"Company"), is a vertically-integrated, non-hazardous solid waste management
company providing collection, transfer, processing and disposal services. On
December 30, 1996, the Company completed the acquisition of substantially all of
the non-hazardous solid waste management business conducted by Laidlaw Inc.
("Laidlaw") in the United States and Canada (the "Laidlaw Acquisition"), for
total consideration of approximately $1.5 billion comprised of $1.2 billion
cash, 14.6 million shares of the Company's common stock, par value $0.01 per
share (the "Common Stock"), warrants to acquire 20.4 million shares of Common
Stock, and two junior subordinated debentures with an aggregate face amount of
$318 million (the "Allied Canada Debentures"). The cash consideration was
financed from the proceeds of a senior credit facility in the aggregate amount
of $1.275 billion (the "Senior Credit Facility") and the sale of $525 million of
the Company's 10 1/4% Senior Subordinated Notes due 2006 (the "1996 Notes").

         On March 16, 1997, pursuant to a Share Purchase Agreement with USA
Waste Services, Inc. ("USA Waste") the Company sold to USA Waste (the "Canadian
Sale") all of the Canadian non-hazardous solid waste management operations of
the Company for approximately $518 million. The Company used the proceeds from
the Canadian Sale to pay down approximately $517 million in debt under the
Senior Credit Facility. The Company acquired the Canadian operations in
connection with the Laidlaw Acquisition. Unless otherwise indicated, all
references to the Company and its operations contained herein give effect to the
Canadian Sale.

         The Company is the fourth largest solid waste management company in the
United States, as measured by revenues. The Company pursues a business strategy
designed to develop vertically-integrated operations centered around landfills
that are owned or operated by the Company in the markets it currently serves.
The Company serves 1.4 million customers through operations in 22 states located
primarily in the midwest, northeast, southeast and southwest United States. The
Company has an extensive network of 32 transfer stations, 46 landfills, and 20
recycling facilities.


INDUSTRY TRENDS

         According to the National Solid Waste Management Association and Waste
Age Magazine, the North American solid waste industry was estimated to have had
revenues of more than $32 billion in 1995. The industry is highly fragmented
with the four largest companies accounting, in 1995, for approximately 30% of
revenues, seven mid-sized public companies accounting for approximately 4% of
revenues, and several thousand municipalities and independent collection firms
accounting for the remainder. The solid waste management industry has been
affected significantly by increased regulation of disposal activities and to a
lesser extent collection activities also, have been affected. In October 1991,
the Environmental Protection Agency (the "EPA") adopted new regulations pursuant
to Subtitle D ("Subtitle D") of the Resource Conservation and Recovery Act of
1976, as amended ("RCRA") governing the disposal of non-hazardous solid waste.
These regulations led to a variety of requirements applicable to landfill
disposal sites, including the construction of liners and the installation of
leachate collection systems, groundwater monitoring systems and methane gas
recovery systems. The regulations also require enhanced control systems to
monitor more closely the waste streams being disposed at landfills, extensive
post-closure monitoring of sites and financial assurances that landfill
operators will be able to comply with the stringent regulations. The rising
costs associated with increasingly stringent industry regulations have tended to
promote consolidation and acquisition activity within the industry.


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         The Company believes that these trends will continue and are the result
of several factors:

         (1)      Subtitle D and similar state regulations have significantly
                  increased the amount of capital and technical expertise
                  required to own and operate a landfill. As a result, many
                  landfill operators that lack the necessary capital or
                  expertise are electing to sell their landfills as an
                  alternative to closing them;

         (2)      a number of municipalities are electing to privatize their
                  municipal landfills as an alternative to funding the changes
                  to such landfills required by Subtitle D and related state
                  regulations; and

         (3)      as a result of heightened sensitivity to environmental
                  conditions in many communities, it is becoming increasingly
                  desirable for solid waste management companies to provide
                  waste recycling programs in addition to conventional
                  collection and disposal services.

These developments, as well as more stringent bonding requirements being imposed
on solid waste management companies by various municipalities, have increased
the amount of capital generally required for solid waste management operations,
causing smaller companies that lack the requisite capital to sell their
operations to better-capitalized companies.


BUSINESS STRATEGY

         The Company's business strategy is to build a vertically-integrated
solid waste management company with a strong presence in specific markets. The
Company plans to implement this strategy by (i) establishing a market presence
generally based on the acquisition or development of a landfill; (ii) increasing
volume in its markets through "tuck-in" acquisitions of collection companies and
marketing to new customers; (iii) providing a high level of customer service;
(iv) competitively pricing its services based on the particular circumstances of
each market; and (v) continuing to control costs and reduce corporate overhead
as a percentage of revenues. The Company believes that its strategy to build
vertically-integrated operations will provide the Company with competitive
advantages in its targeted regional markets.

         The Company pursues acquisitions in geographic areas characterized by
one or more of the following criteria: (i) the availability of permitted and
underutilized landfill capacity located either close to or outside of, but
within economic range of, a major population center, (ii) disposal fees that
justify necessary transportation expenses, (iii) near or medium-term scheduled
closures of landfills near such a population center, (iv) a shift in landfill
ownership from public to private and (v) rural landfills that are likely to
provide opportunities in a local market.

         The Company has adopted the following four-step program in executing
its business strategy:

         (1)      Landfill Acquisitions. Once the Company identifies an area
                  that qualifies under its target market criteria, the Company
                  seeks to establish a market presence, generally by acquiring
                  one or more landfills in that area that can be accessed
                  economically from the metropolitan center or from the regional
                  market area, either through direct hauling or through
                  strategically located transfer operations. In evaluating a
                  landfill acquisition, the Company considers, among others, the
                  following factors: (i) current disposal costs together with
                  transportation costs to the targeted landfill relative to
                  transportation and disposal costs of potential competitors,
                  (ii) expected landfill capacity, (iii) opportunities for
                  landfill expansion, and (iv) projected short-term ability to
                  secure an acceptable level of disposal volume.


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         (2)      Secure Captive Waste Volumes. The Company seeks to build a
                  market presence and increase the utilization of the landfill
                  by securing captive waste streams, which includes developing
                  and acquiring transfer stations, entering into waste
                  collection contracts and acquiring waste collection companies.
                  Generally, the Company pursues the acquisition of collection
                  companies that: (i) have well-established residential or
                  commercial collection routes and accounts, (ii) own and
                  operate transfer stations, or (iii) do not own landfills and
                  are vulnerable to volatile disposal pricing, which the Company
                  believes it can minimize through landfill ownership.

         (3)      "Tuck-in" Acquisitions. The Company acquires service rights,
                  obligations, machinery and equipment in "tuck-in" acquisitions
                  of collection companies to: (i) increase the waste stream
                  directed to its landfills, (ii) maximize its market presence,
                  and (iii) increase customer density on collection routes to
                  reduce operating costs and strengthen return on capital.

         (4)      Integration of Operations. Immediately following an
                  acquisition, the Company begins to integrate the acquired
                  company into its operating and control systems, internalizing
                  waste previously disposed at third party landfills to
                  facilities owned or operated by the Company, establishing an
                  operating plan, implementing the Company's operating policies
                  and procedures, including the consolidation and
                  rationalization of routes and pricing, establishing new
                  banking and cash control procedures, integrating the acquired
                  company's accounting, data processing and management reporting
                  systems and appointing a new board of directors. In many
                  acquisitions, the Company retains the management of the
                  company it acquires in order to benefit from the existing
                  management's understanding of the local market, personal and
                  business contacts, and goodwill in the community.


OPERATIONS

         COLLECTION. Collection operations involve collecting and transporting
non-hazardous waste from the point of generation to the transfer station or the
site of disposal. Solid waste collection is generally provided under two primary
types of arrangements, depending on the customer being served.

         Commercial. The Company provides containerized non-hazardous solid
waste disposal services to a wide variety of commercial and industrial
customers. These customers are provided with containers that are designed to be
lifted mechanically and either emptied into a collection vehicle's compaction
hopper or, in the case of roll-off containers, to be loaded onto the collection
vehicle. The Company's commercial containers generally range in size from one to
eight cubic yards and its roll-off containers generally range in size from 20 to
40 cubic yards. Contracts for commercial containers typically have terms of up
to five years, may not be terminated by the customer prior to the end of the
term and have renewal options. Contracts for roll-off containers may provide for
temporary (such as the removal of waste from a construction site) or ongoing
services. Fees relating to those contracts are determined by general competitive
and prevailing local economic conditions and include other considerations such
as collection frequency, type of equipment furnished, distance traveled to the
disposal site, the cost of disposal and the type and volume or weight of the
waste collected.

         Residential. Residential collection services are performed pursuant to
individual monthly subscriptions directly to households or long-term contracts
with municipal governments that give the Company exclusive rights to service all
or a portion of the homes in such municipalities at established rates. The
Company seeks to obtain municipal contracts which enhance the efficiency and
profitability of the Company's operations as a result of the density of
collection customers within a given area. At the end of the term of most
municipal contracts, the Company will attempt to renegotiate the contract, and
if unable to do so, will rebid the contract on a sealed bid basis. Residential
collection service arrangements with households are made directly between the
Company and the resident. The Company seeks to enter into residential service
arrangements where the route density is high, thereby creating additional
economic benefit. Collection fees are determined by the Company and the customer
based on general competitive and prevailing local economic conditions and
include other considerations such as collection


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frequency, the type and volume or weight of the waste collected, the distance to
the disposal facility, and cost of disposal. Residential collection fees are
either paid by the municipalities out of tax revenues or service charges or are
paid directly by the residents who receive the service.

         TRANSFER STATIONS. A transfer station is a facility where solid waste
is received from third-party and Company owned collection vehicles and then
transferred to and compacted in large, specially-constructed trailers for
transportation to disposal facilities. This consolidation reduces costs by
increasing the density of the waste being transported through competition and by
improving utilization of collection personnel and equipment, and is an
increasingly common procedure in the solid waste management industry. Fees are
generally based upon such factors as the type and volume or weight of the waste
transferred and the transport distance involved. The Company believes that as
increased regulations and public pressure restrict the development of landfills
in urban and suburban areas, transfer stations will increasingly be used as an
efficient means to transport waste over longer distances to available landfills.

         RECYCLING. In response to increasing awareness by the customer of
environmental concerns and expanding federal and state regulations pertaining to
waste recycling, the Company includes recycling as a component of its vertically
integrated solid waste business strategy. Services include curbside collection
of recyclable materials for residential customers, commercial and industrial
collection of recyclable materials, and, to a lesser extent, material
recovery/waste reduction. Recycling fees are generally service based wherein the
customer pays for the cost of removing, processing and disposing of potentially
recyclable materials. In most cases, mixed waste materials are received at an
owned or leased materials recovery facility ("MRF") which is often integrated
into or contiguous to a transfer operation. Materials such as paper, cardboard,
plastic, aluminum and other metals are sorted, separated, accumulated, bound or
placed in a container and readied for transportation to a third-party which will
reuse the separated materials. The purchaser generally pays for the materials
based on fluctuating spot-market prices. Material for which there is no market
or for which the market price is insufficient to warrant processing are disposed
of at a landfill or other disposal facility. The Company seeks to avoid exposure
to fluctuating commodity prices by passing through substantially all of the
profit or loss from the sale of recyclables to its service customers.

         LANDFILLS. Solid waste landfills are the primary method of disposal of
solid waste in the United States. Currently, a landfill must be designed,
permitted, operated and closed in compliance with federal, state and local
regulations pursuant to Subtitle D. Operating procedures include excavation,
continuous spreading and compacting of waste, and covering of waste with earth
or other inert material. The cost of transferring solid waste to a disposal
location places an economic restriction on the geographic scope of landfill
operations in a particular market. Access to a disposal facility, such as a
landfill, is a requirement for all solid waste management companies. While
access can generally be obtained to disposal facilities owned or operated by
unaffiliated parties, the Company believes that, in keeping with its business
strategy, it is preferable for collection companies to own or operate their own
disposal facilities thereby ensuring access on favorable terms and the
internalization of disposal fees.


MARKETING AND SALES

         Each of the Company's districts has a staff responsible for sales and
marketing. The Company's policy is to periodically visit each commercial account
to ensure customer satisfaction and to sell additional services. In addition to
calling on existing customers, each salesperson calls upon potential customers
within a defined area in each market.

         In addition to its sales efforts directed at commercial and industrial
customers, the Company has a municipal marketing coordinator in most service
areas. The municipal marketing coordinators are responsible for interfacing with
each municipality or community to which the Company provides residential service
to assure customer satisfaction. In addition, the municipal coordinators
organize and handle bids for renewal and new municipal contracts in their
service area.


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COMPETITION

         The non-hazardous waste collection and disposal industry is highly
competitive. The industry is comprised of four national waste companies in
addition to the Company, WMX Technologies, Inc., Browning-Ferris Industries,
Inc. ("BFI"), Republic Industries, Inc., USA Waste Services, Inc. and local and
regional companies of varying sizes and competitive resources such as United
Waste Systems, Inc. and Superior Services, Inc. The Company also competes with
those counties and municipalities that maintain their own waste collection or
disposal operations. These counties and municipalities may have financial
advantages through their access to tax revenues and tax-exempt financing and
their ability to mandate the disposal of waste collected within the jurisdiction
at a municipal landfill. The Company may also experience competition from
companies using alternative methods of managing solid waste streams, such as
incineration.

         The solid waste collection and disposal industry is currently
undergoing significant consolidation, and the Company encounters competition in
its efforts to acquire landfills and collection operations. Accordingly, it may
become uneconomical for the Company to make further acquisitions or the Company
may be unable to locate or acquire suitable acquisition candidates at price
levels and on terms and conditions that the Company considers appropriate,
particularly in markets the Company does not already serve.


ENVIRONMENTAL AND OTHER REGULATIONS

         The Company is subject to extensive and evolving environmental laws and
regulations. These regulations are administered by the EPA and various other
federal, state and local environmental, zoning, health and safety agencies, many
of which periodically examine the Company's operations to monitor compliance
with such laws and regulations. The Company believes that there will be
increased regulation and legislation related to the waste management industry
and the Company attempts to anticipate such future regulatory requirements to
ensure compliance.

         The Company's operation of landfills subjects it to certain
operational, monitoring, site maintenance, closure, post-closure and other
obligations which could give rise to increased costs for monitoring and
corrective measures. In connection with the Company's acquisition of existing
landfills, it is often necessary to expend considerable time, effort and money
to obtain permits required to increase the capacity of these landfills.
Governmental authorities have the power to enforce compliance with these
regulations and to obtain injunctions or impose civil or criminal penalties in
case of violations. The Company cannot predict whether or not it will be able to
obtain the governmental approvals necessary to establish new or expand existing
landfills and, if it does, whether or not it will be economically beneficial to
do so.

         The Company's operations are subject to extensive regulation,
principally under the following federal statutes:

         The Resource Conservation and Recovery Act of 1976, as amended. RCRA
regulates the handling, transportation and disposal of hazardous and
non-hazardous wastes and delegates authority to states to develop programs to
ensure the safe disposal of solid wastes. On October 9, 1991, the EPA
promulgated Solid Waste Disposal Facility Criteria for non-hazardous solid waste
landfills under Subtitle D. Subtitle D includes location standards, facility
design and operating criteria, closure and post-closure requirements, financial
assurance standards and groundwater monitoring as well as corrective action
standards, many of which had not commonly been in place or enforced previously
at landfills. Subtitle D applies to all solid waste landfill cells that received
waste after October 9, 1991, and, with limited exceptions, all landfills were
required to meet these requirements by October 9, 1993. Landfills that were not
in compliance with the requirements of Subtitle D on the applicable date of
implementation were required to close. In addition, landfills that stopped
receiving waste before October 9, 1993 were not required to comply with the
final cover provisions of Subtitle D. Each state must comply with Subtitle D and
was required to submit a permit program designed to implement Subtitle D to the
EPA for approval by April 9, 1993. States may impose requirements for


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landfill units that are more stringent than the requirements of Subtitle D. Once
a state has an approved program, it must review all existing landfill permits to
ensure that they comply with Subtitle D.

         The Federal Water Pollution Control Act of 1972 (the "Clean Water
Act"), as amended. This act establishes rules regulating the discharge of
pollutants into streams and other waters of the United States (as defined in the
Clean Water Act) from a variety of sources, including solid waste disposal
sites. If runoff from the Company's landfills or transfer stations may be
discharged into surface waters, the Clean Water Act requires the Company to
apply for and obtain discharge permits, conduct sampling and monitoring and,
under certain circumstances, reduce the quantity of pollutants in those
discharges. The permit program has been expanded to include stormwater
discharges from landfills that receive, or in the past received, industrial
waste. In addition, if development may alter or affect "wetlands," a permit may
have to be obtained and certain mitigation measures may need to be undertaken
before such development may be commenced. This requirement is likely to affect
the construction or expansion of many solid waste disposal sites, including some
owned or being developed by the Company. The Clean Water Act provides civil,
criminal and administrative penalties for violations of its provisions.

         The Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended. The Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA") addresses problems created by
the release or threatened release of hazardous substances into the environment.
CERCLA's primary mechanism for remediating such problems is to impose strict,
joint and several liability for cleanup of disposal sites on current owners and
operators of the site, former site owners and operators at the time of disposal,
and waste generators and parties who arranged for disposal at the facility. The
costs of a CERCLA cleanup can be substantial. Liability under CERCLA is not
dependent on the existence or disposal of "hazardous wastes" (as defined under
RCRA), but can also be founded on the existence of even minute amounts of the
more than 700 "hazardous substances" listed by the EPA.

         The Clean Air Act of 1970 (the "Clean Air Act"), as amended. The Clean
Air Act provides for increased federal, state and local regulation of the
emission of air pollutants. The EPA has construed the Clean Air Act to apply to
landfills. In March 1996, the EPA adopted New Source Performance Standard and
Emission Guidelines (the "Emission Guidelines") for municipal solid waste
landfills. These regulations impose limits on air emissions from solid waste
landfills. The Emission Guidelines propose two sets of emissions standards, one
of which is applicable to all solid waste landfills that commence construction,
reconstruction or modification after May 30, 1991 and another which is
applicable to all solid waste landfills that received waste or had the capacity
to receive waste after November 8, 1987. The Emission Guidelines may be
implemented by the states. These guidelines, combined with the new permitting
programs established under the recent Clean Air Act amendments, will likely
subject solid waste landfills to significant new permitting requirements and, in
some instances, require installation of methane gas recovery systems.

         The Occupational Safety and Health Act of 1970 ("OSHA"), as amended.
OSHA establishes certain employer responsibilities, including maintenance of a
workplace free of recognized hazards likely to cause death or serious injury,
compliance with standards promulgated by the Occupational Safety and Health
Administration, and various recordkeeping, disclosure and procedural
requirements. Various standards, including standards for notices of hazards,
safety in excavation and demolition work, and the handling of asbestos, may
apply to the Company's operations.

         Future Federal Legislation. In the future, the Company's collection,
transfer and landfill operations may also be affected by legislation that may be
proposed in the United States Congress that would authorize the states to enact
legislation governing interstate shipments of waste. Such proposed federal
legislation may 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, under certain circumstances, to reduce the
amounts of waste exported to other states. If this or similar legislation is
enacted, states in which the Company will operate landfills could act to limit
or prohibit the importation of out-of-state waste. Such state actions could
adversely affect landfills within these states that receive a significant
portion of waste originating from out-of-state.


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         State Regulation. Each state in which the Company operates has laws and
regulations governing solid waste disposal and water and air pollution and, in
most cases, regulations governing the design, operation, maintenance and closure
of landfills and transfer stations. Management believes that several states have
proposed or have considered adopting legislation that would regulate the
interstate transportation and disposal of waste in their landfills. Many states
have also adopted legislative and regulatory measures to mandate or encourage
waste reduction at the source and waste recycling.

         The Company's collection and landfill operations may be affected by the
current trend toward laws requiring the development of waste reduction and
recycling programs. For example, a number of states have recently enacted laws
that will require counties to adopt comprehensive plans to reduce, through waste
planning, composting and recycling or other programs, the volume of solid waste
deposited in landfills within the next few years. A number of states have also
taken or propose to take steps to ban or otherwise limit the disposal of certain
wastes, such as yard wastes, beverage containers, newspapers, unshredded tires,
lead-acid batteries and household appliances into landfills.

         The Company has implemented and will continue to implement its own
environmental safeguards that comply with or exceed these governmental
requirements. Additionally, the Company's policy will be to obtain an
environmental assessment prepared by an independent environmental consulting
firm for all real estate acquired.


LIABILITY INSURANCE AND BONDING

         The Company carries general liability, comprehensive property damage,
workers' compensation, employer's liability, directors' and officers' liability
and other coverages it believes are customary to the industry. The Company also
has environmental impairment liability insurance for all of its operating
landfills except one owned and four operated sites. The environmental impairment
liability insurance is in the amount of up to $5 million for the policy term in
excess of a $1 million deductible per claim. Except as discussed in Legal
Proceedings below, management does not expect the impact of any known
environmental or other contingencies to be material to the Company's
consolidated liquidity, financial position or results of operations.

         The Company is required to provide certain financial assurances to
governmental agencies under applicable environmental regulations relating to its
landfill and collection operations. These financial assurances include
performance bonds, letters-of-credit, insurance contracts and trust deposits
required principally to secure the Company's estimated landfill closure and
post-closure obligations and collection contracts. The Company expects to be
required to provide approximately $227.6 million in financial assurance
obligations relating to its landfill operations by the end of fiscal year 1997.
The Company expects that financial assurances will increase in the future as the
Company acquires and expands its activities and that a greater percentage of the
financial assurances will be comprised, directly and indirectly, of
letters-of-credit.


EMPLOYEES

         The Company employs approximately 5,000 persons. Certain employees of
the Company are covered by collective bargaining agreements. The Company
believes relations with its employees are satisfactory.


ITEM 2.  PROPERTIES

         The Company's principal executive offices are located at 15880
Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260 where it currently
leases 33,000 square feet of office space. The Company also maintains six
regional administrative offices in the United States.


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         The principal fixed assets used by the Company in its collection and
transfer operations are 32 owned or operated transfer/recycling facilities. The
Company operates 46 non-hazardous solid waste landfills.


ITEM 3.  LEGAL PROCEEDINGS

         The Company is currently involved in certain routine litigation. The
Company believes that all such litigation arose in the ordinary course of
business and that costs of settlements or judgments arising from such suits will
not have a materially adverse effect on the Company's consolidated liquidity
financial position or results of operations.

         The business of the Company is regulated by federal, state and local
provisions that relate to the protection of the environment. The nature of the
Company's business results in it frequently becoming a party to judicial or
administrative proceedings involving governmental authorities and other
interested parties. At December 31, 1996, the Company was not involved in any
such proceedings where management believes sanctions imposed by governmental
authorities may exceed $100,000. From time to time the Company may also be
subject to actions brought by citizens' groups, adjacent landowners or others in
connection with the permitting and licensing of its landfills or transfer
stations, or alleging personal injury, environmental damage or violations of the
permits and licenses pursuant to which the Company operates.

         In connection with the Laidlaw Acquisition, Allied engaged an
independent environmental consulting firm to assist in conducting an
environmental assessment of the real property owned by certain subsidiaries of
the Company acquired from Laidlaw (the "LWS Subsidiaries") or third-parties, and
properties under the management of the LWS Subsidiaries. Several contaminated
landfills and other properties have been identified, two of which are owned by
subsidiaries of the Company, that would require those subsidiaries to incur
costs for incremental closure and post-closure measures, remediation activities
and litigation costs in the future. The costs of performing the investigation,
design, remediation and allocation of responsibility to the subsidiaries of
Allied vary significantly between sites. Based on information available to the
Company, Allied recorded a provision of $51.5 million for environmental matters,
including closure and post-closure costs, in the 1996 statement of operations
and expects these amounts to be disbursed over the next 30 years.

         The Company has been notified that it is considered a potentially
responsible party at a number of locations under CERCLA or other environmental
laws. The Company continually reviews its status with respect to each location,
taking into account the alleged connection to the location and the extent of the
contribution to the volume of waste at the location, the available evidence
connecting the entity to that location and the numbers and financial soundness
of other potentially responsible parties at the location. The ultimate amounts
for environmental liabilities at sites regarding which the Company may be a
potentially responsible party cannot be determined and estimates of such
liabilities made by the Company, after consultation with its independent
environmental engineers, require assumptions about future events due to a number
of uncertainties including the extent of the contamination, the appropriate
remedy, the financial viability of other potentially responsible parties and the
final apportionment of responsibility among the potentially responsible parties.
Where the Company has concluded that its estimated share of potential
liabilities is probable, a provision has been made in the consolidated financial
statements. Since the ultimate outcome of these matters may differ from the
estimates used in the Company's assessment to date, the recorded liabilities
will be periodically evaluated as additional information becomes available to
ascertain that the accrued liabilities are adequate. The Company has determined
that the recorded liability for environmental matters as of December 31, 1996 of
approximately $152.5 million (including the $51.5 million provision charged to
the 1996 statement of operations) represents the most probable outcome of these
contingent matters. The Company does not expect that adjustments to estimates,
which are reasonably possible in the near term and that may result in changes to
recorded amounts, will have a material effect on the Company's consolidated
liquidity, financial position or results of operations.


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<PAGE>   10
         The consolidated federal income tax returns for the fiscal years ended
August 31, 1986, 1987 and 1988 of certain subsidiaries of the Company that were
acquired from Laidlaw in December 1996 have been under audit by the Internal
Revenue Service. In March 1994, the LSW Subsidiaries received a Statutory Notice
of Deficiency proposing that the LSW Subsidiaries pay additional taxes relating
to disallowed deductions in those income tax returns (the "Tax Controversy").
The consolidated tax group of the LSW Subsidiaries has also received notice that
fiscal years 1992, 1993 and 1994 will be examined regarding the Tax Controversy.
The LSW Subsidiaries could be directly liable for a substantial portion of any
tax and interest assessed if the disallowance of the deduction is sustained. In
addition, under Treasury Regulations promulgated under Section 1502 of the
Internal Revenue Code ("IRC"), each member of the consolidated tax group
including each LSW Subsidiary, is or could be severally liable for federal
income tax liabilities of the entire consolidated tax group, including any taxes
due on the deemed sale of assets by the LSW Subsidiaries pursuant to Section 338
of the IRC and all amounts at issue in the Tax Controversy which are ultimately
determined to be owed.

         Any amounts at issue in the Tax Controversy and for which any LSW
Subsidiary may ultimately be found liable, are included in and covered by the
indemnification of the Company by Laidlaw set forth in the Stock Purchase
Agreement by and between the Company and Laidlaw, among others, dated September
17, 1996 (the "Purchase Agreement"). Further, the Company and Laidlaw, among
others, have entered into a Setoff Agreement, under which Laidlaw has agreed
that if the Tax Controversy results in any damage, liability or expense to any
LSW Subsidiary, and if Laidlaw fails to indemnify the Company against all such
damages, liabilities or expenses within 30 days of a demand for indemnification,
then the Company may setoff the amount of all such damages, liabilities and
expenses against all amounts then owed by the Company under the certain debt
issued to Laidlaw consisting primarily of the Allied Canada Debentures.

         Other than to the extent contemplated in the Setoff Agreement, the
obligation of Laidlaw to indemnify the Company in respect of amounts at issue in
the Tax Controversy is a general, unsecured obligation of Laidlaw. The ability
of Laidlaw to pay and fulfill such indemnification obligation will depend on the
financial condition of Laidlaw at the time of any required performance of such
obligation.


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

On December 27, 1996, a special meeting of the stockholders of the Company was
held. The holders of 45,851,275 shares of Common Stock were present or
represented by proxy at the meeting. At the meeting, the stockholders took the
following actions:

a)       Approval of the issuance and potential issuances of Common Stock
         pursuant to the Laidlaw Acquisition.

         The stockholders approved the issuance and potential issuances of
         Common Stock pursuant to the Purchase Agreement. Votes were cast as
         follows:

<TABLE>
<CAPTION>
         Number of             Number of               Number of
         Votes For           Votes Against          Votes Abstaining
         ----------          -------------          ----------------
<S>                          <C>                    <C>
         44,356,363            325,567                  939,669
</TABLE>

b)       Approval to amend the Certificate of Incorporation of the Company which
         increases the authorized number of shares.

         The stockholders approved the proposal to amend the Certificate of
         Incorporation of the Company which increases the authorized number of
         shares of the Common Stock to 200 million. Votes were cast as follows:

<TABLE>
<CAPTION>
         Number of             Number of              Number of
         Votes For           Votes Against          Votes Abstaining
         ----------          -------------          ----------------
<S>                          <C>                    <C>
         44,185,145             775,384                  890,746
</TABLE>


                                       10

<PAGE>   11
                                  P A R T  I I

ITEM 5.  MARKET FOR THE COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

                                 DIVIDEND POLICY

         The Company has not paid dividends on its Common Stock, does not
anticipate paying any dividends thereon in the foreseeable future and is
prohibited under the terms of the Company's long-term indebtedness from paying
such dividends.

                           PRICE RANGE OF COMMON STOCK

         The Common Stock is traded on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "AWIN." The high and low prices per share
for the periods indicated were as follows:

<TABLE>
<CAPTION>
                                                      High          Low
                                                     -------      ------
<S>                                                  <C>          <C>
               Year ended December 31, 1995
               First Quarter .......................  5           3  3/4
               Second Quarter ......................  7  1/4      4  3/4
               Third Quarter ....................... 10           6  7/8
               Fourth Quarter ......................  9  5/8      6  3/8

               Year ended December 31, 1996
               First Quarter .......................  9  1/8      6  1/2
               Second Quarter ...................... 10  1/8      8  1/8
               Third Quarter .......................  9  1/2      6 13/16
               Fourth Quarter ......................  9  1/2      8  1/8
</TABLE>

         All of the foregoing prices reflect interdealer quotations, without
retail markups, markdowns or commissions.

         As of March 24, 1997, there were approximately 576 record holders of
the Common Stock.


Recent Sales of Unregistered Securities

         The following table reflects sales by the Company of unregistered
securities during the fiscal year ended December 31, 1996. Except as otherwise
disclosed, the issuances by the Company of the securities sold in the
transactions referenced below were not registered under the Securities Act of
1933, as amended, pursuant to the exemptions contemplated in Section 4(2) and
Section 3 (a) (9), thereof, or Regulation D thereunder, for transactions not
involving a public offering. The consideration paid to the Company in respect of
each issuance was cash, unless otherwise indicated.


                                       11

<PAGE>   12
<TABLE>
<CAPTION>
                               Shares or
                               Principal
Description/Date                Amount         Consideration      Underwriters and Other Purchasers
----------------                ------         -------------      ---------------------------------

COMMON STOCK

<S>                     <C>              <C>           <C>
   January 3, 1996            50,000     $    150,000     William La Reese (exercise of warrant)
   January 6, 1996            56,054                      Equus, Inc. (cashless exercise of warrant)

   January 8, 1996            10,000     $     30,000     Richard D. Polson (exercise of warrant)
   January 8, 1996            87,600     $    262,800     Sanders, Morris, Mundy, Inc. (exercise of warrant)
   January 12, 1996           35,927                      Mitsui Nevitt Capital Corporation (cashless exercise of warrant)
   January 19, 1996           14,063     $     51,049     Richard Van Hattem (exercise of warrant)
   January 23, 1996            5,000     $     30,000     Robert G. Rader (exercise of warrant)
   February 2, 1996          157,073                      Trilon Dominion Partners (cashless exercise of warrant)
   February 8, 1996            5,000                      Jeffery J. Jorgenson (conversion of Series D Preferred Stock)
   February 28, 1996          15,000     $     45,000     Richard D. Polson (exercise of warrant)
   March 3, 1996               2,714                      Wanda Bell (conversion of 7% Preferred Stock)
   March 5, 1996               5,000                      Sheldon Stein (conversion of Series D Preferred Stock)
   March 14, 1996             10,000                      David Nagelberg (conversion of Series D referred Stock)
   March 20, 1996              4,285                      Ronald Watkins (conversion of 7% Preferred Stock)
   April 15, 1996             44,706                      John M. Cronin (conversion of royalty agreement)
   April 15, 1996             44,706                      Jennifer D. Cronin (conversion of royalty agreement)
   April 15, 1996             44,706                      Pamela K. Shourd (conversion of royalty agreement)
   April 15, 1996             44,706                      John D. Shourd (conversion of royalty agreement)
   April 15, 1996             25,882                      Susan K. Roach (conversion of royalty agreement)
   April 15, 1996              2,353                      Kristin L. Witt (conversion of royalty agreement)
   April 15, 1996              2,353                      Terry L. Witt (conversion of royalty agreement)
   May 1, 1996                95,274                      St. Andrew Trust PLC (conversion of note)
   May 2, 1996               320,833                      IPP 92, L.P. (conversion of note)
   May 3, 1996                23,751                      Equus, Inc. (inducement shares issued for accelerated conversion of 9%
                                                          Preferred Stock)
   May 10, 1996               19,054                      JO Hambro Investment Management, Ltd. (conversion of note)
   May 10, 1996              190,548                      JO Hambro & Partners Consolidated Venture Trust (conversion of note)
   May 24, 1996               57,164                      Foreign and Colonial (conversion of note)
   May 28, 1996                  723                      Wayne Thompson (employee bonus)
   May 30, 1996               50,000                      Semper Investments, Ltd. (cashless exercise of warrant)
   May 30, 1996               85,000                      Petrotech International, Ltd. (cashless exercise of warrant)
   May 30, 1996                6,297                      First Hemisphere Corporation (cashless exercise of warrant)
   June 7, 1996               50,000                      Semper Investments, Ltd. (cashless exercise of warrant)
</TABLE>


                                       12

<PAGE>   13



<TABLE>
<CAPTION>
<S>                     <C>               <C>             <C>
   June 20, 1996                 190                      Wayne Thompson (employee bonus)
   June 21, 1996             246,154      $ 2,000,000     Roger A. Ramsey (employee purchase of common stock)
   June 21, 1996             246,154      $ 2,000,000     Thomas H. Van Weelden (employee purchase of common stock)
   August 26, 1996             6,211                      Semper Investments, Ltd. (cashless exercise of warrant)
   August 26, 1996            48,018                      Petrotech International, Ltd. (cashless exercise of warrant)
   September 10, 1996        300,000                      IPP 92, L.P. (conversion of note)
   September 24, 1996         50,000                      IPP 92, L.P. (conversion of note)
   October 9, 1996             1,108                      John Miller (cashless exercise of warrant)
   November 12, 1996         733,752                      Merrill Lynch World Income Fund (conversion of 9% Preferred Stock)
   November 12, 1996         314,465                      Convertible Holdings, Inc. (conversion of 9% Preferred Stock)
   November 20, 1996           4,192                      Merrill Lynch World Income Fund (conversion of 9% Preferred Stock)
   November 20, 1996           1,886                      Convertible Holdings, Inc. (conversion of 9% Preferred Stock)
   December 16, 1996           1,000                      Kyle Ray (conversion of 7% Preferred Stock)
   December 20, 1996           4,364                      Eric Cash (employee bonus)
   December 30, 1996      14,600,000                      Laidlaw Transportation, Inc. (acquisition of non- hazardous solid waste
                                                          operations of Laidlaw)

1996 NOTES

   December 5, 1996     $525,000,000     $525,000,000     Various institutional investors(1)

WARRANT

   December 30, 1996      20,400,000                      Laidlaw Transportation, Inc. (acquisition of non-hazardous solid waste
                                                          operations of Laidlaw)
</TABLE>

-----------

(1)      Goldman, Sachs & Co., CS First Boston and Citicorp Securities, Inc.
         acted as placement agents in this private offering.


                                       13

<PAGE>   14
ITEM 6.  SELECTED FINANCIAL DATA

         The selected financial data presented below as of and for the five
years ended December 31, 1996 are derived from the Company's Consolidated
Financial Statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The statement of operations, balance sheet and
other data have been restated to give effect to transactions completed in 1995
and 1996, that were accounted for using the pooling-of-interests method for
business combinations. See Note 2 to the Company's Consolidated Financial
Statements. These selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the notes
thereto, included elsewhere herein. The Company has not paid dividends on its
Common Stock, does not anticipate paying any dividends on its Common Stock in
the foreseeable future, and is prohibited under the terms of the Company's
long-term indebtedness from paying such dividends. All amounts are in thousands
except per share amounts, number of shares and percentages.

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                            ------------------------------------------------------------------------
                                                1992            1993          1994           1995          1996
                                            ------------   ------------   ------------   ------------   ------------
<S>                                         <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
   Revenues ..............................  $     77,686   $    108,948   $    158,354   $    217,544   $    246,679
   Cost of operations ....................        49,661         68,374         98,086        120,738        138,437
   Selling, general and
      administrative expenses ............        13,369         18,278         32,564         36,708         38,602
   Depreciation and
    amortization expense .................         7,991         10,637         16,931         25,779         31,470
   Acquisition related costs (1) .........            --             --             --          1,531         91,693
   Unusual items (2) .....................            --             --          2,100             --          5,744
                                            ------------   ------------   ------------   ------------   ------------
   Operating income (loss) ...............         6,665         11,659          8,673         32,788        (59,267)
   Interest income .......................          (201)          (310)        (1,073)          (716)        (2,110)
   Interest expense ......................         4,580          7,633         13,441         11,372          9,257
                                            ------------   ------------   ------------   ------------   ------------
   Income (loss) before income taxes .....         2,286          4,336         (3,695)        22,132        (66,414)
   Income tax expense (benefit) ..........           717          1,694           (689)         9,751           (399)
                                            ------------   ------------   ------------   ------------   ------------
   Income (loss) before extraordinary item         1,569          2,642         (3,006)        12,381        (66,015)
   Extraordinary loss, net of income tax
      benefit of $1,900 in 1994
      and $8,940 in 1996 .................            --             --         (3,029)            --        (13,412)
                                            ------------   ------------   ------------   ------------   ------------
   Net income (loss) .....................         1,569          2,642         (6,035)        12,381        (79,427)
   Preferred dividends ...................          (310)          (927)        (3,773)        (4,070)        (1,073)

   Conversion fee on equity
      securities converted(3) ............            --             --             --         (2,151)            --
                                            ------------   ------------   ------------   ------------   ------------
   Net income (loss) to common
      shareholders .......................  $      1,259   $      1,715   $     (9,808)  $      6,160   $    (80,500)
                                            ============   ============   ============   ============   ============
   Net income (loss) per share:
      Income (loss) before
      extraordinary loss .................  $       0.07   $       0.08   $      (0.27)  $       0.15   $      (1.15)
      Extraordinary loss .................            --             --          (0.12)            --          (0.23)
                                            ------------   ------------   ------------   ------------   ------------
      Income (loss) ......................  $       0.07   $       0.08   $      (0.39)  $       0.15   $      (1.38)
                                            ============   ============   ============   ============   ============
   Weighted average common and
      common equivalent shares ...........    19,276,886     22,572,468     25,028,107     40,046,459     58,422,581
                                            ============   ============   ============   ============   ============
</TABLE>


                                       14

<PAGE>   15
BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                                   December 31,
                                          -----------------------------------------------------------
                                            1992         1993        1994         1995        1996
                                          --------     --------    --------     --------   ----------
<S>                                       <C>          <C>         <C>          <C>        <C>
   Cash and cash equivalents .........    $  5,887     $  3,812    $  5,223     $  4,016   $   50,094
   Working capital (deficit) .........        (428)       3,892     (13,491)     (37,338)      27,076
   Property and equipment, net .......      75,928       94,208     216,271      302,352      706,752
   Goodwill ..........................      22,398       34,880      76,059       88,429      856,108
   Total assets ......................     135,946      159,926     356,875      458,706    2,317,549
   Total long-term debt,
      net of current portion .........      56,226       61,019     166,252      186,373    1,148,509
   Stockholders' equity ..............      51,323       70,277      89,972      136,305      275,558
   Long-term debt to
      total capitalization ...........        0.52         0.46        0.65         0.58         0.81
</TABLE>

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

(1)      Acquisition related costs of $84.6 million were incurred in 1996 in
         connection with the Laidlaw Acquisition for environmental related
         matters, asset impairments and abandonments, acquisition related
         liabilities, litigation matters, relocation and transition costs and
         bonuses, and other integration costs related to companies acquired.
         Acquisition related costs of $7.1 million were incurred in 1996 for
         transaction and integration costs related to 5 small 1996 acquisitions.
         Acquisition related costs of $1.5 million were incurred in 1995 for
         transaction and integration costs related to 1995 acquisitions.
         Acquisition related costs incurred in 1992 through 1994 for transaction
         and integration costs related to acquisitions made in those years were
         immaterial. See Note 2 to the Company's Consolidated Financial
         Statements.

(2)      In December 1996 the Company recorded $5.7 million in unusual items
         related to ongoing investigation and remediation of the Company's
         Norfolk landfill and other non-recurring valuation adjustments. In
         December 1994 the Company recorded a $2.1 million unusual item related
         to the Company's Norfolk landfill.

(3)      A non-cash conversion fee of $2.2 million was incurred in the fourth
         quarter 1995 as a result of an inducement offered by the Company to
         holders of certain convertible preferred stock and convertible
         subordinated notes to exercise their conversion option to receive
         Allied common stock. The inducement fee consisted of payment of
         dividends or interest from the conversion date through the first call
         or redemption date of each convertible security. Approximately 7.8
         million shares of common stock were issued for conversion and
         approximately 285,000 shares were issued for the conversion fee.


                                       15

<PAGE>   16
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto, included
elsewhere herein.


INTRODUCTION

         The Company has experienced significant growth, a substantial portion
of which has resulted from the acquisition of solid waste businesses. Since
January 1, 1992, the Company has completed 96 acquisitions including the Laidlaw
Acquisition. In 1996, the Company acquired 22 businesses including the Laidlaw
Acquisition and subsequent to 1996 it has acquired 2 businesses. See Note 2 to
the Company's Consolidated Financial Statements. The Company's Consolidated
Financial Statements have been restated to reflect the acquisition of companies
accounted for using the pooling-of-interests method for business combinations.
The majority of the acquisitions were accounted for under the purchase method
for business combinations and, accordingly, the results of operations for such
acquired businesses are included in the Company's financial statements only from
the applicable date of acquisition. As a result, the Company believes its
historical results of operations for the periods presented are not directly
comparable.

         On December 30, 1996, the Company completed the acquisition of
substantially all of the non-hazardous solid waste management business conducted
by Laidlaw in the United States and Canada, for total consideration of
approximately $1.5 billion comprised of $1.2 billion cash, 14.6 million shares
of Common Stock, warrants to acquire 20.4 million shares of Common Stock, and
two junior subordinated debentures with an aggregate face amount of $318
million. The cash consideration was financed from the proceeds of the Senior
Credit Facility and the sale of the 1996 Notes.

         On March 16, 1997, pursuant to a Share Purchase Agreement with USA
Waste, the Company sold to USA Waste all of the Canadian non-hazardous solid
waste management operations of the Company for approximately $518 million. The
Company used the proceeds from the Canadian Sale to pay down approximately $517
million in debt under the Senior Credit Facility. The Company acquired the
Canadian operations in connection with the Laidlaw Acquisition.


GENERAL

         Revenues. The Company's revenues are attributable primarily to fees
charged to customers for waste collection, transfer, recycling and disposal
services. The Company's collection services are generally provided under direct
agreements with its customers or pursuant to contracts with municipalities.
Commercial and municipal contract terms, where used, generally range from 1 to 5
years and commonly have automatic renewal options. The Company's landfill
operations include both Company-owned landfills and those operated for
municipalities for a fee. The Company is fully integrated in each geographic
region in which it is located as it provides collection, transfer and disposal
services. The tables below show for the periods indicated the percentage of the
Company's total reported revenues attributable to services provided and to
geographic region:

<TABLE>
<CAPTION>
                                Year Ended December 31,
                               ------------------------
                                1994     1995     1996
                               ------   ------   ------
<S>                            <C>      <C>      <C>
        Collection(1) .......   69.9%    64.7%    61.9 %
        Transfer ............    8.4      9.5      8.5
        Landfill(1) .........   14.5     18.3     22.0
        Other ...............    7.2      7.5      7.6
                               ------   ------   ------
            Total Revenues ..  100.0%   100.0%   100.0%
                               ======   ======   ======
   </TABLE>


                                       16

<PAGE>   17
<TABLE>
<CAPTION>
                               Year Ended December 31,
                               ------------------------
                                1994     1995     1996
                               ------   ------   ------
<S>                             <C>      <C>      <C>
     Midwest.................   48.7%    52.2%    50.0%
     Southeast...............   30.2     28.0     30.6
     Southwest...............   21.1     19.8     19.4
                               ------   ------   ------
         Total Revenues......  100.0%   100.0%   100.0%
                               ======   ======   ======
</TABLE>

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

(1)      The portion of collection revenues attributable to disposal charges for
         waste collected by the Company and disposed at the Company's landfills
         have been excluded from collection revenues and included in landfill
         revenues.

         The Company's strategy is to develop vertically integrated operations
to ensure internalization of waste it collects and thus realize higher margins
from its operations. By disposing of waste at Company-owned and/or operated
landfills, the Company retains the margin generated through disposal operations
that would otherwise be earned by third-party landfills. Approximately 71% of
Company-collected waste is disposed of at Company-owned and/or operated
landfills as measured using disposal costs in 1996. After taking into account
the Laidlaw Acquisition, this measure is expected to be approximately 60%. In
addition, transfer stations are an integral part of the disposal process. The
Company locates its transfer stations in areas where its landfills are outside
of the population centers in which it collects waste. Such waste is transloaded
and economically transported to its landfills. Transfer and landfill revenues as
a percentage of total revenues increased from 8.4% and 14.5% in 1994 to 8.5% and
22% in 1996, respectively, which reflects the continued implementation of the
Company's strategy.

         Expenses. Cost of operations includes labor, maintenance and repairs,
equipment and facility rent, utilities and taxes, the costs of ongoing
environmental compliance, safety and insurance, disposal costs and costs of
independent haulers transporting Company waste to the disposal site. Disposal
costs include certain landfill taxes, host community fees, payments under
agreements with respect to landfill sites that are not owned, landfill site
maintenance, fuel and other equipment operating expenses and accruals for
estimated closure and post-closure monitoring expenses anticipated to be
incurred in the future.

         Selling, general and administrative expenses include management,
clerical and administrative compensation and overhead, sales costs, community
relations expenses and provisions for estimated uncollectible accounts
receivable and potentially unrealizable acquisition costs.

         Depreciation and amortization expense includes depreciation of fixed
assets and amortization of landfill airspace, goodwill and other intangible
assets.

         In connection with potential acquisitions, the Company incurs and
capitalizes certain transaction and integration costs which include stock
registration, legal, accounting, consulting, engineering and other direct costs.
When an acquisition is completed and is accounted for using the
pooling-of-interests method for business combinations, these costs are charged
to the statement of operations as acquisition related costs. When a completed
acquisition is accounted for using the purchase method for business
combinations, these costs are capitalized. The Company routinely evaluates
capitalized transaction and integration costs and expenses those costs related
to acquisitions not likely to occur. Indirect acquisition costs, such as
executive salaries, general corporate overhead and other corporate services, are
expensed as incurred.

         Certain direct landfill development costs, such as engineering,
upgrading, construction and permitting costs, are capitalized and amortized
based on consumed airspace. The Company believes that the costs associated with
engineering, owning and operating landfills will increase in the future as a
result of federal, state and local regulation and a growing community awareness
of the landfill permitting process. Although there can be no assurance, the
Company believes that it will be able to implement price increases sufficient to
offset these increased expenses. All indirect landfill development costs, such
as executive salaries, general corporate overhead, public affairs and other
corporate services, are expensed as incurred.


                                       17

<PAGE>   18
         Accrued closure and post-closure costs represent an estimate of the
current value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Site specific closure and post-closure engineering cost
estimates are prepared annually for landfills owned and/or operated by the
Company for which it is responsible for closure and post-closure. The present
value of estimated future costs are accrued based on accepted tonnage as
landfill airspace is consumed. Discounting of future costs is applied where the
Company believes that both the amounts and timing of related payments are
reliably determinable. The Company periodically updates its estimates of future
closure and post-closure costs. The impact of changes which are determined to be
changes in estimates are accounted for on a prospective basis.

         The net present value of the closure and post-closure commitment is
calculated assuming inflation of 3.5% and a risk-free capital rate of 7.0%.
Discounted amounts previously recorded are accreted to reflect the effects of
the passage of time. The Company's current estimate of total future payments for
closure and post-closure is $467 million while the present value of such
estimate is $181 million. At December 31, 1995 and 1996, accruals for landfill
closure and post-closure costs (including costs assumed through acquisitions)
were approximately $10.5 million and $107.5 million. The accruals reflect
relatively young landfills with estimated remaining lives, based on current
waste flows, that range from 1 to over 75 years, and an estimated average
remaining life of greater than 30 years.

RESULTS OF OPERATIONS

         The following table sets forth the percentage relationship that the
various items bear to revenues and the percentage of change in dollar amounts
for the periods indicated. The statement of operations data have been restated
to give effect to acquisitions that were accounted for using the
pooling-of-interests method for business combinations. See Note 2 to the
Company's Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                     -------------------------------------------------------
                                                                            1995                    1996
                                                                          Compared                Compared
                                                                           to 1994                 to 1995
                                                                           % Change                % Change
                                                       1994       1995    in Amounts      1996    in Amounts
                                                     -------     ------   ----------    -------   ----------
<S>                                                 <C>         <C>        <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenues .......................................    100.0%      100.0%        37.4%      100.0%         13.4%
Cost of operations .............................     61.9        55.5         23.1        56.1          14.7
Selling, general and administrative expenses ...     20.6        16.9         12.7        15.6           5.2
Depreciation and amortization expense ..........     10.7        11.9         52.3        12.8          22.1
Acquisition related costs ......................       --         0.7        100.0        37.2       5,889.1
Unusual costs ..................................      1.3          --       (100.0)        2.3         100.0
                                                     ----       -----                    -----
Operating income ...............................      5.5        15.0        278.0       (24.0)       (280.8)
Interest expense, net ..........................      7.8         4.9        (13.8)        2.9         (32.9)
Income tax expense, (benefit) ..................     (0.4)        4.5      1,515.2        (0.2)       (104.1)
Extraordinary loss, net of income tax benefit ..      1.9          --       (100.0)        5.4         100.0
                                                     ----       -----                    -----
  Net income (loss) ............................     (3.8)%       5.6%       305.2%      (32.1)%      (741.5)%
                                                    ======      =====                   ======

</TABLE>


                                                        18

<PAGE>   19
YEARS ENDED DECEMBER 31, 1996 AND 1995

         Revenues. Revenues in 1996 were $246.7 million compared to $217.5
million in 1995, an increase of 13.4%. Approximately 4.3% of the increase in
revenues is attributable to acquisitions and 9.1% is attributable to internal
growth. Revenues of $9.4 million for 1996 were generated from companies acquired
subsequent to December 1994, while increases in revenue attributable to existing
operations amounted to $19.8 million. Average price increases as a percentage of
revenue were approximately 3% of revenue while the remainder of internal growth
was from volume.

         Cost of Operations. Cost of operations in 1996 was $138.4 million
compared to $120.7 million in 1995, an increase of 14.7%. This increase in cost
of operations was primarily attributable to the increase in revenues described
above. As a percentage of revenues, cost of operations increased to 56.1% in
1996 from 55.5% in 1995. Operating costs were affected by an increase in the
percentage of waste internalized to 71% in 1996 from 62% in 1995 which resulted
in a decrease in third-party disposal costs as a percent of revenue. Cost of
operations were also effected by a significant increase in municipal solid waste
volumes offset by a decrease in higher priced special waste volumes. This change
in revenue mix had the effect of increasing the cost of disposal relative to
revenues.

         Selling, General and Administrative Expenses. SG&A expenses increased
to $38.6 million in 1996 compared to $36.7 million in 1995, an increase of 5.2%.
As a percentage of revenues, SG&A decreased to 15.6% in 1996 from 16.9% in 1995.
The increase in SG&A expense resulted from expenses associated with acquired
companies and expenses incurred in connection with the Company's increase in
personnel and other expenses related to the anticipated growth of the Company as
it continues to acquire companies. The decrease in SG&A as a percentage of
revenues can be attributed to an increase in revenue producing assets while
corporate level personnel and other related expenses increased moderately.

         Depreciation and Amortization Expense. Depreciation and amortization in
1996 was $31.5 million compared to $25.8 million in 1995, an increase of 22.1%.
The increase in depreciation and amortization expense is due to acquisitions and
capital expenditures. Before the Laidlaw Acquisition, fixed assets increased to
$442.2 million at December 31, 1996 from $366.6 million at December 31, 1995 and
goodwill increased to $110.7 million at December 31, 1996 from $98.1 million at
December 31, 1995. As a percentage of revenues, depreciation and amortization
increased to 12.8% in 1996 from 11.9% in 1995. This increase is primarily
because amortization of landfill airspace as a percentage of revenue increased
to 3.2% in 1996 from 2.7% in 1995 resulting from an increase in the rate of
waste internalization.

         Acquisition Related Costs. In connection with the Laidlaw Acquisition,
the Company incurred approximately $84.6 million in charges primarily associated
with the acquisition, which include $51.5 million of environmental related
matters, $18.4 million of asset impairments and abandonments, and $14.7 million
of acquisition liabilities, of which $2.0 million relates to litigation matters,
$5.4 million relates to relocation and transition costs and bonuses, $3.8
million relates to taxes, claims and assessments and other integration costs,
and $3.5 million relates to acquired accounts receivable considered
uncollectible.

         In connection with the Laidlaw Acquisition, Allied engaged an
independent environmental consulting firm to assist in conducting an
environmental assessment of the real property owned by the acquired subsidiaries
or third-parties, and properties under the management of the acquired companies.
Several contaminated landfills and other properties have been identified, two of
which are owned by subsidiaries of the Company, that would require those
subsidiaries to incur costs for incremental closure and post-closure measures,
remediation activities and litigation in the future. The costs of performing the
investigation, design, remediation and the allocation of responsibility to the
subsidiaries of Allied vary significantly between sites. Based on information
available to the Company, Allied recorded a provision of $51.5 million for
environmental matters, including closure and post-closure costs, in the 1996
statement of operations and expects these amounts to be disbursed over the next
30 years.


                                       19

<PAGE>   20
         As a result of the Laidlaw Acquisition, Allied increased its revenue
base by approximately 400% and entered into 14 new markets where it believes
that it can execute its operating strategy. In connection with the significant
increase in size and the redirection of its strategic operating emphasis, Allied
determined that certain asset values have become impaired as they will provide
no further benefit to Company. Included among the asset impairments are costs of
$10.8 million related to over 50 noncompetition agreements in several markets
where the counterparty no longer poses a significant threat, costs of $4.8
million for discontinued facilities and costs of $2.8 million for market
development activities no longer being pursued.

         Costs of $7.1 million were incurred in 1996 compared to $1.5 million in
1995 for transaction and integration costs directly related to acquisitions
accounted for using the pooling-of-interests method for business combinations.

         Unusual Items. In December 1996 the Company recorded $5.7 million in
unusual items including $2.0 million in connection with the ongoing
investigation and remediation of the Company's Norfolk landfill and $3.7 million
of other non-recurring valuation adjustments.

         Net Interest Expense. Net interest expense was $7.1 million in 1996
compared to $10.6 million in 1995, a decrease of 32.9%. The decrease in net
interest expense is partially due to the conversion of subordinated debt into
Common Stock in the fourth quarter of 1995 which resulted in a reduction to
annual interest charges and the refinancing of the 1994 Notes (as defined
herein) on July 31, 1996 resulting in a decrease in the interest rate from 12%
to 7% for the months of August through December 1996. Also, interest capitalized
in 1996 was $13.0 million compared to $11.1 million in 1995.

         Conversion Fees. A non-cash conversion fee of $2.2 million was incurred
in the fourth quarter of 1995 as a result of an inducement offered by the
Company to holders of certain convertible preferred stock and convertible
subordinated notes to exercise their conversion option to receive Common Stock.
The inducement fee consisted of payment of dividends or interest from the
conversion date through the first call or redemption date of each convertible
security. Approximately 7.8 million shares of Common Stock were issued for
conversion and approximately 285,000 were issued for the conversion fee.

         Income Taxes. Income taxes reflect a benefit at a 0.6% effective income
tax rate for 1996 which deviates from the federal statutory rate of 35% due
primarily to the treatment of expenses for book purposes that, when recognized
for tax purposes, may produce tax goodwill in excess of book goodwill. Other
items impacting the Company's effective tax rate for both 1996 and 1995 include
the differences in the treatment of goodwill for book and tax purposes, state
income taxes, and other permanent differences. See Note 10 to the Consolidated
Financial Statements.

         Extraordinary Loss. On July 31, 1996, Allied completed a tender offer
(the "Tender Offer") for substantially all of the 1994 Notes at the redemption
price of $1,157.50 per $1,000 note. An extraordinary charge related to the
Tender Offer of approximately $18.4 million ($11.0 million net of income tax
benefit), was charged to earnings in the third quarter of 1996. In connection
with the Laidlaw Acquisition, the Company refinanced its $300 million senior
revolving credit facility and recognized an extraordinary charge of
approximately $4.0 million ($2.4 million net of income tax benefit) was charged
to earnings in the fourth quarter of 1996.


                                       20

<PAGE>   21
YEARS ENDED DECEMBER 31, 1995 AND 1994

         Revenues. Revenues in 1995 were $217.5 million compared to $158.4
million in 1994, an increase of 37.4%. The increase in revenues is due primarily
to the effects of acquisitions as well as price and volume increases
attributable to existing operations. Revenues of $34.4 million in 1995 were
generated from companies acquired since January 1994, while increases in
revenues attributable to existing operations amounted to $24.7 million. Average
price increases as a percentage of revenue were approximately 5.7%.

         Cost of Operations. Cost of operations in 1995 was $120.7 million
compared to $98.1 million in 1994, an increase of 23.1%. This increase in costs
was attributable primarily to increase in revenues described above. As a
percentage of revenues, cost of operations decreased to 55.5% in 1995 from 61.9%
in 1994. The resulting increase in margins was due primarily to better
internalization of waste flows in 1995 as compared to 1994 during which
Allied-collected waste disposed at Allied-owned and/or operated landfills, as
measured using disposal costs, was 34.8% of revenue compared to 62.0% for 1995.
Gross profit also increased because of increased operating efficiencies
resulting from improvements made to vehicles and equipment through capital
expenditures made in 1994 and 1995.

         Selling, General and Administrative Expenses. SG&A expenses increased
to $36.7 million in 1995 compared to $32.6 million in 1994, an increase of
12.7%. As a percentage of revenues, SG&A decreased to 16.9% in 1995 from 20.6%
in 1994. The increase in SG&A expenses resulted from expenses associated with
acquired companies and expenses incurred in connection with Allied's increase in
personnel and other expenses related to the anticipated growth of Allied as it
continues to acquire companies. The decrease in SG&A as a percentage of revenues
can be attributed to a significant increase in revenue producing assets while
corporate level personnel and other related expenses increased only moderately.

         Depreciation and Amortization Expense. Depreciation and amortization
expense in 1995 was $25.8 million compared to $16.9 million in 1994, an increase
of 52.3%. The increase in depreciation and amortization expense is due to
acquisitions and capital expenditures. Fixed assets increased to $366.6 million
at December 31, 1995 from $261.4 million at December 31, 1994 and goodwill
increased to $98.1 million at December 31, 1995 from $84.1 million at December
31, 1994. As a percentage of revenues, depreciation and amortization increased
to 11.9% in 1995 from 10.7% in 1994. This increase in primarily because
amortization of landfill airspace as a percentage of revenue increased to 2.7%
in 1995 from 1.0% in 1994 resulting from an increase in the rate of waste
internalization.

         Acquisition Related Costs. Costs of $1.5 million were incurred in
September 1995 for transaction and integration costs related to acquisitions
accounted for using the pooling-of-interests method for business combinations.
During 1994, no acquisitions were accounted for using this method.

         Unusual Items. In December 1994 the Company recorded a provision of
$2.1 million, in excess of the closure and post-closure reserves recorded in the
normal course of business, to recognize the estimated costs of additional
closure, post-closure and remedial measures related to its Norfolk landfill.

         Net Interest Expense. Net interest expense increased to $10.6 million
in 1995 compared to $12.4 million in 1994, a decrease of 13.8%. Interest charges
decreased in 1995 compared to 1994 because of an increase in the amount of
capitalized interest to $11.1 million in the 1995 period compared to $3.5
million in 1994. The amount of interest capitalized increased in 1995 because of
an increase in transfer stations and landfill airspace under development or
under application for development compared to 1994 and the acquisition of
additional landfills subsequent to 1994. The decrease in interest charges was
offset by an increase in the interest rate on the 1994 Notes, from 10.75% in
1994 to 12% in January 1995 and an increase in interest bearing debt to
approximately $223.9 million at December 31, 1995 from approximately $188.0
million at December 31, 1994, due primarily to acquisitions and capital
expenditures.


                                       21

<PAGE>   22
         Conversion Fees. A non-cash conversion fee of $2.2 million was incurred
in the fourth quarter of 1995 as a result of an inducement offered by Allied to
holders of certain convertible securities to exercise their conversion option to
receive Common Stock. The inducement fee consisted of payment of dividends or
interest from the conversion date through the first call or redemption date of
each convertible security. Approximately 7.8 million shares of Common Stock were
issued for conversion and approximately 285,000 were issued for the conversion
fee.

         Income Taxes. Income taxes reflect a 44.1% effective income tax rate in
1995 compared to a 18.6% effective rate in 1994. Allied's effective tax rate in
1995 and 1994 deviates from the federal statutory rates of 35% and 34%,
respectively, due to the effects of differences in the treatment of goodwill for
book and tax purposes, state income taxes, and other permanent differences.

         Extraordinary Items. In connection with the Securities Purchase
Agreement between the Company and TPG Partners, L.P. ("TPG") dated October 27,
1994, as amended (the "TPG Agreement"), the Company solicited and obtained
consents from a majority of the holders of the 1994 Notes causing modifications
to the indenture agreement and the execution of a supplemental indenture (the
"Supplemental Indenture"). Among other things, the Supplemental Indenture
increased the Company's restricted borrowing capacity (with certain limitations)
under current and future revolving credit agreements and lease lines from a
total of $35 million to $120 million, deleted certain borrowing restrictions,
changed certain financial ratio covenants and increased the per annum rate of
interest from 10.75% to 12.0%. The execution of the Supplemental Indenture,
which was effective January 1995, was accounted for as an early extinguishment
of debt. Accordingly, capitalized deferred debt issuance costs related to the
original indenture were written off as of December 31, 1994 and an extraordinary
charge of $4.6 million ($2.8 million net of income tax benefit) was recorded.
Additionally, in the first quarter of 1994, an extraordinary charge of $334,000
($206,000 net of income tax benefit) was recognized as result of the early
extinguishment of various debt instruments using the proceeds from the 1994
Notes.


LIQUIDITY AND CAPITAL RESOURCES

         Historically, the Company has satisfied its acquisition, capital
expenditure and working capital needs primarily through bank financing, public
offerings and private placements of debt and equity securities. Between January
1, 1994 and December 31, 1996, the Company completed the $1.275 billion Senior
Credit Facility (of which $517 million was repaid with proceeds from the
Canadian Sale in March 1997), a $525 million private placement of the 1996
Notes, a $100 million public offering of the 1994 Notes (substantially all of
which were repurchased pursuant to the Tender Offer in July 1996), a $50 million
private placement of Common Stock, a $300 million senior revolving credit
facility (all debt under which was repaid in December 1996), and a $48 million
public equity offering. Because of the capital intensive nature of the solid
waste industry, the Company has used, and expects to continue using amounts in
excess of the cash generated from operations to fund acquisitions and capital
expenditures, including landfill development. In connection with acquisitions,
the Company has assumed or incurred indebtedness with relatively short-term
repayment schedules, thereby increasing its current and medium-term liabilities.
Additionally, operating equipment has been acquired using financing leases which
have short and medium-term maturities. As a result, the Company has periodically
had low levels of working capital or working capital deficits.


                                       22

<PAGE>   23
         During the years ended December 31, 1994, 1995 and 1996, the Company's
cash flows from operating, investing and financing activities were as follows
(in millions):

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                        ---------------------------------
                                                          1994        1995        1996
                                                        --------    -------    ----------
<S>                                                     <C>         <C>        <C>
OPERATING ACTIVITIES:
Net income (loss) ....................................  $   (6.0)   $  12.4    $    (79.4)
Extraordinary loss on early extinguishments of debt ..       4.9         --          22.4
Acquisition related costs ............................        --        1.5          91.7
Unusual items ........................................       2.1         --           5.7
Non-cash operating expenses(1) .......................      16.9       35.9          36.9
Loss on sale of fixed assets .........................       0.7        0.3           1.9
Increase in operating assets and liabilities, net ....      (1.7)     (12.8)        (44.1)
                                                        --------    -------    ----------
  Cash provided by operating activities ..............      16.9       37.3          35.1
                                                        --------    -------    ----------
INVESTING ACTIVITIES:
Cost of acquisitions, net of cash acquired ...........     (49.2)     (18.7)     (1,356.6)
Capital expenditures .................................     (46.6)     (55.6)        (43.7)
Proceeds from sale of fixed assets ...................       1.4        1.1           0.6
Other ................................................       2.0       (0.4)           --
                                                        --------    -------    ----------
  Cash used for investing activities .................     (92.4)     (73.6)     (1,399.7)
                                                        --------    -------    ----------
FINANCING ACTIVITIES:
Net proceeds from sale and
  redemption of preferred stock and common stock .....      15.0       30.6          48.1
Net proceeds from long-term debt .....................     126.3       66.6       1,809.7
Payments of long-term debt ...........................     (59.5)     (55.8)       (445.8)
Other ................................................      (4.9)      (6.3)         (1.3)
                                                        --------    -------    ----------
  Cash provided by financing activities ..............      76.9       35.1       1,410.7
                                                        --------    -------    ----------
Increase (decrease) in cash ..........................  $    1.4    $  (1.2)   $     46.1
                                                        ========    =======    ==========
</TABLE>

----------

(1)      Consists principally of provisions for depreciation and amortization,
         landfill closure and post-closure costs, doubtful accounts, potentially
         unrealizable acquisition costs and deferred income taxes.

         As of December 31, 1996, the Company had cash and cash equivalents of
$50.1 million. The Company's capital expenditure and working capital
requirements have increased significantly, reflecting the Company's rapid growth
by acquisition and development of revenue producing assets, and will increase
further as the Company continues to pursue its business strategy. During 1996
the Company completed the Laidlaw Acquisition for total consideration of
approximately $1.5 billion consisting of $1.2 billion cash, 14.6 million shares
of Common Stock, warrants to acquire 20.4 million shares of Common Stock, and
two junior subordinated debentures with an aggregate face amount of $318 million
and acquired 21 additional businesses for total consideration of approximately
$126.5 million of which approximately $73.9 million of such consideration was
paid in common stock and $3.6 million was paid in seller notes. Total annualized
revenues of the latter businesses are approximately $78.8 million. Subsequent to
December 31, 1996 the Company purchased 2 operating solid waste landfills with
estimated annual revenues of $26.8 million for an aggregate purchase price of
approximately $58.9 million of which approximately $6.5 million of such
consideration was paid in common stock. For the calendar year 1997, the Company
expects to spend approximately $126 million for capital, closure and
post-closure, and remediation expenditures relating to its landfill operations.
As the Company continues to acquire waste operations in 1997, additional capital
amounts will be required during 1997 for the acquisition of businesses and the
capital expenditure requirements related to those acquired businesses.


                                       23

<PAGE>   24
         On December 31, 1996, the Company's debt structure consisted of $525
million of the 1996 Notes, amounts outstanding under the Senior Credit Facility
of approximately $975 million, and $110.7 million of Allied Canada Debentures.
In connection with the Canadian Sale, Allied repaid approximately $517 million
of the Senior Credit Facility. After giving effect to the Canadian Sale, there
is aggregate availability under the Senior Credit Facility of $300 million
pursuant to a revolving credit facility to be used for working capital, letters
of credit, acquisitions and other general corporate purposes. No more than $200
million of funded loans (excluding amounts outstanding pursuant to drawn letters
of credit) may be outstanding at one time, of which not more than $100 million
may be used for acquisitions. The indenture relating to the 1996 Notes and the
Senior Credit Facility contain financial and operating covenants and significant
restrictions on the ability of the Company to complete acquisitions, pay
dividends, incur indebtedness, make investments and take certain other corporate
actions. A substantial portion of the Company's available cash will be required
to be applied to service indebtedness, including indebtedness incurred to
finance the Laidlaw Acquisition, which is expected to include approximately $0.7
million for preferred stock dividends and approximately $126 million in annual
principal and interest payments (after giving effect to the payment of $517
million on the Senior Credit Facility after the Canadian Sale).

         The Company is also required to provide financial assurances to
governmental agencies under applicable environmental regulations relating to its
landfill operations. These financial assurances include performance bonds,
letters-of-credit and trust deposits required principally to secure the
Company's landfill estimated closure and post-closure obligations and collection
contracts. At December 31, 1996, the Company had outstanding approximately $47.0
million of performance bonds, $99.5 million in letters-of-credit and $2.6
million of trust deposits. During calendar year 1997, the Company expects to be
required to provide approximately $227.6 million in financial assurance
obligations relating to its landfill operations. The Company expects that
financial assurance obligations will increase in the future as it acquires and
expands its activities and that a greater percentage of the financial assurances
will be comprised of letters-of-credit.

         The Company has lease facilities (the "Lease Facilities") that allow it
to enter into equipment leases at rates ranging from similar term treasury note
rates plus 2.5% to 3.5% for terms of 36 to 84 months. In addition to equipment
leases outstanding at December 31, 1995 and 1996 of $32.7 million and $45.2
million, respectively, the Company had available lease commitments of $8.5
million and $11.9 million, respectively. The Company intends to enter into
master equipment lease facilities relating to the financing of the acquisition
of trucks and containers.

         The Company expects that Subtitle D and other regulations that apply to
the non-hazardous waste disposal industry will require the Company, as well as
others in the industry, to alter operations and to modify or replace existing
facilities. Such expenditures have been and will continue to be substantial.
Further regulatory changes could accelerate expenditures for closure and
post-closure monitoring and obligate the Company to spend sums in addition to
those presently reserved for such purposes. These factors, together with the
other factors discussed above, could substantially increase the Company's
operating costs and impair the Company's ability to invest in its facilities.

         The Company's ability to meet future capital expenditure and working
capital requirements, to make scheduled payments of principal of, to pay
interest on, or to refinance its indebtedness, and to fund capital amounts
required for the acquisition of businesses and the expansion of existing
businesses depends on its future performance, which, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors beyond its control. One of the primary factors impacting the
Company's future performance will be its ability to integrate the assets
acquired in the Laidlaw Acquisition after the Canadian Sale, and to reduce
redundancies and excess costs. These operations are significantly larger than
the Company's previous operations and represent a substantial increase in the
scope of the Company's business. Based upon the current level of operations and
anticipated growth, management of the Company believes that available cash flow,
together with available borrowing under the Senior Credit Facility, the Lease
Facilities and other sources of liquidity, will be adequate to meet the
Company's anticipated future requirements for working capital,
letters-of-credit, capital expenditures, scheduled payments of principal of and
interest on debt incurred under the Senior Credit Facility, interest on the 1996
Notes and capital amounts required for acquisitions and expansion. However, the
principal payments at maturity on the 1996 Notes may require refinancing. There
can be no assurance that the Company's


                                       24

<PAGE>   25
business will generate sufficient cash flow from operations or that future
financings will be available in an amount sufficient to enable the Company to
service its indebtedness or to make necessary capital expenditures, or that any
refinancing would be available on commercially reasonable terms if at all.
Additionally, depending on the timing, amount and structure of any future
acquisitions and the availability of funds under the acquisition facility under
the Senior Credit Facility, the Company may need to raise additional capital to
fund the acquisition and integration of additional solid waste businesses. The
Company may raise such funds through additional bank financings or public or
private offerings of its debt and equity securities. There can be no assurance
that the Company will be able to secure such funding, if necessary, on favorable
terms, if at all. If the Company is not successful in securing such funding, the
Company's ability to pursue its business strategy may be impaired and results of
operations for future periods may be negatively affected.


SIGNIFICANT FINANCING EVENTS

         In connection with the Laidlaw Acquisition, the Company and Allied
Waste North America, Inc., a wholly owned subsidiary of the Company ("Allied
NA") executed a $1.275 billion Credit Agreement (the "Credit Agreement") among
Goldman Sachs Credit Partners L.P., Credit Suisse and Citibank, N.A.
(collectively the "Agents") (the "Senior Credit Facility"). The Senior Credit
Facility was comprised of (i) a $300 million revolving credit facility; (ii) a
$475 million 5.5 year senior term loan; (iii) a $100 million 6.5 year
Amortization Extended Term Loan AXEL(TM)A; (iv) a $200 million 7.5 year
AXEL(TM)B; and (v) a $200 million 8.5 year AXEL(TM)C. Of the $300 million
available under the revolving credit facility, no more than $200 million may be
outstanding at one time, of which no more than $100 million may be used to
finance permitted acquisitions ("Acquisition Loans"), as defined in the Credit
Agreement, and no more than $150 million may be used for the issuance of standby
letters-of- credit. Borrowings under the revolving credit facility may be used
for permitted acquisitions, repay existing indebtedness or indebtedness assumed
through acquisition and for general corporate purposes. Acquisition Loans
outstanding as of September 2000 become payable quarterly, with a final maturity
of June 2002 and may not be re-borrowed after September 2000. Loans, other than
Acquisition Loans, outstanding under the revolving credit facility are payable
in June 2002. Borrowings under the senior term loan and the AXELs were use to
pay a portion of the cash purchase price of the Laidlaw Acquisition. Amounts
outstanding under the senior term loan and AXELs are payable quarterly,
beginning in June 1997, with final maturities ranging from June 2002 to June
2005. The Credit Agreement contains a number of covenants that, among other
things, require Allied NA to maintain certain financial ratios which commence
with the quarter ended March 31, 1997, and limit Allied NA's ability to make
acquisitions, purchase fixed assets above certain amounts, incur additional
indebtedness and liens, pay dividends except on certain preferred stock, make
optional prepayments on certain subordinated indebtedness, including the 1996
Notes, enter into certain transactions with affiliates or enter into a merger,
consolidation or sale of substantially all of Allied NA's assets. The Senior
Credit Facility is secured by a pledge of the stock of substantially all of
Allied NA's subsidiaries, liens on substantially all personal property and a
negative pledge of assets of Allied NA and its subsidiaries. In addition to the
security granted, the Agents reserve the right to file mortgages on all real
property of Allied NA and its subsidiaries at their sole discretion. The Senior
Credit Facility is guaranteed by the Company and all the subsidiaries of Allied
NA. Allied NA intends on using proceeds from the revolving credit facility to
make strategic acquisitions, repay indebtedness assumed through acquisitions,
and for general corporate purposes. As of December 31, 1996, Allied NA had no
funded loans outstanding and had issued approximately $46 million of standby
letters-of-credit, leaving $200 million available for funded loans and $104
million available for letters-of-credit. In connection with the Canadian Sale,
Allied paid approximately $517 million of the Senior Credit Facility. Payments
were made on a pro rata basis between the term loan and each of the AXEL
traunches as provided by the Credit Agreement.


                                       25

<PAGE>   26
         Also in connection with the Laidlaw Acquisition, Allied NA issued $525
million of 10.25% Senior Subordinated Notes due 2006 in a Rule 144A private
offering. Net proceeds from the sale of the 1996 Notes, after the underwriting
discount and other expenses, were approximately $509 million. The net proceeds
were used to pay a portion of the cash purchase price of the Laidlaw
Acquisition, repay amounts outstanding under the Company's previous $300 million
credit facility with Credit Suisse as agent, fund certain acquisitions and for
general corporate purposes. Allied NA has an obligation to offer fully
registered securities, pursuant to an exchange offer, that are substantially
identical to the 1996 Notes. If Allied NA fails to effect an exchange offer, or
if the registration statement relating to the exchange offer shall be withdrawn
by Allied NA before certain dates, Allied NA will be subject to penalty interest
in varying amounts ranging from 0.25% to 1.0% per annum on the principal amount
thereof as liquidated damages to the holders of the 1996 Notes. On February 28,
1997, Allied NA filed a registration statement relating to the exchange offer
with the Securities and Exchange Commission on Form S-4. The 1996 Notes cannot
be redeemed until December 1, 2001, except under certain circumstances. Prior to
December 1, 2001, the 1996 Notes are subject to redemption, at the option of
Allied NA, at the greater of (i) 100% of the principal amount of (ii) the sum of
the present values of the remaining scheduled payments of principal and interest
thereon discounted to maturity on a semiannual basis at a comparable treasury
yield plus 75 basis points, plus in each case accrued and unpaid interest to the
date of redemption. At any time prior to December 1, 1999, up to 33% of
principal amount of 1996 Notes will be redeemable, at the option of Allied NA,
from the proceeds of one or more public offerings of capital stock by the
Company at a redemption price of 110.25% of principal amount, plus accrued
interest. The 1996 Notes are guaranteed by the Company and substantially all of
Allied NA's subsidiaries, the guarantees of which are expressly subordinated to
the guarantees of Allied NA's Senior Credit Facility. The 1996 Notes contain
several covenants, the most restrictive of which limits Allied NA and its
subsidiaries' ability to incur additional indebtedness without complying with an
interest coverage ratio test. Other covenants contain limitations on payment of
dividends except for certain preferred stock, issuance of redeemable preferred
stock, transactions with affiliates, granting of liens and security interests,
sales of assets and the use of proceeds from sales of assets, mergers and
consolidations, and changes of control. The covenants do permit Allied NA to
incur certain indebtedness including the Senior Credit Facility, indebtedness
issued and/or assumed in permitted acquisitions and other indebtedness which is
limited to a certain percentage of Allied NA's total assets.

         In connection with the Laidlaw Acquisition, Allied Waste Finance
(Canada) Ltd. ("Allied Finance") issued to Laidlaw: (i) the Allied Finance 7%
Debenture (the "Allied Finance 7% Debenture") and (ii) the Allied Finance Zero
Coupon Debenture (the "Allied Finance Zero Coupon Debenture", and together with
the Allied Finance 7% Debenture the "Allied Finance Debentures"). The principal
of the Allied Finance Debentures is payable in December 2008, subject to earlier
prepayment as described below. The Allied Finance 7% Debenture will bear
interest at the fixed rate of 7% per annum payable semi-annually, except for the
first three years during which the interest payments will be deferred. Laidlaw
and the Company have entered into a subscription agreement under which, at the
option of the Company, Laidlaw must subscribe to common stock of the Company in
equal dollar amounts of the interest and principal payments due on the Allied
Finance 7% Debenture. Before its maturity, the Allied Finance Zero Coupon
Debenture will not bear interest. For the first five years after issuance, the
Allied Finance 7% Debenture may not be prepaid by Allied Finance, subject to
change of control provisions described below. Following the fifth anniversary
and until maturity, Allied Finance will have the option to prepay the Allied
Finance 7% Debenture, in whole or in part, at a scheduled discount from the face
amount of the Allied Finance 7% Debenture. The Allied Finance Zero Coupon
Debenture is not pre-payable at the option of Allied Finance prior to it stated
maturity, subject to the change of control provision. Upon a change of control
(as defined in the Allied Finance Debentures), Allied Finance will be obligated
to offer to prepay the Allied Finance Debentures at a predetermined discount to
the face amount of each debenture, respectively. Subject to certain
subordination provisions contained in the Allied Finance Debentures, the
maturity of the Allied Finance Debentures may be accelerated if a default (as
defined in the Allied Finance Debentures) occurs. The Allied Finance Debentures
are unsecured obligations and do not contain any restrictive or financial
covenants. The Allied Finance Debentures are guaranteed by the Company on a
subordinated basis to the Senior Credit Facility and the 1996 Notes.


                                       26

<PAGE>   27
         In connection with Laidlaw Acquisition, the Company issued a warrant to
Laidlaw for the purchase of 20.4 million shares of common stock of the Company
at an exercise price of $8.25 per share (the "Warrant"). The Warrant expires in
December 2008. Laidlaw or any Laidlaw subsidiary may exercise the Warrant only
after the occurrence of a change of control of the Company. Laidlaw is permitted
to transfer the Warrant to any subsidiary of Laidlaw, but not to any other
affiliate of Laidlaw unless the transferee receives the Warrant pursuant to a
pro rata distribution of Warrants to all stockholders of all classes of
Laidlaw's outstanding capital stock. Laidlaw is permitted to transfer the
Warrant to anyone other than one of its affiliates, but only if, after the
transfer, the transferee and its affiliates beneficially own 9% or less of the
total number of shares of common stock of the Company then outstanding.

         In January 1994, the Company issued $100 million of 10 3/4% senior
subordinated notes (the "1994 Notes"). The net proceeds from the sale of the
1994 Notes after underwriting discount and other expenses, were approximately
$95 million. In July 1996, the Company completed the Tender Offer and purchased
substantially all of its 1994 Notes at the redemption price of $1,157.50 per
$1,000 principal amount. In connection with the Tender Offer, the Company
recognized an extraordinary charge of $18.4 million ($11.0 million net of income
tax benefit), in the third quarter of 1996. The Company also received a consent
from a majority of the holders of the 1994 Notes to eliminate all substantive
financial covenants associated with the remaining 1994 Notes.

         Simultaneously with the Tender Offer in July 1996, the Company
completed a new $300 million revolving credit facility which was extinguished on
December 30, 1996 in connection with the financing of the Laidlaw Acquisition.
The Company recognized an extraordinary charge of $4.0 million ($2.4 million net
of income tax benefit), in the fourth quarter.

         On January 24, 1996, the Company completed a public offering of its
Common Stock. It issued 7.6 million shares for approximately $48 million net of
$5.2 million in underwriter discounts, commissions and offering costs. The net
proceeds from the offering were used to repay amounts outstanding under the
Company's outstanding credit agreement and for other general corporate purposes.

         During 1995, the Company offered to holders of all of its Series D, 9%
and $90 convertible preferred stock and its 6% Convertible Subordinated notes an
inducement to exercise their conversion option to receive Allied Common Stock.
The inducement consisted of the payment of dividends and interest that the
holders of these securities would have received from the date of conversion
through the first call or redemption date of each security. In total, 7,757,056
shares of Common Stock were issued upon conversion. Substantially all of the
Series D preferred stock and 6% Convertible Subordinated notes were converted,
all but 5,029 shares of the 9% preferred stock was converted and all of the $90
preferred stock was converted. Accordingly, the Company's annual dividend and
interest requirements decreased by approximately $2.7 million and $0.8 million,
respectively. The inducement resulted in a 1995 conversion fee charge of
approximately $2.2 million paid in 285,000 shares of Common Stock.

         On January 30, 1995, the Company obtained stockholder approval of the
issuance of 11,709,602 shares of Common Stock to TPG and an affiliate, for $50
million (less approximately $5.0 million of direct offering costs and other
costs related to an amendment to the 1994 Notes).


                                       27

<PAGE>   28
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

         This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" includes forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended ("Forward Looking Statements"). All
statements other than statements of historical fact included in this section,
are Forward Looking Statements. Although the Company believes that the
expectations reflected in such Forward Looking Statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, number
of acquisitions and projected or anticipated benefits from acquisitions made by
or to be made by the Company, or projections involving anticipated revenues,
earnings, levels of capital expenditures or other aspects of operating results.
All phases of the Company operations are subject to a number of uncertainties,
risks and other influences, many of which are outside the control of the Company
and any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether Forward Looking Statements made
by the Company ultimately prove to be accurate. Such important factors
("Important Factors") that could cause actual results to differ materially from
the Company's expectations are disclosed in this section and elsewhere in this
report. All subsequent written and oral Forward Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Important Factors described below that could cause actual
results to differ from the Company's expectations.

         Competition. The solid waste collection and disposal business is highly
competitive. The Company competes with numerous waste management companies, a
number of which have significantly larger operations and greater resources than
the Company. The Company also competes with those counties and municipalities
that maintain their own waste collection and disposal operations. Forward
Looking Statements assume that the Company will be able to effectively compete
with the other waste management companies and municipalities.

         Acquisition and Internal Development Targets. The Company's ongoing
acquisition program is a key element of its expansion strategy. In addition,
obtaining landfill and transfer station permits has become increasingly
difficult, time consuming and expensive. There can be no assurance, however,
that the Company will succeed in obtaining such permits, or in locating
appropriate solid waste businesses at price levels that the Company considers
appropriate and that reflect historical prices. The Forward Looking Statements
assume the Company will be successful in obtaining permits and that a number of
acquisition candidates and landfill properties sufficient to meet the Company's
goals will be available for purchase and that the Company will be able to
complete the acquisition at prices that the Company has experienced in the past
two years.

         Integration. The Company's financial position and results of operations
depend to a large extent on the integration of recently acquired businesses. The
Forward Looking Statements assume that integration of acquired companies,
including the internalization of waste, will require from zero to nine months
from the date the acquisition closes. Failure to achieve effective integration
in the anticipated time period or at all could have an adverse effect on the
Company's future results of operations.

         Ongoing Capital Requirements. To the extent that internally generated
cash and cash available under the Company's existing credit facilities are not
sufficient to provide the cash required for future operations, capital
expenditures, acquisitions, debt repayment obligations and/or financial
assurance obligations, the Company will require additional equity and/or debt
financing in order to provide such cash. The Company has incurred significant
debt obligations in the last two years, which entail substantial debt service
costs. The Forward Looking Statements assume that the Company will be able to
raise the capital necessary to finance such requirements at interest rates that
are as good as or better than those it is currently experiencing. There can be
no assurance, however, that such financing will be available or, if available,
will be available on terms satisfactory to the Company.


                                       28

<PAGE>   29
         Economic Conditions. The Company's business is affected by general
economic conditions. The Forward Looking Statements assume that the Company will
be able to achieve certain volume and price growth estimates which are not
impacted by an economic downturn or other factors outside of its control. (As
revenue of the Company continues to grow it is likely that the rates of internal
growth will reflect growth rates which are less than those experienced in 1995
and 1996.) There can be no assurance that an economic downturn or other factors
outside of its control will not result in a reduction in the estimated rates of
growth or a decrease in the volume of waste being collected or disposed of by
the Company and/or in the price that the Company charges for its services.

         Weather Conditions. Protracted periods of inclement weather may
adversely affect the Company's operations by interfering with collection and
landfill operations, delaying the development of landfill capacity and/or
reducing the volume of waste generated by the Company's customers. In addition,
particularly harsh weather conditions may result in the temporary suspension of
certain of the Company's operations. The Forward Looking Statements do not
assume that such weather conditions will occur which might require the Company
to dispose of waste at alternate facilities and at higher costs.

         Dependence on Senior Management. The Company is highly dependent upon
its senior management team. In addition, as the Company continues to grow, its
requirements for operations management with waste industry experience will also
increase. The availability of such experienced management is not known. The
Forward Looking Statements assume that experienced management will be available
when needed by the Company at compensation levels that are within industry
norms. The loss of the services of any member of senior management or the
inability to hire experienced operations management could have a material
adverse effect on the Company.

         Influence of Government Regulation. The Company's operations are
subject to and substantially affected by extensive federal, state and local
laws, regulations, orders and permits, which govern environmental protection,
health and safety, zoning and other matters. These regulations may impose
restrictions on operations that could adversely affect the Company's results,
such as, but not limited to, restrictions on the expansion of disposal
facilities, restrictions on or the banning of disposal of out-of-state waste or
certain categories of waste or mandates regarding the disposal of solid waste.
Because of heightened public concern, companies in the waste management business
may become subject to judicial and administrative proceedings involving federal,
state or local agencies. These governmental agencies may seek to impose fines or
to revoke or deny renewal of operating permits or licenses for violations of
environmental laws or regulations or to require remediation of environmental
problems at sites or nearby properties, or resulting from transportation or
predecessors' transpiration and collection operations, all of which could have a
material adverse effect on the Company. Liability may also arise from actions
brought by individuals or community groups in connection with the permitting or
licensing of operations, any alleged violations of such permits and licenses or
other matters. The Forward Looking Statements assume that there will be no
materially negative impact on its operations due to government regulation.

         Potential Environmental Liability. The Company may incur liabilities
for the deterioration of the environment as a result of its operations. Any
substantial liability for environmental damage could materially adversely affect
the operating results and financial condition of the Company. Due to the limited
nature of the Company's insurance coverage of environmental liability, if the
Company were to incur a liability for environmental damage, its business
liquidity, financial position or results of operations could be materially
adversely affected. The Forward Looking Statements assume that the Company will
not incur any material environmental liabilities other than those for which a
provision has been recorded in the consolidated financial statements and
disclosed in the notes thereto.


                                       29

<PAGE>   30
INFLATION AND PREVAILING ECONOMIC CONDITIONS

         To date, inflation has not had a significant impact on the Company's
operations. Consistent with industry practice, most of the Company's contracts
provide for a pass through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company therefore, believes it
should be able to implement price increases sufficient to offset most cost
increases resulting from inflation. However, competitive factors may require the
Company to absorb cost increases, resulting from inflation. The Company is
unable to determine the future impact of a sustained economic slowdown.

SEASONALITY

         The Company believes that its collection and landfill operations can be
adversely affected by protracted periods of inclement weather which could delay
the development of landfill capacity or transfer of waste and/or reduce the
volume of waste generated.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Report of Independent Accountants.

         Consolidated Balance Sheets - December 31, 1995 and 1996.

         Consolidated Statements of Operations for the Three Years Ended
         December 31, 1996.

         Consolidated Statements of Stockholders' Equity for the Three Years
         Ended December 31, 1996.

         Consolidated Statements of Cash Flows for the Three Years Ended
         December 31, 1996.

         Notes to Consolidated Financial Statements.


                                       30

<PAGE>   31
To Allied Waste Industries, Inc.



We have audited the accompanying consolidated balance sheets of Allied Waste
Industries, Inc., (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Allied Waste Industries, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.



                                                             ARTHUR ANDERSEN LLP


Phoenix, Arizona,
 March 26, 1997.



                                       31

<PAGE>   32
                          ALLIED WASTE INDUSTRIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              December 31
                                                                                      --------------------------
                                                                                          1995           1996
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
ASSETS
Current Assets --
   Cash and cash equivalents...............................................           $     4,016    $    50,094
   Accounts receivable, net of allowance of $2,502
      and $5,806...........................................................                32,172         88,522
   Prepaid and other current assets........................................                 5,369          9,860
   Current portion of landfills............................................                 7,103         23,820
   Inventories.............................................................                 1,960          6,941
   Assets held for sale....................................................                    --        524,716
   Deferred income taxes...................................................                 2,669          5,809
                                                                                      -----------    -----------
          Total current assets.............................................                53,289        709,762
Property and equipment, net................................................               302,352        706,752
Goodwill, net..............................................................                88,429        856,108
Other assets...............................................................                14,636         44,927
                                                                                      -----------    -----------
          Total assets.....................................................           $   458,706    $ 2,317,549
                                                                                      ===========    ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities --
   Current portion of long-term debt to related parties                               $       121    $       136
   Current portion of long-term debt to unrelated parties                                  37,460        532,811
   Accounts payable........................................................                23,750         56,186
   Accrued interest........................................................                 5,995          4,910
   Other accrued liabilities...............................................                14,028         77,458
   Unearned income.........................................................                 9,273         11,185
                                                                                      -----------    -----------
          Total current liabilities........................................                90,627        682,686
Long-term debt to related parties, less current portion                                     1,862        112,473
Long-term debt to unrelated parties, less current portion                                 176,732      1,034,330
Convertible subordinated debt, net of discount, less current portion                        7,779          1,706
Deferred income taxes......................................................                25,649         53,095
Accrued closure, post-closure and environmental costs                                      10,530        135,604
Deferred royalties and other long-term obligations.........................                 9,222         22,097
Commitments and contingencies
Stockholders' Equity --
   Preferred stock, aggregate liquidation preference of
      $15,052 and $9,907 ..................................................                     2              1
   Common stock............................................................                   474            747
   Additional paid-in capital..............................................               134,326        352,589
   Retained earnings (deficit).............................................                 1,503       (77,779)
                                                                                      -----------    -----------
          Total stockholders' equity.......................................               136,305        275,558
                                                                                      -----------    -----------
          Total liabilities and stockholders' equity.......................           $   458,706    $ 2,317,549
                                                                                      ===========    ===========
</TABLE>


The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.


                                       32

<PAGE>   33
                          ALLIED WASTE INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
        (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS AND NUMBER OF SHARES)

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                               ----------------------------------------------
                                                                  1994              1995              1996
                                                               -----------       -----------      -----------
<S>                                                            <C>               <C>                    <C>
Revenues.............................................          $   158,354       $   217,544      $   246,679
Cost of operations...................................               98,086           120,738          138,437
Selling, general and administrative expenses                        32,564            36,708           38,602
Depreciation and amortization........................               16,931            25,779           31,470
Acquisition related costs............................                   --             1,531           91,693
Unusual items........................................                2,100                --            5,744
                                                               -----------       -----------      -----------
  Operating income (loss)............................                8,673            32,788          (59,267)
Interest income......................................               (1,073)             (716)          (2,110)
Interest expense.....................................               13,441            11,372            9,257
                                                               -----------       -----------      -----------
  Income (loss) before income taxes..................               (3,695)           22,132          (66,414)
Income tax expense (benefit).........................                 (689)            9,751             (399)
                                                               -----------       -----------      -----------
  Income (loss) before extraordinary loss                           (3,006)           12,381          (66,015)
Extraordinary loss due to early extinguishment
  of debt, net of income tax benefit                                (3,029)               --          (13,412)
                                                               -----------       -----------      -----------
  Net income (loss)..................................               (6,035)           12,381          (79,427)
Dividends on preferred stock.........................               (3,773)           (4,070)          (1,073)
Conversion fee on equity securities converted                           --            (2,151)              --
                                                               -----------       -----------      -----------
  Net income (loss) to common shareholders                     $    (9,808)      $     6,160      $   (80,500)
                                                               ===========       ===========      ===========
Net income (loss) per share:
  Net income (loss) before extraordinary loss                  $     (0.27)      $      0.15      $     (1.15)
  Extraordinary loss.................................                (0.12)               --            (0.23)
                                                               -----------       -----------      -----------
  Net income (loss)..................................          $     (0.39)      $      0.15      $     (1.38)
                                                               ===========       ===========      ===========
Weighted average common and
  common equivalent shares outstanding                          25,028,107        40,046,459       58,422,581
                                                               ===========       ===========      ===========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                       33

<PAGE>   34
                          ALLIED WASTE INDUSTRIES, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                         TOTAL
                                                                         ADDITIONAL      RETAINED       STOCK-
                                            PREFERRED       COMMON        PAID-IN        EARNINGS       HOLDERS'
                                              STOCK          STOCK        CAPITAL       (DEFICIT)       EQUITY
                                            ---------      ---------     ----------     ---------      ---------
<S>                                         <C>            <C>           <C>            <C>            <C>
Balance, December 31, 1993 ...............  $      46      $     218     $  64,019      $   5,995      $  70,278
  Common stock issued, net ...............         --             33         8,123             --          8,156
  Stock options exercised ................         --             --            87             --             87
  7% Cumulative Convertible
    preferred stock issued, net ..........          1             --         3,490             --          3,491
  Series E Cumulative
    Convertible preferred
    stock issued, net ....................         --             --        15,000             --         15,000
  Series D and $90 Cumulative
    Convertible preferred stock
    and convertible notes converted ......         (3)             1         5,930             --          5,928
  Dividends declared on
    preferred stock ......................         --             --        (3,773)            --         (3,773)
  Equity transactions
    pooled companies .....................         --             --          (141)        (3,019)        (3,160)
  Net loss ...............................         --             --            --         (6,035)        (6,035)
                                            ---------      ---------     ---------      ---------      ---------
Balance December 31, 1994 ................  $      44      $     252     $  92,735      $  (3,059)     $  89,972
  Common stock issued, net ...............         --             90        33,006             --         33,096
  Stock options and warrants exercised ...         --              8         2,048             --          2,056
  Series C, Series D, 9%
    Cumulative Convertible, and
    $90 Cumulative Convertible
    preferred stock and
    convertible notes converted ..........        (42)           124         6,523             --          6,605
  Dividends declared on preferred stock ..         --             --            --         (4,070)        (4,070)
  Conversion fee on equity
    securities converted .................         --             --            --         (2,151)        (2,151)
  Equity transactions of
    pooled companies .....................         --             --            14         (1,598)        (1,584)
  Net income .............................         --             --            --         12,381         12,381
                                            ---------      ---------     ---------      ---------      ---------
Balance December 31, 1995 ................          2            474       134,326          1,503        136,305
  Common stock issued, net ...............         --            242       162,535             --        162,777
  Warrants issued ........................         --             --        49,000             --         49,000
  Stock options and warrants exercised ...         --             10         2,336             --          2,346
  9% Cumulative Convertible
    preferred stock and
    convertible notes converted ..........         (1)            21         5,465             --          5,485
  Dividends declared on preferred stock ..         --             --        (1,073)            --         (1,073)
  Equity transactions pooled companies ...         --             --            --            145            145
  Net loss ...............................         --             --            --        (79,427)       (79,427)
                                            ---------      ---------     ---------      ---------      ---------
Balance December 31, 1996 ................  $       1      $     747     $ 352,589      $ (77,779)     $ 275,558
                                            =========      =========     =========      =========      =========
</TABLE>

             The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.


                                       34

<PAGE>   35
                          ALLIED WASTE INDUSTRIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                      ---------------------------------------------
                                                                         1994              1995           1996
                                                                      -----------      -----------    -------------
<S>                                                                   <C>              <C>            <C>
Operating Activities --
   Net income (loss) ...............................................  $    (6,035)     $    12,381      $   (79,427)
   Adjustments to reconcile net income (loss) to cash provided
     by operating activities --
   Extraordinary loss on early extinguishment of debt ..............        4,929               --           22,352
   Provisions for:
     Depreciation and amortization .................................       16,931           25,779           31,470
     Closure and post-closure costs ................................          850              711            1,300
     Acquisition related costs .....................................           --            1,531           91,693
     Unusual items .................................................        2,100               --            5,744
     Doubtful accounts .............................................        1,768            1,994            2,388
     Deferred income taxes .........................................       (2,679)           5,683            1,700
     Loss on sale of fixed assets ..................................          762              291            1,941
     Write-off intangible assets ...................................           --              237               --
   Change in operating assets and liabilities, excluding the
       effects of purchase acquisitions --
     Accounts receivable, prepaid expenses, inventories and other ..      (20,029)          (9,226)         (16,788)
     Accounts payable, accrued liabilities, unearned income,
       closure and post-closure costs and other ....................       18,305           (2,047)         (27,283)
                                                                      -----------      -----------      -----------
Cash provided by operating activities ..............................       16,902           37,334           35,090
                                                                      -----------      -----------      -----------
Investing Activities --
   Cost of acquisitions, net of cash acquired ......................      (49,160)         (18,715)      (1,356,639)
   Capital expenditures ............................................      (46,560)         (55,633)         (43,695)
   Proceeds from sale of fixed assets ..............................        1,386            1,057              650
   Increase in cash value of life insurance policies ...............         (243)            (272)              --
   Change in deferred acquisition costs and notes receivable .......        2,150              (85)              (9)
                                                                      -----------      -----------      -----------
Cash used for investing activities .................................      (92,427)         (73,648)      (1,399,693)
                                                                      -----------      -----------      -----------
Financing activities --
   Net proceeds from sale and redemption of preferred stock ........       14,926             (316)              --
   Net proceeds from sale of common stock,
     stock options and warrants ....................................           83           30,911           48,119
   Proceeds from long-term debt,
     net of issuance costs .........................................      126,260           66,573        1,809,737
   Repayments of long-term debt ....................................      (59,472)         (55,839)        (445,767)
   Other long-term obligations .....................................        1,390           (1,040)            (365)
   Dividends paid ..................................................       (3,091)          (3,598)          (1,188)
   Equity transactions of pooled companies .........................       (3,160)          (1,584)             145
                                                                      -----------      -----------      -----------
Cash provided by financing activities ..............................       76,936           35,107        1,410,681
                                                                      -----------      -----------      -----------
Increase (decrease) in cash and cash equivalents ...................        1,411           (1,207)          46,078
Cash and cash equivalents, beginning of period .....................        3,812            5,223            4,016
                                                                      -----------      -----------      -----------
Cash and cash equivalents, end of period ...........................  $     5,223      $     4,016      $    50,094
                                                                      ===========      ===========      ===========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


                                       35

<PAGE>   36
                          ALLIED WASTE INDUSTRIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Allied Waste Industries, Inc. ("Allied" or the "Company") is
incorporated under the laws of the State of Delaware. Allied is a solid waste
management company providing non-hazardous waste collection, transfer, recycling
and disposal services in selected markets.

  Principles of consolidation and presentation --

         The consolidated financial statements include the accounts of Allied
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. The consolidated financial statements and
accompanying notes have also been restated to reflect acquisitions accounted for
as poolings-of-interests (See Note 2).

         Certain reclassifications have been made in prior period financial
statements to conform to the current presentation.

  Cash and cash equivalents --

         Cash equivalents are investments with original maturities less than
ninety days. Such instruments are stated at quoted market prices.

  Concentration of credit risk --

         Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high quality
financial institutions and limits the amount of credit exposure to any one
financial institution.

         The Company provides services to commercial and residential customers
in the United States. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. The Company performs ongoing credit evaluations of its
customers, but does not require collateral to support customer receivables. The
Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends and other
information.

  Inventory --

         Inventory is stated at the lower of cost (first-in, first-out method)
or market and consists principally of equipment parts, materials and supplies.

  Property and equipment --

         Property and equipment are recorded at cost, which includes interest to
finance the acquisition and construction of major capital additions during the
development phase, primarily landfills and transfer stations. Interest
capitalized in the three years ended December 31, 1996 was $3,517,000,
$11,088,000 and $12,970,000, respectively. Depreciation is provided on the
straight-line method over the estimated useful lives of buildings (30-40 years),
vehicles and equipment (3-15 years), containers and compactors (5-10 years) and
furniture and office equipment (3-8 years). The cost of landfill airspace,
including original acquisition cost and incurred and projected landfill
preparation costs, is amortized based on tonnage as landfill airspace is
consumed. Other current assets include the current portion of landfill
amortization costs of $7,103,000 and $23,820,000 at December 31, 1995 and 1996,
respectively. Management periodically reviews the realizability of its
investment in operating landfills. Should events and circumstances indicate that
any of the Company's landfills be reviewed for possible impairment, such


                                       36

<PAGE>   37
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

review for recoverability will be made in accordance with Emerging Issues Task
Force Discussion Issue ("EITF") 95-23. The EITF outlines how cash flows for
environmental exit costs should be determined and measured.

         Expenditures for major renewals and betterments are capitalized, while
expenditures for maintenance and repairs which do not improve assets or extend
their useful lives are charged to expense as incurred. For the three years ended
December 31, 1996, maintenance and repair expenses charged to cost of operations
were $12,917,000, $14,741,000 and $14,750,000, respectively. When property is
retired, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized.

  Goodwill --

         Goodwill is the cost in excess of fair value of identifiable assets of
acquired businesses and has been amortized on a straight-line basis over 40
years. The Company continually evaluates whether events and circumstances have
occurred subsequent to its acquisition, that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the related
business segment's discounted future cash flows over the remaining life of the
goodwill in measuring whether the goodwill is recoverable. Goodwill amortization
of $2,203,000, $3,679,000 and $2,247,000 is included in depreciation and
amortization for the three years in the period ended December 31, 1996,
respectively. Accumulated goodwill amortization was $9,631,000 and $11,878,000
at December 31, 1995 and 1996, respectively.

  Other assets --

         Other assets includes notes receivable, landfill closure deposits,
deferred charges and miscellaneous non- current assets. Deferred charges include
costs incurred to acquire businesses and to obtain equity and debt financing.
Upon consummation of an acquisition, deferred costs relating to acquired
businesses accounted for as purchases are allocated to goodwill or landfill
airspace while costs relating to acquired businesses accounted for as
poolings-of-interests are expensed. Direct costs related to acquisitions under
evaluation are capitalized and reviewed for realization on a periodic basis.
These costs are expensed when management determines that the capitalized costs
provide no future benefit. Upon funding of equity and debt offerings, deferred
costs are charged to additional paid-in capital or are capitalized as debt
issuance costs and amortized using the interest method over the life of the
related debt. Miscellaneous assets include consulting and non-competition
agreements which are being amortized in accordance with the terms of the
respective agreements and contracts.

  Accrued closure and post-closure costs --

         Accrued closure and post-closure costs represent an estimate of the
current value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Site specific closure and post-closure engineering cost
estimates are prepared annually for landfills owned and/or operated by the
Company for which it is responsible for closure and post-closure. The present
value of estimated future costs are accrued based on accepted tonnage as
landfill airspace is consumed. Discounting of future costs is applied where the
Company believes that both the amounts and timing of related payments are
reliably determinable. The Company periodically updates its estimates of future
closure and post-closure costs. The impact of changes which are determined to be
changes in estimates are accounted for on a prospective basis.


                                       37

<PAGE>   38
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  Environmental costs --

         Allied accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipts are deemed
probable.

  Deferred royalties and other long-term obligations --

         Other long-term obligations include non-competition agreements with
former owners of acquired companies and deferred royalty obligations. Guaranteed
minimum royalty obligations are recorded upon acquisition of the related asset
whereas royalty obligations dependent upon future waste accepted at landfills
are expensed as earned.

  Revenue --

         Advance billings are recorded as unearned income, and revenue is
recognized as income when services are provided.

  Acquisition related costs --

         In connection with the Laidlaw Acquisition, the Company incurred
approximately $84.6 million in charges primarily associated with the
acquisition, which include approximately $51.5 million of environmental related
matters, $18.4 million of asset impairments and abandonments, and $14.7 million
of acquisition liabilities, of which $2.0 million relates to litigation matters,
$5.4 million relates to relocation and transition costs and bonuses, $3.8
million relates to taxes, claims and assessments and other integration costs,
and $3.5 million relates to acquired accounts receivable considered
uncollectible.

         In connection with the Laidlaw Acquisition, Allied engaged an
independent environmental consulting firm to assist in conducting an
environmental assessment of the real property owned by the acquired subsidiaries
or third-parties, and properties under the management of the acquired companies.
Several contaminated landfills and other properties have been identified, two of
which are owned by subsidiaries of the Company, that would require those
subsidiaries to incur costs for incremental closure and post-closure measures,
remediation activities and litigation costs. The costs of performing the
investigation, design, remediation and the allocation of responsibility to the
subsidiaries of Allied vary significantly between sites. Based on information
available to the Company, Allied recorded a provision of $51.5 million for
environmental matters, including closure and post-closure costs, in the 1996
statement of operations and expects these amounts to be disbursed over the next
30 years.

         As a result of the Laidlaw Acquisition, Allied increased its revenue
base by approximately 400% and entered into 14 new markets where it believes
that it can execute its operating strategy. In connection with the significant
increase in size and the redirection of its strategic operating emphasis, Allied
determined that certain asset values have become impaired as they will provide
no further benefit to Company. Included among the asset impairments are costs of
$10.8 million related to over 50 noncompetition agreements in several markets
where the counter party no longer poses a significant threat due to Allied's
increased size, costs of $4.8 million for discontinued facilities and costs of
$2.8 million for market development activities no longer being pursued.


                                       38

<PAGE>   39
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         Costs of $7.1 million were incurred in 1996 compared to $1.5 million in
1995 for transaction and integration costs directly related to acquisitions
accounted for using the pooling-of-interests method for business combinations

  Unusual items --

         In December 1996 the Company recorded $5.7 million in unusual charges
including $2.0 million in connection with the ongoing investigation and
remediation of the Company's Norfolk landfill and $3.7 million of other
non-recurring valuation adjustments.

  Extraordinary loss --

         On July 31, 1996, the Company completed a tender offer (the "Tender
Offer") and purchased, substantially all of its $100 million 12% Senior
Subordinated Notes due 2004 (the "1994 Notes") at the redemption price of
$1,157.50 per $1,000 note. An extraordinary charge to earnings related to the
Tender Offer of approximately $18.4 million ($11.0 million net of income tax
benefit) was charged to earnings in the third quarter of 1996. The Company also
received a consent from a majority of the holders of the 1994 Notes to eliminate
all substantive financial covenants associated with the remaining 1994 Notes.

         In addition, in December of 1996, the Company refinanced its $300
million senior revolving credit facility with the proceeds from the Senior
Credit Facility related to the Laidlaw Acquisition and recognized an
extraordinary charge of approximately $4.0 million ($2.4 million net of income
tax benefit).

         In connection with the Securities Purchase Agreement between the
Company and TPG dated October 27, 1994, as amended, the Company solicited and
obtained consents from a majority of the holders of its 10.75% 1994 Notes
causing modifications to the indenture agreement and the execution of a
supplemental indenture (the "Supplemental Indenture"). Among other things the
Supplemental Indenture increased the Company's restricted borrowing capacity
(with certain limitations) under current and future revolving credit agreements
and lease lines from a total of $35 million to $120 million, deleted certain
borrowing restrictions, changed certain financial ratio covenants and increased
the per annum rate of interest from 10.75% to 12.0%. The execution of the
Supplemental Indenture, which was effective January 30, 1995, was accounted for
as an early extinguishment of debt. Accordingly, capitalized deferred debt
issuance costs related to the original indenture were written off as of December
31, 1994 and an extraordinary charge of $4,595,000, ($2,823,000 net of income
tax benefit), was recorded. Additionally, in the first quarter of 1994, an
extraordinary charge of $334,000, ($206,000 net of income tax benefit) was
recognized as a result of the early extinguishment of various debt instruments
using the proceeds from the $100 million 1994 Notes.

  Use of estimates --

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Final settlement amounts could differ from those estimates.


                                       39

<PAGE>   40
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  Fair value of financial instruments --

         The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value
of Financial Instruments". The Company's Financial Instruments as defined by
SFAS No. 107 include cash, money market funds, accounts receivable, accounts
payable, long-term debt and convertible subordinated debt. The estimated fair
value amounts have been determined by the Company at December 31, 1996 using
available market information and valuation methodologies described below.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates may not be indicative of the
amounts that could be realized in a current market exchange. The use of
different market assumptions or valuation methodologies could have a material
effect on the estimated fair value amounts.

         The carrying value of cash, money market funds, accounts receivable and
accounts payable approximate fair values due to the short-term maturities of
these instruments.

         The Company's 1996 Notes (see Note 5) had a fair value of $548.6
million at December 31, 1996 based upon quoted market prices. The convertible
subordinated debt has a fair value of approximately $2.4 million based upon the
conversion features of the related instruments and market price of the Company's
common stock at December 31, 1996. The fair value of the Zero Coupon Debenture
and 7% Debenture (see Note 5) approximates book value at December 31, 1996 due
to the short passage of time since their origination. Management believes the
carrying value of all remaining long-term debt approximates fair value.

 Stock-based compensation plans --

         The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, ("APB No. 25"). Effective in January
1, 1996, the Company adopted the disclosure option of SFAS No. 123, "Accounting
for Stock-based Compensation." SFAS No. 123 requires that companies which do not
elect to account for stock-based compensation as prescribed by the statement,
shall disclose the pro forma effects on earnings and earnings per share as if
SFAS No. 123 had been adopted. Additionally, certain other disclosures with
respect to stock compensation and the related assumptions are used to determine
the pro forma effects of SFAS No. 123.

 Accounting pronouncements not yet required to be adopted --

         In March 1997 the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 128 "Earnings Per Share". The new statement is effective for
fiscal years ending after December 15, 1997 and will require restatement of
prior years' earnings per share. The Company has not quantified the effect of
applying the new statement.


                                       40

<PAGE>   41
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  Statements of cash flows --

         The supplemental cash flow disclosures and non-cash transactions for
the three years ended December 31, 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                    ----------------------------------
                                                                      1994         1995         1996
                                                                    --------     --------     --------
<S>                                                                 <C>          <C>          <C>
       Supplemental Disclosures --
         Interest paid ...........................................  $ 12,229     $ 20,922     $ 26,667
         Income taxes paid .......................................       980        2,942        6,271

       Non-Cash Transactions --
         Common stock, preferred stock or warrants
           issued in acquisitions or contributed to 401(k) plan ..  $ 11,426     $    754     $164,764
         Capital leases and debt obligations for
           the purchase of property and equipment ................    13,311       21,659       19,094
         Debt and liabilities incurred or assumed
           in acquisitions .......................................    23,344       14,434      213,082

         Debt converted to common stock or
           preferred stock .......................................     5,928        6,802        5,485
         Capitalized interest ....................................     3,517       11,088       12,970
         Dividends and interest paid, and
         conversion fee on debt and equity securities
           converted paid in common stock ........................        --        3,490           --
</TABLE>


2. BUSINESS COMBINATIONS

         Acquisitions accounted for as purchases are reflected in the results of
operations since the date of purchase in Allied's consolidated financial
statements. The results of operations for acquisitions accounted for as
poolings-of-interests are included in Allied's consolidated financial statements
for all periods presented. Often the final determination of the cost, and the
allocation thereof, of certain of the Company's acquisitions is subject to
resolution of certain contingencies. Once such contingencies are achieved, the
purchase price is adjusted. Shares issued in connection with business
acquisitions have been valued taking into consideration certain restrictions
placed on the stock.

         On December 30, 1996, the Company completed the acquisition of
substantially all of the non-hazardous solid waste management business conducted
by Laidlaw in the United States and Canada, for total consideration of
approximately $1.5 billion comprised of $1.2 billion cash, 14.6 million shares
of Common Stock, a warrant to acquire 20.4 million shares of Common Stock
(valued based on an appraisal by an independent investment banking firm), and a
zero percent and a 7% junior subordinated debenture. The cash consideration was
financed from the proceeds of the Senior Credit Facility and the sale of the
1996 Notes (see Note 5).

         On March 16, 1997, pursuant to a share purchase agreement with USA
Waste Services, Inc. ("USA Waste"), the Company sold to USA Waste (the "Canadian
Sale") all of the Canadian nonhazardous solid waste management operations of the
Company acquired from Laidlaw for approximately $518 million. The Company used
the proceeds from the Canadian Sale to pay down approximately $517 million in
debt under the Senior Credit Facility.


                                       41

<PAGE>   42
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         The following table reflects the allocation of purchase price for the
Laidlaw Acquisition, giving effect to the Canadian Sale, (in thousands):

<TABLE>
<S>                                                           <C>
                Current assets.......................         $    70,137
                Property and equipment...............             353,793
                Goodwill.............................             757,200
                Non-current assets...................               2,550
                Current liabilities..................             (88,759)
                Long-term debt.......................              (4,019)
                Other long-term obligations                      (106,648)
                                                              -----------
                    Total net assets                          $   984,254
                                                              ===========
</TABLE>

         The following table summarizes acquisitions for the three years ended
December 31, 1996, excluding the Laidlaw Acquisition:

<TABLE>
<CAPTION>
                                                       1994             1995            1996
                                                    ---------        ---------        ---------

<S>                                                 <C>              <C>              <C>
Number of businesses acquired accounted for as:
       Poolings-of-interests .....................         --                5                5
       Purchases .................................         21               13               16
Total consideration (in millions) ................  $    99.5(1)     $    45.3(2)     $   126.5
Shares of stock issued:
       Common stock ..............................  2,897,858        4,000,040(3)     8,924,374(4)
       Preferred stock ...........................      9,982               --               --
</TABLE>

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

(1)      Includes $11.7 million paid for two landfills under development.

(2)      Includes $9.9 million paid for the acquisition of an operating
         landfill.

(3)      Includes 23,244 shares of contingently issuable common stock.

(4)      Includes 774,794 shares of contingently issuable common stock.

         Revenues and net income have been restated for acquisitions accounted
for as poolings-of-interests as presented in the following table (in thousands):

<TABLE>
<CAPTION>
                                          Allied
                                          Before
                                          Pooling        1996         Allied, as
                                        Acquisitions   Poolings        Restated
                                        ------------   ---------      ----------
<S>                                     <C>            <C>            <C>
       Year ended December 31, 1996
         Revenues ....................  $ 221,265      $  25,414      $ 246,679
         Net loss ....................    (77,132)        (2,295)       (79,427)

       Year ended December 31, 1995
         Revenues ....................    169,865         47,679        217,544
         Net income ..................     11,584            797         12,381
       Year ended December 31, 1994
         Revenues ....................    114,814         43,540        158,354
         Net loss ....................     (6,731)           696         (6,035)
</TABLE>


                                       42

<PAGE>   43
                       ALLIED WASTE INDUSTRIES, INC.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         Unaudited pro forma statement of operations data --

         The following table compares, for the year ended December 31, 1996,
reported consolidated results of operations to unaudited pro forma consolidated
data as if all of the companies acquired in 1996 (including the Laidlaw
Acquisition, giving effect to the Canadian Sale) and accounted for using the
purchase method for business combinations were acquired as of January 1, 1996
(in thousands, except per share data):

<TABLE>
<CAPTION>
                                                1996           1996
                                             Reported       Pro Forma
                                             ----------     ----------
<S>                                          <C>            <C>
         Revenues .........................  $ 246,679      $ 750,396
         Operating loss ...................    (59,267)        (4,079)
         Net loss .........................    (79,427)      (105,760)
         Net loss to common shareholders ..    (80,500)      (106,833)
         Net loss per common share ........      (1.38)         (1.46)
</TABLE>

-----

         This data does not purport to be indicative of the results of
operations of Allied that might have occurred nor which might occur in the
future.


3.  ASSETS HELD FOR SALE

         In March 1997, the Company completed the Canadian Sale for
approximately $518 million in cash. No gain or loss was recorded on this sale.
In addition, the Company has entered into a definitive agreement to sell certain
non-core medical waste assets for approximately $6.7 million. No gain or loss is
expected to be recorded in connection with this sale.

         At December 31, 1996, the net assets held for sale are classified as
current assets in the consolidated balance sheet and are summarized as follows
(in thousands):

<TABLE>
<S>                                                <C>
                   Cash .........................  $     628
                   Accounts receivable, net .....     43,104
                   Other current assets .........      6,402
                   Property and equipment, net ..    165,622
                   Goodwill .....................    349,192
                   Other long-term assets .......     13,099
                   Current liabilities ..........    (31,338)
                   Long-term liabilities ........    (21,993)
                                                   ---------
                   Total net assets .............  $ 524,716
                                                   =========
                   </TABLE>


                                       43

<PAGE>   44
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


4.   PROPERTY AND EQUIPMENT

         Property and equipment at December 31, 1995 and 1996 was as follows (in
thousands):

<TABLE>
<CAPTION>
                                                       1995              1996
                                                     ---------        ---------
<S>                                                  <C>              <C>
Land and improvements ...........................    $  16,449        $  39,858
Land held for permitting as landfills(1) ........        5,640           66,070
Landfills .......................................      179,463          296,943
Buildings and improvements ......................       24,525           59,359
Vehicles and equipment ..........................       88,410          266,494
Containers and compactors .......................       46,412           59,931
Furniture and office equipment ..................        5,735            7,312
                                                     ---------        ---------
                                                       366,634          795,967
Accumulated depreciation and amortization .......      (64,282)         (89,215)
                                                     ---------        ---------
                                                     $ 302,352        $ 706,752
                                                     =========        =========
</TABLE>

------

(1)      These properties have been approved for use as landfills, and the
         Company is currently in the process of obtaining the necessary permits.


5.   LONG-TERM DEBT

         Long-term debt at December 31, 1995 and 1996 consists of the following
(in thousands):

To related parties --

<TABLE>
<CAPTION>
                                                               1995       1996
                                                             ---------  -------
<S>                                                          <C>        <C>
Unsecured notes payable to stockholders, net of
  discount, interest at an effective rate of 14% ..........  $     --     $110,747
Unsecured notes payable to stockholders, interest at 12% ..     1,983        1,862
                                                             --------     --------
                                                                1,983      112,609
Current portion ...........................................       121          136
                                                             --------     --------
                                                             $  1,862     $112,473
                                                             ========     ========
</TABLE>

          In connection with the Laidlaw Acquisition, a subsidiary of the
Company issued a $150 million 7% Junior Subordinated Debenture (the "7%
Debenture") and a $168.3 million Zero Coupon Debenture (the "Zero Coupon
Debenture" and together with the 7% Debenture, the "Allied Debentures"). The 7%
Debenture bears interest at a fixed rate of 7% per annum payable semi-annually,
except for the first three years during which the interest payments are
deferred. The 7% Debenture and the Zero Coupon Debenture have an effective
interest rate of 14% and have been recorded at a net discounted amount of $77.5
million and $33.2 million, respectively, at December 31, 1996. The Allied
Debentures are due December 2008. Upon a change in control, the Company is
obligated to offer to prepay the Allied Debentures at a predetermined discount
to the face amount of each debenture. The Allied Debentures are guaranteed by
the Company and do not contain any restrictive or financial covenants.


                                       44

<PAGE>   45
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         The $2.0 million notes payable to related parties were issued in April
1995 in accordance with an agreement to acquire certain real estate. This
agreement was executed by one of the Company's subsidiaries prior to the
Company's acquisition of the subsidiary. The agreement required the payment of
an aggregate of $5.6 million to the previous owners upon issuance of a permit to
operate a landfill. Subsequent to execution of this agreement, the previous
owners became stockholders of the Company. These notes bear interest at 12% per
annum with monthly principal and interest payments through maturity in May 1999
and are guaranteed by the Company.


To unrelated parties --

<TABLE>
<CAPTION>
                                                                                       1995           1996
                                                                                    ----------     ----------
<S>                                                                                 <C>            <C>
Senior credit facilities, weighted average interest
   at 9.25% and 10.03% at December 31, 1995
   and 1996, respectively ........................................................  $   37,401     $  975,000
Senior subordinated notes,
   interest at 12% and 10.25%-12%
   at December 31, 1995 and 1996, respectively, unsecured ........................     100,000        525,010

Notes payable to banks, finance companies and individuals, weighted average
   interest rate of 8.0% and 10.35% at December 31, 1995 and 1996, respectively
   and principal payable through 2014, secured by vehicles, equipment, real
   estate, accounts receivable
   or stock of certain subsidiaries ..............................................      33,083          9,475
Notes payable to individuals and a commercial company,
   interest at 5%-12%, principal and interest payable through
   2006, unsecured ...............................................................      11,039         12,383
Obligations under capital leases of vehicles and
   equipment, weighted average interest at
   9.9% and 9.6% at December 31, 1995,
   and 1996, respectively, payable monthly .......................................      32,656         45,217
                                                                                    ----------     ----------
                                                                                       214,179      1,567,085
   Current portion ...............................................................      37,447        532,755
                                                                                    ----------     ----------
                                                                                    $  176,732     $1,034,330
                                                                                    ==========     ==========
</TABLE>

         In connection with the Laidlaw Acquisition, the Company and Allied
Waste North America, Inc., a wholly owned subsidiary of the Company ("Allied
NA") executed a $1.275 billion Credit Agreement (the "Senior Credit Facility").
The Senior Credit Facility was comprised of (i) a $300 million revolving credit
facility; (ii) a $475 million 5.5 year senior term loan; (iii) a $100 million
6.5 year Amortization Extended Term Loan AXEL(TM)A; (iv) a $200 million 7.5 year
AXEL(TM)B; and (v) a $200 million 8.5 year AXEL(TM)C. Of the $300 million
available under the revolving credit facility, no more than $200 million may be
outstanding at one time, of which no more than $100 million may be used to
finance permitted acquisitions ("Acquisition Loans"), as defined in the Credit
Agreement, and no more than $150 million may be used for the issuance of standby
letters-of-credit. Amounts outstanding under the Senior Credit Facility are
payable quarterly, beginning in June 1997, with final maturities in June 2005.
The Senior Credit Facility is secured by a pledge of the stock of substantially
all of Allied NA's assets and is guaranteed by the Company and all the
subsidiaries of Allied NA. As of December 31, 1996, Allied NA had no funded
loans outstanding and had issued approximately $46 million of standby
letters-of-credit, leaving $200 million available for funded loans and $104
million available for letters-of-credit. In connection with the Canadian Sale,
Allied paid approximately $517 million of the Senior Credit Facility. Payments
were made on a pro rata basis between the term loan and each of the AXEL
traunches as provided by the Senior Credit Facility.


                                       45

<PAGE>   46
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         In connection with the Laidlaw Acquisition, Allied NA issued $525
million of 10.25% Senior Subordinated Notes due 2006 (the "1996 Notes") in a
Rule 144A offering. Net proceeds from the sale of the 1996 Notes, after the
underwriting discount and other expenses, were approximately $509 million. The
net proceeds were used to pay a portion of the cash purchase price of the
Laidlaw Acquisition, repay amounts outstanding under the Company's previous $300
million credit facility, fund certain acquisitions and for general corporate
purposes. The 1996 Notes cannot be redeemed until December 1, 2001, except under
certain circumstances. Prior to December 1, 2001, the 1996 Notes are subject to
redemption, at the option of Allied NA, at prices specified in the indenture. At
any time prior to December 1, 1999, up to 33% of principal amount of the 1996
Notes will be redeemable, at the option of Allied NA, from the proceeds of one
or more public offerings of capital stock by the Company at a redemption price
of 110.25% of principal amount, plus accrued interest. The 1996 Notes are
guaranteed by the Company and substantially all of Allied NA's subsidiaries, the
guarantees of which are expressly subordinated to the guarantees of Allied NA's
Senior Credit Facility.

Convertible subordinated debt --
<TABLE>
<CAPTION>

                                                           1995       1996
                                                          ------     ------
<S>                                                       <C>        <C>
Senior Convertible Subordinated Debentures, unsecured ..  $5,000     $  975
Convertible subordinated notes,unsecured ...............   1,992         --
Convertible note payable to an individual, unsecured ...     800        787
                                                          ------     ------
                                                           7,792      1,762

   Current portion .....................................      13         56
                                                          ------     ------
                                                          $7,779     $1,706
                                                          ======     ======
</TABLE>

         During the fourth quarter of 1995, the $5.0 million Convertible
Subordinated Debentures were converted into 1,483,000 shares of Allied common
shares.

         The $5.0 million Senior Convertible Subordinated Debentures bear
interest at 8.5% per annum payable semi-annually, with principal payable in
2002. The debentures are convertible into Allied common shares at $6.00 per
share. Warrants to purchase 195,000 common shares at $6.00 per share were issued
in connection with the sale of the debentures.

         In 1996, the remainder of the 6% Convertible Subordinated Notes were
converted into 362,040 shares of Allied common stock.

         The 8% Convertible note payable to an individual is payable quarterly
through September 1996. Beginning October 1996, principal and interest is
payable in equal monthly installments through October 2006. The note is
convertible into Allied common stock at $10.00 per share during the period of
January 1997 to December 1998.

Debt covenants --

         The Company's Senior Credit Facility, the indenture relating to the
1996 Notes and certain subordinated convertible debt, contain warranties and
covenants, requiring the maintenance of certain tangible net worth, debt to
equity, and cash flow to debt ratios. Additionally, these covenants limit among
other things, the ability of the Company to incur additional secured
indebtedness, make acquisitions and purchase fixed assets above certain amounts,
transfer or sell assets, pay dividends except on certain preferred stock, make
optional payments on certain subordinated indebtedness including the 1996 Notes
or make certain other restricted payments, create liens, enter into certain
transactions with affiliates or consummate a merger, consolidation or sale of
all or substantially all of its assets. At December 31, 1996, Allied was in
compliance with all applicable covenants.


                                       46

<PAGE>   47
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         Substantially all subsidiaries of the Company are jointly and severally
liable for the obligations under the 1996 Notes and the Senior Credit Facility
through unconditional guarantees issued by the subsidiaries which are all,
except in one minor case, wholly-owned by the Company. No significant
restrictions exist regarding the ability of the subsidiary companies to pay
dividends or make loans or advances to Allied.

Future maturities of long-term debt --

         Aggregate future maturities of long-term debt (including a $517 million
repayment on the Senior Credit Facility from the proceeds of the Canadian Sale)
outstanding at December 31, 1996 (in thousands):

<TABLE>
<CAPTION>
                            Maturity        1996
                           ----------    ----------
<S>                                      <C>
                           1997           $  532,947
                           1998               14,778
                           1999               12,830
                           2000                7,202
                           2001                7,777
                           Thereafter      1,105,922
                                          ----------
                                          $1,681,456
                                          ==========
</TABLE>

         Future payments under capital leases, the principal amounts of which
are included above in future maturities of long-term debt, are as follows at
December 31, 1996 (in thousands):

<TABLE>
<CAPTION>
                                              1996
                                -------------------------------
                  Maturity      Principal   Interest    Total
                 ----------     ---------   --------    -------
<S>                             <C>         <C>         <C>
                 1997           $10,950     $ 3,804     $14,754
                 1998             9,737       2,806      12,543
                 1999             8,175       1,928      10,103
                 2000             6,260       1,230       7,490
                 2001             7,246         700       7,946
                 Thereafter       2,849         563       3,412
                                -------     -------     -------
                                $45,217     $11,031     $56,248
                                =======     =======     =======
</TABLE>


6.    CLOSURE, POST-CLOSURE AND ENVIRONMENTAL COSTS

         The net present value of the closure and post-closure commitment is
calculated assuming inflation of 3.5% and a risk-free capital rate of 7.0%.
Discounted amounts previously recorded are accreted to reflect the effects of
the passage of time. The Company's current estimate of total future payments for
closure and post-closure is $467 million, as shown below, while the present
value of such estimate is $181 million. At December 31, 1995 and 1996,
respectively, accruals for landfill closure, post-closure and environmental
costs (including costs assumed through acquisitions) were approximately $10.5
million and $152.5 million. The accruals reflect relatively young landfills
whose estimated remaining lives, based on current waste flows, range from 1 to
over 75 years, with an estimated average remaining life of greater than 30
years.


                                       47

<PAGE>   48
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         The Company's estimate of total future payments for closure and
post-closure liabilities for currently owned and operated landfills is as
follows (in thousands):

<TABLE>
<S>                                        <C>
                            1997           $ 18,122
                            1998             16,581
                            1999              5,741
                            2000              8,331
                            2001              6,331
                            Thereafter      412,211
                                           --------
                                           $467,317
                                           ========
</TABLE>

         During 1994, the Company's landfills became subject to the closure and
post-closure requirements of Subtitle D. Previously, the Company's landfills
were subject to local requirements. The principal changes under Subtitle D are
an extension of the post-closure monitoring period to 30 years, more rigorous
groundwater monitoring, and a requirement to use clay or synthetic liners as
capping materials. The Company updated its estimates of future closure and
post-closure costs in accordance with its interpretations of Subtitle D.

         In connection with the Laidlaw Acquisition, Allied engaged an
independent environmental consulting firm to assist in conducting an
environmental assessment of the real property owned by the acquired subsidiaries
or third-parties, and properties under the management of the acquired companies.
Several contaminated landfills and other properties have been identified, two of
which are owned by subsidiaries of the Company, that would require those
subsidiaries to incur costs for incremental closure and post-closure measures,
remediation activities and litigation costs. The costs of performing the
investigation, design, remediation and the allocation of responsibility to the
subsidiaries of Allied vary significantly between sites. Based on information
available to the Company, Allied recorded a provision of $51.5 million for
environmental matters, including closure and post-closure costs, in the 1996
statement of operations and expects these amounts to be disbursed over the next
30 years.

         Prior to the Company's acquisition of CRX, an investigation of an
unrelated manufacturing facility led to allegations that hazardous wastes were
transported to and disposed of in CRX's Norfolk, Nebraska landfill. A provision
of $2.1 million, in excess of the closure and post-closure reserves recorded in
the normal course of business, was made in the Company's 1994 consolidated
financial statements to recognize the estimated costs of additional closure,
post-closure and remedial measures. Since 1994 the Company has engaged an
independent environmental consultant to assist it in conducting the groundwater
contamination investigation program. Based on a report from the Company's
independent environmental consultant an additional provision of $2.0 million has
been recorded in the 1996 statements of operations. The groundwater
investigation is ongoing and remediation efforts have commenced.

         The ultimate amounts for environmental liabilities cannot be determined
and estimates of such liabilities made by the Company, after consultation with
its independent environmental engineers, require assumptions about future events
due to a number of uncertainties including the extent of the contamination, the
appropriate remedy, the financial viability of other potentially responsible
parties and the final apportionment of responsibility among the potentially
responsible parties. Where the Company has concluded that its estimated share of
potential liabilities is probable, a provision has been made in the consolidated
financial statements. Since the ultimate outcome of these matters may differ
from the estimates used in the Company's assessment to date, the recorded
liabilities will be periodically evaluated as additional information becomes
available to ascertain that the accrued liabilities are adequate. The Company
has determined that the recorded liability for environmental matters as of
December 31, 1996 of approximately $152.5 million represents the most probable
outcome of these contingent matters. The Company does not expect that
adjustments to estimates, which are reasonably possible in the near term and
that may result in changes to recorded amounts, will have a material effect on
the Company's consolidated liquidity, financial positions or results of
operations.


                                       48

<PAGE>   49
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7.  STOCKHOLDERS' EQUITY

         The authorized, issued and outstanding shares of the Company's classes
of capital stock were as follows:

<TABLE>
<CAPTION>
                                                                      Issued and Outstanding
                                    Liquidation                           at December 31,
                                    Preference     Authorized       --------------------------
                                     per Share        Shares           1995            1996
                                   -----------     -----------      ----------      ----------
<S>                                <C>             <C>              <C>             <C>
Preferred stock, $.10 par --
   Series C Convertible .........  $        10         800,000              --              --
   Series D Convertible .........           15         267,000           4,000              --
   9% Cumulative Convertible ....        1,000          30,000           5,029              --
   $90 Cumulative Convertible ...        1,000          20,000              --              --
   7% Cumulative Convertible ....        1,000         100,000           9,963           9,907
Common stock, $.01 par, net of
   570,048 treasury shares ......           --     200,000,000      48,031,528      75,478,867
</TABLE>


         Dividends declared and accrued on the Company's classes of preferred
stock were as follows:

<TABLE>
<CAPTION>
                                            Dividends Declared           Accrued Dividends at
                                       For The Years Ended December 31,      December 31,
                                       --------------------------------  -------------------
                                        1994       1995       1996         1995       1996
                                       ------     ------     ------       ------     ------
<S>                                    <C>        <C>        <C>          <C>        <C>
Series D Convertible ................  $  202     $  184     $    1       $   41     $   --
9% Cumulative Convertible ...........   2,464      2,466        377           75         --
$90 Cumulative Convertible ..........     526        560         --           --         --
7% Cumulative Convertible ...........     472        698        695          145        144
Series E Cumulative Convertible .....     109        162         --           --         --
                                       ------     ------     ------       ------     ------
                                       $3,773     $4,070     $1,073       $  261     $  144
                                       ======     ======     ======       ======     ======
</TABLE>

          On January 30, 1995, all Series E preferred was converted into common
stock. In December 1995, all of the Series C preferred stock and $90 preferred
stock was converted into common stock. During 1996, all of the Series D
preferred stock and 9% preferred stock was converted into Common Stock.

  7% cumulative convertible preferred stock --

         In April 1994, Allied issued 9,982 shares of 7% cumulative convertible
stock ("7% preferred") in connection with the acquisition of Southern States
Environmental Services. The stock has no voting rights and is redeemable at the
option of the Company under certain conditions. The stock is convertible into
common stock at a rate equal to $7.00 per common share subject to anti-dilution
provisions. Dividends are $70.00 per share per annum, cumulative and payable
quarterly in common stock through April 15, 1995 and in cash thereafter.


                                       49

<PAGE>   50
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  Warrants to purchase common stock --

         Warrants to purchase common shares at December 31, 1995 and 1996 are
summarized as follows:

<TABLE>
<CAPTION>
                                                                            1995               1996
                                                                        ---------------   ----------------

<S>                                                                     <C>                <C>
         Number of shares.....................................            3,488,010          22,645,166
         Purchase price per share.............................          $3.00 -- $13.50    $3.37 -- $13.50
         Expiration dates.....................................           1996 -- 2005       1997 -- 2008
</TABLE>

In connection with the Laidlaw Acquisition, the Company issued a warrant to
Laidlaw for the purchase of 20,400,000 shares of Common Stock at an exercise
price of $8.25 per share. Both the number of shares purchasable upon exercise of
the warrant and the exercise price are subject to adjustment under certain
circumstances described in the warrant. Among other restrictions, Laidlaw and
its affiliates are precluded from exercising the warrant unless there is a
change of control of Allied. Laidlaw may sell the warrant to third-parties,
provided that any such third-party and its affiliates do not beneficially own
more than 9% of the Company's then outstanding Common Stock. The warrant expires
December 2008.


8.  STOCK OPTION PLANS

         The 1991 Incentive Stock Plan ("1991 Plan"), the 1993 Incentive Stock
Plan ("1993 Plan") and the 1994 Incentive Stock Plan ("1994 Plan") provide for
the grant of non-qualified stock options, incentive stock options, shares of
restricted stock, shares of phantom stock and stock bonuses. The maximum number
of shares which may be granted under the 1991 Plan may not exceed the greater of
750,000 common shares or 7.5% of the number of common shares outstanding at the
end of a preceding fiscal quarter (4,463,778 shares at December 31, 1996). An
additional 500,000 and 1,000,000 common shares may be granted under the 1993
Plan and the 1994 Plan, respectively. The exercise price, term and other
conditions applicable to each option granted are generally determined by the
Compensation Committee of the Board of Directors.

         The 1994 Amended and Restated Non-Employee Director Stock Option Plan
provides for the grant of non-qualified options to each member of the Board of
Directors, who is not also an employee of the Company, at a price equal to the
fair market value of a common share on the date of grant. The maximum number of
shares which may be granted under the plan is 750,000 common shares. All options
granted under the plan are fully vested and exercisable on the date of grant and
expire ten years from the grant date.

         The Company accounts for its stock-based compensation plans under APB
No. 25, under which no compensation expense has been recognized, as all options
have been granted with an exercise price equal to the fair value of the
Company's common stock upon the date of grant. In 1996, the Company adopted SFAS
No. 123 for disclosure purposes and accordingly, the fair value of each option
grant has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: risk-free
interest rate of 5.18% to 7.64%, expected life of 5-8 years, dividend rate of
zero percent, and expected volatility of 49.09% to 52.04%. Using these
assumptions, the impact on the Company's net income (loss) and net income (loss)
per share would not have been material.


                                       50

<PAGE>   51
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

         A summary of the status of the Company's stock option plans at December
31, 1995 and 1996 and for the years then ended is presented in the table and
narrative below:


<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                    -------------------------
                                                       1995          1996
                                                    ---------      ----------

<S>                                                 <C>            <C>
Options outstanding, beginning of period ........   1,575,739       2,849,568
   Options granted ..............................   1,493,469       1,747,550
   Options exercised ............................    (183,606)       (277,016)
   Options terminated ...........................     (36,034)        (11,408)
                                                   ----------      ----------
Options outstanding, end of period ..............   2,849,568       4,308,694
                                                   ==========      ==========
Options exercisable, end of period ..............   1,774,456       2,170,086
Weighted average fair value of options granted ..  $     4.66      $     8.64

</TABLE>

         Of the 4,308,694 employee and director options outstanding at December
31, 1996, (i) 1,473,382 options have exercise prices between $3.00 and $11.50,
with a weighted average exercise price of $5.30 and a weighted average remaining
contractual life of 5.5 years, of which all are exercisable, (ii) 932,552
options have exercise prices between $4.27 and $4.88, with a weighted average
exercise price of $4.44 and a weighted average remaining contractual life of 8.1
years, of which 613,456 are exercisable (iii) 249,743 options have exercise
prices between $4.50 and $9.50, with a weighted average exercise price of $8.81
and a weighted average remaining contractual life of 9.3 years, of which, 83,248
are exercisable (iv) 1,653,017 options have exercise prices between $4.27 and
$9.50 and a weighted average remaining contractual life of 8.9 years, of which
none are exercisable.

9.  NET INCOME (LOSS) PER COMMON SHARE

         Net income (loss) per common share is calculated by dividing net income
(loss), less dividend requirements on preferred stock, by the weighted average
number of common shares and common share equivalents outstanding during each
period as restated to reflect acquisitions accounted for as
poolings-of-interests. The computation of weighted average common and common
equivalent shares used in the calculation of net income (loss) per common share
is as follows:
<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                              ---------------------------------------------
                                                                  1994             1995             1996
                                                              --------------   -------------    -----------

<S>                                                           <C>              <C>              <C>
Common shares outstanding ..................................   25,805,179       48,031,528       75,478,867
Effect of using weighted average common
   shares outstanding during the period ....................     (876,091)     (10,428,172)     (17,097,236)
Effect of stock options and warrants, assumed exercisable ..           --        1,989,556               --
Effect of Series C preferred stock, assumed converted ......           --          233,533               --
Effect of shares assumed issued
   pursuant to earn-out ....................................       99,019          220,014           40,950
                                                              -----------      -----------      -----------
                                                               25,028,107       40,046,459       58,422,581
                                                              ===========      ===========      ===========
</TABLE>


         Conversion has not been assumed for Series D preferred stock, 9%
preferred stock, 7% preferred stock and convertible subordinated notes in 1994,
1995 or 1996, as the effect would not be dilutive. Additionally, conversion has
not been assumed for stock options and warrants in 1994 and 1996, nor has
conversion been assumed for Series C preferred stock, $90 preferred stock and
Series E preferred stock in 1994, as the effects would not be dilutive. Fully
diluted earnings per common share have not been presented as the effect would
not be dilutive.


                                       51

<PAGE>   52
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10.  INCOME TAXES

         The Company accounts for income taxes using a balance sheet approach
whereby deferred tax assets and liabilities are determined based on the
differences in financial reporting and income tax basis of assets, other than
goodwill, and liabilities, and the differences are measured using the income tax
rate in effect in the year of measurement.

         The Company and its subsidiaries file a consolidated federal income tax
return. As of December 31, 1996, Allied had a net operating loss carryforward
("NOLC") for federal income tax purposes and state income tax purposes of
approximately $15.2 and $7.0 million, respectively. The NOLCs, which expire
beginning in 2004, are available to offset future taxable income subject to
potential limitations. Included in the NOLCs are losses of acquired companies
which the Company believes are realizable after application of change of
ownership and separate return loss year limitation rules. The Company has placed
a valuation reserve on "other" NOLCs to reflect limitations from separate
Company filing rules. These "other" NOLCs are not included in the amounts above.

The components of the income tax provision (benefit) consist of the following
(in thousands):

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                          --------------------------------
                                          1994         1995        1996
                                          -------      -------     -------
<S>                                       <C>          <C>         <C>
         Current tax provision .........  $ 1,011      $ 4,724     $   947
         Deferred provision (benefit) ..   (1,700)       5,027      (1,346)
                                          -------      -------     -------
         Total .........................  $  (689)     $ 9,751     $  (399)
                                          =======      =======     -------
</TABLE>

Reconciliation of the federal statutory tax rate to the Company's effective rate
is as follows:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                                ----------------------------
                                                                1994        1995      1996
                                                                -----       ----      ----
<S>                                                             <C>         <C>       <C>
         Federal statutory tax rate .........................   (34.0)%     35.0%     (35.0)%
         Consolidated state taxes, net of federal benefit ...     4.5        5.0       (5.0)
         Taxes of pooled companies ..........................    (4.2)      (2.1)       0.7
         Amortization of goodwill ...........................     9.3        3.8        2.3
         Potential tax goodwill greater than book goodwill ..      --         --       34.7
         Other permanent differences ........................     5.8        2.4        1.7
                                                                -----       ----       ----
         Effective tax rate .................................   (18.6)%     44.1%      (0.6)%
                                                                =====       ====       ====
</TABLE>

Tax benefits on the extraordinary items in 1994 and 1996 were based on the
Company's then ordinary combined federal and state rate of 38.5% and 40%,
respectively.

         The net current deferred tax asset of $2.7 million and $5.8 million, as
of December 31, 1995 and 1996, respectively, consists of the current benefit
expected to be obtained from the utilization of the Company's NOLCs and its
alternative minimum tax credits. These amounts include a valuation allowance of
$1.2 million and $1.3 million, as of December 31, 1995 and 1996, respectively,
to reflect possible limitations on the ability to use NOLCs for separate company
federal and state filing purposes.


                                       52

<PAGE>   53
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The components of the net long-term deferred tax liability are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                        -----------------------
                                                                         1995            1996
                                                                        -------         -------
<S>                                                                     <C>             <C>
         Deferred tax liability relating to property primarily
           consisting of landfill assets and debt basis differences ..  $28,606         $78,700
                                                                        -------         -------
         Deferred tax assets relating to:
           Closure and post-closure reserves .........................       99           1,883
           Other reserves and estimated expenses .....................    2,858          23,722
                                                                        -------         -------
           Deferred tax assets, net ..................................    2,957          25,605
                                                                        -------         -------
         Net long-term deferred tax liability ........................  $25,649         $53,095
                                                                        =======         =======
</TABLE>

         The increase in the long-term deferred tax liability includes deferred
taxes related to 1996 acquisitions where the financial basis of assets acquired
exceeded the tax basis of those assets.

11.  COMMITMENTS AND CONTINGENCIES

         The Company is subject to extensive and evolving laws and regulations
and has implemented its own environmental safeguards to respond to regulatory
requirements. In the normal course of conducting its operations, Allied may
become involved in certain legal and administrative proceedings. Some of these
actions may result in fines, penalties or judgements against the Company which
may have an impact on earnings for a particular period. Management expects that
such matters in process at December 31, 1996 which have not been accrued in the
consolidated balance sheet will not have a material adverse effect on the
Company's consolidated liquidity, financial position or results from operations.

         The consolidated federal income tax returns for the fiscal years ended
August 31, 1986, 1987 and 1988 of certain subsidiaries of the Company that were
acquired from Laidlaw in December 1996 (the "LSW Subsidiaries") have been under
audit by the Internal Revenue Service. In March 1994, the LSW Subsidiaries
received a Statutory Notice of Deficiency proposing that the LSW Subsidiaries
pay additional taxes relating to disallowed deductions in those income tax
returns (the "Tax Controversy"). The consolidated tax group of the LSW
Subsidiaries has also received notice that fiscal years 1992, 1993 and 1994 will
be examined regarding the Tax Controversy. The LSW Subsidiaries could be
directly liable for a substantial portion of any tax and interest assessed if
the disallowance of the deduction is sustained. In addition, under Treasury
Regulations promulgated under Section 1502 of the Internal Revenue Code ("IRC"),
each member of the consolidated tax group including each LSW Subsidiary, is or
could be severally liable for federal income tax liabilities of the entire
consolidated tax group, including any taxes due on the deemed sale of assets by
the LSW Subsidiaries pursuant to Section 338 of the IRC and all amounts at issue
in the Tax Controversy which are ultimately determined to be owed.

         Any amounts at issue in the Tax Controversy and for which any LSW
Subsidiary may ultimately be found liable, are included in and covered by the
indemnification of the Company by Laidlaw set forth in the Stock Purchase
Agreement by and between the Company and Laidlaw, among others, dated September
17, 1996 (the "Purchase Agreement"). Further, the Company and Laidlaw, among
others, have entered into a Setoff Agreement, under which Laidlaw has agreed
that if the Tax Controversy results in any damage, liability or expense to any
LSW Subsidiary, and if Laidlaw fails to indemnify the Company against all such
damages, liabilities or expenses within 30 days of a demand for indemnification,
then the Company may set off the amount of all such damages, liabilities


                                       53

<PAGE>   54
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

and expenses against all amounts then owed by the Company under the certain debt
issued to Laidlaw consisting primarily of the Allied Canada Debentures.

         Other than to the extent contemplated in the Setoff Agreement, the
obligation of Laidlaw to indemnify the Company in respect of amounts at issue in
the Tax Controversy is a general, unsecured obligation of Laidlaw. The ability
of Laidlaw to pay and fulfill such indemnification obligation will depend on the
financial condition of Laidlaw at the time of any required performance of such
obligation.

         In connection with certain acquisitions, the Company has entered into
agreements to pay royalties based on waste tonnage disposed at specified
landfills. The royalties are payable quarterly and the current amounts due are
included in the accompanying consolidated balance sheets. Additionally, the
Company has entered into a deferred royalty agreement of which the liability may
be converted into an interest bearing note or common shares.

         Allied has operating lease agreements for service facilities, office
space and equipment. Future minimum payments under non-cancelable operating
leases with terms in excess of one year are as follows (in thousands):

<TABLE>
<CAPTION>
                                            December 31, 1996
                                            -----------------
<S>                                         <C>
                           1997             $    12,613
                           1998                   9,566
                           1999                   7,879
                           2000                   5,489
                           2001                   4,184
                           Thereafter            87,084
</TABLE>

Rental expense under such operating leases was $1,307,000, $2,775,000 and
$6,476,047 for the three years ended December 31, 1996, respectively.

         The Company has entered into employment agreements with certain of its
executive officers for periods up to five years. The Company has agreed to
severance pay amounts equal to a multiple of defined compensation under certain
circumstances. In the event of a material change in control or termination of
all executive officers under such agreements, Allied would be required to make
payments of approximately $5.5 million.

         Allied carries a broad range of insurance coverage for protection of
its assets and operations from certain risks including environmental impairment
liability insurance for certain landfills.

         The Company has issued bank letters-of-credit, performance bonds and
other guarantees in the aggregate amount of approximately $53.7 million. These
financial instruments are issued in the normal course of business and are not
reflected in the accompanying balance sheets. Such financial instruments are to
be valued based on the amount of exposure under the instrument and the
likelihood of performance being required. Management does not expect any
material losses to result from these off balance sheet instruments based on
historical results, and therefore, is of the opinion that the fair value of
these instruments is zero.


                                       54

<PAGE>   55
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12.  RELATED PARTY TRANSACTIONS

         Transactions with related parties are entered into only upon approval
by a majority of the independent directors of the Company and only upon terms
comparable to those that would be available from unaffiliated parties.

         The Company leases certain properties and equipment in Illinois from
related parties resulting from prior year acquisitions. In connection with these
leases, payments of $89,000, $69,000 and $45,000 for the three years ended
December 31, 1996, respectively, were made to officers of the Company.

         In connection with certain acquisitions, previous owners are paid an
agreed upon amount not to compete with the Company. Annual payments of $88,000,
were made to officers of the Company for each of the three years ended December
31, 1996 related to these non-compete agreements.

         In connection with certain acquisitions, previous owners agreed to
continue their existing personal guarantees on assumed indebtedness for a fee.
Payments of $20,000 were made to an officer of the Company for the year ended
December 31, 1994.

         A Director is a partner in the firm which serves as the Company's
principal legal counsel.

         During 1994, the Company purchased real property from an officer for
approximately $1 million. The real property was subsequently exchanged for a
transfer station and a materials recovery facility in the Chicago area
previously owned by an unrelated party. No gain or loss was recognized on the
exchange.

         The Company made payments of $191,000 and $254,000 in 1994 and 1995,
respectively, on a life insurance policy for a related party assumed in a 1994
acquisition. A trust of the related party is the beneficiary of the policy.

         In connection with the receipt in April 1995 of all permits necessary
to develop a landfill on certain real estate acquired in July 1992, the Company
was obligated to pay $5.6 million to the previous owners of the real estate,
including current stockholders of the Company. During the years ended December
31, 1995 and 1996, the Company paid $924,000 and $121,000, respectively, to
these stockholders. The Company has $1.9 million in promissory notes payable to
these stockholders outstanding at December 31, 1996.


                                       55

<PAGE>   56
                          ALLIED WASTE INDUSTRIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13.   SUMMARIZED FINANCIAL INFORMATION OF ALLIED WASTE NORTH AMERICA, INC.

         As discussed in Note 5, the 1996 Notes issued by Allied NA (a
consolidated subsidiary of the Company) are guaranteed by Allied. The separate
complete financial statements of Allied NA have not been included herein as such
disclosure is not considered to be material to the holders of the 1996 Notes.
However, summarized balance sheet information for Allied NA and subsidiaries as
of December 31, 1996 is as follows (in thousands):

                Summarized Consolidated Balance Sheet Information

<TABLE>
<CAPTION>
                                                              December 31, 1996
                                                              -----------------
<S>                                                           <C>
       Current assets..................................         $   709,762
       Property and equipment, net.....................             706,752
       Goodwill........................................             856,108
       Other non-current assets........................              44,927
       Current liabilities.............................             682,686
       Long-term debt, net of current portion                     1,037,762
       Due to parent...................................             275,558
       Due to Allied Canada Finance, Ltd.                           110,747
       Other long-term obligations.....................             210,796
</TABLE>

         On November 25, 1996, substantially all of the operating assets and
liabilities of Allied were contributed from Allied to Allied NA. The results of
operations since inception were not material except for the acquisition related
costs and unusual items (see Note 1).

14.  SUBSEQUENT EVENTS

         Subsequent to December 31, 1996, the Company purchased 2 operating
solid waste businesses for a total of approximately $58.9 million of which
approximately $6.5 million was paid for with approximately 750,000 shares of the
Company's common stock.


                                       56

<PAGE>   57
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information required by this item is incorporated by reference to the
material appearing under the heading "Election of Directors" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

         Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required by this item is incorporated by reference to the
material appearing under the headings "Election of Directors" and "Certain
Stockholders" in the Proxy Statement for the 1997 Annual Meeting of
Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required by this item is incorporated by reference to the
material appearing under the heading "Certain Relationships and Related
Transactions" in the Proxy Statement for the 1997 Annual Meeting of
Stockholders.

                                     PART IV

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

         FINANCIAL STATEMENT SCHEDULES --

         Schedules omitted since the information required to be submitted has
been included in the Consolidated Financial Statements of Allied Waste
Industries, Inc. or the notes thereto, or the required information is not
applicable.


Exhibits --

 2.1     Stock Purchase Agreement dated September 17, 1996 among the Company,
         Allied NA, 3294862 Canada Inc., Laidlaw Inc., Laidlaw Transportation,
         Inc., Laidlaw Waste Systems, Inc., Laidlaw Waste Systems (Canada) Ltd.
         and Laidlaw Medical Services Ltd. Exhibit 2.1 to the Company's Current
         Report on Form 8-K dated October 2, 1996, is incorporated herein by
         reference.

 2.2     Purchase Agreement relating to the 1996 Notes dated November 25, 1996.
         Exhibit 2.1 to the Company's Current Report on Form 8-K dated December
         19, 1996, is incorporated herein by reference.

 2.3     Share Purchase Agreement dated January 15, 1997 among the Company,
         Allied Waste Holdings (Canada) Ltd., Laidlaw Waste Systems, Inc., USA
         Waste Services, Inc. and Canadian Waste Services, Inc. Exhibit 10.0 to
         the Company's Current Report on Form 8-K dated January 30, 1997, is
         incorporated herein by reference.


                                       57

<PAGE>   58
 3.1     Amended Certificate of Incorporation of the Company.*

 3.2     Certificate of Designation, Preferences, Rights and Limitations of 7%
         Cumulative Convertible Preferred Stock, par value $.10 per share dated
         April 27, 1994. Exhibit 3.2 to Post-Effective Amendment Number 1 to the
         Company's Registration Statement on Form S-1 (No. 33-75070) is
         incorporated herein by reference.

 3.3     Amended and Restated Bylaws of the Company. Exhibit 10.1 to the
         Company's Quarterly Report on Form 10-Q dated November 5, 1996, is
         incorporated herein by reference.

 4.1     Specimen certificate for shares of Common Stock par value $.01 per
         share. Exhibit 4.2 of the Company's Registration Statement on Form S-1
         (No. 33-48507) is incorporated herein by reference.

 4.2     Indenture relating to the 1994 Notes dated January 15, 1994 between the
         Company and First Trust National Association, as trustee ("First
         Trust"). Exhibit 4.1 to the Company's Registration Statement on Form
         S-1 (No. 33-73110) is incorporated herein by reference.

 4.3     Specimen certificate representing the 1994 Notes. Exhibit 4.2 of the
         Company's Registration Statement on Form S-1 (No. 33-48507) is
         incorporated herein by reference.

 4.4     Second Supplemental Indenture relating to the 1994 Notes dated June 30,
         1994 between the Company and First Trust. Exhibit 1.1 to the Company's
         Current Report on Form 8-K dated December 29, 1994, is incorporated
         herein by reference.

 4.5     Third Supplemental Indenture relating to the 1994 Notes dated January
         31, 1995 between the Company and First Trust. Exhibit 10.3 to the
         Company's Quarterly Report on Form 10-Q dated August 10, 1995, is
         incorporated herein by reference.

 4.6     Fourth Supplemental Indenture relating to the 1994 Notes dated January
         23, 1996, between the Company and First Trust. Exhibit 10.1 to the
         Company's Current Report on Form 8-K dated January 22, 1996, is
         incorporated herein by reference.

 4.7     Fifth Supplemental Indenture relating to the 1994 Notes dated July 30,
         1996 between the Company and First Trust. Exhibit 10.2 to the Company's
         Quarterly Report on Form 10-Q dated August 14, 1996, is incorporated
         herein by reference.

 4.8     Indenture relating to the 1996 Notes dated February 28, 1997 between
         the Company and First Trust. Exhibit 4.1 to the Company's Registration
         Statement on Form S-4 (No. 333- 22575) is incorporated herein by
         reference.

 4.9     1991 Incentive Stock Plan of the Company. Exhibit 10.T to the Company's
         Form 10 dated May 14, 1991, is incorporated herein by reference.

 4.10    1991 Non-Employee Director Stock Plan of the Company. Exhibit 10.U to
         the Company's Form 10 dated May 14, 1991, is incorporated herein by
         reference.

 4.11    1993 Incentive Stock Plan of the Company. Exhibit 10.3 to the Company's
         Registration Statement on Form S-1 (No. 33-73110) is incorporated
         herein by reference.

 4.12    1994 Amended and Restated Non-Employee Director Stock Option Plan of
         the Company. Exhibit B to the Company's Definitive Proxy Statement in
         accordance with Schedule 14A dated April 28, 1994, is incorporated
         herein by reference.

 4.13    Amendment to the 1994 Amended and Restated Non-Employee Director Stock
         Option Plan. Exhibit 10.2 to the Company's Quarterly Report on Form
         10-Q dated August 10, 1995, is incorporated herein by reference.

 4.14    Amended and Restated 1994 Incentive Stock Plan. Exhibit 10.1 to the
         Company's Quarterly Report on Form 10-Q dated May 31, 1996, is
         incorporated herein by reference.

10.1     Employment Agreement dated May 18, 1992, between the Company and Roger
         A. Ramsey, as amended. Exhibit 10.33 to the Company's Registration
         Statement on Form S-1 (No. 33-37110) is incorporated herein by
         reference.

10.2     Employment Agreement dated October 20, 1993, between the Company and
         Thomas H. Van Weelden, as amended. Exhibit 10.32 to the Company's
         Registration Statement on Form S-1 (No. 33-37110) is incorporated
         herein by reference.

10.3     Employment Agreement dated January 3, 1994, between the Company and
         Larry D. Henk, as amended. Exhibit 10.43 to the Company's Current
         Report on Form S-1/A-1 (No. 33-75070) is incorporated herein by
         reference.

10.4     Employment Agreement dated May 26, 1994, between the Company and H.
         Steven Uthoff, as amended. Exhibit 10.45 to the Company's Current
         Report on Form S-1/A-1 (No. 33-75070) is incorporated herein by
         reference.


                                       58

<PAGE>   59
10.5     Securities Purchase Agreement dated October 27, 1994, between the
         Company and TPG Partners, L.P. (the "TPG Agreement"). Exhibit 1.1 to
         the Company's Current Report on Form 8-K dated November 4, 1994, is
         incorporated herein by reference.

10.6     First Amendment to the TPG Agreement dated December 1, 1994. Exhibit
         1.4 to the Company's Current Report on Form 8-K/A-1 dated November 4,
         1994, is incorporated herein by reference.

10.7     Second Amendment to the TPG Agreement dated December 9, 1994. Exhibit
         1.5 to the Company's Current Report on Form 8-K/A-1 dated November 4,
         1994, is incorporated herein by reference.

10.8     Third Amendment to the TPG Agreement dated December 16, 1994. Exhibit
         1.4 to the Company's Current Report on Form 8-K/A-2 dated November 4,
         1994, is incorporated herein by reference.

10.9     Fourth Amendment to the TPG Agreement dated December 30, 1994. Exhibit
         1.1 to the Company's Current Report on Form 8-K/A-3 dated November 4,
         1994, is incorporated herein by reference.

10.10    Agreement dated September 17, 1996, between Allied Waste Industries,
         Inc., TPG Partners, L.P. and TPG Parallel I, L.P. Exhibit 10.1 to the
         Company's Current Report on Form 8-K dated October 2, 1996, is
         incorporated herein by reference.

10.11    Credit Agreement among the Company, Allied NA, and the various lenders
         represented by Goldman Sachs Credit Partners, L.P., Credit Suisse and
         Citibank, N.A. dated December 30, 1996.*

11.1     Statement regarding the computation of per share earnings -- primary.*

11.2     Statement regarding the computation of per share earnings -- fully
         diluted.*

12       Ratio of earnings to fixed charges.*

21       Subsidiaries of the Registrant.*

24.1     Consent of Arthur Anderson LLP.*

27       Financial Data Schedule *

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


                                       59

<PAGE>   60
        REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 1996--


         October 2, 1996            The Company's current report on Form 8-K
                                    reports that the Company entered into a
                                    Stock Purchase Agreement to acquire the
                                    solid waste management operations of Laidlaw
                                    Inc.

         November 29, 1996          The Company's current report on Form 8-K/A-1
                                    reports pro forma financial statements
                                    related to the acquisition of the solid
                                    waste management operations of Laidlaw Inc.

         December 19, 1996          The Company's current report on Form 8-K
                                    reports the issuance of $525 million 10.25%
                                    in Senior Subordinated Notes.

         December 20, 1996          The Company's current report on Form 8-K/A-2
                                    reports revised pro forma financial
                                    statements related to the acquisition of the
                                    solid waste management operations of Laidlaw
                                    Inc.

         December 27, 1996          The Company's current report on Form 8-K/A-3
                                    reports revised pro forma financial
                                    statements related to the acquisition of the
                                    solid waste management operations of Laidlaw
                                    Inc.


                                       60

<PAGE>   61
                                   SIGNATURES


Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant, Allied Waste Industries, Inc., has
caused this Report to be signed on its behalf by the undersigned, in the City of
Scottsdale, State of Arizona, on March 27, 1997.

                                      ALLIED WASTE INDUSTRIES, INC.

                                      By:/s/HENRY L. HIRVELA
                                         -----------------------
                                         Henry L. Hirvela
                                         Vice President-Chief Financial officer
                                         (Principal Financial Officer)

                                      By:/s/PETER S. HATHAWAY
                                         -----------------------
                                         Peter S. Hathaway
                                         Vice President-Chief Accounting Officer
                                         (Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
27, 1997.
<TABLE>
<CAPTION>

            Signature                                             Title
    --------------------------         ------------------------------------------------
<S>                                    <C>
    /s/ROGER A. RAMSEY                 Director, Chairman of the Board of Directors
    --------------------               and Chief Executive Officer
       Roger A. Ramsey

    /s/THOMAS VAN WEELDEN              Director, President and Chief Operating Officer
    ----------------------
       Thomas Van Weelden

    /s/HENRY L. HIRVELA                Vice President - Chief Financial Officer
    ----------------------             (Principal Financial Officer)
       Henry L. Hirvela

    /s/PETER S. HATHAWAY               Vice President - Chief Accounting Officer
    ----------------------             (Principal Accounting Officer)
       Peter S. Hathaway

    /s/DANIEL J. IVAN                  Director, Vice President
    -----------------------
       Daniel J. Ivan

    /s/NOLAN LEHMANN                   Director
    -----------------------
       Nolan Lehmann

    /s/ROBERT G. REEDY                 Director
    -----------------------
       Robert G. Reedy

    /s/ALAN B. SHEPARD                 Director
    -----------------------
       Alan B. Shepard

    -----------------------            Director
       James G. Coulter
</TABLE>


                                       61

<PAGE>   62
                            SIGNATURES - (CONTINUED)


<TABLE>
<CAPTION>
<S>                                    <C>
    /s/JEFFREY A. SHAW                 Director
       ----------------------
       Jeffrey A. Shaw

    /s/JOHN M. LEWIS                   Director
       -----------------------
       John M. Lewis

    /s/WILLIAM K. REILLY               Director
       -----------------------
       William K. Reilly

    /s/BRIAN A. O'LEARY                Director
       ----------------------
       Brian A. O'Leary

    /s/JAMES R. BULLOCK                Director
       ----------------------
       James R. Bullock

    /s/IVAN CAIRNS                     Director
       -----------------------
       Ivan Cairns
</TABLE>


                                       62

<PAGE>   63
                                  EXHIBIT INDEX



  Exhibit #       Exhibit                                                   Page
  ---------       -------                                                   ----

      2.1   Stock Purchase Agreement dated September 17, 1996 among the
            Company, Allied NA, 3294862 Canada Inc., Laidlaw Inc., Laidlaw
            Transportation, Inc., Laidlaw Waste Systems, Inc., Laidlaw
            Waste Systems (Canada) Ltd. and Laidlaw Medical Services Ltd.
            Exhibit 2.1 to the Company's Current Report on Form 8-K dated
            October 2, 1996, is incorporated herein by reference.

      2.2   Purchase Agreement relating to the 1996 Notes dated November
            25, 1996. Exhibit 2.1 to the Company's Current Report on Form
            8-K dated December 19, 1996, is incorporated herein by
            reference.

      2.3   Share Purchase Agreement dated January 15, 1997 among the
            Company, Allied Waste Holdings (Canada) Ltd., Laidlaw Waste
            Systems, Inc., USA Waste Services, Inc. and Canadian Waste
            Services, Inc. Exhibit 10.0 to the Company's Current Report on
            Form 8-K dated January 30, 1997, is incorporated herein by
            reference.

      3.1   Amended Certificate of Incorporation of the Company.*

      3.2   Certificate of Designation, Preferences, Rights and Limitations
            of 7% Cumulative Convertible Preferred Stock, par value $.10
            per share dated April 27, 1994. Exhibit 3.2 to Post-Effective
            Amendment Number 1 to the Company's Registration Statement on
            Form S-1 (No. 33-75070) is incorporated herein by reference.

      3.3   Amended and Restated Bylaws of the Company. Exhibit 10.1 to the
            Company's Quarterly Report on Form 10-Q dated November 5, 1996,
            is incorporated herein by reference.

      4.1   Specimen certificate for shares of Common Stock par value $.01
            per share. Exhibit 4.2 of the Company's Registration Statement
            on Form S-1 (No. 33-48507) is incorporated herein by reference.

      4.2   Indenture relating to the 1994 Notes dated January 15, 1994
            between the Company and First Trust National Association, as
            trustee ("First Trust"). Exhibit 4.1 to the Company's
            Registration Statement on Form S-1 (No. 33-73110) is
            incorporated herein by reference.

      4.3   Specimen certificate representing the 1994 Notes. Exhibit 4.2
            of the Company's Registration Statement on Form S-1 (No. 33-
            48507) is incorporated herein by reference.

      4.4   Second Supplemental Indenture relating to the 1994 Notes dated
            June 30, 1994 between the Company and First Trust. Exhibit 1.1
            to the Company's Current Report on Form 8-K dated December 29,
            1994, is incorporated herein by reference.

      4.5   Third Supplemental Indenture relating to the 1994 Notes dated
            January 31, 1995 between the Company and First Trust. Exhibit
            10.3 to the Company's Quarterly Report on Form 10-Q dated
            August 10, 1995, is incorporated herein by reference.

      4.6   Fourth Supplemental Indenture relating to the 1994 Notes dated
            January 23, 1996, between the Company and First Trust. Exhibit
            1.1 to the Company's Current Report on Form 8-K dated January
            22, 1996, is incorporated herein by reference.


                                     63

<PAGE>   64
  Exhibit #       Exhibit                                                   Page
  ---------       --------                                                  ----

      4.7   Fifth Supplemental Indenture relating to the 1994 Notes dated
            July 30, 1996 between the Company and First Trust. Exhibit 10.2
            to the Company's Quarterly Report on Form 10-Q dated August 14,
            1996, is incorporated herein by reference.

      4.8   Indenture relating to the 1996 Notes dated February 28, 1997
            between the Company and First Trust. Exhibit 4.1 to the
            Company's Registration Statement on Form S-4 (No. 333-22575) is
            incorporated herein by reference.

      4.9   1991 Incentive Stock Plan of the Company. Exhibit 10.T to the
            Company's Form 10 dated May 14, 1991, is incorporated herein by
            reference.

      4.10  1991 Non-Employee Director Stock Plan of the Company. Exhibit
            10.U to the Company's Form 10 dated May 14, 1991, is
            incorporated herein by reference.

      4.11  1993 Incentive Stock Plan of the Company. Exhibit 10.3 to the
            Company's Registration Statement on Form S-1 (No. 33-73110) is
            incorporated herein by reference.

      4.12  1994 Amended and Restated Non-Employee Director Stock Option
            Plan of the Company. Exhibit B to the Company's Definitive
            Proxy Statement in accordance with Schedule 14A dated April 28,
            1994, is incorporated herein by reference.

      4.13  Amendment to the 1994 Amended and Restated Non-Employee
            Director Stock Option Plan. Exhibit 10.2 to the Company's
            Quarterly Report on Form 10-Q dated August 10, 1995, is
            incorporated herein by reference.

      4.14  Amended and Restated 1994 Incentive Stock Plan. Exhibit 10.1 to
            the Company's Quarterly Report on Form 10-Q dated May 31, 1996,
            is incorporated herein by reference.

      10.1  Employment Agreement dated May 18, 1992, between the Company
            and Roger A. Ramsey, as amended. Exhibit 10.33 to the Company's
            Registration Statement on Form S-1 (No. 33-37110) is
            incorporated herein by reference.

      10.2  Employment Agreement dated October 20, 1993, between the
            Company and Thomas H. Van Weelden, as amended. Exhibit 10.32 to
            the Company's Registration Statement on Form S-1 (No. 33-37110)
            is incorporated herein by reference.

      10.3  Employment Agreement dated January 3, 1994, between the Company
            and Larry D. Henk, as amended. Exhibit 10.43 to the Company's
            Current Report on Form S-1/A-1 (No. 33-75070) is incorporated
            herein by reference.

      10.4  Employment Agreement dated May 26, 1994, between the Company
            and H. Steven Uthoff, as amended. Exhibit 10.45 to the
            Company's Current Report on Form S-1/A-1 (No. 33-75070) is
            incorporated herein by reference.

      10.5  Securities Purchase Agreement dated October 27, 1994, between
            the Company and TPG Partners, L.P. (the "TPG Agreement").
            Exhibit 1.1 to the Company's Current Report on Form 8-K dated
            November 4, 1994, is incorporated herein by reference.

      10.6  First Amendment to the TPG Agreement dated December 1, 1994.
            Exhibit 1.4 to the Company's Current Report on Form 8-K/A-1
            dated November 4, 1994, is incorporated herein by reference.

      10.7  Second Amendment to the TPG Agreement dated December 9, 1994.
            Exhibit 1.5 to the Company's Current Report on Form 8-K/A-1
            dated November 4, 1994, is incorporated herein by reference.

      10.8  Third Amendment to the TPG Agreement dated December 16, 1994.
            Exhibit 1.4 to the Company's Current Report on Form 8-K/A-2
            dated November 4, 1994, is incorporated herein by reference.


                                     64

<PAGE>   65


  Exhibit #       Exhibit                                                   Page
  ---------       -------                                                   ----

      10.9  Fourth Amendment to the TPG Agreement dated December 30, 1994.
            Exhibit 1.1 to the Company's Current Report on Form 8-K/A-3
            dated November 4, 1994, is incorporated herein by reference.

      10.10 Agreement dated September 17, 1996, between Allied Waste
            Industries, Inc., TPG Partners, L.P. and TPG Parallel I, L.P.
            Exhibit 10.1 to the Company's Current Report on Form 8-K dated
            October 2, 1996, is incorporated herein by reference.

      10.11 Credit Agreement among the Company, Allied NA, and the various
            lenders represented by Goldman Sachs Credit Partners, L.P.,
            Credit Suisse and Citibank, N.A. dated December 30, 1996.*

      11.1  Statement regarding the computation of per share earnings --
            primary.*

      11.2  Statement regarding the computation of per share earnings --
            fully diluted.*

      12    Ratio of earning to fixed charges.*

      21    Subsidiaries of the Registrant.*

      24.1  Consent of Arthur Anderson LLP.*

      27    Financial Data Schedule*

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


                                     65