<PAGE>   1
                                  UNITED STATES
                       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 September 30, 1998

                                       OR

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

       For the transition period from _________ to _________.

       Commission File Number 1-6805.

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

                        BROWNING-FERRIS INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

          DELAWARE                                              74-1673682
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                             Identification No.)

          757 N. ELDRIDGE
           HOUSTON, TEXAS                                        77079
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code: (281) 870-8100.

Securities registered pursuant to Section 12(b) of the Act:

        Title of each class            Name of each exchange on which registered
---------------------------------      -----------------------------------------

Common Stock, $.16-2/3 par value       New York Stock Exchange, Inc.

                                       Chicago Stock Exchange Incorporated

                                       Pacific Stock Exchange Incorporated


<PAGE>   2

Securities registered pursuant to Section 12(g) of the Act:  None.

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

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

The approximate aggregate market value of common stock held by non-affiliates of
the registrant: $4.8 billion, computed on the basis of $30-3/16 per share,
closing price of the common stock on the New York Stock Exchange, Inc. on
December 2, 1998.

There were 161,326,307 shares of the registrant's common stock, $.16-2/3 par
value, outstanding as of December 2, 1998.


                       DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12 and 13 of Part III (except for information required with
respect to executive officers of the Company, which is set forth under
"Business--Executive Officers of the Company" in Part I of this report) have
been omitted from this report, since the Company will file with the Securities
and Exchange Commission, not later than 120 days after the close of its fiscal
year, a definitive proxy statement, pursuant to Regulation 14A, which involves
the election of directors. The information required by Items 10, 11, 12 and 13
of Part III of this report, which will appear in the definitive proxy statement,
is incorporated by reference into this report.



                                      -ii-
<PAGE>   3
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                PAGE
<S>                                                                                                             <C>
PART I............................................................................................................1

   Item 1.  Business..............................................................................................1
       General....................................................................................................1
       North American Operations..................................................................................4
         Collection...............................................................................................4
         Post-Collection..........................................................................................4
            Landfills.............................................................................................4
            Transfer Stations.....................................................................................5
            Medical Waste.........................................................................................5
            Recycling.............................................................................................5
         Services Group and Other.................................................................................5
       International Operations...................................................................................6
       Waste-To-Energy............................................................................................6
       Regulation.................................................................................................7
       Competition...............................................................................................10
       Waste Disposal Risk Factors...............................................................................10
       Corporate Development.....................................................................................11
       Capital Expenditures......................................................................................12
       Executive Officers of the Company.........................................................................13

   Item 2. Properties............................................................................................16

   Item 3. Legal Proceedings.....................................................................................16
       Environmental Proceedings.................................................................................17

   Item 4. Submission of Matters to a Vote of Security Holders...................................................18


PART II..........................................................................................................19

    Item 5.   Market for the Registrant's Common Equity and Related Stockholder Matters..........................19
    Item 6.   Selected Financial Data............................................................................21
    Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations..............23
    Item 7A.  Quantitative and Qualitative Disclosure About Market Risk..........................................48
    Item 8.   Financial Statements and Supplemental Data.........................................................49

    Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............114


PART III........................................................................................................114


PART IV.........................................................................................................114

   Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................114
       Financial Statements.....................................................................................114
       Schedules................................................................................................114
       Exhibits.................................................................................................115


SIGNATURES......................................................................................................123
</TABLE>



                                     -iii-
<PAGE>   4

                                     PART I.


ITEM 1.  BUSINESS.

GENERAL

Browning-Ferris Industries, Inc. is one of the largest publicly-held companies
that engages, through its subsidiaries and affiliates, in providing waste
services in the United States and Canada. The Company collects, transports,
treats and/or processes, recycles and disposes of commercial, residential and
municipal solid wastes and industrial wastes. BFI is also involved in
waste-to-energy conversion, medical waste services, portable restroom services,
and municipal and commercial sweeping operations. The Company also engages in
providing waste services outside of North America, principally in Europe,
through its equity ownership in SITA, a publicly traded, Paris-based
subsidiary of Suez Lyonnaise des Eaux. See "International Operations."

The terms "BFI" and "Company" refer to Browning-Ferris Industries, Inc.,
incorporated in Delaware on October 26, 1970, and are used herein to include its
subsidiaries, affiliates and predecessors, unless the context requires
otherwise. BFI's executive offices are located at 757 N. Eldridge, Houston,
Texas 77079. The Company's mailing address is P.O. Box 3151, Houston, Texas
77253, and its telephone number is (281) 870-8100.

The Company operates in approximately 450 locations in the United States, Canada
and Puerto Rico and employs approximately 26,000 persons. No single customer or
operating location accounts for a material amount of BFI's revenue or net
income.

In November 1997, the Company announced the signing of an agreement to merge its
operations located outside North America with SITA, S.A., a societe anonyme
formed under the laws of the Republic of France ("SITA"). In March 1998,
pursuant to the terms of the agreement, the Company sold to SITA substantially
all of its equity securities and other ownership interests of its international
operations located outside the United States, Puerto Rico, Canada and Mexico. In
return, the Company received $950 million and ordinary shares of SITA equating
to approximately 19.2% equity ownership in SITA.

In September 1997, the Company commenced a $1 billion equity buy-back program.
The first phase of the program was completed in October 1997 when the Company
purchased 15 million shares of its common stock at a price of approximately $585
million in accordance with the terms of its "Dutch Auction" tender offer. During
the third quarter of fiscal 1998, the second phase of the program, approximately
$415 million in open market purchases and privately negotiated transactions was
completed with the Company having purchased 12.3 million shares of its common
stock.

In March 1998, the Company announced that its Board of Directors had approved a
$500 million increase to its common stock repurchase program, which was
completed in June 1998 with the Company having purchased approximately 14.6
million shares of its common stock.



                                      -1-
<PAGE>   5

In July 1998, the Company announced that its Board of Directors had approved an
additional $750 million increase to its common stock repurchase program. It is
anticipated that this increase to the common stock repurchase program will be
completed on or before September 30, 1999. As of September 30, 1998, the Company
has purchased approximately 14.4 million shares of common stock pursuant to the
July authorization at a total cost of $500 million.

At the end of fiscal 1996, the Company announced a strategic refocus to
emphasize internal growth rather than external growth and to more closely align
the Company's performance objectives with its shareholders' interests. To begin
implementation of this strategy, the Company realigned its North American
operating organization, revised its financial strategies, implemented revised
incentive compensation plans for employees and reduced its capital expenditures
budget as compared to historic levels of such expenditures. The Company
continued this strategy during fiscal 1998 by identifying and divesting of
certain underperforming business operations, including its international
operations, reducing its selling, general and administrative costs and, to a
lesser extent, operating costs, and focusing on return on gross assets in both
its existing business operations and its business development activities. See
below and also "International Operations", "Corporate Development" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."

The Company's operating organization is aligned along functional lines into five
groups: sales and marketing, collection, post-collection, business development,
and business analysis. Each functional group is led by an officer in Houston who
reports directly to either the Company's chief executive officer or another
senior executive officer. The operations are divided into 7 market areas, each
of which includes area vice presidents responsible for one of the five
functional groups within the market area. Each market area is headed by a market
area vice president who reports directly to the Company's chief operating
officer and is responsible for coordinating the activities of the functional
area vice presidents within his market area. The organizational structure is
intended to maximize the expertise and efficiency of each function, improve and
integrate customer service, accelerate company-wide adoption of best practices
and increase oversight and discipline respecting capital expenditures.

The Company's long-term financial goals are to: (i) generate cash returns on
assets in excess of the weighted average cost of capital; (ii) increase profits
at a faster pace than the increase in revenues; and (iii) maintain a strong
credit rating appropriate for supporting business operations. To more closely
align management interests to shareholder interests, the Company has also
revised its long-term incentive compensation plans for management to reallocate
a significant portion of their stock option participation to performance-based
stock awards that will be earned only as certain performance measures are
attained.

The Company's business is subject to extensive governmental regulation and
legislative initiative, such as environmental regulation, mandatory recycling
laws, medical waste regulation, preclusion of certain waste from landfills and
restrictions on the flow of solid waste. Due to continuing public awareness and
influence regarding waste and the environment, and uncertainty with respect to
the enactment and enforcement of future laws, the Company can not always
accurately project the 





                                      -2-
<PAGE>   6

impact any future regulation or legislative initiative may have on its
operations. See "Regulation" and "Legal Proceedings - Environmental Proceedings"
for additional information.

The table below reflects for each of the three years ended September 30, 1998,
the total revenues contributed by the Company's principal lines of business.

<TABLE>
<CAPTION>
                                                Contribution to Consolidated Revenues
                                                           (in millions)
                                                       Year Ended September 30,
                                                  ---------------------------------
                                                   1998         1997         1996
                                                  -------      -------      -------
<S>                                               <C>          <C>          <C>    
North American Operations

Collection Services - Solid Waste                 $ 2,753      $ 2,913      $ 2,886

Transfer and Disposal - Solid Waste                 1,108        1,079        1,050

Recycling Services                                    473          555          531

Medical Waste Services                                198          199          200

Services Group and Other                              121          106           89

Elimination of Affiliated Companies' Revenues        (543)        (527)        (513)
                                                  -------      -------      -------

Total North American Operations                     4,110        4,325        4,243

International Operations                              636        1,458        1,536
                                                  -------      -------      -------

Total Company                                     $ 4,746      $ 5,783      $ 5,779
                                                  =======      =======      =======
</TABLE>


Total assets at September 30, 1998, 1997 and 1996 were $4,999 million, $6,678
million and $7,601 million, respectively.




                                      -3-
<PAGE>   7


                            NORTH AMERICAN OPERATIONS

COLLECTION

BFI collects solid waste in approximately 260 operating locations in 46 states,
Canada and Puerto Rico. These operations provide solid waste collection services
for commercial establishments, industrial plants, medical institutions, and
governmental and residential units. BFI uses approximately 910,000 containers
and approximately 9,000 specially equipped collection trucks in its North
American waste collection operations.

The Company's commercial and industrial solid waste collection services are
typically performed pursuant to service agreements that provide for one-year to
three-year initial terms and specified successive terms thereafter. Residential
collection contracts with individual homeowners, homeowner groups and
municipalities are generally for periods of one to five years, frequently with
renewable terms. Solid waste collection contracts with governmental units are
usually awarded pursuant to a competitive bidding process.

Operating costs, disposal costs and collection fees vary widely throughout the
geographic areas of the Company's operations. Prices for solid waste collection
services are determined locally, principally by the volume, weight and type of
wastes collected, treatment required, risks involved in handling or disposing of
the wastes, collection frequency, disposal costs, distance to final disposal
sites, quantity and type of equipment furnished to the customer and other
competitive factors. The Company's ability to pass on cost increases is often
influenced by competitive and other factors. Long-term residential solid waste
collection contracts often include a formula for adjusting fees, generally based
on published price indices, to cover increases in certain operating costs.

The Company is the largest provider of medical waste services in North America
and collects infectious and pathological waste materials from approximately
210,000 customers.

The Company also collects recyclable materials, principally paperboard, office
paper and other paper products, in North America from approximately 5.2 million
households, including curbside customers, and for approximately 140,000
commercial and industrial customers. The Company's recycling collection
contracts often provide for customer participation in price increases or price
decreases on resale of recycled commodities.

POST-COLLECTION

Landfills

Sanitary landfilling is the primary method employed by the Company for final
disposal of the segment of the solid waste stream that is not recycled. BFI
currently operates 94 solid waste landfill sites in North America, 18 of which
are operated under contracts with municipalities or others. The Company has
approximately 15,000 acres permitted as landfill disposal sites, 





                                      -4-
<PAGE>   8

consisting of acres in unopened and unlined landfill cells, acres in filled and
capped landfill cells which are in open landfill sites, and acres in open
landfill cells. The permitted acreage does not reflect the volume (or
"airspace") available for disposal, which depends on the vertical space and
landfill configuration as well as the surface acres. BFI does not currently own
or lease a landfill site in every metropolitan area in which it is engaged in
solid waste collection; however, the Company intends to continue to seek, where
advisable, ownership or lease of disposal facilities in all such areas. To date,
the Company has not experienced excessive difficulty securing the use of
disposal facilities owned or operated by others in those communities in which it
does not operate its own landfill sites.

Transfer Stations

BFI operates 90 solid waste transfer stations where solid wastes are compacted
for transfer to final disposal facilities. Transfer stations are used for the
purpose of either (i) reducing costs associated with transporting waste to final
disposal sites, or (ii) better utilizing the Company's disposal sites. Where
practical, transfer and recycling functions are combined at the same transfer
station to form "Trancycleries."(TM)

Medical Waste

The Company owns or operates 25 treatment sites using either incineration or
autoclaving (steam sterilization) technology. The Company also utilizes
approximately 90 collection sites to service medical waste customers in most
major metropolitan cities in the United States.

Recycling

The Company currently operates 90 recycleries in North America which receive,
process and dispose of recyclable materials. During fiscal 1998, the Company
closed 12 recycling facilities due to the continuing weakness in recycled
commodity prices, and plans to close additional facilities during fiscal 1999.
The Company operates a centralized materials marketing group with the objective
of establishing longer-term customer relationships and agreements with
purchasers of recycled commodities. The Company has developed relationships with
numerous other companies to assure municipalities and other customers of
continuous and diversified resale markets. In order to reduce the impact of the
price volatility that is inherent in this business segment, the Company has
included floor pricing provisions in a large number of its fiber resale
contracts.

The Company also engages in organic materials recycling and/or disposal and
other alternative energy concepts such as biomass fuels. 

SERVICES GROUP AND OTHER

In April 1997, the Company acquired the lease and related assets of a
waste-to-energy facility located in Chester, Pennsylvania. See
"Waste-To-Energy". The Company also rents and services 





                                      -5-
<PAGE>   9

portable restroom facilities and provides street and parking lot sweeping. The
Company may also participate, to a limited extent, in the end-use development of
certain BFI landfills that have reached permitted capacity and other real and
personal property in which it has an interest. From time to time, the Company
sells or otherwise disposes of surplus land and other real or personal property
and reflects any gain or loss from such transactions in the results of
operations for the period in which the transactions occur.


                            INTERNATIONAL OPERATIONS

On November 10, 1997, the Company announced the signing of an agreement to merge
its operations located outside North America with SITA. On March 31, 1998,
pursuant to the terms of the agreement, the Company sold substantially all of
its equity securities and other ownership interests of its international
operations located outside the United States, Puerto Rico, Canada and Mexico to
SITA. In return, the Company received $950 million and ordinary shares, FF50 par
value, of SITA equating to approximately 19.2% equity ownership in SITA. See
Note (8) of Notes to Consolidated Financial Statements.

Suez Lyonnaise des Eaux, a societe anonyme formed under the laws of the Republic
of France ("Suez Lyonnaise"), owns greater than 50% of the Ordinary Shares of
SITA. Pursuant to a Shareholders' Agreement between the Company and Suez
Lyonnaise, the Company is entitled to a 20% representation on SITA's board of
directors.

SITA is a leading waste services company that provides collection, recycling,
waste-to-energy and disposal services in Europe, with additional operations in
the Asia-Pacific region and Latin America.



                                 WASTE-TO-ENERGY

The Company and Duke/UAE Ref-Fuel LLC ("Duke/UAE"), a Delaware limited liability
corporation which is indirectly owned 65% by Duke Capital Corporation and 35% by
United American Energy Corporation, are each 50% partners in partnerships that
design, build, own and operate facilities that burn solid waste and recover
energy and other materials. Duke/UAE acquired its partnership interests from Air
Products and Chemicals, Inc., the Company's prior partner, in December 1997.
These partnerships market their capabilities under the name American
Ref-Fuel(R).

In April 1997, the Company acquired 100% of the lease and related assets of the
Delaware County Resource Recovery Facility, located in Chester, Pennsylvania,
from Westinghouse Electric Corporation. The facility, which has a capacity of
approximately 1,000,000 tons per year, utilizes a rotary mass-burn process and
is operated by American Ref-Fuel.





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<PAGE>   10

American Ref-Fuel currently operates six waste-to-energy facilities, including
the Chester, Pennsylvania facility. Five of these facilities, which are located
in Hempstead (Long Island), New York, Essex County, New Jersey, Niagara Falls,
New York, Rochester, Massachusetts and Chester, Pennsylvania, have capacities of
approximately 800,000 to 1,300,000 tons per year. The Preston, Connecticut
facility has a capacity of approximately 250,000 tons per year.

Four of the facilities owned by American Ref-Fuel partnerships utilize the solid
waste mass-burning technology of the German firm, Deutsche Babcock Anlagen GmbH
("DBA"), for which American Ref-Fuel is a licensee in North America. This
technology has been utilized successfully for over 30 years in Europe and
elsewhere.

In connection with four of the existing American Ref-Fuel projects, both the
Company and Duke Capital Corporation have delivered, and in connection with any
future projects may be required to deliver, support agreements for certain
project indebtedness of each of the respective subsidiary partners. See Note
(12) of Notes to Consolidated Financial Statements for information concerning
these obligations.

The Company's equity and loan investments in American Ref-Fuel's waste-to-energy
projects were approximately $130 million at September 30, 1998. American
Ref-Fuel's business is very capital intensive and its ability to raise capital
is an important factor in its competitiveness in the waste services industry.
When feasible, American Ref-Fuel attempts to finance its projects with tax
exempt bonds due to the lower interest costs. During fiscal 1999, the Company
plans to evaluate select acquisition opportunities presented by American
Ref-Fuel.

All waste-to-energy facilities must meet rigid environmental laws and
regulations. Existing laws and regulations can be changed or administered so as
to affect the design, construction, startup or operation of such facilities.
Management believes that the technologies employed at its facilities are capable
of meeting anticipated future changes in laws and regulations; however, there
can be no assurance that required environmental and other permits will be issued
for any planned project. See "Regulation" and "Waste Disposal Risk Factors."


                                   REGULATION

All of the Company's principal business activities in the United States are
governed by federal, state and local laws and regulations pertaining to public
health and the environment, as well as transportation laws and regulations.
These regulatory systems are complex and are subject to change.

The U.S. Congress and certain states have considered legislation, and some
states are taking action, to ban or otherwise restrict the interstate
transportation of wastes for disposal, to impose discriminatory fees on such
transported wastes, to limit the types of wastes that may be disposed of at
existing disposal facilities, and to mandate waste minimization initiatives,
recycling quotas and composting of yard wastes.




                                      -7-
<PAGE>   11

In recent years, a number of communities have instituted "flow control"
requirements, which typically require that waste collected within a particular
area be deposited at a designated facility. In May 1994, the U.S. Supreme Court
ruled that a flow control ordinance was inconsistent with the Commerce Clause of
the Constitution of the United States. A number of lower federal courts have
struck down similar measures. Although the U.S. Congress has considered
legislation that would partially grant flow control authority under the Commerce
Clause, no legislation has been enacted. In the future, the U.S. Congress may
consider bills that could at least partially overturn these court decisions and
immunize particular governmental actions (for example, flow control mandates
that were in place prior to the 1994 U.S. Supreme Court decision) from Commerce
Clause scrutiny.

Similarly, the U.S. Supreme Court has consistently held that state and local
measures that seek to restrict the importation of extraterritorial waste or tax
imported waste at a higher rate are unconstitutional. To date, congressional
efforts to enable states to, under certain circumstances, impose differential
taxes on out-of-state waste or restrict waste importation have not been
successful.

In the absence of federal legislation, certain local laws that directly or
indirectly divert waste flows to designated facilities may be unenforceable, and
discriminatory taxes and waste importation restrictions should continue to be
subject to judicial invalidation. If the U.S. Congress adopts legislation
allowing for certain types of flow control or restricting the importation of
waste, or if legislation affecting interstate transportation of waste is adopted
at the federal or state level, such legislation could adversely affect the
Company's waste collection, transportation, treatment and disposal operations.

Because a major component of the Company's business is the collection and
disposal of solid waste in an environmentally sound manner, a material amount of
the Company's capital expenditures are related (directly or indirectly) to
environmental protection measures, including compliance with federal, state and
local provisions that have been enacted or adopted regulating the discharge of
materials into the environment. There are costs that are associated with
facility upgrading, corrective actions, facility closure and post-closure care
in addition to other costs normally associated with the Company's waste
management activities. The majority of these expenditures are made in the normal
course of the Company's business and do not place the Company at any competitive
disadvantage.

In October 1991, the EPA issued its final regulations under Subtitle D of the
Resource Conservation and Recovery Act of 1976 ("RCRA"), which set forth minimum
federal performance and design criteria for municipal solid waste landfills. All
Subtitle D regulations are now in effect. Management of BFI believes that these
regulations are having a favorable long-term impact on its landfill operations,
but meeting these regulatory requirements has resulted in increased costs.

In March 1996, the EPA issued final regulations under the Clean Air Act to
control the release of landfill gas from municipal solid waste landfills. At
many of its facilities, the Company has installed gas extraction and control
systems that meet the technical specifications in the rule. At 




                                      -8-
<PAGE>   12

those facilities that do not have systems, and at new facilities, as
appropriate, the Company will continue to design, permit and install gas
collection and control systems in accordance with EPA and state requirements.
The Company has obtained or is seeking operating or other applicable permits for
these activities. In addition, landfills located in those areas of the country
that do not meet prescribed air quality standards may require more costly
control systems.

State financial responsibility regulations, adopted in various forms, require
owners or operators of waste disposal facilities and underground storage tanks
to demonstrate the financial ability to respond to and correct sudden and
accidental pollution occurrences, as well as non-sudden or gradual pollution
occurrences. To meet these requirements, the Company has secured Environmental
Impairment Liability ("EIL") insurance coverage in amounts the Company believes
are in compliance with federal and state law. Under the current EIL policy,
which is collateralized, the Company must reimburse the carrier for any losses.
It is possible that the Company's results of operations could be adversely
affected in a particular reporting period in the event of significant
environmental impairment claims.

Many state regulations also require owners or operators of waste disposal
facilities to provide assurance of their financial ability to cover the
estimated costs of proper closure and post-closure monitoring and maintenance of
these facilities. The federal Subtitle D regulations require all states to adopt
financial assurance regulations that meet the federal standards. The Company has
generally relied upon its consolidated financial position to issue corporate
guarantees, or has utilized letters of credit to satisfy these requirements. In
April, 1998, the EPA promulgated a financial test and corporate guarantee for
use by private Subtitle D facilities which afford the Company an additional cost
effective method to satisfy the financial assurance requirements. The Company
has also established a captive insurance company that is being used in several
states to provide insurance as a recognized means of demonstrating this
financial assurance. The Company has had success and is continuing its efforts
to secure acceptance of captive-issued insurance policies which serve as a
cost-effective alternative to certain other forms of financial assurance, such
as letters of credit.








                                      -9-
<PAGE>   13

                                   COMPETITION

BFI competes with both publicly-held and privately-owned waste services
companies. This competition is intense and has increased in recent years. BFI
believes that neither it nor any other waste services company has a significant
portion of any major aspect of the solid waste services markets. In some
geographic areas, all or part of the solid waste collection, processing and
disposal services offered by BFI may also be provided by municipalities or by
governmental authorities with regional or multi-county jurisdiction. Because
solid waste services provided by municipal or regional governmental authorities
are generally subsidized by tax revenues and utilize major equipment and
facilities that are financed with proceeds from the sale of tax-exempt bonds,
these authorities may provide such services at lower prices (though not
necessarily at lower costs) than those of private companies.

Competition is encountered primarily from publicly-held and numerous
locally-owned private solid waste services companies and, to a lesser degree,
from municipalities and other governmental units with respect to residential
solid waste collection and solid waste sanitary landfills. Intense competition
in pricing and type and quality of services offered is encountered. Some
competitors in certain markets have increased competitive pressure by their
willingness to accept lower pricing to maintain market share.


                           WASTE DISPOSAL RISK FACTORS

There are serious, sometimes unforeseeable, business risks and potentially
substantial cost exposures associated with the establishment, ownership and
operation of solid waste landfill sites and other types of waste processing and
disposal facilities. These risk factors include, but are not limited to: (i) the
difficulty of obtaining permits to expand or establish new sites and facilities
and public and private opposition to the location, expansion and operation of
these facilities, (ii) governmental actions at all levels that seek to restrict
the interstate movement of waste for disposal or which seek to limit the types
of waste that can be disposed of in certain facilities, which can, in each case,
result in declining volumes of waste available for disposal at some facilities,
(iii) costs associated with liner requirements, groundwater monitoring, leachate
and landfill gas control, surface water control, post-closure monitoring, site
cleanup, other remedial work and maintenance and long-term care obligations,
(iv) the obligation to manage possible adverse effects on the environment, (v)
regulations requiring demonstration of financial responsibility and conformance
to prescribed or changing standards and methods of operation, (vi) judicial and
administrative proceedings regarding alleged possible adverse environmental and
health effects of landfills or other treatment and disposal facilities, and
(vii) reduction in the volume of solid waste available for direct landfill
disposal in certain states because of governmental incentives to reduce the
daily volume of waste that may be disposed of, initiatives that require waste
recycling, minimization or composting and because of incineration in large
waste-to-energy facilities. See also "Waste-To-Energy", "Regulation" and "Legal
Proceedings - Environmental Proceedings."





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<PAGE>   14

BFI has periodically undertaken or been required, and may in the future
undertake or be required, to cease or to alter substantially its operations at
existing waste disposal sites, to implement new construction standards and to
add additional monitoring, post-closure maintenance or corrective measures at
waste disposal sites. See "Regulation" for information concerning capital
expenditures relating to environmental and health laws and regulations and Notes
(2) and (9) of Notes to Consolidated Financial Statements.

If the Company is unable to continue disposing of planned volumes of wastes at
existing solid waste landfills or is unable to either expand existing landfills
or establish new sites, it would be required to obtain the rights to use other
disposal facilities or to suspend or curtail solid waste collection or disposal
activities. Any such actions would have an adverse impact on the Company's
collection business and could substantially reduce the Company's revenues and
results of operations and increase the risk of impairing the value of the
Company's investment in existing or proposed facilities. These developments
could also result in accelerating the recognition of closure costs and
post-closure monitoring cost accruals for those landfills, with a corresponding
negative impact on the Company's results of operations.

The economic viability of certain waste-to-energy facilities may be adversely
affected by (i) the availability of commercially reasonable energy sales
contracts; (ii) the availability of landfills for the disposal of ash residue,
bypass and nonprocessible waste; (iii) existing and proposed governmental
standards applicable to the disposal of ash residue that could limit the number
of sites available for such disposal; (iv) air emission standards applicable to
the facilities; (v) the possible lower cost of other alternatives for waste
disposal and (vi) the continuing uncertainty with respect to the enforceability
of local flow control laws. Waste-to-energy facilities may also be adversely
affected by many of the same factors that are currently impacting other waste
disposal facilities.

Certain geographic regions in the United States have, at times, experienced
shortages of suitable solid waste disposal facilities. Without long term
planning, many private and governmental solid waste collection companies
operating in the affected areas, including BFI, could be required to curtail or
even suspend land disposal operations, or seek other, more distant sites. In
other cases, collection companies, including BFI, may be excluded from disposing
of solid waste in landfills or waste-to-energy facilities either because of
regulation or because of the landfill or facility owners' desire to preserve the
remaining capacity for their own disposal needs.


                              CORPORATE DEVELOPMENT

The Company's corporate development program will evaluate opportunities to
expand its customer base by acquiring businesses and properties, broadening the
type of services offered and entering into new domestic markets. The Company
expects to modestly increase capital expenditures for acquisitions and other
corporate development activities during fiscal 1999 as compared to fiscal 1998,
but intends to maintain such expenditures below historic levels, with a
continuing emphasis on achieving returns over time at targeted amounts in excess
of the Company's cost of capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - 




                                      -11-
<PAGE>   15

Liquidity and Capital Resources." The Company intends to further divest certain
domestic business assets and operations that are not expected to achieve desired
performance objectives. 

                              CAPITAL EXPENDITURES

Capital expenditures were approximately $560 million in fiscal 1998, consisting
of $27 million for acquired businesses. Approximately $114 million was expended
in connection with internal market development projects and municipal contracts
and $419 million related to additions and replacements of capital items for
existing operations, including existing landfill cell development. See Notes
(6), (7) and (8) of Notes to Consolidated Financial Statements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for additional financing
information.





                                      -12-
<PAGE>   16

                        EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company, their positions (including their
principal areas of responsibility with the Company) and their respective ages
are as follows:

<TABLE>
<CAPTION>
Name                                       Position                                       Age *
----                                       --------                                       -----
<S>                               <C>                                                    <C>
Bruce E. Ranck                    President, Chief Executive Officer and                  49
                                  Director (1)

Norman A. Myers                   Executive Vice President and                            62
                                  Chief Development Officer

J. Gregory Muldoon                Executive Vice President and                            44
                                  Chief Operating Officer

Jeffrey E. Curtiss                Senior Vice President and                               50
                                  Chief Financial Officer

Hugh J. Dillingham, III           Senior Vice President                                   49
                                  Post Collection

Sandra D. Glatzau                 Senior Vice President                                   46
                                  Marketing and Sales

J. Frederick Snyder               Senior Vice President                                   45
                                  Collection

Rufus Wallingford                 Senior Vice President and                               58
                                  General Counsel

Edward Schick                     Vice President of Business Services and                 42
                                  Corporate Controller
</TABLE>

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

* As of December 2, 1998.

(1)  Serves on the Executive Committee of the Board of Directors.


Mr. Ranck was elected President and Chief Executive Officer in October 1995,
having served as President and Chief Operating Officer of the Company since
November 1991 and as Executive Vice President (Solid Waste Operations-North
America) from October 1989 to November 1991. Prior to that time, he served the
Company as a Regional Vice President in one of the Company's former regions for
a period in excess of five years. Mr. Ranck has been a director of the Company
since March 1990. He also serves as a director of Furon Co. and as a director or
trustee of several educational and charitable organizations.

Mr. Myers was elected Executive Vice President and Chief Development Officer in
March 1997. He served as a director from 1978 through March 1997, as Vice
Chairman of the Board from 1982 




                                      -13-
<PAGE>   17

through March 1997 and as Chief Marketing Officer from 1981 through March 1997.
He was initially elected a Vice President in December 1970 and an Executive Vice
President in July 1976. Mr. Myers is a director of My Friends, a foundation for
children in crisis.

Mr. Muldoon was elected Executive Vice President and Chief Operating Officer in
May 1996 having served as Senior Vice President (Corporate Development) since
September 1992 and as Vice President (Operations) since December 1991. He joined
the Company in 1980 and has served in a number of operating positions. Mr.
Muldoon is a director of the Boys and Girls Club of Greater Houston Inc.

Mr. Curtiss became Senior Vice President and Chief Financial Officer of the
Company in January 1992. Before that time, he served from August 1989 to January
1992 as Executive Vice President, Chief Financial Officer and a director of
Heritage Media Corporation, an American Stock Exchange-listed company based in
Dallas.

Mr. Dillingham was elected Senior Vice President, Post Collection (formerly
Senior Vice President (Processing and Disposal)) in March 1993, having served as
Vice President (Disposal Operations) since December 1991. Prior to his election,
he served as Divisional Vice President of Disposal Operations in one of the
Company's former regions, and has over eighteen years of experience with the
Company in landfill operations. Mr. Dillingham serves as a director of the
Wildlife Habitat Council.

Ms. Glatzau was elected Senior Vice President, Sales and Marketing in September
1996. In May 1995, Ms. Glatzau was appointed Corporate Vice President -
Marketing and Sales, and from March 1992 through April 1995, she served as
Corporate Vice President - Investor Relations. Ms. Glatzau joined the Company in
1978 and served the Company at various levels including sales representative,
regional sales trainer and sales manager and as Divisional Vice President of
Marketing and Sales for one of the Company's former regions.

Mr. Snyder was elected Senior Vice President, Collection in September 1996. From
1989 through May 1996, Mr. Snyder served as Regional Vice President in two of
the Company's former regions. Mr. Snyder joined the Company in 1976 and served
as a District Manager from 1977 through 1989.

Mr. Wallingford became Senior Vice President and General Counsel of the Company
in January 1994. Prior to that time, he was a senior partner with the law firm
of Fulbright & Jaworski L.L.P., Houston, Texas, for a period in excess of five
years. Mr. Wallingford also serves as a director of the Children's Museum in
Houston, Texas.

Mr. Schick was elected Vice President of Business Services and Corporate
Controller in January 1998. He joined BFI in 1987 as Regional Controller in the
Company's former Midwest Region. He subsequently held the title of Assistant
Corporate Controller and later was placed in charge of Operations Analysis. In
1992, he relocated to Europe as Chief Financial Officer of Browning-




                                      -14-
<PAGE>   18

Ferris Industries Europe, Inc. and was instrumental in the sale of the Company's
international operations to SITA.

All officers of the Company (including executive officers) are elected by the
Board of Directors, generally at its meeting held the day of the annual meeting
of stockholders or as soon thereafter as practicable. Each officer is elected to
hold office until his successor shall have been chosen and shall have qualified
or until his death or the effective date of his resignation or removal. Subject
to Board of Director approval, the 1999 Annual Meeting of Stockholders is
scheduled to be held March 3, 1999 in Houston, Texas.





                                      -15-
<PAGE>   19
ITEM 2. PROPERTIES.

In its operations, the Company uses specially-equipped trucks, containers and
compactors. The Company also owns and/or operates sanitary landfill sites
throughout the United States and Canada. See "Business - North American
Operations - Collection" and "Business - North American Operations - Landfills"
and Notes (7) and (9) of Notes to Consolidated Financial Statements.

The Company leases its executive offices which are located at 757 N. Eldridge,
Houston, Texas. The Company also owns real estate, buildings and other physical
properties, which it employs in its daily operations in a large number of its
operating locations. The Company also leases a substantial portion of its
transfer stations, offices, storage and shop space. See Notes (7) and (12) of
Notes to Consolidated Financial Statements.

BFI believes that its property and equipment is well-maintained and adequate for
its current needs, although substantial investments are expected to be made in
additional property and equipment for expansion, for replacement of assets as
they reach the end of their useful lives and in connection with corporate
development activities. See "Business - Corporate Development" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Certain of the Company's property and equipment is subject to mortgages and
liens securing payment of portions of Company indebtedness. See Notes (10) and
(12) of Notes to Consolidated Financial Statements for information with respect
to mortgage and lease obligations on these properties.

ITEM 3. LEGAL PROCEEDINGS.

The Company is involved in various administrative matters or litigation,
including original or renewal permit application proceedings in connection with
the establishment, operation, expansion, closure and post-closure activities of
certain landfill disposal facilities, environmental proceedings relating to
governmental actions resulting from the involvement of various subsidiaries of
the Company with certain waste sites (including Superfund sites) (see
"Environmental Proceedings"), personal injury and other civil actions, as well
as other claims and disputes that could result in additional litigation or other
adversary proceedings.

While the final resolution of any such litigation or such other matters may have
an impact on the Company's consolidated financial results for a particular
reporting period, management believes that the ultimate disposition of such
litigation or such other matters will not have a materially adverse effect upon
the consolidated financial position of the Company.



                                      -16-
<PAGE>   20
ENVIRONMENTAL PROCEEDINGS

The Company strives to conduct its operations in compliance with applicable laws
and regulations, including environmental rules and regulations, and has as its
goal 100% compliance. However, management believes that in the normal course of
doing business, companies in the waste disposal industry, including the Company,
are faced with governmental enforcement proceedings and resulting fines or other
sanctions and will likely be required to pay civil penalties or to expend funds
for remedial work on waste disposal sites. The possibility always exists that
such expenditures could be substantial, which would have a negative impact on
earnings for a particular reporting period. Management of BFI believes that the
existence of these proceedings does not provide an accurate reflection of the
Company's operating policies, procedures and capabilities, although the Company
will have to respond to those issues in filings required to be made with respect
to its operations in certain jurisdictions. In any event, management of the
Company believes that the ultimate resolution of such proceedings will neither
individually nor in the aggregate have a materially adverse effect upon the
consolidated financial position of the Company.

The Company is continuously engaged in various original or renewal permit
application proceedings in connection with the establishment, operation,
expansion, closure and post-closure activities relating to waste treatment and
disposal facilities, properties and activities. These proceedings, which are a
necessary and routine part of waste disposal activities, are held before a
variety of regulatory and judicial agencies at the federal, state and local
level. In these proceedings, legal challenges are routinely raised by private
parties and by the regulatory agencies, alleging a variety of adverse
consequences (including adverse effects on the environment, in some instances
with particular reference to the inequitable distribution of environmental
burdens among various social groups and classes) if the proposed permits are
granted or renewed. Opposition is also routinely encountered in connection with
proposed changes in zoning designations, operating procedures, remedial or
upgrading actions and post-closure activities at waste processing and disposal
facilities. See "Business Regulation."

The Company is participating in potentially responsible party ("PRP") groups at
104 waste disposal sites listed on the EPA's National Priority List, which sites
may be subject to remedial action under the Comprehensive Environmental
Response, Compensation and Liability Act (also known as "Superfund"). Complete
settlements with other members of the PRP groups and/or the EPA have been
negotiated with respect to 77 of these sites. Partial settlements have been
negotiated with regard to 14 of the sites. These settlements had no material
effect on the Company's results of operations or consolidated financial
position. Further, the Company has received information requests relating to 60
additional sites on the EPA's National Priority List. For 48 of these sites, the
Company has determined that it is not a PRP. The Company's PRP status at the
remaining 12 sites has not yet been determined. The number of Superfund sites
with which the Company is involved may increase or decrease depending upon the
EPA's findings from responses to these information requests and any future
information requests which may be received. Superfund legislation permits strict
joint and several liability to be imposed without regard to fault, and as a
result, one company might be required to bear significantly more than its
proportional share of the cleanup costs if it is unable to obtain appropriate
contributions from other responsible parties.




                                      -17-
<PAGE>   21
Management routinely reviews each site requiring corrective action (including
Superfund sites) in which the Company is involved, considering its role with
respect to each site and the relationship to the involvement of other parties at
the site, the quantity and content of the waste with which it is associated, and
the number and financial capabilities of the other parties at the various sites.
Based on reviews of the various sites, currently available information and
management's judgment and significant prior experience related to similarly
situated facilities, expense accruals are provided by the Company, to the extent
quantifiable, for its share of estimated future costs associated with corrective
actions to be implemented at certain of these sites and existing accruals are
revised as deemed necessary. The final negotiated settlement relating to the
large majority of Superfund sites occurs several years after a party's
identification as a potentially responsible party, due to the many complex
issues that must be addressed in determining the magnitude of the contamination
at the site. The process for addressing contamination at a site usually includes
technical investigations, selection of a remedy and implementation of the remedy
selected. In many cases, the expenditures related to actual corrective action
may be incurred over a number of years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Environmental
Matters."

Management believes that the ultimate disposition of these environmental matters
will not have a materially adverse effect upon the liquidity, capital resources,
business or consolidated financial position of the Company, although the
resolution of one or more of these matters could have a significant negative
impact on the Company's consolidated financial results for a particular
reporting period. It can be reasonably expected that the Company will become
involved in additional remedial actions and Superfund sites in the future.

On January 23, 1998, the Company and a subsidiary were notified by the U.S.
Department of Justice ("DOJ") that they were targets of a federal grand jury
investigation regarding possible violations of the Clean Water Act with respect
to a medical waste facility located in the District of Columbia. The Company's
subsidiary fully cooperated with the DOJ's investigation. On May 29, 1998, the
DOJ and the Company's subsidiary filed a plea agreement styled United States of
America v. Browning-Ferris Inc. in the U.S. District Court for the District of
Columbia. On October 1, 1998, judgment was entered pursuant to which the
Company's subsidiary pled guilty to three violations under the Clean Water Act
and agreed to pay $1.5 million in fines and make a $100,000 community service
contribution.

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

During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders.




                                      -18-
<PAGE>   22
                                    PART II.


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

BFI's Common Stock is traded on the New York Stock Exchange, the Chicago Stock
Exchange, the Pacific Stock Exchange and The International Stock Exchange of the
United Kingdom and Republic of Ireland Ltd. The table below sets forth by fiscal
quarter, for the fiscal years ended September 30, 1997 and 1998, the high and
low sales prices of BFI's Common Stock on the New York Stock Exchange -
Composite Transactions, as reported in The Wall Street Journal.

<TABLE>
<CAPTION>
                                     Fiscal Year 1997                      Fiscal Year 1998
                              -------------------------------       --------------------------------
                                  High               Low               High                Low
                              -------------       -----------       ------------       -------------
<S>                           <C>                 <C>               <C>                <C>  
         First Quarter             $27-5/8           $24-1/8            $38-7/8            $29-7/16
         Second Quarter             32-7/8            25-3/4             38-1/8                  30
         Third Quarter              35-1/2            26-3/8             37-1/8              31-1/2
         Fourth Quarter           38-13/16            33-7/8             38-5/8              30-1/4
</TABLE>

As of December 2, 1998, there were approximately 14,000 holders of record of BFI
Common Stock.

In June 1998, the Board of Directors elected to renew the Company's Preferred
Stock Purchase Rights Plan and in connection therewith declared a dividend of
one Preferred Stock Purchase Right (a "Right") on each outstanding share of the
Company's Common Stock and on each share subsequently issued until separate
Rights certificates are distributed or the Rights expire or are redeemed. See
Note (14) of Notes to Consolidated Financial Statements for more detailed
information concerning these Rights.

BFI has paid cash dividends on its Common Stock each year since 1950. Cash
dividends are paid quarterly. During fiscal 1997 and 1998, 70 cents and 76
cents, respectively, were paid in dividends on each share of Common Stock. The
most recently declared quarterly cash dividend on the Common Stock was 19 cents
per share. The payment of dividends or other distributions on, or with respect
to, the Common Stock is limited by provisions of the Company's Amended and
Restated Multicurrency Revolving Credit Agreement and Second Amended and
Restated Revolving Credit Agreement. See Note (10) of Notes to Consolidated
Financial Statements for a description of these credit agreements. The amount
available for payment of dividends or distributions on or with respect to Common
Stock pursuant to the most restrictive of such limitations was approximately
$236 million on September 30, 1998, after giving effect to cash dividends paid
or declared through September 30, 1998. BFI currently expects to continue the
payment of dividends, although future dividend payments will depend on BFI's
earnings, financial needs and other factors.




                                      -19-
<PAGE>   23



                       THIS PAGE INTENTIONALLY LEFT BLANK







                                      -20-
<PAGE>   24
Item 6. - Selected Financial Data

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
                             SELECTED FINANCIAL DATA

     The following is a summary of certain consolidated financial information
regarding the Company for the five years ended September 30, 1998.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                         Year Ended September 30,
                                ----------------------------------------------------------------------------
                                   1998            1997            1996             1995            1994
------------------------------------------------------------------------------------------------------------
                                                (In Thousands Except for Per Share Amounts)
<S>                             <C>             <C>             <C>              <C>             <C>        
Operating
 Statement Data:
Revenues                        $ 4,745,748     $ 5,782,972     $ 5,779,277      $ 5,779,351     $ 4,314,541

Income before
 special charges (credits),
 extraordinary
 items and cumulative
 effects of changes
 in accounting
 principles                     $   336,495     $   332,822     $   273,014      $   384,561     $   283,973

Income (loss) before
 extraordinary items
 and cumulative effects
 of changes in accounting
 principles                     $   349,373     $   283,695     $   (89,172)     $   384,561     $   283,973

Net income (loss)               $   338,811     $   265,214     $  (101,331)     $   384,561     $   278,710

Income (loss) per share
 (diluted) -
 Income (loss)
  before extraordinary
  items and cumulative
  effects of changes in
  accounting principles         $      1.93     $      1.39     $     (0.45)     $      1.92     $      1.52

  Net income (loss)             $      1.87     $      1.30     $     (0.51)     $      1.92     $      1.49

Cash dividends per
 common share                   $       .76     $       .70     $       .68      $       .68     $       .68
</TABLE>

(Continued on Following Page)



                                      -21-
<PAGE>   25

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                      Year Ended September 30,
                    --------------------------------------------------------------------------
                           1998           1997           1996           1995           1994
----------------------------------------------------------------------------------------------
                                                    (In Thousands)
<S>                     <C>            <C>            <C>            <C>            <C>       
Balance Sheet Data:

Property and
 equipment, net         $2,812,221     $3,567,155     $3,920,721     $3,722,292     $3,049,767


Total assets            $4,999,481     $6,678,292     $7,600,906     $7,460,372     $5,796,955


Long-term debt          $1,792,863     $1,675,162     $2,766,885     $2,410,748     $1,458,629


Common stock-
 holders' equity        $1,413,458     $2,660,763     $2,510,278     $2,741,750     $2,391,680



Cash Flow Data:

Capital
 expenditures           $  525,447     $  494,725     $  935,382     $  929,596     $  694,475

Payments for
 businesses
 acquired               $   24,409     $   21,305     $  188,451     $  769,369     $  398,734

Cash flows from
 operating
 activities             $  733,581     $  999,100     $  856,843     $1,030,489     $  693,928
</TABLE>




                                      -22-
<PAGE>   26
Item 7. - Management's Discussion and Analysis of Financial Condition and
          Results of Operations

FORWARD-LOOKING STATEMENTS

      The following discussion and analysis of the Company's operations,
financial performance and results, as well as material set forth elsewhere
herein, includes statements that are not historical facts. Such statements are
"forward-looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995) based on the Company's expectations and as such, these
statements are subject to uncertainty and risk. These statements should be read
in conjunction with the "Regulation", "Competition" and "Waste Disposal Risk
Factors" sections of this document which describe many of the external factors
that could cause the Company's actual results to differ materially from the
Company's expectations.

RESULTS OF OPERATIONS

      Fiscal 1998 was a year in which the Company improved its earnings per
share and returns significantly by divesting underperforming operations,
reducing costs and repurchasing shares of its common stock. In March 1998, the
Company sold substantially all of its operations outside of North America to
SITA, a Paris-based subsidiary of Suez Lyonnaise des Eaux. In exchange for these
operations, the Company received $950 million in cash and an ownership interest
of approximately 19.2% in ordinary shares of SITA. SITA is a leading industrial
waste services company, which provides collection, recycling, waste-to-energy
and disposal services related to residential, commercial, industrial and medical
waste outside of North America. The Company also repurchased 56.3 million shares
of its common stock during fiscal 1998 at a total cost of approximately $2.0
billion, which favorably affected earnings per share despite the higher interest
expense resulting from the stock repurchases.

      Net income for fiscal 1998 was $336.5 million ($1.856 diluted earnings per
share) before special credits, extraordinary item and cumulative effects of
changes in accounting principles on consolidated revenues of $4.75 billion.
These results compare with net income before special charges and extraordinary
items for fiscal 1997 of $332.8 million ($1.634 diluted earnings per share on a
restated basis) on consolidated revenues of $5.78 billion. This represents a 14%
increase in earnings per share in fiscal 1998 over last year.

      The current year results reflect pre-tax special credits of $21.5 million
($.07 diluted earnings per share) related principally to the 



                                      -23-
<PAGE>   27

estimated gain associated with the sale of substantially all of the Company's
operations outside of North America to SITA at the end of March 1998.

      Fiscal 1998 results also include a net after-tax charge of $.053 diluted
earnings per share related to the cumulative effects of changes in accounting
principles. This charge related to (1) the write-off of previously capitalized
business process reengineering costs of approximately $21 million ($13.8 million
after-tax, or $.076 diluted earnings per share) as a result of a November 1997
consensus ruling issued by the Emerging Issues Task Force of the Financial
Accounting Standards Board offset partially by (2) the adoption of a preferable
method of accounting for employee retirement plan costs that more closely
matches current economic realities, which resulted in the recognition of an
after-tax credit of $4.2 million, or $.023 diluted earnings per share. See Note
(5) of Notes to Consolidated Financial Statements.

      Extraordinary charges of $.005 and $.091 diluted earnings per share were
recorded in fiscal years 1998 and 1997, respectively, associated with the
redemption and refinancing of debt.

      Fiscal 1998 net income after considering special credits, extraordinary
item and accounting changes was $338.8 million ($1.869 diluted earnings per
share) compared with net income, after considering special charges and
extraordinary items, of $265.2 million ($1.302 diluted earnings per share on a
restated basis) for fiscal 1997.

      Fiscal 1998 results before special credits, extraordinary charges and
cumulative effects of changes in accounting principles, reflect the effects of
actions taken in the Company's North American operations in fiscal 1997 to (1)
reduce SG&A staffing levels and operating costs in the Company's collection and
recycling businesses, (2) divest underperforming operations and assets and (3)
improve customer pricing. Similar cost reduction actions taken in the Company's
international operations began to impact favorably the Company's international
operating results prior to the sale of these operations in March 1998.

      Additionally, to improve the Company's long-term competitiveness in the
North American solid waste industry, the Company announced in May 1998 a cost
reduction program expected to reduce expenses by $30 million during the second
half of fiscal 1998 (before considering severance costs) and have an annualized
effect of over $80 million in fiscal 1999. This cost reduction program was
undertaken based on initiatives developed over several previous quarters. Under
this cost reduction program, the Company is also continuing to pursue field




                                      -24-
<PAGE>   28

facility and functional consolidation and other actions, which are improving
operating costs.

      Through the end of fiscal 1998, the Company benefited from approximately
$40 million of cost savings (before severance costs) from actions taken under
this cost reduction program. The primary drivers of these cost savings were
reduced costs associated with the Company's employee retirement plan, reduced
operating expenses, especially in the landfill and recycling operations,
corporate and field headcount reductions and a one-time gain of $9.4 million
relating to termination of a postretirement medical plan. The Company believes
its fiscal 1999 cost reduction target of $80 million (including the impact of
fiscal 1998 actions) under this program continues to be achievable.

      Fiscal 1998 costs were affected unfavorably by increased selling, general
and administrative costs, including staffing, related to implementation of the
Company's new SAP software system and the continued support of certain existing
software systems not yet replaced. The new system was implemented and
amortization commenced on January 1, 1998. At the outset of fiscal 1998, the
Company expected to realize benefits in purchasing costs and in its accounting
and administrative support areas as certain modules of SAP were installed in the
field operations over the course of the year. However, the Company is incurring
the higher costs of the new system, approximately $24 million in fiscal 1998
over 1997, but is not yet realizing the expected benefits. Actions were taken in
September 1998 to suspend further development of the second phase of SAP so that
greater emphasis could be placed on the resolution of issues related to the
phase already implemented, including the modification of a number of business
processes. The Company will continue to rely on legacy systems for billing,
customer and operational requirements. The Company continues to believe that the
SAP software system will ultimately yield significant long-term economic
benefits.

      Although significant progress was made in the current fiscal year, the
Company did not achieve its goals for fiscal 1998 as its results fell short of
its milestones for revenue growth, return on gross assets, selling, general and
administrative ("SG&A") expense and operating income. The Company recognizes
that substantial work remains to be accomplished, particularly in the area of
SG&A. The emphasis in fiscal 1999 will be to accelerate the rate of growth and
the cost reduction program. The Company also plans to continue to focus on asset
management and to limit capital spending in fiscal 1999.




                                      -25-
<PAGE>   29


Revenues

      Revenues declined from $5.78 billion in fiscal 1997 to $4.75 billion in
fiscal 1998. Revenues were unchanged from fiscal years 1996 to 1997. The
following table reflects the contribution to total revenue of the Company's
business segments for the last three years (in millions):

<TABLE>
<CAPTION>
                                      Year Ended September 30,
                                    ---------------------------
                                     1998      1997      1996
                                    -------   -------   -------
<S>                                 <C>       <C>       <C>   
North American Operations (1)
Collection Services -
  Solid Waste                       $2,753    $2,913    $2,886

Transfer and Disposal -
  Solid Waste
    Unaffiliated customers             565       552       537
    Affiliated companies               543       527       513
                                    ------    ------    ------
                                     1,108     1,079     1,050
Recycling Services                     473       555       531
Medical Waste Services                 198       199       200
Services Group and Other               121       106        89
Elimination of affiliated
  companies' revenues                 (543)     (527)     (513)
                                    ------    ------    ------
Total North American Operations      4,110     4,325     4,243
                                    ------    ------    ------
International Operations (2)
Germany                                301       633       662
The Netherlands                        125       289       323
United Kingdom                         102       227       193
Other                                  108       309       358
                                    ------    ------    ------
Total International Operations         636     1,458     1,536
                                    ------    ------    ------
Total Company                       $4,746    $5,783    $5,779
                                    ======    ======    ======
Percentage Increase (Decrease)
  from Prior Year                      (18)%      --%       --%

</TABLE>

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


                                      -26-
<PAGE>   30

      (1) Revenues from Canadian operations of $172 million, $176 million and
      $169 million for fiscal years 1998, 1997 and 1996, respectively, are
      included in North American revenues.

      (2) Revenues declined significantly from prior years due principally to 
      the divestiture of substantially all of the Company's international 
      operations in March 1998.

      The following table reflects changes in revenues for fiscal 1998 from
price, volume, acquisitions, divestitures, and foreign currency translation
compared with revenue changes for fiscal years 1997 and 1996.

<TABLE>
<CAPTION>
                                    Change in Revenues
                              ------------------------------
                               1998        1997        1996
                              ------      ------      ------
<S>                           <C>         <C>         <C> 
 Price                           0.5%        1.2%       (5.9)%
 Volume                          0.1         1.0         0.4
 Acquisitions                    1.5         2.4         5.7
 Divestitures                  (19.7)       (2.4)         --
 Foreign currency
   translation                  (0.3)       (2.1)       (0.2)
                              ------      ------      ------
 Total Percentage Increase
   (Decrease)                  (17.9)%       0.1%         --%
                              ======      ======      ======
</TABLE>

      As shown above, the divestiture of North American and international
business operations in fiscal 1997 and the sale of substantially all of the
Company's remaining international operations in March 1998 resulted in a
significant reduction in revenues for the current year compared with fiscal
1997. Further, increased disposal volumes in fiscal 1998 were almost totally
offset by reduced volumes related to the loss of (1) certain municipal contracts
put out to bid that were not re-awarded to the Company and (2) certain small
container work for schools, post offices, city-controlled apartment projects and
other government-owned buildings. Revenue volumes have been favorably affected
in fiscal 1998 by higher customer retention due to improved customer
satisfaction. In fiscal 1998, revenues increased due to pricing in each of the
Company's North American business operations, with the exception of disposal
operations. Revenue growth due to acquisitions was attributable to acquisitions
consummated in both fiscal years 1997 and 1998.

      In order to achieve greater internal revenue growth in the future, the
Company named marketplace revenue managers during the third quarter of fiscal
1998 and redeployed 175 additional outside 




                                      -27-
<PAGE>   31

sales personnel in various markets, as deemed appropriate, in order to generate
additional new business. The Company also is implementing more aggressive price
increases in certain customer segments and marketplaces and is competitively
pricing business in general business and small container government contract
work to maintain route density. The Company has continued to exercise pricing
discipline on municipal contracts and, as a result, has lost more of this work
than contemplated. Lastly, the Company continues to pursue additional third
party volumes via reciprocal waste disposal agreements with other companies. As
a result of the Company's actions, year-to-year internal growth for the last six
months of fiscal 1998 was greater than the internal growth experienced during
the first six months of fiscal 1998.

      As shown above, acquisitions accounted for revenue growth of 2.4% during
fiscal 1997 over fiscal 1996. Revenue growth due to acquisitions was
attributable principally to acquisitions consummated in fiscal 1996. No
significant acquisitions were closed in fiscal 1997 with the emphasis on
internal rather than external growth. In fiscal 1997, increases in revenues due
to price were noted in the Company's international, collection, medical waste
and, to a lesser extent, recycling businesses while a decrease was experienced
in the transfer and disposal business. The weighted average market prices for
corrugated, office paper and newspaper in North America did not change
significantly from fiscal 1996 to 1997. The increases in revenue due to volume
in fiscal 1997 compared with the prior year were driven by increases in the
North American collection, transfer and disposal and recycling businesses.
Revenues also reflected the effect of divestitures and lower international
revenues from foreign currency translation due to the stronger U.S. dollar.

      Fiscal 1996 revenue growth due to acquisitions was due in part to the
acquisition of Attwoods in December 1994, which resulted in increased revenues
principally in the United States and the United Kingdom, as well as the
Company's acquisition efforts during fiscal 1995. The 5.9% decrease in revenues
in fiscal 1996 due to changes in price was due to the significant decline in the
weighted average price of recycling commodities in North America and Germany
during the year compared with fiscal 1995. In North America, despite the
mitigating impact of floor price contracts, the average price of recycling
commodities for fiscal 1996 declined 53% from the prior year average. The
weighted average market prices in North America for corrugated, office paper and
newspaper declined from $147 per ton in fiscal 1995 to $61 per ton in fiscal
1996. Paper prices have historically been cyclical, but in late fiscal 1995 and
through fiscal 1996, unprecedented changes in recycling commodity prices were
experienced. The decline in revenues associated with lower worldwide recycling
commodity prices was offset slightly by increases in revenues due to 



                                      -28-
<PAGE>   32

pricing in the North American collection business and, to a lesser extent, in
the landfill and medical waste businesses.

Cost of Operations

      The following table reflects the portion of cost of operations associated
with depreciation and amortization expense for the periods presented:

<TABLE>
<CAPTION>
                                                                  Year Ended September 30,
                                  ------------------------------------------------------------------------------------------
                                                   Revenue                         Revenue                         Revenue
                                     1998             %              1997             %              1996             %
                                  ----------      ----------      ----------      ----------      ----------      ----------
                                                                 (Dollar amounts in thousands)
<S>                               <C>             <C>             <C>             <C>             <C>             <C>  
Cost of
  operations,
  excluding
  depreciation
  and
  amortization
  expense                         $3,046,389            64.2%     $3,815,738            66.0%     $3,824,784            66.2%
Depreciation
  and
  amortization
  expense                            391,272             8.2%        473,876             8.2%        490,831             8.5%
                                  ----------      ----------      ----------      ----------      ----------      ----------
                                  $3,437,661            72.4%     $4,289,614            74.2%     $4,315,615            74.7%
                                  ==========      ==========      ==========      ==========      ==========      ==========
</TABLE>

      Cost of operations decreased $852.0 million or 19.9% for fiscal 1998,
compared with last year. Most of the decrease in cost of operations is
attributable to the impact of divestitures of certain business operations and
assets in fiscal 1997, the sale of the Company's international operations in
March 1998, and the Company's cost reduction programs implemented in both fiscal
years 1997 and 1998. As a result of the cost reduction programs, the Company has
reduced its operating headcount through the re-routing of trucks, field facility
and functional consolidations, closures of operating facilities and, where
appropriate, after careful review, a reduction in supervisory and administrative
support personnel.

      Cost of operations decreased $26.0 million or 0.6% during fiscal 1997
compared with fiscal 1996. The decrease in cost of operations is attributable to
the impact of divestitures of certain business operations and the operating cost
reduction program initiated in March 1997. These decreased costs were offset
largely by the increase in 




                                      -29-
<PAGE>   33

cost of operations related to businesses acquired in fiscal 1996 and, to a
lesser extent, fiscal 1997.

      Cost of operations increased $168.3 million (4%) in fiscal 1996 compared
with fiscal 1995. Most of this increase in cost of operations was attributable
to businesses acquired, including the acquisition of Attwoods in December 1994.
Cost of operations as a percent of revenues increased to 74.7% in fiscal 1996
compared with 71.8% in fiscal 1995. This increase as a percent of revenues from
fiscal 1995 was principally attributable to the negative effect on revenues of
lower worldwide recycling commodity prices in fiscal 1996 compared with the
prior year.

Selling, General and Administrative Expense

      The following table reflects the portion of SG&A expense associated with
depreciation and amortization expense for the periods presented:

<TABLE>
<CAPTION>
                                                             Year Ended September 30,
                                  ------------------------------------------------------------------------------
                                                Revenue                     Revenue                     Revenue
                                    1998           %           1997             %          1996             %
                                  --------      --------      --------      --------      --------      --------
                                                          (Dollar amounts in thousands)
<S>                               <C>           <C>           <C>           <C>           <C>           <C>  
SG&A, excluding
  depreciation
  and
  amortization
  expense                         $604,601          12.7%     $716,448          12.4%     $762,375          13.2%

Depreciation
  and
  amortization
  expense                           78,683           1.7%       95,794           1.6%      111,694           1.9%
                                  --------      --------      --------      --------      --------      --------
                                  $683,284          14.4%     $812,242          14.0%     $874,069          15.1%
                                  ========      ========      ========      ========      ========      ========
</TABLE>

      SG&A expense decreased $129.0 million in fiscal 1998, or 15.9% from last
year. The decrease in SG&A expense was driven largely by the impact of the
divestitures of certain business operations and assets in fiscal 1997, the sale
of substantially all of the Company's international operations in March 1998 and
the reduction in employees and other cost reduction actions to improve operating
and administrative efficiency implemented in both fiscal years 1997 and 1998.
This decrease was offset partially by an increase in expense of 



                                      -30-
<PAGE>   34

approximately $24 million related to implementation of the Company's new SAP
software system and the continued support of certain existing systems not yet
replaced. Fiscal 1998 SG&A expense was also affected unfavorably by
approximately $6 million of severance costs incurred in the latter half of the
year in connection with the cost reduction program announced in May 1998.

      SG&A expense was $812.2 million for fiscal 1997, a decrease of 7.1% from
fiscal 1996. The $61.8 million decrease in SG&A expense was driven largely by
the impact of divestitures of certain business operations as well as the
reduction in employees worldwide and other cost reduction actions to improve
operating and administrative efficiency. This decrease was offset partially by
higher costs associated with businesses acquired (principally in fiscal 1996)
and approximately $21 million in severance and reorganization expenses included
in SG&A expense associated with both the reorganization of North American
operations announced in June 1996 and the fiscal 1997 reduction of employees
worldwide.

      SG&A expense increased $31.2 million (4%) in fiscal 1996, compared with
fiscal 1995. SG&A expense as a percent of revenues increased to 15.1% in fiscal
1996 compared with 14.6% in fiscal 1995. The increase in SG&A expense in fiscal
1996 as a percent of revenue compared with the prior year resulted principally
from the negative effect on revenues of lower worldwide recycling commodity
prices between the years. The $31 million increase in SG&A expense in fiscal
1996 compared with the prior year was primarily related to higher costs
(including goodwill amortization expense) associated with the Company's
acquisition activities, a substantial portion of which was related to the
acquisition of Attwoods in December 1994. Fiscal 1996 SG&A expense also included
approximately $4.2 million of expenses associated with the reorganization
announced in June 1996. SG&A expense for fiscal 1996 was offset partially by
reduced incentive compensation related to the lower earnings level achieved in
1996.

Special Charges (Credits), net

      Special credits of $21.5 million ($12.9 million or $.07 per share after
income taxes) were reported for fiscal 1998. These special credits are related
principally to the estimated gain of $17.9 million recognized from the sale in
March 1998 of substantially all of the Company's operations outside North
America to SITA, a Paris-based subsidiary of Suez Lyonnaise des Eaux. In
exchange for these operations, the Company received $950 million in cash and an
ownership interest of approximately 19.2% in ordinary shares of SITA. Costs
associated with the sale of these operations included estimated transaction and
other expenses and losses accumulated in the foreign 



                                      -31-
<PAGE>   35

currency translation component of common stockholders' equity (approximately
$133 million). A portion of the total gain, net of related costs, has been
deferred in connection with the Company's continuing investment in SITA. The
remaining amounts included in special credits were attributable principally to
net gains associated with the divestiture of certain North American operations
in the current fiscal year.

      Special charges of $82 million ($49 million or $0.24 per share after
income taxes) were included in fiscal 1997 results of operations. Non-cash
expenses of $53 million were due to cumulative foreign currency translation
losses associated with the sale of Italian operations and $96 million were for
anticipated losses related to decisions to divest additional underperforming or
non-core business operations and assets located primarily in the United Kingdom,
the Netherlands and the United States. These losses were offset partially by net
gains of $67 million arising largely from 56 divestitures completed in fiscal
1997, principally in North America.

      Special charges of $447 million ($362 million or $1.80 per share after
income taxes) were included in fiscal 1996 results of operations. The charges
resulted principally from management decisions to sell the Company's Italian
operations, divest certain domestic and international non-core business assets
and operations and close certain recycling facilities not expected to achieve
desired performance objectives. The special charges also included a writedown to
fair value of the Company's investment in the Azusa, California landfill. See
Note (4) of Notes to Consolidated Financial Statements for further discussion of
the special charges (credits).

Interest Expense and Income

      Interest expense and income for the last three fiscal years were as
follows (in thousands):

<TABLE>
<CAPTION>
                                           1998      1997      1996
                                         --------  --------  --------
<S>                                      <C>       <C>       <C>     
             Gross interest expense      $131,726  $174,939  $195,605
             Interest capitalized          (8,726)   (9,714)  (16,306)
                                         --------  --------  --------
             Interest expense            $123,000  $165,225  $179,299
                                         ========  ========  ========
             Interest income             $  4,723  $  7,142  $  8,842
                                         ========  ========  ========
</TABLE>




                                      -32-
<PAGE>   36
      Fiscal 1998 interest expense declined by $42.2 million to $123.0 million
from $165.2 million for fiscal 1997 due to (1) the decrease of $308 million of
weighted average debt outstanding in fiscal 1998 and (2) lower average cost of
indebtedness. The decrease in average debt outstanding was driven by the $999.8
million reduction in debt during fiscal 1997, principally in the latter half of
the fiscal year, the utilization of cash proceeds of $950 million from the sale
of the Company's international operations in March 1998, and cash proceeds of
$409.7 million received in exchange for approximately 11.5 million shares of the
Company's common stock in June 1998. Reductions in debt were offset, to some
extent, by additional borrowings, principally associated with the common stock
repurchase program (56.3 million shares repurchased at a cost of approximately
$2 billion). The lower average cost of indebtedness is due primarily to the
early retirement of debt during the latter part of fiscal 1997 with interest
rates ranging from 6.10% to 9.25% and to the increased utilization of commercial
paper borrowings during the latter part of fiscal 1998 at interest rates ranging
from 5.55% to 6.25%.

      Fiscal 1997 interest expense declined by $14.1 million to $165.2 million
from $179.3 million for fiscal 1996. This decrease was driven principally by the
$999.8 million reduction in debt during fiscal 1997, largely as a result of cash
proceeds from the 56 businesses divested in fiscal 1997, increased cash flow
from improved operating performance and the limitation on capital spending in
fiscal 1997 ($527 million) compared with fiscal 1996 ($1.2 billion).

      Fiscal 1996 interest expense was $179.3 million, an increase of $19.8
million when compared with fiscal 1995 interest expense of $159.5 million. The
increase in gross interest expense in fiscal 1996 was principally the result of
acquisition activities, including the acquisition of Attwoods in the first half
of fiscal year 1995.

      Interest capitalized fluctuates from year-to-year depending upon the
number of construction and other qualifying projects and average interest
capitalization rate.

Equity in Earnings of Unconsolidated Affiliates

      Equity in earnings of unconsolidated affiliates increased $6.1 million
from fiscal 1997 to fiscal 1998 primarily due to improved earnings from the
Company's North American waste-to-energy equity affiliates. The reduction in
equity in earnings of unconsolidated foreign affiliates as a result of the sale
of the Company's international operations in March 1998 was largely offset by
equity in earnings of SITA of approximately $7.8 million.



                                      -33-
<PAGE>   37
      Equity in earnings of unconsolidated affiliates declined slightly from
fiscal 1996 to fiscal 1997 due to the reduction in equity earnings from
Pfitzenmeier & Rau ("P&R") due to the acquisition of the remaining 50% ownership
interest of P&R by Otto Waste Services during the second quarter of fiscal 1996,
offset to a large extent by improved earnings from the Company's Hong Kong
equity affiliates. The Company acquired a 50% ownership interest in Otto Waste
Services in February 1994 and consolidated Otto's financial results, which
included equity in earnings of Otto's unconsolidated affiliates, until these
operations were sold in March 1998 as part of the sale of international
operations to SITA.

Income Taxes

      The Company's effective income tax rate for fiscal 1998 was 40.0% prior to
considering equity in earnings of SITA of $7.8 million, which are included in
pre-tax income, but have already been tax effected prior to being recorded by
the Company. The Company's effective income tax rate for fiscal year 1997 was
40.0%, and the effective income tax rate for fiscal 1996 was 40.0% prior to
considering the special charges of $447 million taken in the fourth quarter.
Actual income tax expense for fiscal 1996 exceeded pre-tax reported income
(income before income taxes, minority interest and extraordinary item)
significantly in recognition that certain amounts included in the special
charges either were not deductible for income tax purposes or that deductible
amounts could expire prior to utilization by the Company.

Minority Interest in Income of Consolidated Subsidiaries

      The minority interest in income of consolidated subsidiaries is
principally associated with the net income of Otto Waste Services. The decrease
in minority interest in income of consolidated subsidiaries of $6.8 million for
fiscal 1998 compared with fiscal 1997 was due to the sale of substantially all
of the Company's international operations in March 1998. The $1.7 million
increase in fiscal 1997 over fiscal 1996 was not significant. The fiscal 1996
decline of $18.4 million from fiscal 1995 was principally due to the negative
impact of lower recycling commodity prices received in Germany in fiscal 1996 as
compared with the prior year.




                                      -34-
<PAGE>   38

Extraordinary Items

      During the second quarter of fiscal 1998, one of the Company's
unconsolidated affiliates, American Ref-Fuel Company of Southeastern
Connecticut, incurred a pre-tax charge of $3.1 million associated with its
obligation to redeem approximately $90 million principal amount of 1988 Series A
Bonds in November 1998. As a result, the Company reflected an extraordinary
charge, after-tax, of $999,000 (or approximately $0.005 per share) in its
Consolidated Statement of Operations related to its 50% ownership interest in
this affiliate. Interest was payable on the 1988 Series A Bonds at a weighted
average interest rate of approximately 7.9%, compared with the weighted average
interest rate of approximately 5.1% for the new bonds, which mature in 2015.

      During the second quarter of fiscal 1997, the Company's unconsolidated
affiliate, American Ref-Fuel Company of Hempstead, incurred a pre-tax charge to
expense of $9.6 million associated with the redemption of approximately $250
million principal amount of Series 1985 Bonds, which were refinanced. As a
result, the Company has reflected an extraordinary charge, after tax, of $3.1
million (or approximately $0.015 per share) in its fiscal 1997 results of
operations related to its 50% ownership interest in this affiliate.

      During the third quarter of fiscal 1997, the Company redeemed $160 million
of private placement notes previously scheduled to mature in fiscal 1998 and
$11.8 million of tax-exempt debt associated with a landfill that was sold in the
third quarter by the Company. On September 3, 1997, the Company announced a
tender offer for its $300 million 7 7/8% Senior Notes due March 15, 2005. Prior
to expiration of the tender offer on September 17, 1997, approximately $230.5
million of these notes were tendered pursuant to the tender offer. During the
fourth quarter of fiscal 1997, the Company also acquired $122.6 million of its
outstanding publicly traded debt through open market purchases. The Company
purchased $43.3 million of its 6.10% Senior Notes, $38.8 million of its 6.375%
Senior Notes, $40.0 million of its 7.40% Debentures and $0.5 million of its 9
1/4% Debentures. These redemptions of debt, aggregating $524.9 million, resulted
in extraordinary charges to the Company's fiscal 1997 net income of $15.4
million, after income taxes, or approximately $0.076 per share.

      On January 2, 1996, the Company announced that its $400 million 6 3/4%
Convertible Subordinated Debentures due 2005 and its $345 million of 6 1/4%
Convertible Subordinated Debentures due 2012 were being called for redemption.
The redemption, which occurred on February 2, 1996, resulted in an extraordinary
charge to the Company's fiscal 1996 




                                      -35-
<PAGE>   39

net income of $12.2 million, after income taxes, or approximately $0.061 per
share.

Cumulative Effects of Changes in Accounting Principles

      On November 20, 1997, the FASB's Emerging Issues Task Force issued EITF
No. 97-13, a consensus ruling requiring that certain business process
reengineering costs typically capitalized by companies be expensed as incurred.
The ruling further required that previously capitalized costs of this nature be
written off as a cumulative effect of a change in accounting principle in the
quarter containing November 20, 1997. The Company had previously capitalized
these types of costs in connection with its current SAP software implementation
project. As a result, the Company recorded an after-tax charge of $13.8 million
or $.076 diluted earnings per share in fiscal 1998 as the cumulative effect of a
change in accounting principle.

      During the second quarter of fiscal 1998, the Company changed its method
of accounting for recognition of value changes in its employee retirement plan
for purposes of determining annual expense under SFAS No. 87 - "Employers'
Accounting for Pensions", effective October 1, 1997. The Company has changed its
method of calculating the value of assets of its plan from a calculation that
recognizes changes in fair value of assets over five years to recognition of
changes in fair value immediately. The Company has also changed the method of
recognizing gains and losses from deferral within a 10% corridor and
amortization of gains outside this corridor over the future working careers of
the participants to a deferral below a 5% corridor, immediate recognition within
a 5-10% corridor and amortization of gains outside this corridor over the future
working careers of the participants. The new method is preferable because, in
the Company's situation, it produces results which more closely match current
economic realities of the Company's retirement plan through the use of the
current fair value of assets while still mitigating the impact of extreme gains
and losses. As a result, the Company recorded an after-tax credit of $4.2
million, or $.023 diluted earnings per share, as the cumulative effect of a
change in accounting principle.

Profitability Ratios and Other Financial Information

      The following profitability ratios (shown as a percent of revenues)
reflect certain profitability trends for the Company's operations. Also
presented below are return on asset information and ratios of earnings to fixed
charges.


                                      -36-
<PAGE>   40

<TABLE>
<CAPTION>
                                                  Year Ended September 30,
                                         -----------------------------------------
                                           1998             1997            1996
                                         --------         --------        --------
<S>                                      <C>              <C>             <C>  
Profitability margins:
  Gross profit                               27.6%            25.8%           25.3%
  Income from operations before
    special charges (credits)                13.2%            11.8%           10.2%
  Income from operations                     13.6%            10.4%            2.5%
  Income before income taxes,
    minority interest,
    extraordinary items
    and cumulative effects of
    changes in accounting
    principles                               12.4%             8.6%            0.5%
  Net income before special
    charges (credits), extraordinary
    items and cumulative effects
    of changes in accounting
    principles                                7.1%             5.8%            4.7%
  Net income (loss)                           7.1%             4.6%           (1.8)%

Other financial information:
  Pre-tax, pre-interest return on
    average total assets, excluding
    special charges                          12.3%            10.2%            8.4%

  Return on gross assets                     13.5%(1)         11.9%           11.4%

  Ratio of earnings to fixed
    charges                                  3.81(2)          2.98(3)         1.02(4)
</TABLE>

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

(1) Excluding severance costs of $3.1 million, after tax, incurred in the third
quarter of fiscal 1998.

(2) Excluding the effects of the fiscal 1998 special credits of $21 million, the
ratio of earnings to fixed charges for fiscal 1998 was 3.71.

(3) Excluding the effects of the fiscal 1997 special charges of $82 million, the
ratio of earnings to fixed charges for fiscal 1997 was 3.31.

(4) Excluding the effects of the fiscal 1996 special charges of $447 million,
the ratio of earnings to fixed charges for fiscal 1996 was 2.77.



                                      -37-
<PAGE>   41

      All of the profitability margins presented above showed improvement for
the year ended September 30, 1998 compared with fiscal 1997. Profitability
margins in fiscal 1998 were affected favorably by the sale of substantially all
of the Company's international operations in March 1998 and the divestiture of
other underperforming operations and assets, which occurred principally in the
latter half of fiscal 1997. Improvement in the North American gross profit
margin was noted in the Company's disposal business as well as its recycling and
medical waste businesses. Increased landfill volumes and cost reduction efforts
were the key drivers of improved margin performance. In the recycling business,
the improvement was due to the successful execution of strategies to exit
underperforming recycleries, improve the quality of recyclable materials
received and reduce operating costs per ton, as well as slightly higher weighted
average commodity prices. The weighted average market prices for recycling
commodities in North America, principally corrugated, office paper and
newspaper, increased to approximately $68 per ton in the current year from
approximately $66 per ton last year. Increased SG&A expenses as a percentage of
revenues affected unfavorably the North American income from operations margin.
Prior to the sale of the Company's international operations in March 1998, a
slight improvement was noted in the gross profit margin and the income from
operations margin of these operations compared with the same period of the prior
year.

      Special charges of $82 million and $447 million taken in fiscal years 1997
and 1996, respectively, had a significant negative impact on the profitability
margins of the Company other than the gross profit margin. Improvement was noted
in each of the above profitability margins in fiscal 1997 when compared with
fiscal 1996. These margins were affected favorably by the Company's operating
and SG&A cost reduction efforts, the divestiture of certain underperforming
business operations and assets, and improved customer pricing. The current year
profitability margins were affected negatively by employee severance and
reorganization expenses of approximately $24 million, although this effect was
offset largely by an increase in income from operations of $27.2 million, a
significant portion of which is related to reduced depreciation and amortization
expense resulting from the special charges taken in fiscal years 1996 and 1997.
Improved operating profit margins were achieved in each of the Company's core
business types in North America as well as its international operations during
fiscal 1997.

      Total assets declined from $7.6 billion at September 30, 1996 to $6.7
billion at September 30, 1997 and declined further to $5.0 billion at September
30, 1998. The fiscal 1997 decline resulted principally from the divestitures of
56 business operations and asset divestitures in fiscal 1997, decreases due to
foreign currency translation and decreases for depreciation and amortization
expense, 



                                      -38-
<PAGE>   42

offset partially by fiscal 1997 capital expenditures. Pre-tax, pre-interest
return on average total assets increased in fiscal 1997 over fiscal 1996 due
both to the improved earnings and the reduction in assets over the course of the
year. The decline in total assets in fiscal 1998 was attributable principally to
the sale of substantially all of the Company's international operations to SITA
in March 1998. The improvement in pre-tax, pre-interest return on average total
assets in fiscal 1998 over fiscal 1997 was driven largely by the sale of the
lower margin international operations.

      Management's focus shifted in fiscal 1997 from external growth to an
emphasis on internal growth with success measured by cash flow and return on
gross assets. Return on gross assets ("ROGA"), although not a measure of
financial performance under generally accepted accounting principles, is a
measurement utilized by the Company which represents the quotient of operating
cash flow divided by average gross assets, where operating cash flow and gross
assets are defined as follows:

      Operating cash flow - the sum of (i) net income before extra-ordinary
      items and cumulative effects of changes in accounting principles, (ii)
      minority interest, (iii) interest expense, net of related income tax
      benefit, (iv) depreciation and amortization expense and (v) asset
      impairment writedowns (e.g. special charges in fiscal 1997 and 1996).
      Special credits have also been excluded for purposes of this computation.

      Gross assets - the sum of total assets, accumulated depreciation and
      amortization, and asset impairment writedowns (until such assets are sold
      or otherwise disposed of -- approximately $33 million and $96 million at
      September 30, 1998 and 1997, respectively), less the sum of (i) current
      liabilities, net of interest-bearing indebtedness included therein, (ii)
      noncurrent accrued environmental and landfill costs associated with the
      continuing operations of the Company and (iii) deferred income tax
      liabilities.

The gross assets in the ROGA computation for a fiscal year are the average of
the applicable five quarter-end amounts in the period.

      Although the Company did not achieve its milestones during fiscal 1998,
improvement was noted in operating profit margin and return on gross assets from
fiscal 1997. The Company's goals and actions in fiscal 1998 continued to align
the Company's performance with its stockholders' interests. In addition,
incentive compensation plans link employees to common goals and reward them only
as stockholders and customers benefit from improved performance by the Company.
The fiscal 1998 milestones for the total Company and its North American




                                      -39-
<PAGE>   43

operations compared with actual performance for fiscal 1998, excluding severance
costs, and fiscal 1997 are as follows:

<TABLE>
<CAPTION>
                                                                                         North
                                     Total Company                                      America
                        ------------------------------------------      ------------------------------------------
                         Fiscal         Fiscal            Fiscal         Fiscal          Fiscal            Fiscal
                          1998           1998              1997           1998            1998              1997
                        Milestone       Actual            Actual        Milestone        Actual            Actual
                        ---------      ---------         ---------      ---------      ---------         ---------
<S>                     <C>            <C>               <C>            <C>            <C>               <C>  
SG&A as a percent
  of revenues                13.5%          14.3%(1)          14.0%          13.5%          14.3%(1)          14.0%
Operating profit
  margin (2)                 13.8%          13.3%(1)          11.8%          15.0%          14.1%(1)          13.1%
Revenue growth (3) 
  Internal                    3.5%           0.6%              2.2%           4.0%           0.6%              2.1%
  Acquisitions                1.0%           1.5%              2.4%           1.0%           1.5%              2.0%
                        ---------      ---------         ---------      ---------      ---------         ---------
      Total                   4.5%           2.1%              4.6%           5.0%           2.1%              4.1%

Return on gross
  assets                     13.3%          13.5%(1)          11.9%          14.7%          14.2%(1)          13.4%
</TABLE>

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

      (1) SG&A and operating profit as a percent of revenues exclude severance
      costs of $5.2 million incurred in the third quarter of fiscal 1998. Return
      on gross assets excludes the after-tax effect of these severance costs
      ($3.1 million).

      (2) Excluding special charges (credits), net.

      (3) Revenue growth from price, volume and acquisitions, excluding the
      effects of divestitures and foreign currency exchange.



                                      -40-
<PAGE>   44


      The fiscal 1999 milestones for the total Company compared with fiscal 1998
actual performance are as follows:

<TABLE>
<CAPTION>
                                            Fiscal 1999    Fiscal 1998
                                            Milestones       Actual
                                           ------------    -----------
<S>                                        <C>             <C>  
               SG&A as a percent of
                 revenues (1)                12.2%           12.3%
               Operating profit margin       14.7%           13.3%
               Revenue growth                 3.5%            2.1%
               Return on gross assets        13.8%           13.5%
</TABLE>

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

      (1) Reflected on a restated basis to conform to fiscal 1999 presentation.
      Amounts exclude depreciation and amortization previously included in SG&A
      expense and reflect the reclassification of certain expenses from SG&A
      expense to costs of operations.

      EBITDA (defined herein as income from operations plus depreciation and
amortization expense before considering special charges or credits) was $1.09
billion for fiscal 1998 compared with $1.25 billion for fiscal 1997. The current
year decline in EBITDA is principally attributable to the Company's divestiture
of business operations during fiscal 1997 and its international operations in
March 1998. North American EBITDA (including approximately $6 million of
severance costs) was $985 million for fiscal 1998, a slight decline from EBITDA
of $1,003 million for fiscal 1997. North American EBITDA also declined
principally as a result of the divestiture of business operations and assets,
principally in fiscal 1997. EBITDA, which is not a measure of financial
performance under generally accepted accounting principles, is included in this
discussion because the Company understands that such information is used by
certain investors when analyzing the Company's financial condition and
performance.

      The effect of general inflation, as measured by the average consumer price
index, has not historically had a material impact on the Company's overall
financial position or results of operations.

ENVIRONMENTAL MATTERS

      As of September 30, 1998 and 1997, the Company's balance sheet included
accrued environmental costs of $481 million and $613 million, respectively,
associated with its obligations for closure and post-closure of its operating
and closed landfills and for remediation and corrective actions at Superfund
sites and other facilities which are discussed in the following paragraphs. See
Notes (2) and (9) of Notes to Consolidated Financial Statements for a discussion
of the Company's 




                                      -41-
<PAGE>   45

environmental and landfill accounting policies and other financial information
related to environmental and landfill accruals.

      The Company's landfills are subject to specific operating permit
requirements and the applicable existing regulatory requirements of the
national, state and local jurisdictions in which they are operated. On an
ongoing basis, the Company, based on input from its engineers and accounting
personnel, estimates its future cost requirements for closure and post-closure
management of its landfills based on its interpretations of these regulations
and standards. Accruals for these costs are typically provided as the remaining
permitted airspace of these facilities is consumed. Reviews of the future cost
requirements for closure and post-closure monitoring and maintenance for the
Company's operating landfills by the Company's engineers and accounting
personnel are performed at least annually and are the basis upon which the
Company's estimates of these future costs and the related accruals are revised.

      The Company is also responsible for a significant number of closed solid
waste landfills which require varying levels of inspection, maintenance,
environmental monitoring and from time to time corrective action. An overall
program of management has been implemented to provide a systematic and routine
standard of care and maintenance and to ensure environmental compliance at these
closed facilities.

      In fiscal year 1990, the Company announced its withdrawal from the
hazardous waste collection, treatment and disposal business principally because
the Company believed its resources would be better utilized if they were
directed toward developing opportunities in the solid waste business.
Anticipated cash expenditures related principally to remediation and
post-closure monitoring at certain closed sites are expected to be required over
a long period of time with no significant amounts anticipated to be paid in any
single year. In addition, these future cash expenditures will be offset in part
by the realization of related income tax benefits.

      Various subsidiaries of the Company are participating in potentially
responsible party ("PRP") groups at 104 waste disposal sites listed on the U.S.
Environmental Protection Agency's National Priority List, which may be subject
to remedial action under Superfund. The Company's association with these sites
is typically attributable to the transportation of waste to the listed sites by
its subsidiaries (or their predecessors). In many cases, these waste disposal
activities were performed by companies prior to their acquisition by the
Company. Certain of the Company's subsidiaries have negotiated settlements with
other members of the PRP groups and the EPA with respect to 77 of these 104
Superfund sites. Partial 




                                      -42-
<PAGE>   46

settlements have been negotiated with regard to 14 of the remaining sites. These
settlements had no material effect on the Company's liquidity, results of
operations or financial position. Further, various subsidiaries have received
information requests relating to 60 additional sites on the EPA's National
Priority List. For 48 of these sites, the Company has determined it is not a
PRP; the Company's PRP status at the remaining 12 sites has not yet been
determined. The number of Superfund sites with which the Company's subsidiaries
are involved may increase or decrease depending upon the EPA's findings from
responses to these information requests and any future information requests
which may be received. Superfund legislation permits strict joint and several
liability to be imposed without regard to fault, and as a result, one company
may be required to bear significantly more than its proportional share, or
possibly all, of the cleanup costs if it is unable to obtain appropriate
contributions from other responsible parties. The final negotiated settlement
relating to the large majority of Superfund sites occurs several years after a
company has been identified as a PRP due to the many complex issues that must be
addressed in determining the magnitude of contamination present, the cause of
the contamination and the recommended remedial action to be taken. In many
cases, the expenditures related to actual remediation may also occur over a
number of years.

      The Company has implemented programs to promote compliance with the laws,
regulations and permit requirements governing its landfills and has as its goal
100% compliance. These programs include systematic site reviews and evaluations
of each site requiring corrective action (including Superfund sites) in which
the Company's subsidiaries are involved, considering each subsidiary's role with
respect to each site and the relationship to the involvement of other parties at
the site, the quantity and content of the waste with which the subsidiary was
associated, and the number and financial capabilities of the other parties at
the various sites. Even with these programs, management believes that in the
normal course of doing business, companies in the waste disposal industry are
faced with governmental enforcement proceedings resulting in fines or other
sanctions and will likely be required to pay civil penalties or to expend funds
for remedial work on waste disposal sites. Based on reviews of the various
sites, currently available information, and management's judgment and
significant prior experience related to similarly situated facilities, expense
accruals are provided by the Company, to the extent quantifiable, for its share
of estimated future costs associated with corrective actions to be implemented
at certain of these sites and existing accruals are revised as deemed necessary.
Management also routinely reviews the realization of its investments in
operating landfills and the adequacy of its accruals for the future costs of
closure and post-closure monitoring and maintenance at its operating 




                                      -43-
<PAGE>   47

and closed landfills and adjusts its asset values and accruals as deemed
appropriate.

      Management believes that the ultimate disposition of these environmental
matters will not have a materially adverse effect upon the liquidity, capital
resources, business or consolidated financial position of the Company, though
resolution of one or more of these matters could have a significant negative
impact on the Company's consolidated financial results for a particular
reporting period. Due to the nature of the Company's business and the continuing
emphasis of government in all jurisdictions and the public on environmental
issues relating to the waste disposal industry, it can be reasonably expected
that various subsidiaries of the Company will become involved in additional
remediation actions and Superfund sites in the future. Management attempts to
anticipate future changes in laws, regulations and operating permit requirements
which may affect the Company's operations; however, there is no assurance that
such future changes will not significantly affect such operations.

YEAR 2000 ISSUES

      Many computer software systems, as well as certain hardware and equipment
utilizing date-sensitive information, were configured to use a two-digit date
field, which will preclude them from properly recognizing dates in the year
2000. The inability to properly recognize date-sensitive information in the year
2000 could render systems inoperable or cause them to incorrectly process
operational or financial information. In fiscal 1995, the Company initiated a
project to implement the SAP suite of business systems software (which is year
2000 compliant) to replace essentially all of the Company's existing business
systems. The first phase of this project, implemented in January 1998, replaced
approximately 45% of the existing business systems of the Company. Due to timing
related to implementation of the second phase of this project, the Company
commenced a Year 2000 Project to ensure compliance of remaining legacy systems
by early 1999. To date, the Company has incurred expense of approximately $3
million in connection with the Year 2000 modifications of legacy computer
systems and does not expect additional costs related to these systems to be
material to its consolidated results of operations or financial position.

      In addition, machinery and equipment often use or are controlled or
monitored by electronic devices that contain embedded microchips. Such machinery
and equipment could be rendered partially or totally inoperable if embedded
microchips are date-sensitive and do not properly recognize the year 2000.



                                      -44-
<PAGE>   48

      The Company has initiated a process to (1) identify critical supplier and
customer related issues, (2) assess the year 2000 readiness of equipment located
at all of its operating facilities and (3) determine what contingency plans may
be required. At this time, the potential effects in the event that the Company
and/or third parties are unable to resolve year 2000 problems timely are not
determinable, however, the Company believes it will be able to resolve its own
year 2000 issues.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's working capital and related ratios at the end of the last
three years were as follows:

<TABLE>
<CAPTION>
                                              As of September 30,
                                        -------------------------------
                                          1998        1997       1996
                                        ---------   --------   --------
<S>                                    <C>         <C>         <C>      
       Working capital (in thousands)  $ (57,839)  $(189,861)  $(10,695)
       Working capital ratios               .9:1        .9:1      1.0:1
</TABLE>

      The Company's long-term strategy in managing working capital is to
maintain substantial available commitments under bank credit agreements or other
financial agreements to finance short-term capital requirements in excess of
internally generated cash while minimizing working capital.

      As discussed in Note (15) of Notes to Consolidated Financial Statements,
in July 1995, the Company issued to the public 11,499,200 7.25% Automatic Common
Exchange Securities with a stated amount of $35.625 per security. The Company
issued 11,499,200 shares of its common stock (from treasury stock) to the
holders of these securities on June 30, 1998 in exchange for cash proceeds of
$409.7 million.

      As previously announced, in October 1997, the Company repurchased 15
million shares of its outstanding common stock at a price of $39 per share under
the terms of a Dutch auction tender offer. This purchase of approximately $585
million of common stock was the first phase of a two-part program to buy back $1
billion of the Company's common stock. The second phase of the program,
approximately $415 million in open market purchases and privately negotiated
transactions of common stock or automatic common exchange security units, was
completed during the third quarter of fiscal 1998.

      In late March 1998, coincident with the announcement of completion of the
sale of its operations outside North America to 



                                      -45-
<PAGE>   49

SITA, the Company announced that its Board of Directors had approved a $500
million increase to the current stock repurchase program permitting the Company
to repurchase additional shares of its common stock. This expanded share
repurchase program was completed in June 1998.

      In early July 1998, the Company announced that its Board of Directors had
approved an additional $750 million increase to its common stock repurchase
program. It is anticipated that this newly authorized share repurchase program
will be completed on or before September 30, 1999.

      Through September 30, 1998, the Company had repurchased 56.3 million
shares of its common stock at a total cost of approximately $2.0 billion, as
authorized under the common stock repurchase programs discussed above.

      During December 1997, the Company amended the terms of its existing $750
million Multicurrency Revolving Credit Agreement to reduce the total commitment
to $500 million and to extend the termination date. Under the terms of the
amended agreement, the facility has a 364-day term with a one-year term-out
option available to the Company at any time prior to its maturity date in
December 1998. The agreement contains a net worth requirement consistent with
the Company's $1 billion revolving credit agreement. In addition, the Company's
net worth maintenance requirements under its $1 billion revolving credit
agreement and its $500 million Multicurrency Revolving Credit Agreement have
been amended, effective March 31, 1998. The definition of consolidated net worth
was amended (i) to include on a pro forma basis $409.7 million of common stock
(subsequently issued upon the maturity of the Automatic Common Exchange
Securities in June 1998) and (ii) to reduce the consolidated net worth
requirement to $1.2 billion for the remainder of fiscal 1998. The consolidated
net worth maintenance requirement of $1.2 billion increases annually after
September 30, 1998 by 20% of the consolidated net income of the preceding year
and excludes the effect of any foreign currency translation adjustments on net
worth. As of September 30, 1998, no borrowings were outstanding under these
revolving credit agreements.

      The available credit capacity under the Company's $1 billion revolving
credit agreement, which matures in May 2000, is used principally to support the
Company's commercial paper program, under which up to $1.5 billion in commercial
paper may be issued. Borrowings under the commercial paper program may not
exceed the available credit under the Company's two existing bank credit
agreements. There were approximately $590.7 million of commercial paper
borrowings outstanding as of September 30, 1998.



                                      -46-
<PAGE>   50
      As of September 30, 1998, the Company's unused committed borrowing
capacity under its Multicurrency Revolving Credit Agreement and its $1 billion
bank credit agreement was approximately $900 million. Such capacity may be used
to refinance amounts outstanding under short-term facilities, for financing the
Company's $2.25 billion stock buyback program, or for other capital
requirements. Of the $1.8 billion of the Company's long-term indebtedness
outstanding at September 30, 1998, 64% was at fixed interest rates for a period
of at least 12 months. Management's long-term objective is to maintain most of
its indebtedness in fixed interest rate obligations, although variable rate debt
has been and will likely continue to be used to meet short-term and certain
longer term financing needs. The Company's weighted average cost of indebtedness
declined to approximately 6.2% for fiscal 1998 from 7.2% for fiscal 1997. The
lower average cost of indebtedness is due primarily to the early retirement of
debt during the latter part of fiscal 1997 with interest rates ranging from
6.10% to 9.25% and to the increased utilization of commercial paper borrowings
during the latter part of fiscal 1998 at interest rates ranging from 5.55% to
6.25%.

      As of September 30, 1998, there have been significant changes in balance
sheet caption amounts compared with September 30, 1997, principally as a result
of (i) the sale of substantially all of the Company's operations outside North
America to SITA in March 1998 and the associated investment in ordinary shares
of SITA and (ii) the common stock repurchase program. There have been no other
material changes in the Company's financial condition from that reported at
September 30, 1997, except as disclosed herein. In addition, the decline in cash
flows from operating activities for fiscal 1998 compared with fiscal 1997 was
driven largely by divestitures of business assets and operations in the latter
half of fiscal 1997 and in fiscal 1998, including the sale of substantially all
of the Company's international operations to SITA.

      The capital appropriations budget for fiscal year 1999 has been
established at $600 million to provide for normal replacement requirements, new
assets to support planned revenue growth within all consolidated businesses and
corporate market development activities. Market development activities
principally include new or expanded solid waste transfer and disposal
facilities, recycling processing centers, acquisitions of solid waste businesses
and other investments in North American operations.

      The Company believes that its cash flows from operations and its access to
cash from banks and other external sources, including the public markets, are
more than sufficient for its financing needs.



                                      -47-
<PAGE>   51
Item 7A. - Quantitative and Qualitative Disclosure About Market Risk

      The Company currently utilizes no material derivative financial
instruments which expose the Company to significant market risk. The Company is
exposed to cash flow and fair value risk due to changes in interest rates with
respect to its long-term debt. The table below presents principal cash flows and
related weighted average interest rates of the Company's long-term debt at
September 30, 1998 by expected maturity dates. Weighted average variable rates
are based on implied forward rates in the yield curve at September 30, 1998.
Implied forward rates should not be considered a predictor of actual future
interest rates. The information is presented in U.S. dollars, the Company's
reporting currency.

<TABLE>
<CAPTION>
                                                       Expected Maturity Date
                           -------------------------------------------------------------------------
                                                                                            There-                      Fair
                             1999         2000         2001         2002         2003        after         Total        Value
                           --------     --------     --------     --------     --------     --------     --------     --------
                                        (Amounts in millions except for percentages)
<S>                        <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>     
Fixed Rate                 $      9     $    108     $      5     $      4     $    160     $    865     $  1,151     $  1,217
  Average
    interest
    rate                       10.5%         9.2%        10.5%        10.5%         6.2%         7.3%         7.4%

Variable Rate                    --     $    591           --           --           --     $     60     $    651     $    651
  Average
    interest
    rate                         --          5.2%          --           --           --          4.4%         5.1%
</TABLE>





                                      -48-
<PAGE>   52


Item 8. - Financial Statements and Supplemental Data

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Browning-Ferris Industries, Inc.:

We have audited the accompanying consolidated balance sheet of Browning-Ferris
Industries, Inc. (a Delaware corporation) and subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of operations, common
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1998. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Browning-Ferris Industries,
Inc. and subsidiaries as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II listed in Item 14 of Part IV
herein is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.


ARTHUR ANDERSEN LLP

Houston, Texas
December 3, 1998



                                      -49-
<PAGE>   53


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                  For The Three Years Ended September 30, 1998
                   (In Thousands Except for Per Share Amounts)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                           Year Ended September 30,
                                                -------------------------------------------
                                                   1998            1997            1996
-------------------------------------------------------------------------------------------
<S>                                             <C>             <C>             <C>        
Revenues                                        $ 4,745,748     $ 5,782,972     $ 5,779,277
Cost of operations                                3,437,661       4,289,614       4,315,615
                                                -----------     -----------     -----------
Gross profit                                      1,308,087       1,493,358       1,463,662
Selling, general and administrative expense         683,284         812,242         874,069
Special charges (credits), net                      (21,464)         81,879         446,800
                                                -----------     -----------     -----------
Income from operations                              646,267         599,237         142,793
Interest expense                                    123,000         165,225         179,299
Interest income                                      (4,723)         (7,142)         (8,842)
Equity in earnings of unconsolidated
  affiliates                                        (60,078)        (53,988)        (55,370)
                                                -----------     -----------     -----------
Income before income taxes, minority
  interest, extraordinary items and
  cumulative effects of changes in
  accounting principles                             588,068         495,142          27,706
Income taxes                                        232,089         198,057         105,188
Minority interest in income of
  consolidated subsidiaries                           6,606          13,390          11,690
                                                -----------     -----------     -----------
Income (loss) before extraordinary items
  and cumulative effects of changes in
  accounting principles                             349,373         283,695         (89,172)

Extraordinary losses on redemptions of debt
  of unconsolidated affiliates, net of
  income tax benefits of $538 and $1,677 for
  fiscal years 1998 and 1997, respectively              999           3,124              --
Extraordinary losses on redemption of debt,
  net of income tax benefits of $8,269 and
  $4,467 for fiscal years 1997 and 1996,
  respectively                                           --          15,357          12,159
Cumulative effects of changes in
  accounting principles, net of income
  tax benefit of $4,611                               9,563              --              --
                                                -----------     -----------     -----------
Net income (loss)                               $   338,811     $   265,214     $  (101,331)
                                                ===========     ===========     ===========
</TABLE>

(Continued on Following Page)



                                      -50-
<PAGE>   54


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                  For The Three Years Ended September 30, 1998
                   (In Thousands Except for Per Share Amounts)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                                      Year Ended September 30,
                                          ----------------------------------------------
                                             1998             1997             1996
----------------------------------------------------------------------------------------
<S>                                       <C>              <C>              <C>          
Income (loss) per share:
  Basic -
    Income (loss) before extraordinary
      items and cumulative effects of
      changes in accounting principles    $      1.939     $      1.399     $      (.446)
    Extraordinary items                          (.005)           (.091)           (.061)
    Cumulative effects of changes in
      accounting principles                      (.053)              --               --
                                          ------------     ------------     ------------
    Net income (loss)                     $      1.881     $      1.308     $      (.507)
                                          ============     ============     ============
  Diluted -
    Income (loss) before extraordinary
      items and cumulative effects of
      changes in accounting principles    $      1.927     $      1.393     $      (.446)
    Extraordinary items                          (.005)           (.091)           (.061)
    Cumulative effects of changes in
      accounting principles                      (.053)              --               --
                                          ------------     ------------     ------------
    Net income (loss)                     $      1.869     $      1.302     $      (.507)
                                          ============     ============     ============
Number of common shares used in
computing earnings per share:

  Basic                                        180,153          202,800          199,953
                                          ============     ============     ============
  Diluted                                      181,298          203,745          199,953
                                          ============     ============     ============

Cash dividends per common share           $        .76     $        .70     $        .68
                                          ============     ============     ============
</TABLE>



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



                                      -51-
<PAGE>   55


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                     ASSETS

<TABLE>
<CAPTION>
------------------------------------------------------------------------
                                                     September 30,
                                               ------------------------
                                                  1998          1997
------------------------------------------------------------------------
                                                   (In Thousands)
<S>                                            <C>           <C>       
CURRENT ASSETS:
  Cash                                         $   89,893    $   78,746
  Short-term investments                            5,812         3,811
  Receivables -
    Trade, net of allowances for doubtful
      accounts of $22,072 and of $38,376          603,331       820,678
    Other                                          16,205        71,547
  Inventories                                      21,035        40,414
  Deferred income taxes                            99,695       117,404
  Prepayments and other                           101,696       112,063
                                               ----------    ----------
    Total current assets                          937,667     1,244,663
                                               ----------    ----------


PROPERTY AND EQUIPMENT, at cost, less
  accumulated depreciation and amortization
  of $2,223,913 and $2,512,196                  2,812,221     3,567,155
                                               ----------    ----------


OTHER ASSETS:
  Cost over fair value of net tangible
    assets of acquired businesses,
    net of accumulated amortization of
    $83,050 and $168,401                          592,946     1,418,827
  Other intangible assets, net of
    accumulated amortization of $81,959
    and $92,794                                    70,594        81,208
  Deferred income taxes                            24,588        50,057
  Investments in unconsolidated affiliates        512,964       235,559
  Other                                            48,501        80,823
                                               ----------    ----------
    Total other assets                          1,249,593     1,866,474
                                               ----------    ----------

    Total assets                               $4,999,481    $6,678,292
                                               ==========    ==========
</TABLE>

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



                                      -52-
<PAGE>   56
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                   LIABILITIES AND COMMON STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
                                                             September 30,
                                                      ---------------------------
                                                         1998            1997
---------------------------------------------------------------------------------
CURRENT LIABILITIES:                      (In Thousands Except for Share Amounts)
<S>                                                   <C>             <C>        
  Notes payable and current portion of
    long-term debt                                    $     9,241     $   151,736
  Accounts payable                                        354,916         496,733
  Accrued liabilities -
    Salaries and wages                                     83,199         115,477
    Taxes, other than income                               31,238          58,112
    Other                                                 332,221         414,601
  Income taxes                                              9,076          19,204
  Deferred revenues                                       175,615         178,661
                                                      -----------     -----------
    Total current liabilities                             995,506       1,434,524
                                                      -----------     -----------
LONG-TERM DEBT, net of current portion                  1,792,863       1,675,162
                                                      -----------     -----------
OTHER LIABILITIES:
  Accrued environmental and landfill costs                392,853         505,278
  Deferred income taxes                                   210,511         149,803
  Other                                                   194,290         252,762
                                                      -----------     -----------
    Total other liabilities                               797,654         907,843
                                                      -----------     -----------
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY:
  Common stock, $.16 2/3 par; 400,000,000 shares
    authorized; 208,310,631 and 213,387,697 shares
    issued                                                 34,725          35,572
  Additional paid-in capital                            1,631,236       1,839,378
  Retained earnings                                     1,368,485       1,080,810
  Treasury stock, 46,008,054 and 1,239,246
    shares, at cost                                    (1,620,988)        (18,951)
  Stock and Employee Benefit Trust,
    7,252,452 shares at yearend 1997                           --        (276,046)
                                                      -----------     -----------
    Total common stockholders' equity                   1,413,458       2,660,763
                                                      -----------     -----------
    Total liabilities and common stockholders'
      equity                                          $ 4,999,481     $ 6,678,292
                                                      ===========     ===========
</TABLE>

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



                                      -53-
<PAGE>   57

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                  For The Three Years Ended September 30, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
                                                          Year Ended September 30,
                                                    -------------------------------------
                                                      1998          1997          1996
-----------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                 $ 338,811     $ 265,214     $(101,331)
                                                    ---------     ---------     ---------
  Adjustments to reconcile net income (loss)
   to net cash provided by operating activities:
    Depreciation and amortization -
     Property and equipment                           425,295       501,656       521,185
     Goodwill                                          28,531        43,215        47,374
     Other intangible assets                           16,129        24,799        33,966
    Special charges (credits), net                    (21,464)       81,879       446,800
    Cumulative effects of changes in
     accounting principles                              9,563            --            --
    Deferred income tax expense                        94,496        81,146         3,034
    Amortization of deferred investment
     tax credit                                          (706)         (706)         (706)
    Provision for losses on accounts
     receivable                                        20,604        30,116        29,527
    Gains on sales of fixed assets                     (4,654)       (6,995)       (4,512)
    Equity in earnings of unconsolidated
     affiliates, net of dividends received
     and extraordinary items                          (19,876)        7,373       (13,455)
    Minority interest in income of consolidated
     subsidiaries, net of dividends paid                1,052         6,059        10,895
    Increase (decrease) in cash from changes
     in assets and liabilities excluding
     effects of acquisitions and divestitures:
       Trade receivables                              (50,865)      (41,089)      (28,683)
       Inventories                                     (6,415)        4,103         1,563
       Other assets                                    40,246        42,430        29,991
       Other liabilities                             (137,166)      (40,100)     (118,805)
                                                    ---------     ---------     ---------
     Total adjustments                                394,770       733,886       958,174
                                                    ---------     ---------     ---------
  Net cash provided by operating activities           733,581       999,100       856,843
                                                    ---------     ---------     ---------
</TABLE>

(Continued on Following Page)



                                      -54-
<PAGE>   58

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                  For The Three Years Ended September 30, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                   Year Ended September 30,
                                            ---------------------------------------
                                                 1998         1997         1996
-----------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>        
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                          (525,447)    (494,725)    (935,382)
  Payments for businesses acquired               (24,409)     (21,305)    (188,451)
  Proceeds from businesses divested              991,849      372,202           --
  Investments in unconsolidated affiliates       (37,816)     (39,700)     (82,535)
  Proceeds from disposition of assets             47,297       41,667       57,742
  Purchases of short-term investments           (119,655)          --           --
  Sales of short-term investments                     --       21,539      302,065
  Return of investment in unconsolidated
   affiliates                                     99,884       69,286       56,861
                                             -----------  -----------  -----------
  Net cash provided by (used in)
    investing activities                         431,703      (51,036)    (789,700)
                                             -----------  -----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuances of common stock        465,644       68,761       13,316
  Proceeds from issuances of
    indebtedness                                 599,847      191,255      980,834
  Repayments of indebtedness                     (68,710)  (1,098,030)    (904,459)
  Repurchases of common stock                 (2,008,468)          --           --
  Dividends paid                                (141,524)    (137,572)    (137,944)
                                             -----------  -----------  -----------
  Net cash used in financing activities       (1,153,211)    (975,586)     (48,253)
                                             -----------  -----------  -----------

EFFECT OF EXCHANGE RATE CHANGES                     (926)      (3,956)      (1,474)
                                             -----------  -----------  -----------
NET INCREASE (DECREASE) IN CASH                   11,147      (31,478)      17,416
CASH AT BEGINNING OF YEAR                         78,746      110,224       92,808
                                             -----------  -----------  -----------
CASH AT END OF YEAR                          $    89,893  $    78,746  $   110,224
                                             ===========  ===========  ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
  Interest, net of capitalized amounts       $   126,832  $   170,398  $   174,590
  Income taxes                               $   154,148  $   168,393  $   163,251
</TABLE>

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



                                      -55-
<PAGE>   59


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
                                              Year Ended September 30,
                                          ---------------------------------------
                                            1998           1997           1996
---------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>      
Shares of common stock:
  Beginning of year                         213,388        213,390        213,441
  Stock option exercises                      2,071          2,918            563
  Common stock issuances related to -
    Dividend Reinvestment Plan                    8             67            101
    BFI Employee Stock Ownership and
      Savings Plan                               43            699            754
    Acquisitions                                  4             64            988
  Retirements of common stock                (7,252)        (3,760)        (2,584)
  Other                                          49             10            127
                                          ---------      ---------      ---------
  End of year                               208,311        213,388        213,390
                                          =========      =========      =========


Common stock:
  Beginning of year                       $  35,572      $  35,572      $  35,581
  Stock option exercises                        345            486             94
  Common stock issuances related to -
    Dividend Reinvestment Plan                    1             11             17
    BFI Employee Stock Ownership and
      Savings Plan                                7            117            126
    Acquisitions                                  1             11            165
  Retirements of common stock                (1,209)          (627)          (431)
  Other                                           8              2             20
                                          ---------      ---------      ---------
  End of year                                34,725         35,572         35,572
                                          ---------      ---------      ---------
</TABLE>


(Continued on Following Page)



                                      -56-
<PAGE>   60
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                                      Year Ended September 30,
                                             ------------------------------------------
                                                1998            1997            1996
---------------------------------------------------------------------------------------
<S>                                          <C>             <C>             <C>      
Additional paid-in capital:
  Beginning of year                           1,839,378       1,730,612       1,801,407
  Stock option exercises and related
    income tax benefit                           61,551          81,140          13,868
  Common stock issuances related to -
    Dividend Reinvestment Plan                      316           1,954           2,908
    BFI Employee Stock Ownership and
      Savings Plan                                1,607          20,811          21,404
    Automatic Common Exchange Securities          3,198              --              --
    Acquisitions                                    119           1,718          29,133
  Adjustment of Stock and Employee
    Benefit Trust to market                     (23,413)        124,585         (62,388)
  Retirements of common stock                  (251,424)       (123,223)        (74,858)
  Other                                             (96)          1,781            (862)
                                             ----------      ----------      ----------
  End of year                                 1,631,236       1,839,378       1,730,612
                                             ----------      ----------      ----------

Retained earnings:
  Beginning of year                           1,080,810       1,031,331       1,328,244
  Net income (loss)                             338,811         265,214        (101,331)
  Cash dividends                               (133,431)       (142,266)       (133,623)
  Foreign currency translation
    adjustment                                   82,295         (73,469)        (61,959)
                                             ----------      ----------      ----------
  End of year                                 1,368,485       1,080,810       1,031,331
                                             ----------      ----------      ----------
</TABLE>


(Continued on Following Page)



                                      -57-
<PAGE>   61
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                                     Year Ended September 30,
                                          ---------------------------------------------
                                             1998             1997             1996
---------------------------------------------------------------------------------------
<S>                                        <C>             <C>              <C>     
Treasury stock:
  Beginning of year                           (18,951)         (11,926)         (10,494)
  Stock option exercises                         (297)          (5,313)          (1,649)
  Common stock issuances related to -
    Automatic Common Exchange
      Securities                              406,461               --               --
    Acquisitions                                  283           (1,468)             303
  Common stock repurchases                 (2,008,468)              --               --
  Other                                           (16)            (244)             (86)
                                          -----------      -----------      -----------
  End of year                              (1,620,988)         (18,951)         (11,926)
                                          -----------      -----------      -----------


Stock and Employee Benefit Trust:
  Beginning of year                          (276,046)        (275,311)        (412,988)
  Reimbursements of common stock              252,633          123,850           75,289
  Adjustment to market                         23,413         (124,585)          62,388
                                          -----------      -----------      -----------
  End of year                                      --         (276,046)        (275,311)
                                          -----------      -----------      -----------
Total common stockholders' equity         $ 1,413,458      $ 2,660,763      $ 2,510,278
                                          ===========      ===========      ===========
</TABLE>



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



                                      -58-
<PAGE>   62

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   Nature of business and basis of presentation -

      Browning-Ferris Industries, Inc. and its subsidiaries (the "Company")
provide waste services in the United States and Canada. The Company collects,
transports, treats and/or processes, recycles and disposes of commercial,
residential and municipal solid waste and industrial wastes. The Company is also
involved in waste-to-energy conversion, medical waste services, portable
restroom services, and municipal and commercial sweeping operations. Further,
the Company is engaged in waste services outside of North America, principally
in Europe, through its equity ownership in SITA, a publicly traded, Paris-based
subsidiary of Suez Lyonnaise des Eaux.

      The accompanying financial statements are prepared on a consolidated
basis. All significant intercompany accounts and transactions have been
eliminated. Entities over which the Company exercises control are consolidated.
Other investments are accounted for under the equity method or the cost method,
as appropriate. Foreign currencies have been translated into United States
dollars at appropriate exchange rates.

      The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingencies at the date of the financial statements, and affect
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the Company's estimates.

(2)   Summary of significant accounting policies -

Short-term investments.

      Short-term investments are carried at cost, which approximates the
aggregate market value. At September 30, 1998 and 1997, short-term investments
of approximately $5.8 million and $3.8 million, respectively, were invested in
time deposits.

Inventories.

      Inventories consisting principally of equipment parts, materials and
supplies are generally valued under a method which approximates the lower of
cost (first-in, first-out) or market.



                                      -59-
<PAGE>   63

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Property and equipment.

      Property and equipment are recorded at cost. Capitalized landfill costs
include expenditures for land and related airspace, permitting costs and
preparation costs. Landfill permitting and preparation costs represent only
direct costs related to these activities, including legal, engineering,
construction and the direct costs of Company personnel dedicated for these
purposes. Interest is capitalized on landfill permitting and construction
projects and other projects under development while the assets are undergoing
activities to ready them for their intended use. The interest capitalization
rate is based on the Company's weighted average cost of indebtedness. Interest
capitalized during fiscal years 1998, 1997 and 1996 was $8,726,000, $9,714,000
and $16,306,000, respectively. Management routinely reviews its investment in
operating landfills, transfer stations and other significant facilities to
determine whether the costs of these investments are realizable.

      Landfill permitting and acquisition costs, excluding the estimated
residual value of land, are typically amortized as permitted airspace of the
landfill is consumed. For most of the Company's landfills, preparation costs,
which include the costs of construction associated with excavation, liners, site
berms and the installation of leak detection and leachate collection systems,
are also typically amortized as total permitted airspace of the landfill is
consumed. In determining the amortization rate for these landfills, preparation
costs include the total estimated costs to complete construction of the
landfill's permitted capacity. For the remaining landfills, the landfill
preparation costs are generally less significant and are amortized as the
airspace for the particular benefited phase is consumed. Units-of-production
amortization rates are determined annually for each of the Company's operating
landfills. The rates are based on estimates provided by the Company's engineers
and accounting personnel, and consider the information provided by aerial
surveys which are generally performed annually.

      Depreciation of property and equipment, other than landfills, is provided
on the straight-line method based upon the estimated useful lives of the assets,
generally estimated as follows:



                                      -60-
<PAGE>   64
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<S>                                                        <C>       
         Solid waste and recycling collection vehicles     8-10 years
         Other trucks, tractors and trailers                  8 years
         Landfill equipment                                 5-7 years
         Containers and compactors                           12 years
         Injection molded carts                              10 years
         Other residential carts                              5 years
         Transfer stations and buildings                  20-40 years
         Office and other equipment                        3-10 years
</TABLE>

      Expenditures for major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
During fiscal 1998, 1997 and 1996, maintenance and repairs charged to expense
were $292,663,000, $338,553,000 and $336,374,000, respectively. When property
and equipment is retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in income.

Intangible assets.

      The cost over fair value of net tangible assets of acquired businesses
("goodwill") is amortized on the straight-line method over periods not exceeding
40 years. Other intangible assets, substantially all of which are customer lists
and covenants not to compete, are amortized on the straight-line method over
their estimated lives, typically no more than seven years.

Long-lived assets.

      Long-lived assets are comprised principally of property and equipment,
goodwill and other intangible assets. The Company periodically evaluates whether
events and circumstances have occurred that indicate the remaining estimated
useful lives of these assets should be revised or the remaining balances of
these assets are not recoverable. When factors indicate that an evaluation
should be performed for possible impairment, the Company uses an estimate of the
future income from operations of the related asset or business as a measure of
future recoverability of these assets.




                                      -61-
<PAGE>   65
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Deferred income taxes.

      Deferred tax assets and liabilities reflect the impact of temporary
differences between the financial reporting basis and tax basis of assets and
liabilities. Such amounts are recorded using presently enacted tax rates and
regulations. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.

      Unamortized investment tax credits have been included in deferred income
taxes for financial reporting purposes. The Company amortizes investment tax
credits under the deferral method over the estimated useful lives of the related
assets as they are placed in service. No investment tax credits have been
generated since fiscal year 1992.

Deferred revenues.

      Amounts billed to customers prior to providing the related services are
deferred and later reported as revenues in the period in which the services are
rendered.

Other liabilities.

      Accrued environmental and landfill costs -

      Accrued environmental and landfill costs includes the non-current portion
of accruals associated with obligations for closure and post-closure of the
Company's operating and closed landfills, corrective actions and remediation at
certain of these landfill facilities and corrective actions at Superfund sites.
The Company, based on input from its engineers and accounting personnel,
estimates its future cost requirements for closure and post-closure monitoring
and maintenance for solid waste operating landfills in the United States based
on its interpretation of the technical standards of the U.S. Environmental
Protection Agency's Subtitle D regulations and the air emissions standards under
the Clean Air Act as they are being applied on a state-by-state basis. Closure
and post-closure monitoring and maintenance costs represent the costs related to
cash expenditures yet to be incurred when a landfill facility ceases to accept
waste and closes. Accruals for closure and post-closure monitoring and
maintenance requirements in the U.S. consider final capping of 




                                      -62-
<PAGE>   66
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


the site, site inspections, ground-water monitoring, leachate management,
methane gas control and recovery, and operation and maintenance costs to be
incurred during the period after the facility closes. Certain of these
environmental costs, principally capping and methane gas control costs, are also
incurred during the operating life of the site in accordance with the landfill
operation requirements of Subtitle D and the air emissions standards. Estimated
future net cash inflows from methane gas recovery activities are considered a
cost reduction component of closure and post-closure costs at a number of the
Company's landfills. Future net cash inflows of methane gas recovery activities
at each of these landfills represents cash to be received from sales of methane
gas or electricity in excess of the incremental costs to construct and operate
the methane gas recovery systems. Future cost requirements for closure and
post-closure monitoring and maintenance of Canadian operating landfills are
determined based on the landfill regulations governing the facility. The Company
typically provides accruals for these estimated costs as the remaining permitted
airspace of such facilities is consumed. Reviews of the future cost requirements
for closure and post-closure monitoring and maintenance for the Company's
operating landfills by the Company's engineers and accounting personnel are
performed at least annually and are the basis upon which the Company's estimates
of these future costs and the related accrual rates are revised.

      An overall program of management of closed solid waste landfills
previously owned or operated by the Company has been implemented to provide a
systematic and routine standard of care and maintenance and to ensure
environmental compliance at closed facilities which require varying levels of
inspection, maintenance, environmental monitoring and, from time to time,
corrective action. Additionally, the Company routinely reviews and evaluates
each landfill site requiring corrective action (including Superfund sites) in
which the Company's subsidiaries are involved, considering each subsidiary's
role with respect to each site and the relationship to the involvement of other
parties at the site, the quantity and content of the waste with which the
subsidiary was associated and the number and financial capabilities of the other
parties at the various sites. Based on reviews of the various sites, currently
available information, and management's judgment and significant prior
experience related to similarly situated facilities, expense accruals are
provided by the Company, to 




                                      -63-
<PAGE>   67
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


the extent quantifiable, for its share of estimated future costs associated with
corrective actions to be implemented at certain of these sites and existing
accruals are revised as deemed necessary. Expense accruals related to the
estimated costs of post-closure care of previously owned or operated solid waste
landfills are also reviewed on a periodic basis and revised as necessary.

      Accruals for closure, post-closure and certain other liabilities related
to hazardous waste disposal were provided in fiscal 1990 when the Company
discontinued its hazardous waste operations. The Company reviews the adequacy of
these accruals on a periodic basis to determine whether any revisions in the
accruals provided at that time are required.

      Other noncurrent items -

      Other noncurrent items as of September 30, 1998 and 1997 were as follows
(in thousands):

<TABLE>
<CAPTION>
                                                  1998        1997
                                                --------    --------
<S>                                             <C>         <C>     
             Self-insurance accruals            $132,359    $121,722
             Minority interest in
               consolidated subsidiaries           1,512      57,035
             Accrued pension costs                18,631      31,792
             Other                                41,788      42,213
                                                --------    --------
                                                $194,290    $252,762
                                                ========    ========
</TABLE>

      In addition to the above items, included in other accrued liabilities at
September 30, 1998 and 1997 was the current portion of self-insurance accruals
of $71,774,000 and $89,567,000, respectively, and accrued pension costs of
$1,995,000 and $16,849,000, respectively.

      The Company is self insured for workers' compensation, auto liability and
general and comprehensive liability claims. Under its insurance policies, the
Company generally has self-insured retention limits ranging from $500,000 to
$5,000,000 and has obtained fully insured layers of coverage above such
self-retention limits. The Company provides for its self-insurance accruals
based upon estimates provided by a third-party actuary. The actuary reviews the
Company's actual claims' 




                                      -64-
<PAGE>   68
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


activity and estimates the ultimate exposure related to these aggregate claims.
The Company reviews its self-insurance accruals quarterly and revises these
accruals as necessary.

Cash flow information.

      The Consolidated Statement of Cash Flows provides information about
changes in cash and excludes the effects of non-cash transactions, principally
related to business combinations discussed in Note (6).

New accounting pronouncements.

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 - "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The statement, which is
to be applied prospectively, is effective for the Company's quarter ending
December 31, 1999. The Company is currently evaluating the impact of SFAS No.
133 on its future results of operations and financial position.

      In April 1998, Statement of Position ("SOP") No. 98-5 - "Reporting on the
Costs of Start-Up Activities" was issued by the American Institute of Certified
Public Accountants. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of the
statement, which is effective for the Company's fiscal year 2000, is to be
reported as a cumulative effect of a change in accounting principle. The Company
believes that the future adoption of SOP No. 98-5 will not have a material
effect on its results of operations or financial position.

(3)   Reorganization -

      During June 1996, the Company announced the reorganization of its North
American operating business structure, which became effective in August 1996.
The Company's previous organization divided North America into 45 divisions
reporting to six regional offices with operations conducted from approximately
400 districts. The new 




                                      -65-
<PAGE>   69
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


organization divides North America into market areas and retains the district
office organization. In addition, the new structure organizes the Company's
operations by specific business functions with direct reporting to the corporate
office. There was no reorganization charge recorded to cover the estimated
future expenses associated with this announcement. The costs associated with
this reorganization were expensed as incurred and were included in selling,
general and administrative expenses.

(4)   Special charges (credits), net -

Fiscal 1996 special charges ($447 million).

      Special charges of $447 million ($362 million or $1.80 per share after
income taxes) were included in fiscal 1996 results of operations. Charges of
$349 million resulted principally from management decisions to sell the
Company's Italian operations, divest certain domestic and international non-core
business assets and operations and close certain recycling facilities not
expected to achieve desired performance objectives. The remainder of the special
charges related to the writedown of the Company's investment in the Azusa,
California landfill to fair value, which was determined based upon the present
value of the estimated future cash flows using a discount rate commensurate with
the risks involved.

      The Company initiated a plan to sell its Italian operations during the
fourth quarter of fiscal 1996, which was formally approved by the Company's
Board of Directors. The Company's investment in its Italian operations, before
considering special charges, was $206 million as of September 30, 1996. The
Company completed the sale of these operations during June 1997. Losses
accumulated in the foreign currency translation component of common
stockholders' equity (approximately $53 million) were recognized as an
additional loss upon consummation of the sale of these operations and were
included in the fiscal 1997 special charges (see discussion below). Summary
financial information related to the Company's Italian operations is as follows
(in thousands):



                                      -66-
<PAGE>   70
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                          Year Ended September 30,
                                          ------------------------
                                            1997            1996
                                          --------        --------
<S>                                       <C>             <C>     
          Revenues                        $ 81,926        $122,782
          Loss from operations and
            equity in earnings of
            unconsolidated affiliates
            before special charges        $ (2,190)(1)    $ (4,019)(2)
</TABLE>

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

      (1) Does not reflect impact of special charges taken in fiscal 1997 (see
      below).

      (2) Does not reflect special charge of $178.6 million included in the
      fiscal 1996 special charges.

      The Company also decided to divest of certain domestic and international
non-core business assets and operations and close certain recycling facilities
during the fourth quarter of fiscal 1996. These decisions were reached based on
a review of the non-core business assets and operations which were not expected
to achieve the Company's desired performance objectives and a review of certain
of the Company's recycling operations which had been adversely affected by the
significant decline in commodity prices at that time. The special charges, which
included asset writedowns and related liabilities recorded for certain
contractual arrangements, did not consider future expenses associated
principally with severance and relocation costs which would occur as a result of
these decisions. Assets of these operations, prior to the special charges, were
approximately $177 million as of September 30, 1996. The results of operations
for these non-core business assets and operations and recycling facilities were
not material to the Company's consolidated results of operations as the
aggregated revenues and loss from operations of these assets and operations
represented less than 4% of the Company's corresponding consolidated totals, on
a pre-special charges basis. During fiscal years 1997 and 1998, the Company sold
a number of these business operations and closed 47 recycling facilities.

      In October 1996 (pursuant to a judicial order issued in September),
California authorities suspended the Company's 




                                      -67-
<PAGE>   71
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


ability to accept municipal solid waste at its Azusa, California landfill
pending compliance with certain regulatory requirements. As a result of the
changing competitive nature of waste disposal in the Los Angeles market area and
the continuing negative legal climate, including the adverse decisions discussed
above, bearing on the site's ability to accept municipal solid waste, $98
million was included in the special charges to reduce the carrying amount of
this investment to its estimated fair value. The fair value was determined based
upon the present value of the estimated future cash flows using a discount rate
commensurate with the risks involved. The Company sold this landfill facility
during fiscal 1997.

Fiscal 1997 special charges ($82 million).

      Special charges of $82 million ($49 million or $0.24 per share after
income taxes) were reported in fiscal 1997. Included in these special charges
were non-cash expenses of $53 million due to cumulative foreign currency
translation losses associated with the sale of Italian business operations and
$96 million for anticipated losses related to decisions to divest additional
underperforming or non-core business operations and assets located primarily in
the United Kingdom, the Netherlands and the United States. These losses were
offset partially by net gains of $67 million arising largely from 56
divestitures completed in fiscal 1997, principally in North America.

      The results of operations for these additional underperforming or non-core
business operations to be divested were not material to the Company's
consolidated results of operations for fiscal 1997 as the aggregated total
assets, revenues and income (loss) from operations of these assets and business
operations represented approximately 3% or less of the Company's corresponding
consolidated totals, on a pre-special charge basis.

Fiscal 1998 special credits ($21 million).

      Special credits of $21.5 million ($12.9 million after income taxes or $.07
per share) were reported for fiscal 1998. These special credits are related
principally to the estimated gain of $17.9 million recognized from the sale in
March 1998 of substantially all of the Company's operations outside North




                                      -68-
<PAGE>   72
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


America to SITA, a Paris-based subsidiary of Suez Lyonnaise des Eaux. In
exchange for these operations, the Company received $950 million in cash and an
ownership interest of approximately 19.2% in ordinary shares of SITA. Costs
associated with the sale of these operations included estimated transaction and
other expenses and losses accumulated in the foreign currency translation
component of common stockholders' equity (approximately $133 million). A portion
of the total gain, net of related costs, has been deferred in connection with
the Company's continuing investment in SITA.

      The Company's consolidated results of operations on an unaudited pro forma
basis for the years ended September 30, 1998 and 1997, respectively, as though
the sale of the operations outside North America had occurred on October 1, 1996
are as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                    Year Ended September 30,
                                                 -------------------------------
                                                     1998              1997
                                                 -------------     -------------
<S>                                              <C>               <C>          
Pro forma revenues                               $   4,116,151     $   4,328,394

Pro forma income before
  extraordinary items and
  cumulative effects of changes
  in accounting principles                       $     328,683     $     350,855

Pro forma earnings per shares (i) -
  Basic                                          $        1.82     $        1.73
  Diluted                                        $        1.81     $        1.72
</TABLE>

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

      (i) Excluding the after-tax impact of special charges (credits), net,
      earnings per share amounts for the years ended September 30, 1998 and 1997
      were:

<TABLE>
<CAPTION>
                                 1998                    1997
                          -------------------    -------------------
                          Actual    Pro forma    Actual    Pro forma
                          ------    ---------    ------    ---------
<S>                       <C>         <C>        <C>         <C>  
            Basic         $1.87       $1.82      $1.64       $1.55
            Diluted       $1.86       $1.81      $1.63       $1.54
</TABLE>



                                      -69-
<PAGE>   73
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      These pro forma results are presented for informational purposes and do
not purport to show the actual results which would have occurred had the sale of
the international operations been consummated on October 1, 1996, nor should
they be viewed as indicative of future results of operations. In addition, these
pro forma amounts give no effect to earnings from the Company's equity
investment in SITA on a pro forma basis for the periods prior to consummation of
the sale of the international operations. Had any such estimated earnings from
the Company's investment in SITA been considered in the Company pro forma
results of operations presented above, management believes that pro forma
earnings per share amounts would reflect significantly less dilution when
compared with the related historical earnings per share amounts.

      The remaining amounts included in special credits were attributable
principally to net gains associated with the divestiture of certain North
American operations in the current fiscal year.

(5)   Cumulative effects of changes in accounting principles -

      On November 20, 1997, the Financial Accounting Standards Board's Emerging
Issues Task Force issued EITF No. 97-13, a consensus ruling requiring that
certain business process reengineering costs typically capitalized by companies
be expensed as incurred. The ruling further required that previously capitalized
costs of this nature be written off as a cumulative effect of a change in
accounting principle in the quarter containing November 20, 1997. The Company
had previously capitalized these types of costs in connection with its current
SAP software implementation project. As a result, the Company recorded an
after-tax charge of $13.8 million or $.076 diluted earnings per share in the
first quarter of fiscal 1998 as the cumulative effect of a change in accounting
principle.

      During the second quarter of fiscal 1998, the Company changed its method
of accounting for recognition of value changes in its employee retirement plan
for purposes of determining annual expense under SFAS No. 87 - "Employers'
Accounting for Pensions", effective October 1, 1997. The Company has changed its
method of calculating the value of assets of its plan from a calculation which
recognized changes in fair value of assets over five years to recognition of
changes 



                                      -70-
<PAGE>   74
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


in fair value immediately. The Company has also changed the method of
recognizing gains and losses from deferral within a 10% corridor and
amortization of gains outside this corridor over the future working careers of
the participants to a deferral below a 5% corridor, immediate recognition within
a 5-10% corridor and amortization of gains outside this corridor over the future
working careers of the participants. The new method is preferable because, in
the Company's situation, it produces results which more closely match current
economic realities of the Company's retirement plan through the use of the
current fair value of assets while still mitigating the impact of extreme gains
and losses. As a result, the Company recorded an after-tax credit of $4.2
million, or $.023 diluted earnings per share, as the cumulative effect of a
change in accounting principle.

(6)   Business combinations -

      During the current fiscal year, the Company paid approximately $25.5
million (including additional amounts payable, principally to former owners, of
$.7 million and the issuance of 7,089 shares of the Company's common stock
valued at $.2 million) to acquire 30 solid waste businesses, which were
accounted for as purchases. In connection with these acquisitions, the Company
recorded additional interest-bearing indebtedness of $.2 million and other
liabilities of $1.5 million. The results of these business combinations are not
material to the Company's consolidated results of operations or financial
position.

      During the prior fiscal year, the Company paid approximately $22.5 million
(including additional amounts payable, primarily to former owners, of $1.2
million) to acquire 22 solid waste businesses, which were accounted for as
purchases. In connection with these acquisitions, the Company recorded
additional interest-bearing indebtedness of $2.5 million and other liabilities
of $4.8 million. The results of these business combinations were not material to
the Company's consolidated results of operations or financial position.

      The results of all businesses acquired in fiscal years 1998 and 1997 have
been included in the consolidated financial statements from the dates of
acquisition. In allocating purchase price, the assets acquired and liabilities
assumed in 



                                      -71-
<PAGE>   75

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


connection with the Company's acquisitions have been initially assigned and
recorded based on preliminary estimates of fair value and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available. As a result, the financial information included in the
Company's consolidated financial statements is subject to adjustment
prospectively as subsequent revisions in estimates of fair value, if any, are
necessary.

(7)   Property and equipment -

      Property and equipment at September 30, 1998 and 1997 was as follows (in
thousands):

<TABLE>
<CAPTION>
                                                      1998               1997
                                                   ----------         ----------
<S>                                                <C>                <C>       
Land and improvements                              $  217,190         $  330,835
Buildings                                             389,568            596,053
Landfills                                           1,558,064          1,661,888
Vehicles and equipment                              2,704,058          3,373,894
Construction-in-progress                              167,254            116,681
                                                   ----------         ----------
  Total property and
    equipment                                       5,036,134          6,079,351
Less accumulated depreciation
  and amortization                                  2,223,913          2,512,196
                                                   ----------         ----------
  Property and equipment, net                      $2,812,221         $3,567,155
                                                   ==========         ==========
</TABLE>

      Included in the landfill category of property and equipment, net are $54.1
million and $35.7 million as of September 30, 1998 and 1997, respectively,
related to solid waste landfill market development projects, including landfill
permitting costs, for which amortization has not yet commenced. The Company
reviews the realization of these projects on a periodic basis.

(8)   Investments in unconsolidated affiliates -

      The Company uses the equity method of accounting for investments in
unconsolidated affiliates over which it exercises voting control of 20% - 50%.
The summarized combined balance sheet and income statement information (and the




                                      -72-
<PAGE>   76
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Company's related investments and earnings) presented in the table below
includes amounts primarily related to the following significant equity
investees: SITA (France) (19.2% equity ownership with 20% Board of Director
representation) (acquired March 1998), American Ref-Fuel Company of Hempstead,
Inc. (New York) (50%), American Ref-Fuel Company of Essex County, Inc. (New
Jersey) (50%), American Ref-Fuel Company of Southeastern Connecticut, Inc.
(50%), American Ref-Fuel Company of Niagara, L.P. (New York) (50%), American
Ref-Fuel Company Operations of SEMASS, L.P. (50%), Swire BFI Waste Services,
Ltd. (Hong Kong) (50%) (through March 1998), P&R (Germany) (50% - for the period
February 1994 through February 1996, at which time the remaining 50% ownership
interest was acquired) and Congress Development Company (Chicago, Illinois)
(50%).

      At September 30, 1998, the ordinary shares of SITA owned by the Company
had a net book value of $374 million and a market value, based on the Paris
Stock Exchange closing price, of approximately $477 million. Under the terms of
the Company's shareholders agreement with Suez Lyonnaise des Eaux, these
ordinary shares cannot be sold, transferred or otherwise disposed of by the
Company until after March 31, 2001, except with the prior written consent of
Suez Lyonnaise des Eaux.



                                      -73-
<PAGE>   77
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                                    1998                1997
                                                  ----------          ----------
                                                          (in thousands)
<S>                                               <C>                 <C>       
Combined Balance Sheet Information
  as of Fiscal Yearend:
    Assets -
      Current assets                              $1,742,447          $  279,938
      Noncurrent assets                            3,695,399           1,434,272
                                                  ----------          ----------
                                                  $5,437,846(1)       $1,714,210
                                                  ==========          ==========
    Liabilities and Net Worth -
      Current liabilities                         $1,198,725          $  192,745
      Noncurrent liabilities                       3,419,713           1,200,656
      Net worth                                      819,408             320,809
                                                  ----------          ----------
                                                  $5,437,846          $1,714,210
                                                  ==========          ==========
Company's Investments in and
  Advances to Equity Investees(2)                 $  510,387          $  215,761
                                                  ==========          ==========
</TABLE>

<TABLE>
<CAPTION>
                                           1998             1997             1996
                                        -----------      -----------      -----------
                                                       (in thousands)
<S>                                     <C>              <C>              <C>        
Combined Income Statement
  Information for the Fiscal
   Year Ended:
    Revenues                            $ 2,056,467      $   553,098      $   511,086
    Gross profit                        $   550,637      $   226,853      $   213,236
    Income before extraordinary
      item                              $   154,328      $    93,465      $    95,438
    Extraordinary item (4)              $    (3,074)     $    (9,602)     $        --
    Net income                          $   151,254      $    83,863      $    95,438
</TABLE>




                                      -74-
<PAGE>   78
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                             1998        1997        1996
                                            -------     -------     -------
<S>                                         <C>         <C>         <C>    
Company's Income Statement Information:
  Equity in Earnings
    of Equity Investees (3)                 $60,078     $53,988     $55,370
  Extraordinary item, net of
    income tax benefit of $538
    and $1,677 for fiscal 1998
    and 1997, respectively (4)              $   999     $ 3,124     $    --

Dividends Received from Equity
  Investees                                 $38,665     $56,560     $41,915
</TABLE>

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

      (1) Includes assets of $3.8 billion related to SITA.

      (2) Includes investment in excess of underlying equity of SITA of $237
      million and subordinated note and other receivables of $43 million as of
      September 30, 1998, and subordinated note and other receivables of $61
      million as of September 30, 1997.

      (3) Differences between the equity in earnings of equity investees
      reported by the Company and the Company's proportionate share of the
      combined earnings of the related equity investees have resulted
      principally from accounting differences in the recognition of income, the
      elimination of intercompany transactions and the amortization of
      investment in excess of underlying equity of SITA over 40 years.

      (4) During the second quarter of fiscal 1998, the Company's unconsolidated
      affiliate, American Ref-Fuel Company of Southeastern Connecticut, incurred
      a pre-tax charge of $3.1 million associated with its obligation to redeem
      approximately $90 million principal amount of 1988 Series A Bonds in
      November 1998. As a result, the Company reflected an extraordinary charge,
      after-tax of $999,000 (or approximately $.005 per share) in its fiscal
      1998 Consolidated Statement of Operations related to its 50% ownership
      interest in this affiliate. Interest was payable on the 1988 Series A
      Bonds at a weighted average interest rate of approximately 7.9%, compared
      with the weighted average interest rate of approximately 5.1% for the new
      bonds, which mature in 2015.



                                      -75-
<PAGE>   79
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      During the second quarter of fiscal 1997, the Company's unconsolidated
affiliate, American Ref-Fuel Company of Hempstead, incurred a pre-tax charge to
expense of $9.6 million associated with the redemption of approximately $250
million principal amount of Series 1985 Bonds, which were refinanced. As a
result, the Company reflected an extraordinary charge, after tax, of $3.1
million (or approximately $.015 per share) in its fiscal 1997 Consolidated
Statement of Operations related to its 50% ownership interest in this affiliate.
Interest was payable on the Series 1985 Bonds due 2010 at a weighted average
interest rate of approximately 7.3%, compared with the weighted average interest
rate of approximately 5% for the new bonds, which are also due in 2010.

(9)   Accrued environmental and landfill costs -

      Accrued environmental and landfill costs at September 30, 1998 and 1997
were as follows (in thousands):

<TABLE>
<CAPTION>
                                             1998         1997
                                           --------     --------
<S>                                        <C>          <C>     
Continuing operations -

  Accrued costs associated with open
    landfills (including landfills
    under expansion)                       $219,253     $248,820

  Accrued costs associated with closed
    landfills and corrective action
    costs (including Superfund sites)       173,722      264,516
                                           --------     --------
       Total                                392,975      513,336

  Less current portion (included in
    other accrued liabilities)               72,711       81,291
                                           --------     --------
       Total long-term                     $320,264     $432,045
                                           ========     ========
</TABLE>



                                      -76-
<PAGE>   80
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<S>                                     <C>          <C>     
Discontinued operations -

  Accrued costs of closure, post-
    closure and certain other
    liabilities associated with
    discontinued operations             $ 88,322     $ 99,914

  Less current portion (included in
    other accrued liabilities)            15,733       26,681
                                        --------     --------
       Total long-term                  $ 72,589     $ 73,233
                                        ========     ========

Total long-term portion of accrued
 environmental and landfill costs       $392,853     $505,278
                                        ========     ========
</TABLE>

      For a discussion of the Company's significant accounting policies related
to these environmental and landfill costs, see Note (2) - "Summary of
significant accounting policies" - "Other liabilities" - "Accrued environmental
and landfill costs".

Open landfills.

      The Company operates 88 solid waste landfills in the United States, 18 of
which are operated under contracts with municipalities or others. The Company
also operates 6 landfills in Canada. The Company is responsible for closure and
post-closure monitoring and maintenance costs at most of these landfills which
are currently operating or are engaged in expansion efforts. Estimated aggregate
closure and post-closure costs will be fully accrued for these landfills at the
time that such facilities cease to accept waste and are closed. Considering
existing accruals at the end of fiscal 1998, approximately $125-$175 million of
additional accruals are to be provided over the remaining lives of these
facilities. Estimated additional environmental costs ranging from $425-$475
million, principally related to capping and certain methane gas control and
recovery activities expected to occur during the operating lives of these sites,
are also to be expensed over the remaining lives of these landfill facilities.




                                      -77-
<PAGE>   81
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Closed landfills and corrective action costs (including Superfund sites).

      These costs relate to closure and post-closure activities or corrective
actions at closed solid waste landfills owned or previously operated by the
Company as well as a number of Superfund sites where subsidiaries of the Company
are participating in potentially responsible party groups or are otherwise
involved.

Discontinued operations.

      These costs relate to closure and post-closure activities or corrective
actions at hazardous waste landfills owned or previously operated by the Company
as well as a number of Superfund sites where subsidiaries of the Company
previously disposed of hazardous waste and are participating in potentially
responsible party groups or are otherwise involved. The Company discontinued its
hazardous waste operations in April 1990.

(10)  Long-term debt -

      Long-term debt at September 30, 1998 and 1997 was as follows (in
thousands):




                                      -78-
<PAGE>   82
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                               1998           1997
                                            ----------     ----------
<S>                                         <C>            <C>       
Senior indebtedness (maturing as set
   forth in the following paragraphs):
   6.10% Senior Notes, net of
     unamortized discount of
     $986 and $1,218                        $  155,703     $  155,471
   6.375% Senior Notes, net of
     unamortized discount of
     $1,360 and $1,507                         159,840        159,693
   7 7/8% Senior Notes, net of
     unamortized discount of $169
     and $195                                   69,332         69,306
   7.40% Debentures, net of
     unamortized discount of
     $1,720 and $1,767                         358,280        358,233
   9 1/4% Debentures                            99,500         99,500
   Solid waste revenue bond obligations        220,044        219,974
   Other notes payable, primarily
     5.5%-15.5%                                 46,790        505,674
                                            ----------     ----------
                                             1,109,489      1,567,851

 Commercial paper and short-term
   facilities to be refinanced                 692,615        259,047
                                            ----------     ----------
 Total long-term debt                        1,802,104      1,826,898
 Less current portion                            9,241        151,736
                                            ----------     ----------
 Long-term debt, net of current portion     $1,792,863     $1,675,162
                                            ==========     ==========
</TABLE>

      The long-term portion of the debt outstanding at September 30, 1998,
matures as follows: 2000, $698,795,000; 2001, $4,955,000; 2002, $4,425,000;
2003, $159,977,000 and in subsequent years, $924,711,000.




                                      -79-
<PAGE>   83
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Extraordinary items.

      During the third quarter of fiscal 1997, the Company redeemed $160 million
of private placement notes previously scheduled to mature in fiscal 1998 and
$11.8 million of tax-exempt debt associated with a landfill that was sold in the
third quarter by the Company.

      On September 3, 1997, the Company announced a tender offer for its $300
million 7 7/8% Senior Notes due March 15, 2005. Prior to expiration of the
tender offer on September 17, 1997, approximately $230.5 million of these notes
were tendered pursuant to the tender offer. During the fourth quarter of fiscal
1997, the Company also acquired $122.6 million of its outstanding publicly
traded debt through open market purchases. The Company purchased $43.3 million
of its 6.10% Senior Notes, $38.8 million of its 6.375% Senior Notes, $40.0
million of its 7.40% Debentures and $0.5 million of its 9 1/4% Debentures.

      These redemptions of debt, aggregating $524.9 million, resulted in
extraordinary charges to the Company's fiscal 1997 net income of $15.4 million,
after income taxes, or approximately $.076 diluted earnings per share.

6.10% and 6.375% Senior Notes.

      In January 1996, the Company issued $200 million of 6.10% Senior Notes due
January 15, 2003 and $200 million of 6.375% Senior Notes due January 15, 2008
(the "Notes"). The Notes are not redeemable prior to maturity and are not
subject to any sinking fund. Net proceeds from the sale of the Notes were
applied to the repayment of a portion of the $745 million of Convertible
Subordinated Debentures called for redemption on February 2, 1996. See Note
(11).

7 7/8% Senior Notes.

      In March 1995, the Company issued $300 million of 7 7/8% Senior Notes
which mature on March 15, 2005. Net proceeds received by the Company from the
sale were used to repay indebtedness associated with the acquisition of Attwoods
and other working capital requirements.




                                      -80-
<PAGE>   84
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


7.40% Debentures.

      In September 1995, the Company issued $400 million of 7.40% Debentures due
September 15, 2035. These debentures are not subject to any sinking fund and may
be redeemed as a whole or in part, at the option of the Company at any time. The
redemption price is equal to the greater of (i) the principal amount of the
debentures and (ii) the present value of future principal and interest payments
discounted at a rate specified under the terms of the indenture. Net proceeds
received from the sale of these debentures were used to repay short-term
indebtedness associated with various acquisitions, including the Attwoods
acquisition.

9 1/4% Debentures.

      In May 1991, the Company issued $100 million of 9 1/4% Debentures which
mature on May 1, 2021. The debentures may not be redeemed prior to maturity and
are not subject to any sinking fund.

Solid waste revenue bond obligations.

      Certain subsidiaries of the Company have entered into agreements under
which they receive proceeds from the sale by government authorities of solid
waste revenue bonds. These subsidiaries are obligated to make payments
sufficient to pay the interest and retire the bonds. The weighted average
interest rate of these issues is approximately 5.63%. These issues mature at
various dates through the year 2027. The solid waste revenue bond obligations of
the subsidiaries are either guaranteed by the Company or supported by letters of
credit issued by commercial banks.

Other notes payable.

      During February and March 1995, the Company borrowed a total of $160
million under separate senior note agreements with a number of lending
institutions. These notes were redeemed during fiscal 1997. Interest was payable
semi-annually on the senior notes at rates ranging from 7.5% - 8.0%.

      Additionally, notes payable includes mortgages payable and other secured
debt, unsecured debt and capitalized lease 



                                      -81-
<PAGE>   85
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


obligations of the Company. Approximately $208 million of this indebtedness at
September 30, 1997, related to a large number of separate company debt
instruments of Otto Waste Services and its consolidated subsidiaries (divested
in March 1998).

Bank credit agreements.

      During May 1995, the Company modified the terms of its existing $1 billion
revolving credit agreement extending the maturity of the facility to May 2000.
The agreement continues to provide total committed credit capacity of $1
billion. This $1 billion credit agreement can be utilized to borrow U.S.
domestic dollars or Eurodollars on a committed basis. At the option of the
Company and the participating banks, U.S. dollar and Eurodollar loans bear a
rate of interest based on the London Interbank Offered Rate ("LIBOR"), the prime
rate, the federal funds rate or a certificate of deposit rate, plus a margin.
The $1 billion revolving credit agreement with a group of U.S. and international
banks currently requires a facility fee of .1% per annum on the total
commitment, whether used or unused. This $1 billion credit agreement is used
primarily to support the Company's commercial paper program. At September 30,
1998 and 1997, the Company had no outstanding borrowings under this bank credit
agreement.

      During December 1997, the Company amended the terms of its existing $750
million Multicurrency Revolving Credit Agreement to reduce the total commitment
to $500 million and to extend the termination date. Under the terms of the
amended agreement, the facility has a 364-day term with a one-year, term-out
option available to the Company at any time prior to its maturity date in
December 1998. The facility can be utilized to borrow U.S. dollars, pounds
sterling, deutsche mark, French francs or Dutch guilders as determined by the
Company. At the option of the Company, the loans bear a rate of interest based
upon LIBOR or the federal funds rate, plus a margin, or the prime rate. The
Multicurrency Revolving Credit Agreement with Credit Suisse, as administrative
agent for a group of U.S. and international banks, requires a facility fee of
 .06% per annum on the total commitment, whether used or unused. At September 30,
1998 and 1997, the Company had no outstanding borrowings under this agreement.

      The Company's net worth maintenance requirements under its $1 billion
revolving credit agreement and its $500 million 



                                      -82-
<PAGE>   86
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Multicurrency Revolving Credit Agreement were amended, effective March 31, 1998.
The definition of consolidated net worth was amended to (i) include on a pro
forma basis the $409.7 million of common stock (subsequently issued upon the
maturity of the Automatic Common Exchange Securities in June 1998) and (ii) to
reduce the consolidated net worth requirements to $1.2 billion for the remainder
of fiscal 1998. The consolidated net worth requirement of $1.2 billion increases
annually after September 30, 1998 by 20% of the consolidated net income of the
preceding year and excludes the effect of any foreign currency translation
adjustments on net worth.

      In March 1995, Otto Waste Services entered into a five-year revolving
credit facility in the amount of 600 million deutsche mark with a group of
German and international banks. Interest was payable on loans under the facility
at the Frankfurt Interbank Offered Rate ("FIBOR") plus a margin. This agreement
required a facility fee of .45% per annum (.30% per annum if Otto Waste Services
maintains certain net worth requirements) on the total facility commitment,
whether used or unused. At September 30, 1997, Otto Waste Services had
outstanding borrowings under this facility of 360 million deutsche mark
(approximately U.S. $204.6 million). Otto Waste Services was included with the
international operations divested in March 1998.

      As of September 30, 1998, distributions from retained earnings could not
exceed $236 million under the most restrictive of the Company's net worth
maintenance requirements.

Commercial paper and short-term facilities to be refinanced.

      Under the Company's commercial paper program, the Company is authorized to
issue up to $1.5 billion in commercial paper. The Company may use proceeds from
borrowings under this program to refinance existing indebtedness and for general
corporate purposes, including interim financing of business acquisitions and
funding working capital requirements. Borrowings under the commercial paper
program may not exceed the available credit under the Company's existing bank
credit agreements. It is the Company's intention to refinance outstanding
short-term borrowings classified as long-term debt through the use of existing
committed long-term bank credit 




                                      -83-
<PAGE>   87
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


agreements in the event that alternative long-term refinancing is not arranged.
A summary by country of commercial paper balances and other outstanding
borrowings to be refinanced as of September 30, 1998 and 1997 is as follows
(amounts in thousands):

<TABLE>
<CAPTION>
                            1998                  1997
                    --------------------  --------------------
                      Amount    Interest    Amount    Interest
                       to be     Rate at     to be     Rate at
                    Refinanced   Yearend  Refinanced   Yearend
                    ----------  --------  ----------  --------
<S>                  <C>          <C>      <C>        <C>    
United States -
  Commercial paper   $590,676     5.8%     $     --       --%
  Other               101,939     6.7%           --       --%
Germany                    --      --%      259,047     4-10%
                     --------              --------
                     $692,615              $259,047
                     ========              ========
</TABLE>

(11)  Convertible Subordinated Debentures -

      On January 2, 1996, the Company announced that its $400 million 6 3/4%
Convertible Subordinated Debentures due 2005 and its $345 million 6 1/4%
Convertible Subordinated Debentures due 2012 were being called for redemption.
The redemption, which occurred on February 2, 1996, resulted in an extraordinary
charge to the Company's fiscal 1996 net income of $12.2 million, after income
taxes, or approximately $.061 per share.

(12)  Commitments and contingencies -

Legal proceedings.

      The Company and certain subsidiaries are involved in various
administrative matters or litigation, including personal injury and other civil
actions, as well as other claims and disputes that could result in additional
litigation or other adversary proceedings.

      While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not have
a 




                                      -84-
<PAGE>   88
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


materially adverse effect upon the consolidated financial position of the
Company.

Environmental proceedings.

      The Company and certain subsidiaries are involved in various environmental
matters or proceedings, including original or renewal permit application
proceedings in connection with the establishment, operation, expansion, closure
and post-closure activities of certain landfill disposal facilities, and
proceedings relating to governmental actions resulting from the involvement of
various subsidiaries of the Company with certain waste sites (including
Superfund sites), as well as other matters or claims that could result in
additional environmental proceedings.

      While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition of these matters will not have
a materially adverse effect upon the consolidated financial position of the
Company.

Insurance matters.

      Under its insurance policies, the Company generally has self-insured
retention limits ranging from $500,000 to $5,000,000 and has obtained fully
insured layers of coverage above such self-retention limits. The Company has a
wholly-owned domestic insurance subsidiary which operates as a captive insurance
company. It currently writes insurance to meet financial assurance obligations
related to closure and post-closure of certain landfills of the Company. At
September 30, 1998, no claims had been made relative to this insurance
operation, and no claim reserves had been posted.

      In order to meet existing governmental requirements, the Company has been
able to secure an environmental impairment liability insurance policy in amounts
which the Company believes are in compliance with the amounts required by
federal and state law. Under this policy, the Company must reimburse the carrier
for losses incurred by the Company.




                                      -85-
<PAGE>   89
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Waste-to-energy projects.

      Certain of the Company's subsidiaries have 50% ownership interests in
American Ref-Fuel partnerships that construct, own and operate facilities which
generate and sell electricity from the incineration of solid waste.
Substantially all of the remaining ownership interests are held by Duke/UAE
Ref-Fuel LLC, an entity indirectly owned 65% by Duke Capital Corporation ("Duke
Capital") and 35% by United American Energy Corporation. The five facilities
currently in commercial operation under this ownership structure are located in
Hempstead, New York, Essex County in New Jersey, Preston, Connecticut, Niagara
Falls, New York and Rochester, Massachusetts. Financing arrangements for four of
these projects include agreements with the Company and Duke Capital to each
severally fund one-half of each partnership's cash deficiencies resulting from
the partnership's failure to perform.

      With respect to the facilities located in Hempstead, New York, Essex
County in New Jersey and Preston, Connecticut, the Company and Duke Capital
generally will not be required to fund cash deficiencies associated with waste
deliveries by the sponsoring municipality below certain minimum levels, changes
in law or termination of incineration service for reasons other than default by
the respective partnership. In the event of a partnership default which results
in termination of incineration service, the Company may limit its financial
obligations by partnership as follows:

      Hempstead, New York - Funding of 50% of periodic payments related to
      outstanding debt. At September 30, 1998, $210 million of total unamortized
      project debt was outstanding. Average annual debt service on 50% of the
      debt over the next five years is $11 million. The Company has guaranteed
      $5 million of additional partnership debt and annual debt service on such
      debt is estimated to be $.2 million.

      Essex County in New Jersey - Funding of 50% of cash deficiencies including
      debt service up to $50 to $100 million, depending upon the circumstances.
      Average annual debt service on 50% of the debt over the next five years is
      $10 million.



                                      -86-
<PAGE>   90
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      Preston, Connecticut - Funding of 50% of periodic payments related to
      outstanding debt. At September 30, 1998, total outstanding debt included
      $85 million of unamortized project debt and $43 million of additional
      partnership debt (of which $21.5 million is guaranteed by the Company).
      Average annual debt service on 50% of the debt over the next five years is
      $5 million.

      With respect to the facilities located in Niagara Falls, New York and
Rochester, Massachusetts, the Company may limit its financial obligations by
partnership as follows:

      Niagara Falls, New York - Funding of 50% of partnership cash deficiencies
      relating to debt service. At September 30, 1998, $165 million of total
      unamortized partnership debt was outstanding (of which $82.5 million is
      guaranteed by the Company). Average annual debt service on 50% of the debt
      over the next five years is estimated to be $3 million.

      SEMASS in Rochester, Massachusetts - Under support agreements and
      guarantees (i) lending up to 50% of $5 million to the SEMASS Partnership
      under certain circumstances, (ii) deferring up to 50% of $7 million of
      operating cost reimbursement, and (iii) funding up to 50% of $5 million in
      operating damages. These obligations have been assigned to the lenders.
      The SEMASS Partnership has non-recourse indebtedness outstanding of
      approximately $291 million (weighted average fixed rate of 9.7%) as of
      September 30, 1998. Average annual debt service on 50% of the debt over
      the next five years is approximately $19 million.

Operating leases.

      The Company and its subsidiaries lease substantial portions of their
office and other facilities under various lease agreements. During the fourth
quarter of fiscal 1998, the Company acquired approximately $84 million of trucks
and containers under the purchase option provisions of related operating lease
agreements. At September 30, 1998, total minimum rental commitments becoming
payable under all noncancellable operating leases are as follows (in thousands):



                                      -87-
<PAGE>   91
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<S>      <C>         <C>           <C>                      <C>    
         1999        $44,011       2003                     $35,886
         2000        $40,450       2004 - 2008             $136,489
         2001        $38,959       2009 - 2013             $100,946
         2002        $39,876       All years thereafter     $28,488
</TABLE>

      Total rental expenses for fiscal years 1998, 1997 and 1996, substantially
all of which related to fixed amount rental agreements, were $97,088,000,
$107,622,000 and $105,134,000, respectively.

(13)  Preferred stock -

      The Company is authorized by its Restated Certificate of Incorporation to
issue 25 million shares of preferred stock, the terms and conditions to be
determined by the Board of Directors in creating any particular series.

(14)  Preferred Stock Purchase Rights Plan -

      In June 1988, the Board of Directors of the Company adopted a Preferred
Stock Purchase Rights Plan and in connection therewith declared a dividend of
one Preferred Stock Purchase Right on each outstanding share of the Company's
common stock and on each share subsequently issued until separate Rights
certificates were distributed, or the Rights expired or were redeemed. In June
1998, prior to the expiration of the June 1988 plan, the Board of Directors
adopted a new plan and declared a dividend distribution of one Right for each
outstanding share of the Company's common stock, payable on June 15, 1998. When
exercisable, each Right will entitle a holder to purchase one one-hundredth of a
share of a new series of the Company's Preferred Stock at an exercise price of
$125.00, subject to adjustment.

      If the Company is acquired in a business combination transaction on or at
any time after the date on which a person obtains ownership of 20% or more of
the Company's outstanding common stock, provision generally must be made prior
to the consummation of such transaction to entitle each holder of a Right to
purchase at the exercise price a number of the acquiring company's common shares
having a market value at the time of such transaction of two times the exercise
price of the Right. The Rights also provide that upon the occurrence of certain
other specific matters, each holder will have the right to receive, upon payment
of the exercise price, shares 



                                      -88-
<PAGE>   92
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


of the new series of Preferred Stock having a market value of two times the
exercise price of a Right. The Company has a right to redeem the Rights for $.01
per Right prior to the time they become exercisable. The Rights will expire on
June 15, 2008.

(15)  Common stock -

Earnings per share.

      In February 1997, SFAS No. 128 - "Earnings Per Share" was issued. This
statement, which established new standards for computing and presenting earnings
per share, became effective for the Company's quarter ended December 31, 1997.
All prior periods presented have been restated pursuant to the requirements of
this new standard. The adoption of SFAS No. 128 had no material effect on the
Company's previously reported earnings per share. The following table reconciles
the number of common shares outstanding with the number of common shares used in
computing basic and diluted earnings per share for the years ended September
30(in thousands):

<TABLE>
<CAPTION>
                                        1998         1997          1996
                                      --------     --------      --------
<S>                                   <C>          <C>           <C>    
Common shares outstanding, end
  of period                            162,303      212,148       212,363
Less - Shares held in Stock and
  Employee Benefit Trust                    --       (7,252)      (11,012)
                                      --------     --------      --------
Common shares outstanding for
  purposes of computing earnings
  per share, end of period             162,303      204,896       201,351
Effect of using weighted average
  common shares outstanding             17,850       (2,096)       (1,398)
                                      --------     --------      --------
Shares used in computing earnings
  per share - basic                    180,153      202,800       199,953
Effect of shares issuable under
  stock option plans based on the
  treasury stock method                  1,145          945            --
                                      --------     --------      --------
Shares used in computing earnings
  per share - diluted                  181,298      203,745       199,953
                                      ========     ========      ========
</TABLE>


                                      -89-
<PAGE>   93
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      Shares of common stock held in the Stock and Employee Benefit Trust (the
"Trust") were not considered to be outstanding in the computation of common
shares outstanding until shares were utilized at the Company's option for the
purposes for which the Trust was established.

      Basic earnings per share amounts were computed by dividing earnings by the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share amounts were computed considering the
dilutive effect of stock options in the calculation. Options to purchase 2.8
million shares of common stock at prices ranging from $35.31 to $43.38 per share
were outstanding during fiscal 1998 but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares. The 7.25% Automatic Common
Exchange Securities had no effect on the computations for the periods presented.

Common stock repurchase program.

      As previously announced, in October 1997, the Company repurchased 15
million shares of its outstanding common stock at a price of $39 per share under
the terms of a Dutch auction tender offer. This purchase of approximately $585
million of common stock was the first phase of a two-part program to buy back $1
billion of the Company's common stock. The second phase of the program,
approximately $415 million in open market purchases and privately negotiated
transactions of common stock or automatic common exchange security units, was
completed early in the third quarter of fiscal 1998.

      In late March 1998, coincident with the announcement of completion of the
sale of its operations outside North America to SITA, the Company announced that
its Board of Directors had approved a $500 million increase to the current stock
repurchase program permitting the Company to repurchase additional shares of its
common stock. This expanded share repurchase program was completed in June 1998.

      In early July 1998, the Company announced that its Board of Directors
approved an additional $750 million increase to its common stock repurchase
program. It is anticipated that this newly authorized share repurchase program
will be completed on or before September 30, 1999.



                                      -90-
<PAGE>   94
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      Through September 30, 1998, the Company had repurchased approximately 56.3
million shares of its common stock at a total cost of $2.0 billion, as
authorized under the common stock repurchase program discussed above.

Stock and Employee Benefit Trust.

      In February 1995, the Company established a Stock and Employee Benefit
Trust to which it sold 15,000,000 shares of the Company's newly issued common
stock. This trust was established to provide the Company the option to use the
trust to fund future payments under existing employee compensation and benefit
plans as well as other general corporate purposes for which common stock might
be issued. All remaining shares held in the Stock and Employee Benefit Trust
were fully utilized during the third quarter of fiscal 1998 and, as a result,
the trust has been terminated. Unutilized shares in the trust were valued at
market at the end of each reporting period and reflected as a reduction of
common stockholders' equity in the balance sheet.

Automatic Common Exchange Securities.

      In July 1995, the Company issued to the public 11,499,200 7.25% Automatic
Common Exchange Securities with a stated amount of $35.625 per security ($409.7
million in total). Each security consisted of (1) a purchase contract under
which (a) the holder would purchase from the Company on June 30, 1998 (earlier
under certain circumstances), for an amount in cash equal to the stated amount
of $35.625, between .8333 of a share (in total approximately 9.6 million shares)
and one share (a maximum of 11,499,200 shares) of the Company's common stock
(depending on the then market value of the common stock) and (b) the Company
would pay the holder contract fees at the rate of 2.125% per annum on the
security, and (2) 5.125% United States Treasury Notes having a principal amount
equal to $35.625 and maturing on June 30, 1998. The Treasury Notes underlying
these securities were pledged as collateral to secure the holders' obligations
to purchase the Company's common stock under the purchase contract. On June 30,
1998, the principal of the Treasury Notes underlying such securities was
automatically applied to satisfy in full the holders' obligations to purchase
the Company's common stock, and the Company issued 11,499,200 shares of its
common stock (from 



                                      -91-
<PAGE>   95
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


treasury stock) to the holders of these securities in exchange for cash proceeds
of $409.7 million.

Stock incentive plans.

      The Company presently maintains six stock option plans affording
employees, directors and other persons affiliated with the Company the right to
purchase shares of its common stock. At September 30, 1998, options were
available for future grants only under four plans, the Company's 1990 plan, both
1993 plans and the 1996 plan. At September 30, 1998, all of the options
outstanding were non-qualified stock options, except for 51,300 incentive stock
options issued to the Company's officers. The exercise price, term and other
conditions applicable to each option granted under the Company's plans are
generally determined by the Compensation Committee at the time of the grant of
each option and may vary with each option granted. The stock options generally
vest 25% per year over a four-year period and expire after 10 years. The options
are granted at a price equal to the stock's fair market value on the date of the
grant.

      Transactions under all stock option plans are summarized below (option
amounts in thousands):




                                      -92-
<PAGE>   96
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                      1998                1997               1996
                ------------------  ------------------  ------------------
                          Weighted            Weighted            Weighted
                           Average             Average             Average
                          Exercise            Exercise            Exercise
                 Options   Price     Options    Price    Options    Price
                --------  --------  --------  --------  --------  --------
<S>             <C>       <C>       <C>       <C>       <C>       <C>   
Outstanding at
  beginning
  of year         10,518    $28.03   12,012    $27.49   10,173    $26.53
Granted            1,985    $36.15    1,974    $26.91    2,689    $30.46
Exercised         (2,071)   $26.85   (2,918)   $24.89     (564)   $22.54
Terminated          (476)   $30.39     (550)   $29.04     (286)   $30.90
                  ------             ------             ------
Outstanding
  at end of
  year             9,956    $29.78   10,518    $28.03   12,012    $27.49
                  ======             ======             ======
Exercisable at
  end of year      5,801    $28.33    5,787    $27.71    6,853    $26.77
Available for
  future grants
  at end of
  year             8,276              9,979             12,424
</TABLE>

       As of September 30, 1998, the options outstanding are as follows (option
amounts in thousands):

<TABLE>
<CAPTION>
                               Outstanding               Exercisable
                    ------------------------------  -------------------
                             Weighted    Weighted              Weighted
                             Average     Average               Average
     Range of                Exercise    Remaining             Exercise
   Exercise Prices  Options   Price        Years    Options     Price
   ---------------  -------  ---------  ----------  --------  ---------
<S>                 <C>      <C>        <C>         <C>       <C>   
   $17.31 - $20.00     454    $17.31        3.2         454    $17.31
   $20.01 - $30.00   4,641    $26.09        5.8       3,246    $25.78
   $30.01 - $40.00   4,495    $33.95        7.1       1,735    $33.34
   $40.01 - $43.38     366    $40.88        1.2         366    $40.88
</TABLE>




                                      -93-
<PAGE>   97
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      Under the 1993 and 1996 Stock Incentive Plans, restricted common stock of
the Company may be granted to officers, other key employees and certain
non-employee directors. Shares granted are subject to certain restrictions on
ownership and transferability. Such restrictions on outstanding restricted stock
grants lapse two years from the date of grant for officers, 18 months to three
years for key employees and three years for non-employee directors. However,
beginning in fiscal 1997, annual stock awards granted to non-employee directors
are no longer restricted. The deferred compensation expense related to
restricted stock grants is amortized to expense on a straight-line basis over
the period of time the restrictions are in place and the unamortized portion is
classified as a reduction of additional paid-in capital in the Company's
Consolidated Balance Sheet. Additionally, the 1993 and 1996 Stock Incentive
Plans provide for common stock awards. Restricted stock grants and common stock
awards reduce stock options otherwise available for future grant. Of the
2,000,000 shares which may be awarded to officers and key employees as
restricted stock grants or stock awards, 46,850 restricted shares were issued
during the current year and 51,600 restricted shares were outstanding as of
September 30, 1998. In addition, 1,980 restricted shares issued to non-employee
directors were outstanding as of September 30, 1998. Common stock awards
totaling 2,135 shares were granted to non-employee directors during fiscal 1998.
Shares of restricted stock granted for the three years ended September 30, 1998
were as follows:

<TABLE>
<CAPTION>
                                           Year Ended September 30,
                                           ------------------------
                                            1998     1997     1996
                                           ------   ------   ------
<S>                                        <C>      <C>      <C>   
       Restricted stock granted            46,850    5,750   94,655
       Weighted average fair value of
         restricted stock granted          $35.15   $31.82   $31.12
</TABLE>

      During fiscal 1998 and 1997, performance share awards of 198,500 and
1,028,500, respectively, were granted to officers and certain key employees
pursuant to the Company's Long-Term Incentive Plan. After considering
cancellation of 219,875 of these awards, 1,007,125 of the performance share
awards remained outstanding as of September 30, 1998. These performance shares
vest in increments of 25% based upon the 




                                      -94-
<PAGE>   98
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


attainment of performance goals as described in the Long-Term Incentive Plan.
The performance shares are earned only if the market price of the Company's
common stock exceeds specific price targets while attaining certain levels of
cash returns on gross assets in excess of the Company's weighted average cost of
capital. No compensation expense has been recorded to date related to these
awards.

      The Company accounts for all stock incentive plans related to employees
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". Compensation expense related to these plans during fiscal years
1998, 1997 and 1996 was $963,644, $1,662,000 and $1,771,000, respectively.

      The Company's consolidated results of operations on a pro forma basis, as
though the compensation cost for these plans had been determined consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation", are as follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                               Year Ended September 30,
                                       -------------------------------------------
                                          1998            1997            1996
                                       -----------     -----------     -----------
<S>                                    <C>             <C>             <C>         
Pro forma income (loss) before
  extraordinary items and
  cumulative effects of changes
  in accounting principles             $   341,214     $   278,698     $   (91,642)
Pro forma net income (loss)            $   330,652     $   260,217     $  (103,801)

Pro forma income (loss) per common
  and common equivalent share -

  Income (loss) before
    extraordinary items and
    cumulative effects of changes
    in accounting principles           $      1.88     $      1.37     $     (0.46)
  Net income (loss)                    $      1.82     $      1.28     $     (0.52)
</TABLE>

      Because SFAS No. 123 has not been applied to options granted prior to
October 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes 




                                      -95-
<PAGE>   99
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


option pricing model with the following assumptions used for the grants:

<TABLE>
<CAPTION>
                              Year Ended September 30,
                     -------------------------------------------
                         1998           1997           1996
                     -------------  -------------  -------------
<S>                  <C>            <C>            <C>     
Risk-free
  interest rate       5.1% -  5.9%   6.1% -  6.9%   5.6% -  6.7%
Expected lives
  (in years)               6              6              6
Expected
  volatility         21.0% - 23.2%  19.3% - 24.5%  22.9% - 25.8%
Expected dividend
  yields              1.9% -  2.1%   1.8% -  2.6%   2.2% -  2.7%
</TABLE>

      The weighted average fair values of options granted during fiscal years
1998, 1997 and 1996 were $9.78, $7.68 and $8.67 per option, respectively.

Dividend Reinvestment Plan.

      The Company has a Dividend Reinvestment Plan which provides registered
common stockholders an opportunity to reinvest automatically their dividends in
shares of the Company's common stock. Each participant in the plan may also make
additional cash payments of not less than $25 per remittance and not more than
$60,000 per calendar year to be invested in such common shares pursuant to the
plan. The plan provides that newly issued shares may be acquired from the
Company, purchased on the open market or purchased under a combination of the
two alternatives.

(16)  Foreign currency translation -

      Increases (decreases) in the component of common stockholders' equity
associated with foreign currency translation adjustments for the three years in
the period ended September 30, 1998, are as follows (in thousands):




                                      -96-
<PAGE>   100
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                             Year Ended September 30,
                                     ------------------------------------------
                                        1998            1997            1996
                                     ----------      ----------      ----------
<S>                                  <C>             <C>             <C>       
Beginning cumulative
  translation adjustment             $ (104,607)     $  (31,138)     $   30,821
Translation adjustment
  for the fiscal year                   (25,347)       (126,334)        (61,959)
Sale of Italian operations                   --          52,865              --
Sale of international operations        107,642              --              --
                                     ----------      ----------      ----------
Ending cumulative
  translation adjustment             $  (22,312)     $ (104,607)     $  (31,138)
                                     ==========      ==========      ==========
</TABLE>

(17)  Income taxes -

      The components of (i) earnings before income taxes, minority interest,
extraordinary items and cumulative effects of changes in accounting principles
and (ii) the income tax provision for each of the three fiscal years ended
September 30, are as set forth below (in thousands).

<TABLE>
<CAPTION>
                                  1998          1997           1996
                                ---------     ---------      ---------
<S>                             <C>           <C>            <C>      
Domestic:
  Excluding special credits
    (charges)                   $ 517,719     $ 498,141      $ 429,705
  Special credits (charges)         3,545        71,330       (187,087)
                                ---------     ---------      ---------
  As reported                     521,264       569,471        242,618
                                ---------     ---------      ---------
Foreign (1):
  Excluding special credits
    (charges)                      48,885        78,880         44,801
  Special credits (charges)        17,919      (153,209)      (259,713)
                                ---------     ---------      ---------
  As reported                      66,804       (74,329)      (214,912)
                                ---------     ---------      ---------
Total:
  Excluding special credits
    (charges)                     566,604       577,021        474,506
  Special credits (charges)        21,464       (81,879)      (446,800)
                                ---------     ---------      ---------
  As reported                   $ 588,068     $ 495,142      $  27,706
                                =========     =========      =========
</TABLE>


                                      -97-
<PAGE>   101
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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

      (1) Amounts are net of intercompany interest expense for fiscal years
      1998, 1997 and 1996 of $18,795,000, $42,976,000 and $53,660,000,
      respectively. Prior to the divestiture of its international operations in
      March 1998, the Company maintained a capital structure with respect to its
      foreign operations designed to minimize worldwide income and other tax
      costs.

<TABLE>
<CAPTION>
                                                          State
                           Federal        Foreign        & Local        Total
                          ---------      ---------      ---------     ---------
<S>                       <C>            <C>            <C>           <C>      
1998: Current             $ 105,191      $  15,593      $  17,515     $ 138,299
      Deferred               74,471          9,640         10,385        94,496
      Amortization
        of investment
        tax credit             (706)            --             --          (706)
                          ---------      ---------      ---------     ---------
                          $ 178,956      $  25,233      $  27,900     $ 232,089
                          =========      =========      =========     =========

1997: Current             $ 101,460      $  12,367      $   3,790     $ 117,617
      Deferred               45,944         19,296         15,906        81,146
      Amortization
        of investment
        tax credit             (706)            --             --          (706)
                          ---------      ---------      ---------     ---------
                          $ 146,698      $  31,663      $  19,696     $ 198,057
                          =========      =========      =========     =========

1996: Current             $  51,900      $  33,497      $  17,463     $ 102,860
      Deferred               30,895        (35,382)         7,521         3,034
      Amortization
        of investment
        tax credit             (706)            --             --          (706)
                          ---------      ---------      ---------     ---------
                          $  82,089      $  (1,885)     $  24,984     $ 105,188
                          =========      =========      =========     =========
</TABLE>




                                      -98-
<PAGE>   102
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following is a reconciliation between the U.S. federal income tax rate and
the effective income tax rate for each of the three fiscal years in the period
ended September 30, 1998:

<TABLE>
<CAPTION>
                                       1998            1997            1996
                                     ---------       ---------       ---------
<S>                                  <C>             <C>             <C>   
Excluding Special Charges:
  Income tax - U.S. federal rate         35.00%          35.00%          35.00%
  Federal effect of state income
    taxes                                (1.66)          (1.39)          (2.31)
  Effect of foreign operations            (.14)            .06           (2.05)
  All other, net                          1.53            2.35            2.77
                                     ---------       ---------       ---------
  Federal and foreign                    34.73           36.02           33.41
  State income taxes                      4.74            3.98            6.59
                                     ---------       ---------       ---------
  Effective income tax rate,
    excluding special charges            39.47           40.00           40.00
Effect of Special Charges                   --              --          339.66
                                     ---------       ---------       ---------
Effective income tax rate                39.47%          40.00%         379.66%
                                     =========       =========       =========
</TABLE>

      The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities at September 30, 1998 and
1997, are as follows (in thousands):



                                      -99-
<PAGE>   103
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                   1998                   1997
                          ---------------------  ---------------------
                           Deferred   Deferred   Deferred   Deferred
                             Tax        Tax        Tax        Tax
                            Assets  Liabilities   Assets   Liabilities
                          --------  -----------  --------  -----------
<S>                       <C>       <C>          <C>       <C>     
Depreciation and
  amortization            $ 89,818   $488,489    $126,197   $535,195
Accrued environ-
  mental and
  landfill costs           132,790         --     159,508         --
Accruals related
  to discontinued
  operations                 4,270         --      10,211         --
Self-insurance
  accruals                  69,683         --      68,004         --
Assets and operations
  to be divested            19,399         --      29,651         --
Net operating loss
  carryforwards             89,192         --      82,843         --
Other                      240,610    153,025     285,196    141,768
                          --------   --------    --------   --------
Deferred tax assets
  and liabilities          645,762    641,514     761,610    676,963

Unamortized investment
  tax credits                          19,010                 19,716

Valuation allowance        (71,466)               (47,273)
                          --------   --------    --------   --------
Deferred tax assets and
  liabilities, net of
  unamortized investment
  tax credits and
  valuation allowance     $574,296   $660,524    $714,337   $696,679
                          ========   ========    ========   ========
</TABLE>

      The valuation allowance applies principally to a substantial portion of
the net operating loss carryforwards and deductions associated with the special
charges which could expire prior to utilization by the Company. Foreign net
operating loss carryforwards of approximately $27 million are available to
reduce future taxable income of the applicable foreign entities for periods
which generally range from 1999 




                                     -100-
<PAGE>   104
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


to 2004. Domestic state net operating loss carryforwards of approximately $1.6
billion (the tax benefit of which is calculated at rates ranging generally from
5%-10%) are available to reduce future taxable income of the applicable entities
taxable in such states for periods which range from 1999 to 2013. The net change
in the total valuation allowance for the year ended September 30, 1998, was an
increase of $24.2 million, principally due to increased valuation reserves
related to the increased net operating loss carryforwards resulting from the
restructuring of U.S. legal entities. The fiscal 1997 valuation allowance
decreased by $145.5 million from the prior year due to the sale of the Italian
operations in the third quarter of fiscal 1997.

      Deferred income taxes have not been provided as of September 30, 1998, on
approximately $76 million of undistributed earnings of foreign affiliates which
are considered to be permanently reinvested.

(18)  Employee benefit plans -

Employee stock ownership and savings plan.

      The Company sponsors an employee stock ownership and savings plan which
incorporates deferred savings features permitted under IRS Code Section 401(k).
The plan covers substantially all U.S. employees with one or more years of
service except for certain employees subject to collective bargaining
agreements. Eligible employees may make voluntary contributions to one or more
of six investment funds through payroll deductions which, in turn, will allow
them to defer income for tax purposes. The Company matches these voluntary
contributions at a rate of $.50 per $1.00 on the first 5% of total earnings
contributed by each participating employee. The Company matches the voluntary
contributions through open market purchases or issuances of shares of the
Company's common stock. The Company expenses its contributions to the employee
stock ownership and savings plan which for fiscal years 1998, 1997 and 1996 were
$12,195,000, $12,710,000 and $11,752,000, respectively.




                                     -101-
<PAGE>   105
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Employee retirement plans.

      The Company and its domestic subsidiaries have two defined benefit
retirement plans covering substantially all U.S. employees except for certain
employees subject to collective bargaining agreements. The benefits for these
plans are based on years of service and the employee's compensation. The
Company's general funding policy for these plans is to make annual contributions
to the plans equal to or exceeding the actuary's recommended contribution.
During the second quarter of fiscal 1998, the Company changed its method of
accounting for recognition of value changes in its employee retirement plan for
purposes of determining annual expense under SFAS No. 87 - "Employers'
Accounting for Pensions", effective October 1, 1997 (see Note 5).

      The employees of the Company in various international operations,
substantially all of which were divested in March 1998, were covered by defined
benefit plans. The benefits for these plans were based generally on years of
service and the employee's compensation. Under the Company's funding policy,
annual contributions were made in order to fund the plans over the participants'
total expected periods of service in conformity with the requirements of local
law or custom. No additional disclosures pertaining to these plans have been
included because the related amounts were not material to the Company's
consolidated financial statements.

      The following table sets forth the funded status and amounts recognized in
the Company's Consolidated Balance Sheet as of September 30, 1998 and 1997, and
the significant assumptions used in accounting for the U.S. defined benefit
plans. The measurement dates for these plans were June 30, 1998 and 1997.




                                     -102-
<PAGE>   106
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                         1998            1997
                                       ---------       ---------
                                     (Dollar Amounts in Thousands)
<S>                                    <C>             <C>       
Actuarial present value of
  accumulated benefit obligations,
  including vested benefits of
  $231,046 and $186,856,
  respectively                         $(257,897)      $(207,438)
                                       =========       =========
Actuarial present value
  of projected benefit
  obligation                           $(271,277)      $(222,274)
Plan assets at fair value,
  primarily commercial
  paper, common stocks
  (including 22,000 shares
  of the Company's common
  stock at both dates) and
  mutual funds                           287,774         245,032
                                       ---------       ---------
Projected benefit obligation
  (in excess of) less than
  plan assets                             16,497          22,758
Contributions made after
  measurement date but
  before end of fiscal year                6,248           4,762
Unrecognized net gain                     (1,224)        (32,020)
Unrecognized prior service
  cost                                   (11,351)        (12,654)
Unrecognized net asset
  at transition                           (1,099)         (1,292)
                                       ---------       ---------
Prepaid (accrued) pension costs        $   9,071       $ (18,446)
                                       =========       =========

Discount rate                               6.75%           7.75%
Rate of increase in
  compensation levels                        4.0%            4.0%
Expected long-term rate of
  return on assets                          10.5%           10.5%
</TABLE>

      The components of net annual pension cost for fiscal years 1998, 1997 and
1996 for the U.S. defined benefit plans were as follows (in thousands):



                                     -103-
<PAGE>   107
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                    1998          1997          1996
                                  --------      --------      --------
<S>                               <C>           <C>           <C>     
Service cost (benefits earned
  during the period)              $ 12,100      $ 13,454      $ 12,260
Interest cost on projected
  benefit obligation                17,806        16,050        13,521
Investment gain on plan
  assets                           (40,315)      (42,564)      (27,957)
Net amortization and deferral        5,343        21,765        12,056
                                  --------      --------      --------
Net annual pension (income)
  expense                         $ (5,066)     $  8,705      $  9,880
                                  ========      ========      ========
</TABLE>

Termination indemnity plan.

      The employees of the Company's Italian operations, which were divested in
June 1997, were covered by a termination indemnity plan. Benefits under the
plan, which were based on periods of service and the employee's compensation,
were payable in a lump sum upon (1) retirement, (2) termination, (3) death after
10 years of credited service or (4) disability after 10 years of credited
service. Expense in fiscal year 1997 for the period prior to divestiture and for
fiscal year 1996 related to this unfunded plan was $1,350,000 and $1,809,000,
respectively.

Other postretirement benefits.

      The Company currently maintains an unfunded postretirement benefit plan
which provides for employees participating in its medical plan to receive a
monthly benefit after retirement based on years of service. As permitted under
SFAS No. 106 - "Employers' Accounting for Postretirement Benefits Other Than
Pensions", the Company chose to recognize the transition obligation (the
actuarially-determined accumulated post-retirement benefit obligation of
approximately $11.9 million at September 30, 1994) over a 20-year period.
Current year expense was not material to the Company's results of operations.



                                     -104-
<PAGE>   108
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      During the fourth quarter of fiscal 1998, the Company restricted the
participation in its postretirement benefit plan to employees over the age of 55
with 10 years of experience and individuals already covered by the plan. The
curtailment gain of $9.4 million associated with this benefit reduction was
recognized in income in the fourth quarter of fiscal 1998.

Postemployment benefits.

      The Company maintains no plans which provide significant benefits to
former or inactive employees after employment but before retirement.

(19)  Operations by industry segment and geographic area -

      The Company's revenues and income are derived principally from one
industry segment, which includes the collection, transportation,
processing/recovery and disposal of municipal solid waste and industrial wastes.
This segment renders services to a variety of commercial, industrial,
governmental and residential customers. Substantially all revenues represent
income from unaffiliated customers.

      The table below reflects certain geographic information relating to the
Company's operations. For purposes of this table, general corporate expenses
have been included in the computation of income from operations and are
classified under "United States and Puerto Rico" (in thousands).




                                     -105-
<PAGE>   109
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                   1998               1997                1996
                                ----------        -----------         -----------
<S>                             <C>               <C>                 <C>        
Revenues:
  United States and
    Puerto Rico                 $3,937,564        $ 4,148,647         $ 4,073,558
                                ----------        -----------         -----------
  Foreign -
    Canada                         172,458            176,009             169,077
    Other
     (principally
      Europe)                      635,726          1,458,316           1,536,642
                                ----------        -----------         -----------
    Total foreign                  808,184          1,634,325           1,705,719
                                ----------        -----------         -----------
  Consolidated                  $4,745,748        $ 5,782,972         $ 5,779,277
                                ==========        ===========         ===========
Combined income (loss)
 from operations and equity
 in earnings of uncon-
 solidated affiliates:
  United States and
    Puerto Rico                 $  602,059(1)     $   653,866(2)      $   327,421(3)
                                ----------        -----------         -----------
  Foreign -
    Canada                          20,417             10,504              (7,857)
    Other
      (principally
       Europe)                      83,869(1)         (11,145)           (121,401)
                                ----------        -----------         -----------
    Total foreign                  104,286               (641)(2)        (129,258)(3)
                                ----------        -----------         -----------
  Consolidated                  $  706,345        $   653,225         $   198,163
                                ==========        ===========         ===========
</TABLE>



                                     -106-
<PAGE>   110
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                              1998              1997           1996
                           ----------        ----------     ----------
<S>                        <C>               <C>            <C>       
Depreciation and
 amortization:
  United States and
    Puerto Rico            $  392,713        $  418,542     $  438,639
                           ----------        ----------     ----------
  Foreign -
    Canada                     16,393            18,370         17,615
    Other (principally
      Europe)                  60,849           132,758        146,271
                           ----------        ----------     ----------
    Total foreign              77,242           151,128        163,886
                           ----------        ----------     ----------
  Consolidated             $  469,955        $  569,670     $  602,525
                           ==========        ==========     ==========
Identifiable assets:
  United States and
    Puerto Rico            $4,426,392        $4,471,306     $4,803,978
                           ----------        ----------     ----------
  Foreign -
    Canada                    171,936           185,372        206,908
    Other (principally
      Europe)                 401,153         2,021,614      2,590,020
                           ----------        ----------     ----------
    Total foreign             573,089(4)      2,206,986      2,796,928
                           ----------        ----------     ----------
  Consolidated             $4,999,481        $6,678,292     $7,600,906
                           ==========        ==========     ==========
</TABLE>

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

      (1) Fiscal year 1998 earnings information includes special credits
      (principally net gains from the divestiture of business assets and
      operations) of $3,545,000 for operations in the United States and Puerto
      Rico and $17,919,000 related to the divestiture of substantially all of
      the Company's operations outside of North America in March 1998. See Note
      (4).

      (2) Fiscal year 1997 earnings information includes special credits
      (principally net gains from the divestiture of business assets and
      operations) of $71,330,000 for operations in the United States and Puerto
      Rico and includes special charges of $153,209,000 for foreign operations,
      principally Europe. See Note (4). 



                                     -107-
<PAGE>   111
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      (3) Fiscal year 1996 earnings information for operations in the United
      States and Puerto Rico and for foreign operations include special charges
      of $187,087,000 and $259,713,000, respectively. See Note (4).

      (4) Fiscal year 1998 identifiable assets declined significantly due to the
      divestiture of substantially all of the Company's operations outside of
      North America in March 1998, offset partially by the increase associated
      with the Company's investment in SITA of $373,888,000 at September 30,
      1998.

(20)  Fair value of financial instruments -

      The following disclosures of the estimated fair values of financial
instruments have been determined by the Company using available market data and
valuation methodologies. Considerable judgment is required in developing the
methodologies used to determine the estimates of fair value and in interpreting
available market data and, accordingly, the estimates presented herein are not
necessarily indicative of the values of such financial instruments in a current
market exchange. Additionally, under certain financing agreements, the Company
is prohibited from redeeming certain of the long-term debt before its maturity.




                                     -108-
<PAGE>   112
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                  As of September 30,
                        ---------------------------------------
                               1998                 1997
                        ------------------   ------------------
                           Book     Fair        Book     Fair
                          Value     Value      Value     Value
                        --------  --------   --------  --------
                                     (In Thousands)
<S>                     <C>       <C>        <C>       <C>     
Debt -
  6.10% Senior Notes    $155,703  $157,907   $155,471  $152,671
  6.375% Senior Notes    159,840   162,112    159,693   154,879
  7.40% Debentures       358,280   366,542    358,233   365,835
  7 7/8% Senior Notes     69,332    77,297     69,306    74,086
  9 1/4% Debentures       99,500   123,779     99,500   123,073
  Solid waste revenue
    bond obligations     220,044   230,420    219,974   229,902
  Other notes payable     46,790    51,375    505,674   526,259
  Commercial paper and
    short-term facilities
    to be refinanced     692,615   698,262    259,047   258,365
</TABLE>

      The book values of cash, short-term investments, trade accounts
receivables, trade accounts payable and financial instruments included in other
receivables, other assets and accrued liabilities approximate their fair values
principally because of the short-term maturities of these instruments.

      The estimated fair value of long-term debt is based on quoted market
prices where available or on present value calculations which are calculated
using current rates for similar debt with the same remaining maturities.

      In the normal course of business, the Company has letters of credit,
performance bonds and other guarantees which are not reflected in the
accompanying consolidated balance sheets. In the past, no significant claims
have been made against these financial instruments. Management believes that the
likelihood of performance under these financial instruments is minimal and
expects no material losses to occur in connection with these financial
instruments.



                                     -109-
<PAGE>   113
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(21)  Related party transactions -

      Otto Holding International B.V. ("OHI") owns the other 50% interest of
Otto Waste Services. Otto Waste Services was included with the international
operations divested by the Company in March 1998. The Company, primarily through
its 50% ownership of Otto Waste Services, was previously engaged in various
transactions through the ordinary course of business with OHI, its subsidiaries
and unconsolidated affiliates or other affiliated parties ("OHI Group"). The OHI
Group leased containers and equipment under operating leases and provided
certain administrative services to Otto Waste Services during the current fiscal
year. Charges for these administrative services were approximately $1.8 million,
$3.6 million and $4.7 million for fiscal years 1998, 1997 and 1996,
respectively. The Company, including Otto Waste Services, also purchased or
entered into capital leases for approximately $30.8 million of containers from
the OHI Group during fiscal year 1996; no such capital leases were entered into
in fiscal 1998 or 1997. Included in the Company's Consolidated Balance Sheet at
September 30, 1997 were the following amounts relating to transactions with the
OHI Group (in thousands):

<TABLE>
<CAPTION>
                                                         1997
                                                        -------
<S>                                                     <C>    
         Capital lease obligations                      $30,014
         Notes payable, interest
          payable at FIBOR plus 2%                        8,077
</TABLE>

      During fiscal 1996, Otto Waste Services sold certain assets related to
plastics processing to the OHI Group. These assets were sold to OHI for
approximately $2.5 million resulting in a loss on the sale for Otto Waste
Services of approximately $1.3 million which was included in the Company's
fiscal 1996 earnings. Additionally, Otto Waste Services sold the stock of one of
its subsidiaries to the OHI Group at its recorded book value of approximately
$2.1 million. OHI also sold two companies specializing in plastics recycling and
processing to Otto Waste Services at their net book value of approximately
$372,000. In connection with the acquisition of these two companies, Otto Waste
Services assumed liabilities of approximately $6.6 million of long-term debt
with third parties and approximately $7.7 million in net payables with
affiliated companies of Otto Waste Services and other companies within the OHI
Group.



                                     -110-
<PAGE>   114
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


(22)  Quarterly financial information (Unaudited) -

<TABLE>
<CAPTION>
                         First        Second         Third        Fourth
                        Quarter       Quarter       Quarter       Quarter
                      ----------    ----------    ----------    ----------
                            (In Thousands Except for Per Share Amounts)
<S>              <C>  <C>           <C>           <C>           <C>       
     Revenues    1998 $1,344,742    $1,305,717    $1,042,648    $1,052,641
                 1997 $1,495,137    $1,413,731    $1,471,252    $1,402,852

     Gross
      profit     1998 $  363,383    $  348,993    $  293,636    $  302,075
                 1997 $  383,839    $  359,381    $  376,051    $  374,087

     Income from
      operations 1998 $  175,321(1) $  181,069(1) $  141,578    $  148,299
                 1997 $  163,802    $  152,754    $   97,657(2) $  185,024(2)

     Income
      taxes      1998 $   59,916    $   63,781    $   53,453    $   54,939
                 1997 $   50,507    $   47,955    $   30,688    $   68,907

     Income before
      extraordinary
      items and cumulative
      effects of changes in
      accounting
      principles 1998 $   86,758    $   93,343    $   84,201    $   85,071
                 1997 $   71,880    $   70,955    $   41,926    $   98,934

     Net income  1998 $   72,995(3) $   96,544(3) $   84,201    $   85,071
                 1997 $   71,880    $   67,831(4) $   40,241(5) $   85,262(5)
</TABLE>




                                     -111-
<PAGE>   115
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


<TABLE>
<CAPTION>
                                First    Second       Third    Fourth
                               Quarter   Quarter     Quarter   Quarter
                               -------   -------     -------   -------
                              (In Thousands Except for Per Share Amounts)
<S>                            <C>       <C>         <C>       <C>   
     Earnings per share:
       Income before extraordinary items
        and cumulative effects of changes
        in accounting principles -
           1998 -
             Basic             $0.454    $0.504      $0.483    $0.500
             Diluted           $0.451    $0.501      $0.480    $0.497
           1997 -
             Basic             $0.357    $0.350      $0.206    $0.484
             Diluted           $0.356    $0.349      $0.205    $0.480

     Net Income
           1998 -
             Basic             $0.382    $0.521      $0.483    $0.500
             Diluted           $0.380    $0.518      $0.480    $0.497
           1997 -
             Basic             $0.357    $0.335      $0.198    $0.417
             Diluted           $0.356    $0.334      $0.197    $0.414
</TABLE>

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

            (1) In the second quarter of fiscal 1998, the Company recorded
            pre-tax special credits of $17.9 million related to the gain
            recognized from the sale in March 1998 of substantially all of the
            Company's operations outside of North America to SITA, a Paris-based
            subsidiary of Suez Lyonnaise des Eaux. The remaining special credits
            of $2.6 million and $1.0 million recorded in the first and second
            quarters of fiscal 1998, respectively, related principally to net
            gains associated with the divestiture of certain North American
            Operations. See Note (4).

            (2) In the third quarter of fiscal 1997, the Company incurred
            special charges of $84 million which included foreign currency
            translation losses associated with the sale of the Company's Italian
            operations and anticipated losses related to decisions to divest
            additional underperforming or non-core business operations and
            assets, offset partially by net gains from divestitures completed in
            the third quarter. In the fourth quarter of fiscal 1997, the Company
            reported a special credit of 





                                     -112-
<PAGE>   116
                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            $2.2 million related principally to net gains from the sale of
            business operations in the fourth quarter, offset partially by
            changes in estimated losses associated with previous decisions to
            divest certain operations and assets. See Note (4).

            (3) In the first quarter of fiscal 1998, the Company recorded an
            after-tax charge of $13.8 million as the cumulative effect of a
            change in accounting principle in response to the FASB's Emerging
            Issues Task Force EITF No. 97-13, a consensus ruling requiring that
            certain business process reengineering costs typically capitalized
            by companies be expensed as incurred. In the second quarter of
            fiscal 1998, the Company recorded an after-tax credit of $4.2
            million as the cumulative effect of a change in accounting
            principle. The Company changed its method of accounting for
            recognition of value changes in its employee retirement plan for
            purposes of determining annual expense under SFAS No. 87 -
            "Employers' Accounting for Pensions", effective October 1, 1997. See
            Note (5).

            (4) In the second quarter of fiscal 1997, the Company recorded an
            after-tax loss of $3.1 million associated with the redemption of
            approximately $250 million of debt by an unconsolidated affiliate
            (American Ref-Fuel Company of Hempstead), which was reflected in the
            Company's Consolidated Statement of Operations as an extraordinary
            item. See Note (8).

            (5) In the third and fourth quarters of fiscal 1997, the Company
            recorded after-tax losses of $1.7 million and $13.7 million,
            respectively, associated with redemption of debt, which was
            reflected in the Company's Consolidated Statement of Operations as
            an extraordinary item. See Note (10).



                                     -113-

<PAGE>   117

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

     None.

                                    PART III.

Items 10, 11, 12 and 13 of Part III (except for information required with
respect to executive officers of the Company which is set forth under "Business
- Executive Officers of the Company" in Part I of this report) have been omitted
from this report, since the Company will file with the Securities and Exchange
Commission, not later than 120 days after the close of its fiscal year, a
definitive proxy statement, pursuant to Regulation 14A, which involves the
election of directors. The information required by Items 10, 11, 12 and 13 of
this report, which will appear in the definitive proxy statement, is
incorporated by reference into Part III of this report.


                                    PART IV.

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

FINANCIAL STATEMENTS

Browning-Ferris Industries, Inc. and Subsidiaries:

         Report of independent public accountants.

         Consolidated statement of operations for the three years ended
         September 30, 1998.

         Consolidated balance sheet--September 30, 1998 and 1997.

         Consolidated statement of cash flows for the three years ended
         September 30, 1998.

         Consolidated statement of common stockholders' equity for the three
         years ended September 30, 1998.

         Notes to consolidated financial statements.

SCHEDULES

         II Allowance for doubtful accounts for the three years ended September
30, 1998.

Schedules, other than those listed above, are omitted because of the absence of
conditions under which they are required, or because the information is included
in the financial statements or notes thereto.



                                     -114-
<PAGE>   118
EXHIBITS

               3.1     Restated Certificate of Incorporation of BFI, dated
                       October 7, 1991. (Exhibit 3(a) of Form 10-K for the
                       fiscal year ended September 30, 1993, is hereby
                       incorporated by reference.)

              *3.2     By-laws of BFI, as amended through December 1, 1998.

               4.1     Rights Agreement, dated June 3, 1998, between BFI and
                       First Chicago Trust Company of New York. (Exhibit 4 of
                       Form 8-K dated June 3, 1998, is hereby incorporated by
                       reference.)

               4.2     Second Amended and Restated Revolving Credit Agreement,
                       dated as of May 31, 1995, among BFI and Texas Commerce
                       Bank National Association, as Administrative Agent, and
                       the other banks named therein. (Exhibit 4.4 of Form 10-K
                       for the fiscal year ended September 30, 1995, is hereby
                       incorporated by reference.)

               4.3     First Amendment to the Second Amended and Restated
                       Revolving Credit Agreement, dated March 31, 1998, among
                       BFI, Chase Bank of Texas, National Association (formerly
                       Texas Commerce Bank National Association), and the other
                       banks named therein. (Exhibit 4.2 of Form 10-Q for the
                       quarter ended June 30, 1998, is hereby incorporated by
                       reference.)

               4.4     Restated Indenture, dated as of September 1, 1991,
                       between First City, Texas-Houston, National Association,
                       Trustee, and BFI. (Exhibit 4.8 of Form 10-K for the
                       fiscal year ended September 30, 1991, is hereby
                       incorporated by reference.)

               4.5     Indenture, dated as of August 1, 1987, between First
                       RepublicBank Houston, National Association, Trustee, and
                       BFI. (Exhibit 4.1 to Registration Statement on Form S-3
                       No. 33-16537 is hereby incorporated by reference.)

               4.6     First Supplemental Indenture, dated as of January 11,
                       1994, between Nations Bank of Texas, National
                       Association, Trustee, and BFI. (Exhibit 4(f) to
                       Registration Statement on Form S-3 No. 33-58790 is hereby
                       incorporated by reference.)

               4.7     Amended and Restated Multicurrency Revolving Credit
                       Agreement, dated December 27, 1996, among BFI and Credit
                       Suisse and the Banks specified therein. (Exhibit 4 of
                       Form 10-Q for the quarter ended December 31, 1996, is
                       hereby incorporated by reference).

               4.8     First Amendment to Amended and Restated Multicurrency
                       Revolving Credit Agreement, dated December 26, 1997,
                       among BFI, Credit Suisse First Boston and the Banks
                       specified therein. (Exhibit 10.3 of the Form 10-Q for the
                       quarter ended December 31, 1997, is hereby incorporated
                       by reference.)



                                     -115-
<PAGE>   119

               4.9     Second Amendment to the Amended and Restated
                       Multicurrency Revolving Credit Agreement, dated March 31,
                       1998, among BFI, Credit Suisse First Boston and the Banks
                       specified therein. (Exhibit 4.1 of Form 10-Q for the
                       quarter ended June 30, 1998, is hereby incorporated by
                       reference.)

              10.1     Employment Agreement, dated October 1, 1995, between BFI
                       and William D. Ruckelshaus. (Exhibit 10.1 of Form 10-K
                       for the fiscal year ended September 30, 1995, is hereby
                       incorporated by reference.)

              10.2     Deferral Agreement, dated December 28, 1988, between BFI
                       and William D. Ruckelshaus. (Exhibit 10.2 of the Form
                       10-Q for the quarter ended December 31, 1988, is hereby
                       incorporated by reference.)

              10.3     Employment Agreement, dated July 10, 1989, between BFI
                       and Harry J. Phillips, Sr. (Exhibit 10.5 of Form 10-K for
                       the fiscal year ended September 30, 1989, is hereby
                       incorporated by reference.)

              10.4     First Amendment, dated January 21, 1992, to the
                       Employment Agreement, dated as of July 10, 1989, between
                       BFI and Harry J. Phillips, Sr. (Exhibit 10.6 to
                       Registration Statement on Form S-4 No. 33-52240 is hereby
                       incorporated by reference.)

              10.5     Second Amendment, dated December 7, 1993, to the
                       Employment Agreement, dated as of July 10, 1989, between
                       BFI and Harry J. Phillips, Sr. (Exhibit 10 of the Form
                       10-Q for the quarter ended December 31, 1993, is hereby
                       incorporated by reference.)

              10.6     Form of Employment Agreement between BFI and each of
                       Norman A. Myers, Bruce E. Ranck and certain other
                       officers and former officers (Exhibit 10.6 of Form 10-K
                       for the fiscal year ended September 30, 1989, is hereby
                       incorporated by reference.)

              10.7     Executive Officer Form of Employment Agreement between
                       BFI and certain executive officers, beginning in January
                       1993. (Exhibit 10.9 of Post-Effective Amendment No. 1 to
                       Registration Statement on Form S-4 No. 33-52240 is hereby
                       incorporated by reference.)

             *10.8     Browning-Ferris Industries, Inc. Restated 1996 Stock
                       Incentive Plan. 

             *10.9     Browning-Ferris Industries, Inc. Restated 1993 Stock
                       Incentive Plan. 

            *10.10     Browning-Ferris Industries, Inc. Restated 1993
                       Non-Employee Director Stock Plan. 


                                     -116-
<PAGE>   120

             *10.11    Browning-Ferris Industries, Inc. Restated 1990 Stock
                       Option Plan. 

              10.12    Browning-Ferris Industries, Inc. 1987 Stock Option Plan.
                       (Exhibit 10.11 of Form 10-K for the fiscal year ended
                       September 30, 1988, is hereby incorporated by reference.)

             *10.13    Amendments dated September 4, 1996, December 3, 1996, 
                       December 2, 1997 and May 4, 1998 to BFI's 1987 Stock 
                       Option Plan.

              10.14    Browning-Ferris Industries, Inc.'s Cash Balance and
                       Retirement Plan, as amended and restated pursuant to an
                       indenture dated September 15, 1994. (Exhibit 10.18 of
                       Form 10-K for the fiscal year ended September 30, 1994,
                       is hereby incorporated by reference.)

             *10.15    First, Second, Third, Fourth and Fifth Amendments, dated 
                       as of March 31, 1995, December 31, 1995, December 31, 
                       1996, December 31, 1996 and May 9, 1998, respectively, to
                       the BFI Cash Balance and Retirement Plan.

              10.16    BFI Employee Stock Ownership and Savings Plan, as amended
                       through December 1, 1986. (Exhibit 10.10 of Form 10-K for
                       the fiscal year ended September 30, 1986, is hereby
                       incorporated by reference.)

              10.17    Fifth Amendment dated June 8, 1988, to the BFI Employee
                       Stock Ownership and Savings Plan. (Exhibit 10.16 of Form
                       10-K for the fiscal year ended September 30, 1988, is
                       hereby incorporated by reference.)

              10.18    Sixth Amendment, dated December 23, 1988, to the BFI
                       Employee Stock Ownership and Savings Plan. (Exhibit 10.4
                       of the Form 10-Q for the quarter ended December 31, 1988,
                       is hereby incorporated by reference.)

              10.19    Seventh, Eighth and Ninth Amendments, dated as of May 31,
                       1989, June 7, 1989 and October 31, 1991, respectively, to
                       the BFI Employee Stock Ownership and Savings Plan.
                       (Exhibit 10.20 of Form 10-K for the fiscal year ended
                       September 30, 1991, is hereby incorporated by reference.)

              10.20    Tenth Amendment, dated September 7, 1993, to the BFI
                       Employee Stock Ownership and Savings Plan. (Exhibit 10.22
                       of Form 10-K for the fiscal year ended September 30,
                       1993, is hereby incorporated by reference.)

              10.21    Amended and Restated Partnership Agreement, dated as of
                       December 5, 1997, by and between Duke/UAE Ref-Fuel
                       Management LLC, BFI Ref-Fuel, Inc. and Air Products
                       Ref-Fuel, Inc. (Exhibit 10.1 of Form 10-Q for the quarter
                       ended December 31, 1997, is hereby incorporated by
                       reference.)


                                     -117-
<PAGE>   121
              10.22    Amended and Restated Parent Agreement relating to
                       American Ref-Fuel Company, dated as of December 5, 1997,
                       among Duke Capital Corporation, United American Energy
                       Corp., Duke/UAE Ref-Fuel LLC and BFI. (Exhibit 10.2 of
                       Form 10-Q for the quarter ended December 31, 1997, is
                       hereby incorporated by reference.)

              10.23    BFI Deferred Compensation Plan (Exhibit 10.4 of Form 10-Q
                       for the quarter ended December 31, 1997, is hereby
                       incorporated by reference.)

             *10.24    BFI Convertible Annual Incentive Award Plan as amended on
                       December 2, 1998.

              10.25    BFI Annual Management Incentive Plan. (Exhibit 10.2 of
                       Form 10-Q for the quarter ended March 31, 1997, is hereby
                       incorporated by reference.)

              10.26    BFI Long-Term Incentive Plan. (Exhibit 10.3 of Form 10-Q
                       for the quarter ended March 31, 1997, is hereby
                       incorporated by reference.)

              10.27    Stock Purchase Agreement, dated as of February 16, 1998,
                       among BFI, BFI International, Inc., Suez Lyonnaise Des
                       Eaux, S.A. and SITA, S.A. (Exhibit 2 of Form 10-Q for the
                       quarter ended March 31, 1998, is hereby incorporated by
                       reference.)

              10.28    Shareholders Agreement, dated as of March 31, 1998,
                       between BFI and Suez Lyonnaise des Eaux, S.A. (Exhibit 10
                       of Form 10-Q for the quarter ended March 31, 1998, is
                       hereby incorporated by reference.)

             *12.      Computation of Ratio of Earnings to Fixed Charges of
                       Browning-Ferris Industries, Inc. and Subsidiaries.

             *21.      Subsidiaries of the Registrant.

             *23.1     Consent of Arthur Andersen LLP.

             *27.      Financial Data Schedule.

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

*Filed herewith.

Reports on Form 8-K
-------------------

None


                                     -118-
<PAGE>   122
--------------------

NOTE: Upon the request of a holder of the Company's securities directed to
Browning-Ferris Industries, Inc., P.O. Box 3151, Houston, Texas 77253, Attn:
Secretary, the Company will furnish a copy of any exhibit for ten cents per page
to cover the cost of copying and mailing.

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





                                     -119-
<PAGE>   123


                                   SCHEDULE II




                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                         ALLOWANCE FOR DOUBTFUL ACCOUNTS

                  For the Three Years Ended September 30, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------
                      Additions
          Balance      Charged     Deductions       Balance
         Beginning       to           from          End of
          of Year      Income       Reserves(a)      Year
-----------------------------------------------------------
<S>      <C>          <C>          <C>             <C>
1998      $38,376      $20,604      $(36,908)       $22,072

1997      $40,622      $30,116      $(32,362)       $38,376

1996      $39,777      $29,527      $(28,682)       $40,622
</TABLE>



(a)  Amounts determined not to be collectible. Amount for fiscal 1998 also
includes a reduction in the reserve of approximately $18.0 million related to
the divestiture of substantially all of the Company's international operations
in March 1998.





                                     -120-
<PAGE>   124



                                   SIGNATURES



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


                                      BROWNING-FERRIS INDUSTRIES, INC.
                                               (Registrant)


DATE: December 4, 1998   By:              /s/ Bruce E. Ranck
                            ----------------------------------------------------
                                              Bruce E. Ranck
                                         President, Chief Executive
                                           Officer and Director


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

                                        /s/ William D. Ruckelshaus              
                            ----------------------------------------------------
                                          William D. Ruckelshaus                
                                           Chairman of the Board                
                                               and Director                     
                                                                                
                                            /s/ Bruce E. Ranck                  
                            ----------------------------------------------------
                                              Bruce E. Ranck,                   
                              President, Chief Executive Officer and Director   
                                                                                
                                          /s/ Jeffrey E. Curtiss                
                            ----------------------------------------------------
                                            Jeffrey E. Curtiss,                 
                                         Senior Vice President and              
                                          Chief Financial Officer               
                                                                                
                                             /s/ Edward Schick                  
                            ----------------------------------------------------
                                               Edward Schick                    
                                    Vice President of Business Services         
                                         And Corporate Controller               
      
      



                                     -121-
<PAGE>   125
      
      
      
                                             /s/ John W. Alden                  
                            ----------------------------------------------------
                                          John W. Alden, Director               
                                                                                
                                         /s/ Gregory D. Brenneman               
                            ----------------------------------------------------
                                      Gregory D. Brenneman, Director            
                                                                                
                                           /s/ William T. Butler                
                            ----------------------------------------------------
                                            William T. Butler,                  
                                                 Director                       
                                                                                
                                           /s/ Gerald Grinstein                 
                            ----------------------------------------------------
                                        Gerald Grinstein, Director,             
                                                                                
                                           /s/ Robert J. Herbold                
                            ----------------------------------------------------
                                        Robert J. Herbold, Director             
                                                                                
                                           /s/ Harry J. Phillips, Sr.
                            ----------------------------------------------------
                                          Harry J. Phillips, Sr.,               
                                                 Director                       
                                                                                
                                           /s/ Joseph L. Roberts                
                            ----------------------------------------------------
                                          Joseph L. Roberts, Jr.,               
                                                 Director                       
                                                                                
                                            /s/ Marc J. Shapiro                 
                            ----------------------------------------------------
                                         Marc J. Shapiro, Director              
                                                                                
                                           /s/ Robert M. Teeter                 
                            ----------------------------------------------------
                                        Robert M. Teeter, Director              
                                                                                
                                          /s/ Marina v.N. Whitman               
                            ----------------------------------------------------
December 4, 1998                       Marina v.N. Whitman, Director            
                          



                                     -122-
<PAGE>   126
                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
            EXHIBIT
            NUMBER     DESCRIPTION
            ------     -----------
            <S>        <C>
               3.1     Restated Certificate of Incorporation of BFI, dated
                       October 7, 1991. (Exhibit 3(a) of Form 10-K for the
                       fiscal year ended September 30, 1993, is hereby
                       incorporated by reference.)

              *3.2     By-laws of BFI, as amended through December 1, 1998.

               4.1     Rights Agreement, dated June 3, 1998, between BFI and
                       First Chicago Trust Company of New York. (Exhibit 4 of
                       Form 8-K dated June 3, 1998, is hereby incorporated by
                       reference.)

               4.2     Second Amended and Restated Revolving Credit Agreement,
                       dated as of May 31, 1995, among BFI and Texas Commerce
                       Bank National Association, as Administrative Agent, and
                       the other banks named therein. (Exhibit 4.4 of Form 10-K
                       for the fiscal year ended September 30, 1995, is hereby
                       incorporated by reference.)

               4.3     First Amendment to the Second Amended and Restated
                       Revolving Credit Agreement, dated March 31, 1998, among
                       BFI, Chase Bank of Texas, National Association (formerly
                       Texas Commerce Bank National Association), and the other
                       banks named therein. (Exhibit 4.2 of Form 10-Q for the
                       quarter ended June 30, 1998, is hereby incorporated by
                       reference.)

               4.4     Restated Indenture, dated as of September 1, 1991,
                       between First City, Texas-Houston, National Association,
                       Trustee, and BFI. (Exhibit 4.8 of Form 10-K for the
                       fiscal year ended September 30, 1991, is hereby
                       incorporated by reference.)

               4.5     Indenture, dated as of August 1, 1987, between First
                       RepublicBank Houston, National Association, Trustee, and
                       BFI. (Exhibit 4.1 to Registration Statement on Form S-3
                       No. 33-16537 is hereby incorporated by reference.)

               4.6     First Supplemental Indenture, dated as of January 11,
                       1994, between Nations Bank of Texas, National
                       Association, Trustee, and BFI. (Exhibit 4(f) to
                       Registration Statement on Form S-3 No. 33-58790 is hereby
                       incorporated by reference.)

               4.7     Amended and Restated Multicurrency Revolving Credit
                       Agreement, dated December 27, 1996, among BFI and Credit
                       Suisse and the Banks specified therein. (Exhibit 4 of
                       Form 10-Q for the quarter ended December 31, 1996, is
                       hereby incorporated by reference).

               4.8     First Amendment to Amended and Restated Multicurrency
                       Revolving Credit Agreement, dated December 26, 1997,
                       among BFI, Credit Suisse First Boston and the Banks
                       specified therein. (Exhibit 10.3 of the Form 10-Q for the
                       quarter ended December 31, 1997, is hereby incorporated
                       by reference.)
</TABLE>


<PAGE>   127
<TABLE>
<CAPTION>
            EXHIBIT
            NUMBER     DESCRIPTION
            ------     -----------
            <S>        <C>
               4.9     Second Amendment to the Amended and Restated
                       Multicurrency Revolving Credit Agreement, dated March 31,
                       1998, among BFI, Credit Suisse First Boston and the Banks
                       specified therein. (Exhibit 4.1 of Form 10-Q for the
                       quarter ended June 30, 1998, is hereby incorporated by
                       reference.)

              10.1     Employment Agreement, dated October 1, 1995, between BFI
                       and William D. Ruckelshaus. (Exhibit 10.1 of Form 10-K
                       for the fiscal year ended September 30, 1995, is hereby
                       incorporated by reference.)

              10.2     Deferral Agreement, dated December 28, 1988, between BFI
                       and William D. Ruckelshaus. (Exhibit 10.2 of the Form
                       10-Q for the quarter ended December 31, 1988, is hereby
                       incorporated by reference.)

              10.3     Employment Agreement, dated July 10, 1989, between BFI
                       and Harry J. Phillips, Sr. (Exhibit 10.5 of Form 10-K for
                       the fiscal year ended September 30, 1989, is hereby
                       incorporated by reference.)

              10.4     First Amendment, dated January 21, 1992, to the
                       Employment Agreement, dated as of July 10, 1989, between
                       BFI and Harry J. Phillips, Sr. (Exhibit 10.6 to
                       Registration Statement on Form S-4 No. 33-52240 is hereby
                       incorporated by reference.)

              10.5     Second Amendment, dated December 7, 1993, to the
                       Employment Agreement, dated as of July 10, 1989, between
                       BFI and Harry J. Phillips, Sr. (Exhibit 10 of the Form
                       10-Q for the quarter ended December 31, 1993, is hereby
                       incorporated by reference.)

              10.6     Form of Employment Agreement between BFI and each of
                       Norman A. Myers, Bruce E. Ranck and certain other
                       officers and former officers (Exhibit 10.6 of Form 10-K
                       for the fiscal year ended September 30, 1989, is hereby
                       incorporated by reference.)

              10.7     Executive Officer Form of Employment Agreement between
                       BFI and certain executive officers, beginning in January
                       1993. (Exhibit 10.9 of Post-Effective Amendment No. 1 to
                       Registration Statement on Form S-4 No. 33-52240 is hereby
                       incorporated by reference.)

             *10.8     Browning-Ferris Industries, Inc. Restated 1996 Stock
                       Incentive Plan. 

             *10.9     Browning-Ferris Industries, Inc. Restated 1993 Stock
                       Incentive Plan. 

            *10.10     Browning-Ferris Industries, Inc. Restated 1993
                       Non-Employee Director Stock Plan. 
</TABLE>


<PAGE>   128
<TABLE>
<CAPTION>
            EXHIBIT
            NUMBER     DESCRIPTION
            ------     -----------
            <S>        <C>
             *10.11    Browning-Ferris Industries, Inc. Restated 1990 Stock
                       Option Plan. 

              10.12    Browning-Ferris Industries, Inc. 1987 Stock Option Plan.
                       (Exhibit 10.11 of Form 10-K for the fiscal year ended
                       September 30, 1988, is hereby incorporated by reference.)

             *10.13    Amendments dated September 4, 1996, December 3, 1996, 
                       December 2, 1997 and May 4, 1998 to BFI's 1987 Stock 
                       Option Plan.

              10.14    Browning-Ferris Industries, Inc.'s Cash Balance and
                       Retirement Plan, as amended and restated pursuant to an
                       indenture dated September 15, 1994. (Exhibit 10.18 of
                       Form 10-K for the fiscal year ended September 30, 1994,
                       is hereby incorporated by reference.)

             *10.15    First, Second, Third, Fourth and Fifth Amendments, dated 
                       as of March 31, 1995, December 31, 1995, December 31, 
                       1996, December 31, 1996 and May 9, 1998, respectively, to
                       the BFI Cash Balance and Retirement Plan.

              10.16    BFI Employee Stock Ownership and Savings Plan, as amended
                       through December 1, 1986. (Exhibit 10.10 of Form 10-K for
                       the fiscal year ended September 30, 1986, is hereby
                       incorporated by reference.)

              10.17    Fifth Amendment dated June 8, 1988, to the BFI Employee
                       Stock Ownership and Savings Plan. (Exhibit 10.16 of Form
                       10-K for the fiscal year ended September 30, 1988, is
                       hereby incorporated by reference.)

              10.18    Sixth Amendment, dated December 23, 1988, to the BFI
                       Employee Stock Ownership and Savings Plan. (Exhibit 10.4
                       of the Form 10-Q for the quarter ended December 31, 1988,
                       is hereby incorporated by reference.)

              10.19    Seventh, Eighth and Ninth Amendments, dated as of May 31,
                       1989, June 7, 1989 and October 31, 1991, respectively, to
                       the BFI Employee Stock Ownership and Savings Plan.
                       (Exhibit 10.20 of Form 10-K for the fiscal year ended
                       September 30, 1991, is hereby incorporated by reference.)

              10.20    Tenth Amendment, dated September 7, 1993, to the BFI
                       Employee Stock Ownership and Savings Plan. (Exhibit 10.22
                       of Form 10-K for the fiscal year ended September 30,
                       1993, is hereby incorporated by reference.)

              10.21    Amended and Restated Partnership Agreement, dated as of
                       December 5, 1997, by and between Duke/UAE Ref-Fuel
                       Management LLC, BFI Ref-Fuel, Inc. and Air Products
                       Ref-Fuel, Inc. (Exhibit 10.1 of Form 10-Q for the quarter
                       ended December 31, 1997, is hereby incorporated by
                       reference.)
</TABLE>


<PAGE>   129
<TABLE>
<CAPTION>
            EXHIBIT
            NUMBER     DESCRIPTION
            ------     -----------
            <S>        <C>
              10.22    Amended and Restated Parent Agreement relating to
                       American Ref-Fuel Company, dated as of December 5, 1997,
                       among Duke Capital Corporation, United American Energy
                       Corp., Duke/UAE Ref-Fuel LLC and BFI. (Exhibit 10.2 of
                       Form 10-Q for the quarter ended December 31, 1997, is
                       hereby incorporated by reference.)

              10.23    BFI Deferred Compensation Plan (Exhibit 10.4 of Form 10-Q
                       for the quarter ended December 31, 1997, is hereby
                       incorporated by reference.)

             *10.24    BFI Convertible Annual Incentive Award Plan as amended on
                       December 2, 1998.

              10.25    BFI Annual Management Incentive Plan. (Exhibit 10.2 of
                       Form 10-Q for the quarter ended March 31, 1997, is hereby
                       incorporated by reference.)

              10.26    BFI Long-Term Incentive Plan. (Exhibit 10.3 of Form 10-Q
                       for the quarter ended March 31, 1997, is hereby
                       incorporated by reference.)

              10.27    Stock Purchase Agreement, dated as of February 16, 1998,
                       among BFI, BFI International, Inc., Suez Lyonnaise Des
                       Eaux, S.A. and SITA, S.A. (Exhibit 2 of Form 10-Q for the
                       quarter ended March 31, 1998, is hereby incorporated by
                       reference.)

              10.28    Shareholders Agreement, dated as of March 31, 1998,
                       between BFI and Suez Lyonnaise des Eaux, S.A. (Exhibit 10
                       of Form 10-Q for the quarter ended March 31, 1998, is
                       hereby incorporated by reference.)

             *12.      Computation of Ratio of Earnings to Fixed Charges of
                       Browning-Ferris Industries, Inc. and Subsidiaries.

            * 21.      Subsidiaries of the Registrant.

            * 23.1     Consent of Arthur Andersen LLP.

            * 27.      Financial Data Schedule.
</TABLE>

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

*Filed herewith.