<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, 1997

                                       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
7.25% Automatic Common Exchange        New York Stock Exchange, Inc.
Securities                             
                                       Chicago Stock Exchange Incorporated
                                                                            
                                       Pacific Stock Exchange Incorporated

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: $6.7 billion, computed on the basis of $35-3/8 per share,
closing price of the common stock on the New York Stock Exchange, Inc. on
December 3, 1997.

There were 196,791,285 shares of the registrant's common stock, $.16-2/3 par
value, outstanding as of December 3, 1997.




                      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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
      Regulation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
      Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 
      Waste Disposal Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
      Corporate Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
      Capital Expenditures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
      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. . . . . . . . . . . . . . . . . . . . . . . . . . . .  19

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 . . . . . . . . . . . . . . . . . . . . . . . .  44

   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  45

   ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . .  93

PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  93
</TABLE>





                                    -iii-
<PAGE>   4
<TABLE>
<S>                                                                                                                   <C>
PART IV.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  93

   ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.  . . . . . . . . . . . . . . . . . . . .  93
      Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  93
      Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  93
      Exhibits  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  94

SIGNATURES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
</TABLE>





                                     -iv-
<PAGE>   5
                                    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.  The Company collects, transports, treats and/or processes, recycles
and disposes of commercial, residential and municipal solid waste 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 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 (including unconsolidated affiliates) operates in approximately 420
locations in North America and approximately 270 locations outside North
America and employs approximately 40,000 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").  Pursuant to the
terms of the agreement, the Company will sell to SITA 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 will receive US$1 billion and ordinary shares of SITA equating to
approximately 20% equity ownership in SITA.  The transaction is expected to be
consummated during the first quarter of calendar 1998.  The transaction has
been approved by the boards of directors of the Company and SITA and is subject
to the satisfactory completion of due diligence, approval by regulatory
authorities, and authorization by SITA's shareholders of the issuance of
additional ordinary shares.  See "International."

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
acquired 15 million shares of its Common Stock at a price of $39.00 per share
in accordance with the terms of its "Dutch Auction" tender offer. The second
phase of the program consists of the purchase of approximately $415 million of
the Company's Common Stock and/or its 7.25% Automatic Common Exchange
Securities in open market purchases and privately negotiated transactions and
is expected to be completed by September 30, 1998.





                                      -1-
<PAGE>   6

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 to implement this strategy during fiscal 1997 by significantly
reducing capital expenditures from the prior year, identifying and divesting of
certain underperforming business operations, reducing its selling, general and
administrative costs and, to a lesser extent, operating costs, and shifting its
focus to return on gross assets in both its existing business operations and
its business development activities.  See below and also "Corporate
Development" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations."

The Company's North American 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 to either the Company's chief executive
officer or chief operating officer.  The North American operations are divided
into 13 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 international operations (excluding Canada) are aligned into two
operational areas, Europe and the Pacific Rim.  BFI Europe, from its regional
office in the Netherlands, oversees the Company's operations in Finland,
Germany, the Netherlands, Spain, Switzerland and the United Kingdom.
Management oversight for operations in Australia, Hong Kong, Kuwait and New
Zealand and the coordination of expansion into new markets outside Europe are
provided from the corporate office in Houston.

Management of the operations in each country is carried out by a country
manager, and in some cases where the operations are larger or more extensive,
by country managers, with one of the country managers being an experienced BFI
expatriate employee and the other an experienced national manager.  The Company
believes that strong national management in each country of operation is
extremely important, together with support from the corporate office in Houston
and BFI's regional office in Europe, in areas of accounting, compliance, legal,
technical, sales and market development.  BFI has implemented a divisional
market structure in several countries which permits and encourages increased
growth opportunities in more localized markets.

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





                                      -2-
<PAGE>   7
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 that will be earned only as certain
performance measures are attained.

The Company's business is subject to extensive U.S. and foreign 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 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, 1997,
the total revenues contributed by the Company's principal lines of business.
<TABLE>
<CAPTION>
                                                                       Contribution to Consolidated Revenues
                                                                                  (in millions)
                                                                              Year Ended September 30,
                                                                    1997             1996              1995  
                                                                  -------          --------          --------
<S>                                                               <C>               <C>               <C>
North American Operations
-------------------------
Collection Services - Solid Waste                                 $2,913            $2,886            $2,758
Transfer and Disposal - Solid Waste                                1,079             1,050             1,026
Recycling Services                                                   555               531               675
Medical Waste Services                                               199               200               189
Services Group and Other                                             106                89                83
Elimination of Affiliated Companies'
Revenues                                                            (527)             (513)             (483)
                                                                  ------            ------            ------
Total North American Operations                                    4,325             4,243             4,248
International Operations                                           1,458             1,536             1,531   
------------------------                                          ------            ------            ------
Total Company                                                     $5,783            $5,779            $5,779   
                                                                  ======            ======            ======
</TABLE>

Total assets at September 30, 1997, 1996 and 1995 were $6,678 million, $7,601
million and $7,460 million, respectively.





                                      -3-
<PAGE>   8
                           NORTH AMERICAN OPERATIONS

COLLECTION

BFI collects solid waste in approximately 275 operating locations in 45 states,
Puerto Rico and Canada.  These operations provide solid waste collection
services for commercial establishments, industrial plants, medical
institutions, and governmental and residential units.  BFI uses approximately
911,000 containers and approximately 9,300 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
150,000 customers.

The Company also collects recyclable materials, principally paperboard, office
paper and other paper products, in North America from approximately 5.8 million
households, including curbside customers, and for approximately 133,000
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 98 solid waste landfill sites in North America, 19 of which
are operated under contracts with municipalities or others.  The Company has
approximately 15,000 acres permitted as landfill disposal sites,





                                      -4-
<PAGE>   9
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 acreage shown 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 91 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 29 treatment sites using either incineration or
autoclaving (steam sterilization) technology.  The Company also utilizes over
100 collection sites to service medical waste customers in most major
metropolitan cities in the United States.

Recycling

The Company currently operates 102 recycleries in North America which receive,
process and dispose of recyclable materials.  During fiscal 1997, the Company
closed 35 recycling facilities due to the continuing weakness in recycled
commodity prices, and plans to close additional facilities during fiscal 1998.
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, tire
recycling and other alternative energy concepts such as biomass fuels. The
Company currently operates 28 organic processing centers.

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>   10
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, S.A., a societe
anonyme formed under the laws of the Republic of France ("SITA").  The
transaction is expected to be consummated during the first quarter of calendar
1998.

Pursuant to the terms of the agreement, the Company will sell to SITA 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 will receive US$1 billion and ordinary shares, FF50 par
value (the "Ordinary Shares"), of SITA equating to approximately 20% equity
ownership in SITA.

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

The transaction has been approved by the boards of directors of the Company and
SITA and is subject to the satisfactory completion of due diligence and
approval by regulatory authorities.  The transaction is also subject to the
authorization by SITA's shareholders of the issuance of the Ordinary Shares to
the Company and a rights offering to existing shareholders of SITA. Upon
completion of the transaction, SITA will be the largest waste services company
in Europe with annualized revenues of approximately US$2.8 billion.

The Company is involved in waste collection, processing, disposal and/or
recycling operations in approximately 270 locations (including locations of
unconsolidated affiliates) in Australia, Finland, Germany, Hong Kong, Kuwait,
the Netherlands, New Zealand, Spain, Switzerland and the United Kingdom.
European operations comprise the largest number of operating locations outside
North America.

The Company currently collects solid waste in approximately 160 locations and
operates 47 landfill sites in its international operations (including, in each
case, locations of unconsolidated affiliates). The Company also has 50
recycleries and 49 transfer stations in its international operations and





                                      -6-
<PAGE>   11
uses approximately 285,000 containers and approximately 3,800 specially
equipped collection trucks in its international waste collection operations.

The Company owns 50% of the stock of Otto Entsorgungsdienstleistungen GmbH
("Otto Waste Services"), which is primarily engaged in providing collection and
recycling services under long-term contracts with municipalities in Germany and
Duales System Deutschland GmbH, the non-governmental organization responsible
for the collection and processing of certain recyclable materials in Germany.
During fiscal 1997, the Company reported consolidated revenues of approximately
$630 million applicable to Otto Waste Services.  The Company's interest in Otto
Waste Services will also be merged into SITA.


                                WASTE-TO-ENERGY

The Company and Air Products and Chemicals, Inc. ("Air Products"),
headquartered in Allentown, Pennsylvania, are each 50% general partners in
partnerships that design, build, own and operate facilities that burn solid
waste and recover energy and other materials.  These partnerships market their
capabilities under the name American Ref-Fuel(R).  The Company also owns 100%
of a lease of a waste-to-energy facility located in Chester, Pennsylvania.

In April 1996, Air Products announced its intention to divest its partnership
interests in American Ref-Fuel.  On November 1, 1997, Air Products entered into
an agreement to sell its 50% interests in American Ref-Fuel partnerships to a
new company formed by Duke Energy Power Services, a subsidiary of Duke Energy
Corporation, and United American Energy Corp.  The sale is subject to approvals
by each company's board of directors and relevant regulatory agencies.  The
transaction is expected to be consummated in December 1997.

In April 1997, the Company acquired 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.

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.





                                      -7-
<PAGE>   12
In connection with four of the existing American Ref-Fuel projects, both the
Company and Air Products 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 (11) 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 $174 million at September 30, 1997.
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 1998, 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.

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.





                                      -8-
<PAGE>   13
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 will have 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 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 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 is also 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





                                      -9-
<PAGE>   14
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.  The EPA has proposed and is expected to promulgate by early
1998, a financial test and corporate guarantee for use by private Subtitle D
facilities, which, if adopted, will 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.

In its international operations, the Company has noted a trend toward increased
environmental regulation.  For example, in Europe, policies have been
established to encourage waste reduction, to promote re-use and recycling, to
reduce packaging waste, to strengthen the standards for permitting and
supervision of waste disposal operations and to control crossborder movements
of waste.  BFI, with its commitment to sustainable development and the rational
management of all resources, including waste, believes that the continuation of
this trend and enhanced enforcement of increasingly stringent regulations will
benefit its international operations.


                                  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





                                      -10-
<PAGE>   15
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 sanitary 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."

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 at
existing facilities 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 (8) 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 net income.





                                      -11-
<PAGE>   16
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.

With respect to international operations, the profitability and risks
associated with these operations can also be affected, to a greater or lesser
extent depending on the foreign country in which the operations are located, by
changes in national economies, financial and political policies, war, invasion,
social instability, currency fluctuations and other risk factors associated
with operations in foreign countries.  On November 10, 1997, the Company
announced that it had agreed to merge its operations located outside North
America with SITA.  See "International."


                             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 1998 as compared to fiscal 1997,
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 - 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.  The Company has also agreed to merge its operations
located outside of North America with SITA.  See "International."  When
investing in capital-intensive facilities such as landfills, the Company faces
the risk that required permits will not be obtained or renewed. If permits are
not ultimately obtained and maintained, the value of such facilities can be
substantially impaired, which could adversely affect future results of
operations.  See "North American Operations - Post-Collection - Landfills" and
"Regulation."





                                      -12-
<PAGE>   17
                              CAPITAL EXPENDITURES

Capital expenditures were approximately $527 million in fiscal 1997, consisting
of $30 million for acquired businesses.  Approximately $160 million was
expended in connection with internal market development projects and municipal
contracts and $337 million related to additions and replacements of capital
items for existing operations, including existing landfill cell development.
See Notes (5), (6) and (7) 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.


                       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                48
                                 Director (1)
Norman A. Myers                  Executive Vice President and                          61
                                 Chief Development Officer
J. Gregory Muldoon               Executive Vice President and                          43
                                 Chief Operating Officer
Jeffrey E. Curtiss               Senior Vice President and                             49
                                 Chief Financial Officer
Hugh J. Dillingham, III          Senior Vice President                                 48
                                 Post Collection
Sandra D. Glatzau                Senior Vice President                                 45
                                 Marketing and Sales
J. Frederick Snyder              Senior Vice President                                 44
                                 Collection
Rufus Wallingford                Senior Vice President and                             57
                                 General Counsel
David R. Hopkins                 Vice President, Controller and                        54
                                 Chief Accounting Officer
</TABLE>
----------------                                                          
* As of December 3, 1997.  

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





                                      -13-
<PAGE>   18
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 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.





                                      -14-
<PAGE>   19
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. Hopkins, who was a Divisional Vice President and Assistant Controller prior
to becoming Controller of the Company in September 1986, joined the Company in
September 1980.  He was elected a Vice President and named Chief Accounting
Officer in December 1986.  From September 1991 to January 1992, he served as
acting Chief Financial Officer of the Company.

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 annual meeting of
stockholders is scheduled to be held March 4, 1998 in Houston, Texas.





                                      -15-
<PAGE>   20
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, and in the United Kingdom, Germany,
Hong Kong, the Netherlands, New Zealand, Spain, and Australia.  See "Business
- North American Operations - Collection" and "Business - North American
Operations - Landfills" and Notes (6) and (8) 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 (6) and (11) 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 (9) and (11) 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>   21
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
102 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 76 of these sites.  Partial settlements have been
negotiated with regard to 13 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
62 additional sites on the EPA's National Priority List.  For 45 of these
sites, the Company has determined that it is not a PRP.  The Company's PRP
status at the remaining 17 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>   22
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 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
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.

A subsidiary of the Company, CECOS International, Inc. ("CECOS"), is a party to
a consent order with the U.S.  Environmental Protection Agency, one aspect of
which concerns a leachate pretreatment system that CECOS agreed to construct at
one of its closed facilities.  By letter dated March 16, 1994, the USEPA has
demanded $528,500 in stipulated penalties due to CECOS's alleged failure to
commence timely start-up of the leachate pretreatment system that is presently
operating.  On March 28, 1996, the USEPA filed a lawsuit styled United States
of America v. CECOS International, Inc. in the United States District Court for
the Southern District of Ohio, seeking payment of such stipulated penalties.
CECOS is vigorously contesting this matter.  Management of the Company is
unable to conclude whether the ultimate monetary sanction in this matter, if
any, will be more than $100,000.

On March 9, 1991, CECOS was named in a civil administrative complaint, entitled
In the Matter of CECOS International, Inc., initiated by Region II of the EPA.
This complaint alleges that CECOS landfilled certain waste generated by General
Motors Corporation, that by definition contained polychlorinated biphenyls in
excess of the regulatory limit, rather than incinerating such waste, and that
CECOS failed to test the waste in accordance with the requirements of its
permits. The original complaint sought monetary sanctions against CECOS in the
amount of $14,150,000. In September 1996, the EPA withdrew certain of its
allegations resulting in a reduction in the monetary sanctions sought to
$2,975,000.  CECOS is vigorously contesting the allegations in the





                                      -18-
<PAGE>   23
complaint.  Management of the Company is currently unable to determine whether
the ultimate monetary sanction, if any, will be more than $100,000.

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.

                                    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, 1996 and 1997, 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 1996                     Fiscal Year 1997
                                  -------------------------            -------------------------
                                   High              Low               High               Low
                                  -------           -------            -------           -------
           <S>                    <C>             <C>                 <C>                 <C>
           First Quarter          $31-7/8           $27-3/8            $27-5/8            $24-1/8
           Second Quarter          32-5/8            28                 32-7/8             25-3/4
           Third Quarter           32-7/8            27-7/8             35-1/2             26-3/8
           Fourth Quarter          29-1/8            21-3/8           38-13/16             33-7/8
</TABLE> 

As of December 3, 1997, there were approximately 16,000 holders of record of
BFI Common Stock.

In June 1988, the Company's Board of Directors adopted a 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 (13) 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 each of fiscal 1996 and 1997, 68 cents
was 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 (9) 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





                                      -19-
<PAGE>   24
Stock pursuant to the most restrictive of such limitations was approximately
$1.2 billion on September 30, 1997, after giving effect to cash dividends paid
or declared through September 30, 1997.  After payment for the shares of Common
Stock acquired by the Company in accordance with the terms of its "Dutch
Auction" tender offer, this amount was reduced by $585 million to approximately
$615 million.  See "Business-General."  BFI currently expects to continue the
payment of dividends, although future dividend payments will depend on BFI's
earnings, financial needs and other factors.

Due to the nature of the Company's business, the Company or its competitors
receives unfavorable publicity from time to time, which can result in
aberrational market conditions for the Company's securities.





                                      -20-
<PAGE>   25
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, 1997.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------
                                     Year Ended September 30,
                 -----------------------------------------------------------
                   1997        1996       1995        1994        1993
----------------------------------------------------------------------------
                         (In Thousands Except for Per Share Amounts)
<S>              <C>         <C>         <C>         <C>         <C>       
Operating
 Statement Data:
----------------

Revenues         $5,782,972  $5,779,277  $5,779,351  $4,314,541  $3,478,830


Income before
 special charges
 and extra-
 ordinary items  $  332,822  $  273,014  $  384,561  $  283,973  $  213,910

Income (loss)
 before extra-
 ordinary items  $  283,695  $  (89,172) $  384,561  $  283,973  $  197,440


Net income
 (loss)          $  265,214  $ (101,331) $  384,561  $  278,710  $  197,440

Income (loss)
 per common and
 common equivalent 
   share -

  Income (loss)
   before extra-
   ordinary items     $1.39      $(0.44)      $1.93       $1.52       $1.15

  Net income (loss)   $1.30      $(0.50)      $1.93       $1.49       $1.15

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




(Continued on Following Page)




                                       21
<PAGE>   26



<TABLE>
<CAPTION>
----------------------------------------------------------------------------
                                      Year Ended September 30,
                  ----------------------------------------------------------
                    1997        1996       1995        1994        1993
----------------------------------------------------------------------------
                          (In Thousands Except for Per Share Amounts)

<S>              <C>         <C>         <C>         <C>         <C>       
Balance Sheet Data:
------------------

Property and
 equipment, net  $3,567,155  $3,920,721  $3,722,292  $3,049,767  $2,515,709


Total assets     $6,678,292  $7,600,906  $7,460,372  $5,796,955  $4,295,642


Senior long-term
 debt            $1,675,162  $2,766,885  $1,665,804  $  713,680  $  333,689


Convertible
 subordinated
 debentures      $       --  $       --  $  744,944  $  744,949  $  744,949


Common stock-
 holders' equity $2,660,763  $2,510,278  $2,741,750  $2,391,680  $1,532,603



Cash Flow Data:
--------------

Capital
 expenditures    $  494,725  $  935,382  $  929,596  $  694,475  $  606,240

Payments for
  businesses
  acquired       $   21,305  $  188,451  $  769,369  $  398,734  $   83,786

Cash flows from
 operating
 activities      $  999,100  $  856,843  $1,030,489  $  693,928  $  613,965
</TABLE>



                                       22
<PAGE>   27
     Item 7. - Management's Discussion and Analysis of Financial Condition and
               Results of Operations

          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 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 1997 was a crucial year for the Company that included the
     reorganization of its North American operating business structure which
     became effective in August 1996 and the announcement at the end of fiscal
     1996 of a strategic shift in focus from an emphasis on external growth to
     an emphasis on internal growth with success measured by cash flow and
     return on gross assets. In fiscal 1997, the Company significantly reduced
     capital expenditures from the prior year, streamlined its portfolio of
     assets largely through divestiture activities, reduced its selling, general
     and administrative ("SG&A") costs and, to a lesser extent, operating costs,
     and shifted its focus to return on gross assets in both its existing
     business operations and its business development activities. Subsequent to
     yearend, the Company announced the signing of an agreement to merge its
     international operations with SITA, a Paris-based company, in exchange for
     U.S. $1 billion and ordinary shares of SITA stock that will result in
     approximately a 20 percent ownership in SITA.

          Net income for fiscal 1997 was $332.8 million or $1.63 per share,
     before special charges and extraordinary items, an increase of 21.9% from
     the prior year, on consolidated revenues of $5.783 billion, flat with the
     prior year. Pre-tax special charges reported in fiscal 1997 were $82
     million ($49 million or $0.24 per share after income taxes). The fiscal
     1997 results were also reduced by after-tax extraordinary items of $18.5
     million, or $0.09 per share, associated with the retirement of debt. After
     the special charges and extraordinary items, net income for fiscal 1997 was
     $265.2 million, or $1.30 per share.

          The current year results compare with net income, before special
     charges and an extraordinary item, for fiscal 1996 of $273.0 million or
     $1.36 per share, on consolidated revenues of $5.779 billion. Pre-tax
     special charges included in the fiscal 1996 results of operations were $447
     million ($362 million or $1.80 per share after income taxes). The fiscal
     1996 extraordinary item of $12.2 million, after tax ($0.06 per share) was
     associated with the redemption of $745 million of



                                       23
<PAGE>   28

     Convertible Subordinated Debentures. After the special charges and
     extraordinary item, the Company reported a net loss for fiscal 1996 of
     $101.3 million, or $0.50 per share.

          Fiscal 1997 earnings, before special charges and extraordinary items,
     were favorably affected by improved operating profit in the Company's North
     American operations, which resulted from actions taken to (1) reduce SG&A
     staffing levels and operating costs in the Company's collection and
     recycling businesses, (2) improve customer pricing and (3) divest certain
     underperforming operations and assets. Similar actions taken in the
     Company's international operations also had a favorable effect on the
     Company's operating profitability during the latter part of the year.
     Fiscal 1997 results were affected negatively by severance and
     reorganization expenses of approximately $24 million associated with the
     reorganization of North American operations announced in June 1996 and the
     reductions, principally in the first half of the current fiscal year, in
     worldwide employee staffing levels to effect improvements in operating and
     administrative efficiency. Additionally, an increase in the Company's
     income from operations of $27.2 million, a significant portion of which is
     related to lower depreciation and amortization expense, was reflected in
     current year earnings as a result of the special charges of $447 million
     taken in the fourth quarter of fiscal 1996 and the special charges of $82
     million taken in fiscal 1997 (see Note (4) of Notes to Consolidated
     Financial Statements).

          During fiscal 1997, the Company's actions reflected its previously
     announced strategic shift in focus away from an emphasis on external growth
     to an emphasis on internal growth and on increasing return on assets.
     Marketing and sales personnel were realigned with half of the sales force
     focused on customer segments by industry and the remainder on integrated
     direct sales (telephone-based sales). The redeployment and retraining of
     the sales force that was completed in the first half of fiscal 1997 is
     enabling sales personnel to better focus on the Company's customers. In
     addition, the plan to reduce SG&A, commenced during the first quarter of
     fiscal 1997, has resulted in the reduction of approximately 1,300 employees
     worldwide since the Company announced its reorganization in June 1996 and
     the consolidation of certain business and administrative activities. SG&A
     as a percent of revenues was 14.0% for fiscal 1997, lower than the prior
     year (15.1%). The Company exceeded its SG&A milestone for fiscal 1997,
     which was to reduce SG&A as a percent of revenues to 14.6% for the fiscal
     year.

          During the first quarter of fiscal 1997, the Company completed its
     initial marketplace and business line strategic reviews and identified core
     and non-core business operations (including those considered in the special
     charges incurred in the fourth quarter of fiscal 1996) to be marketed and
     sold with aggregate annual revenues of approximately $270 million in the
     U.S. and $130 million outside of the U.S. The Company has



                                       24
<PAGE>   29

       continued its strategic reviews of underperforming marketplaces since the
       first quarter. The goal of these reviews is to identify the key drivers
       of performance or underperformance in each marketplace and identify
       actions to improve the business operations. However, in some cases, these
       reviews have resulted in a conclusion to divest the operations as it is
       evident that the Company will be unable to achieve its desired returns
       even with identified areas for improvement. As a result of these reviews,
       the Company identified additional business operations with annual
       revenues of $130 million in North America and $155 million (a portion of
       which is not consolidated for financial reporting purposes) in
       international operations to be divested (including those considered in
       the current fiscal year special charges). During fiscal 1997, the Company
       sold business operations with annual revenues of approximately $540
       million (of which approximately $340 million related to North American
       operations), with most of these sales concluded during the latter half of
       the fiscal year. Additionally, subsequent to year-end, the Company
       announced the signing of an agreement to merge its international
       operations with SITA, a Paris-based company. (See "Subsequent Event").
       The Company has also identified real estate assets of approximately $60
       million that are actively being marketed.

            In March 1997, the Company initiated an effort to reduce operating
       expenses by $100 million on an annualized basis by the beginning of the
       fourth quarter of fiscal 1997. The Company reduced operating headcount
       through the re-routing of trucks, consolidations and closures of
       operating facilities and, where appropriate, after careful review, a
       reduction in supervisory personnel. Although this goal was not fully
       achieved during fiscal 1997, actions to be taken in fiscal 1998, in
       addition to those enumerated above, have been identified to further
       reduce operating expenses, including the consolidation of container and
       truck facilities, shedding fringe waste collection routes, reducing costs
       associated with accidents and injuries through increased focus on safety,
       and the implementation of disposal volume swaps with third parties. The
       Company is also optimistic that SAP, its new information systems
       platform, will assist in cost reduction efforts beginning in fiscal 1998.
       Maintenance and procurement areas will now have a tool that will provide
       information on a national basis. This data will enable managers to make
       better decisions and reduce operating costs. The Company also focused on
       asset management throughout fiscal 1997. Reduced capital spending is
       leading to lower fixed costs, which is another contributor to the
       Company's effort to reduce operating costs. Capital expenditures,
       including acquisitions, for fiscal 1997 were limited to $527 million
       compared with $1.2 billion in fiscal 1996.

       Revenues

            Revenues for fiscal 1997 were $5.8 billion, unchanged from fiscal
       years 1996 and 1995. The following table reflects the 

                                      25
<PAGE>   30

       contribution to total revenue of the Company's business segments for the
       last three years (in millions):

<TABLE>
<CAPTION>
                                             Year Ended September 30,
                                           ---------------------------
                                            1997      1996      1995
                                           -------   -------   -------

<S>                                        <C>       <C>       <C>   
       North American Operations (1)
       -----------------------------
       Collection Services -
         Solid Waste                       $2,913    $2,886    $2,758

       Transfer and Disposal -
         Solid Waste
           Unaffiliated customers             552       537       543
           Affiliated companies               527       513       483
                                           ------    ------    ------
                                            1,079     1,050     1,026

       Recycling Services                     555       531       675
       Medical Waste Services                 199       200       189
       Services Group and Other               106        89        83
       Elimination of affiliated
         companies' revenues                 (527)     (513)     (483)
                                           ------    ------    ------
       Total North American Operations      4,325     4,243     4,248
                                           ------    ------    ------
       International Operations
       ------------------------
       Germany                                633       662       710
       The Netherlands                        289       323       323
       United Kingdom                         227       193       176
       Other                                  309       358       322
                                           ------    ------    ------
       Total International Operations       1,458     1,536     1,531
                                           ------    ------    ------
       Total Company                       $5,783    $5,779    $5,779
                                           ======    ======    ======
       Percentage Increase from
         Prior Year                            --%       --%       34%
</TABLE>

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

           (1) Revenues from Canadian operations of $176 million, $169 million
           and $178 million for fiscal years 1997, 1996 and 1995, respectively,
           are included in North American revenues.

           The following table reflects changes in revenues for fiscal 1997 from
       price, volume, acquisitions, divestitures, and foreign currency
       translation compared with revenue changes for fiscal years 1996 and 1995.
       The fiscal 1997 growth in revenue from acquisitions, price and volume was
       offset by the significant decrease in revenues due to the divestitures of
       business operations and foreign currency translation.



                                       26
<PAGE>   31

<TABLE>
<CAPTION>
                                              Change in Revenues
                                      ------------------------------
                                       1997        1996        1995
                                      ------      ------      ------

<S>                                    <C>        <C>          <C> 
           Price                       1.2%       (5.9)%       5.9%
           Volume                      1.0         0.4         5.8
           Acquisitions                2.4         5.7        19.9
           Divestitures               (2.4)         --          --
           Foreign currency
             translation              (2.1)       (0.2)        2.4
                                      ----        ----        ----
           Total Percentage Increase   0.1%         --%       34.0%
                                      ====        ====        ====
</TABLE>

            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 the current year with the
       emphasis on internal rather than external growth. Revenues increased 1.2%
       due to change in price during 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 the current year compared with last year were
       driven by increases in the North American collection, transfer and
       disposal and recycling businesses. Revenues also reflect 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 pricing in the North American collection business and, to a lesser
       extent, in the landfill and medical waste businesses.



                                       27
<PAGE>   32

            The 34% increase in revenues in fiscal 1995 compared with fiscal
       1994 was principally attributable to improved recycling business results,
       the impact in fiscal 1995 of the acquisition of Otto Waste Services
       ("Otto") in Germany in February 1994 and the Attwoods acquisition (with
       operations principally in the United States and the United Kingdom).
       North American recycling revenues increased $316 million in 1995, an 88%
       increase from fiscal 1994. Weighted average paper prices for fiscal 1995
       reached an all-time high. Revenues from German operations were also
       favorably affected by the increased worldwide recycling commodity prices
       experienced in fiscal 1995.

       Cost of Operations

            Cost of operations decreased $26 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. As a
       result of this cost reduction program, the Company has reduced its
       operating headcount through the re-routing of trucks, consolidations and
       closures of operating facilities and, where appropriate, after careful
       review, a reduction in supervisory personnel. These decreased costs were
       offset largely by the increase in cost of operations related to
       businesses acquired in fiscal 1996 and, to a lesser extent, fiscal 1997.
       Cost of operations as a percent of revenues decreased from 74.7% for
       fiscal 1996 to 74.2% for fiscal 1997.

            Cost of operations increased $168 million (4%) in fiscal 1996, and
       $1,024 million (33%) in fiscal 1995, in both cases compared with the
       immediately prior year. Most of this increase in cost of operations is
       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 is principally
       attributable to the negative effect on revenues of lower worldwide
       recycling commodity prices in fiscal 1996 compared with the prior year.
       The fiscal 1995 increase in cost of operations was due principally to the
       Attwoods and Otto acquisitions.

            Included in cost of operations is depreciation and amortization
       expense of approximately $474 million, $491 million and $453 million for
       fiscal years 1997, 1996 and 1995, respectively.


                                       28
<PAGE>   33

       Selling, General and Administrative Expense

            SG&A was $812 million for fiscal 1997, a decrease of 7.1% from last
       year. SG&A as a percent of revenues decreased from 15.1% of revenues for
       fiscal 1996 to 14.0% of revenues in fiscal 1997. The $61.8 million
       decrease in SG&A 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 associated with both the reorganization of North
       American operations announced in June 1996 and the current year reduction
       of employees worldwide.

            SG&A expenses increased $31 million (4%) in fiscal 1996 and $196
       million (30%) in fiscal 1995, in both cases compared with the immediately
       prior year. 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. Increased SG&A expenses in fiscal 1995 over the prior year were
       principally due to acquisition activities, including the Attwoods and
       Otto acquisitions.

            Included in SG&A expense for fiscal years 1997, 1996 and 1995 was
       depreciation and amortization expense of $96 million, $112 million and
       $99 million, respectively.

       Special Charges, net

            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 


                                       29
<PAGE>   34

       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.

       Interest Expense and Income

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

<TABLE>
<CAPTION>
                                           1997      1996      1995
                                         --------  --------  --------

<S>                                      <C>       <C>       <C>     
             Gross interest expense      $174,939  $195,605  $170,958
             Interest capitalized          (9,714)  (16,306)  (11,429)
                                         --------  --------  --------
             Interest expense            $165,225  $179,299  $159,529
                                         ========  ========  ========
             Interest income             $  7,142  $  8,842  $  7,422
                                         ========  ========  ========
</TABLE>

            Fiscal 1997 interest expense declined by $14.1 million to $165.2
       million from $179.3 million for fiscal 1996. The 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). In fiscal 1997, the Company
       significantly exceeded its current year milestone for long-term debt
       which was to maintain interest-bearing debt at or below the September 30,
       1996 level.

           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. The increase in interest capitalized in fiscal 1996
       compared with the prior year was due to increased construction activities
       at a number of landfills and other qualifying projects over the prior
       year. 


                                       30
<PAGE>   35
       Many of these construction projects were completed by fiscal 1996 
       yearend.

       Equity in Earnings of Unconsolidated Affiliates

            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.

            Equity in earnings of unconsolidated affiliates increased slightly
       from fiscal 1995 to 1996. This year-over-year improvement was due
       principally to earnings improvement of American Ref-Fuel and certain
       other domestic and international affiliates, partially offset by reduced
       earnings from P&R. The Company acquired a 50% ownership interest in Otto
       Waste Services in February 1994 and consolidates Otto's financial
       results, which include equity in earnings of Otto's unconsolidated
       affiliates.

       Income Taxes

            The Company's effective income tax rate for fiscal years 1997 and
       1995 was 40.0%. The Company's 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
       $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.

       Extraordinary Items

            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



                                       31
<PAGE>   36


       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 $0.02 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 $0.08
       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 net income of
       $12.2 million, after income taxes, or approximately $0.06 per share.

       Subsequent Event

            In November 1997, the Company announced the signing of an agreement
       to merge its operations outside North America with SITA, a Paris-based
       subsidiary of Suez Lyonnaise des Eaux. Under the terms of the agreement,
       the Company will receive cash totaling U.S. $1 billion and ordinary
       shares of SITA stock that will result in approximately a 20 percent
       ownership in the company. Upon completion of the transaction, Suez
       Lyonnaise des Eaux will own more than 50 percent of SITA. The transaction
       has been approved by the boards of the Company and SITA, and is subject
       to satisfactory completion of due diligence, approval by regulatory
       authorities and authorization by SITA's shareholders of the issuance of
       additional ordinary shares. Closing of the transaction is anticipated by
       the end of the first quarter of calendar year 1998. 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. As a result of this transaction, SITA will
       be an industry leader in France, the United Kingdom, the Netherlands,
       Germany, Spain and Brazil.


                                       32
<PAGE>   37

            This transaction and the resulting global partnership with SITA and
       its parent company represent a continuation of the Company's focus on its
       core North American business, while continuing to participate in the
       growth of the global environmental services industry. The Company intends
       to use the proceeds from the transaction to continue its Board-approved
       financial strategy to pay down debt and buy back equity. Additionally,
       the Company will accelerate a prudent, results-driven, external growth
       strategy as a result of this transaction and the recent streamlining of
       North American operations.

            Financial information related to the Company's international
       operations for fiscal 1997 and 1996 is as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                    Fiscal Year
                                              -----------------------
                                                 1997         1996
                                              ----------   ----------

<S>                                           <C>          <C>       
           Revenues                           $1,458,316   $1,536,642
           Cost of operations                  1,135,061    1,195,441
                                              ----------   ----------
           Gross profit                          323,255      341,201
           SG&A                                  208,623      239,151
           Special charges, net                  145,144      244,973
                                              ----------   ----------
           Loss from operations               $  (30,512)  $ (142,923)
                                              ==========   ==========

           Income from operations before
             special charges                  $  114,632   $  102,050
                                              ==========   ==========
           Equity in earnings of
             unconsolidated affiliates        $   19,367   $   21,522
                                              ==========   ==========
</TABLE>

       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.


                                       33
<PAGE>   38

<TABLE>
<CAPTION>
                                              Year Ended September 30,
                                             ------------------------
                                              1997     1996     1995
                                             ------   ------   ------

<S>                                           <C>      <C>      <C>  
         Profitability margins:
           Gross profit                       25.8%    25.3%    28.2%
           Income from operations
             before special charges           11.8%    10.2%    13.7%
           Income from operations             10.4%     2.5%    13.7%
           Income before income taxes,
             minority interest and
             extraordinary items               8.6%     0.5%    12.0%
           Net income before special charges
             and extraordinary items (1)       5.8%     4.7%     6.7%
           Net income (loss) (1)               4.6%    (1.8)%    6.7%

         Other financial information:
           Pre-tax, pre-interest return on
             average total assets, excluding
             special charges                  10.2%     8.4%    12.2%

           Return on Gross Assets             11.9%    11.4%    13.9%

           Ratio of earnings to fixed
             charges                           2.98(2)  1.02(3)  4.04
</TABLE>

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

            (1) Amounts do not reflect the pro forma effect of the use of cash
            proceeds of $409.7 million to be received in the future under the
            provisions of the 7.25% Automatic Common Exchange Securities. See
            Note (14) of Notes to Consolidated Financial Statements.

            (2) 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.

            (3) 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.

            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 employees 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 


                                       34
<PAGE>   39

       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.

            Exclusive of the impact of special charges, fiscal 1996 results
       reflected declines in all of the profitability margins presented above as
       compared with fiscal 1995. These profitability margins were affected
       negatively by the significant worldwide decline in the average value of
       recycling commodities in fiscal 1996. Lower average recycling commodity
       prices in the prior year principally affected earnings and profitability
       margins in the Company's North American and German operations. These
       profitability margins were also negatively affected in fiscal 1996 by the
       relatively low profit margins in the Company's Italian operations and, to
       a lesser extent, its Spanish and Australian operations.

            Total assets declined from $7.6 billion at September 30, 1996 to
       $6.7 billion at September 30, 1997. This 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, offset partially by fiscal
       1997 capital expenditures. Total assets increased to $7.6 billion in
       fiscal 1996, only a slight increase over the $7.5 billion of total assets
       at the end of fiscal 1995, reflective of the reduction in assets
       resulting from the special charges. 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. Pre-tax, pre-interest return on average total assets, excluding
       special charges, decreased in fiscal 1996 from the prior year as a result
       of lower earnings, principally due to the significant worldwide decline
       in the average value of recycling commodities in fiscal 1996.

            As stated previously, 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 item, (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).


                                       35
<PAGE>   40

           Gross assets - the sum of total assets, accumulated depreciation and
               amortization, and asset impairment writedowns (until such assets
               are sold or otherwise disposed of), less the sum of (i) current
               liabilities, net of interest-bearing indebtedness included
               therein, (ii) 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. ROGA
       for fiscal years 1997, 1996 and 1995 was 11.9%, 11.4% and 13.9%,
       respectively.

            The Company's goals and actions for fiscal 1998 will continue to
       align the Company's performance with its stockholders' interests. In
       addition, incentive compensation plans will continue to 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 Company and its North American operations are as follows:

<TABLE>
<CAPTION>
                                     Total Company
                               -------------------------
                                                           Fiscal 1998
                               Fiscal 1998   Fiscal 1997   North American
                               Milestones      Actual       Milestones
                               -----------   -----------   --------------

<S>                              <C>           <C>             <C>  
       SG&A as a percent of
         revenues                13.5%         14.0%           13.5%
       Operating profit
         margin                  13.8%         11.8%           15.0%
       Revenue growth -
         Internal                 3.5%          2.2%            4.0%
         Acquisitions             1.0%          2.4%            1.0%
                                 -----         -----           -----
             Total                4.5%          4.6% (1)        5.0%

       ROGA                      13.3%         11.9%           14.7%
</TABLE>

       ----------

            (1) Fiscal 1997 represents revenue growth from price, volume and
            acquisitions and exclude the effects of divestitures and foreign
            currency exchange.

       Additionally, the Company's fiscal 1997 milestones compared with its
       fiscal 1997 and 1996 actual performance was as follows (dollar amounts in
       millions):


                                       36
<PAGE>   41

<TABLE>
<CAPTION>
                                             Fiscal 1997
                                        ---------------------
                                                                 Fiscal
                                                                  1996
                                        Milestone     Actual     Actual
                                        ---------   ---------    -------

<S>                                       <C>         <C>         <C>  
       SG&A as a percent of revenues      14.6%       14.0%       15.1%
       Operating profit margin            12.0%       11.8%       10.2%
       ROGA                               11.9%       11.9%       10.4%
       Capital expenditures                $790        $527      $1,226
       Cash flow positive (reduce      less than
         interest-bearing debt)          $2,827      $1,827      $2,827
</TABLE>

           EBITDA (defined herein as income from operations plus depreciation
       and amortization expense before considering special charges) was $1.25
       billion for fiscal 1997 compared with $1.19 billion for the prior fiscal
       year. 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, 1997 and 1996, the Company's balance sheet
       included accrued environmental costs of $613 million and $666 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 (8) of Notes to
       Consolidated Financial Statements for a discussion of the Company's
       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, 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. Engineering
       reviews of the future cost requirements for closure and post-closure
       monitoring and maintenance for the Company's operating landfills are
       performed at least annually 


                                       37
<PAGE>   42

       and are the basis upon which the Company's estimates of these future
       costs and the related accruals are revised. In its foreign operations,
       the Company has noted a trend toward increased landfill regulation,
       particularly in those countries within the European Economic Community.
       While increasing regulation often presents new business opportunities to
       the Company, it likewise often results in increased operating costs in
       those jurisdictions in which such regulatory changes occur and could
       potentially have a negative impact on results of operations.

            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 102 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 76 of these 102
       Superfund sites. Partial settlements have been negotiated with regard to
       13 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 62 additional sites on the EPA's National Priority List. For 45 of
       these sites, the Company has determined it is not a PRP; the Company's
       PRP status at the remaining 17 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 



                                       38
<PAGE>   43

       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. 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. 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. 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 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 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 


                                       39
<PAGE>   44

       changes in laws, regulations and operating permit requirements which may
       affect its operations; however, there is no assurance that such future
       changes will not significantly affect its operations.

       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,
                                        -------------------------------
                                          1997        1996       1995
                                        ---------   --------   --------

<S>                                     <C>         <C>        <C>    
       Working capital (in thousands)   $(189,861)  $(10,695)  $ 7,967
       Working capital ratios                .9:1      1.0:1     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 (14) 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. These securities are not included on the Company's
       balance sheet; an increase in common stockholders' equity will be
       reflected when cash proceeds totaling over $400 million are received by
       the Company no later than June 30, 1998.

            During December 1996, the Company amended the terms of its existing
       $750 million Multicurrency Revolving Credit Agreement which was
       originally established to fund the Company's acquisition of Attwoods plc
       in December 1994. 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 of December 1997. The
       agreement contains a net worth requirement consistent with the Company's
       $1 billion revolving credit agreement. At September 30, 1997 and 1996,
       the Company had no outstanding borrowings under this agreement.

            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. These
       redemptions resulted in extraordinary charges to the Company's net income
       of $1.7 million, after income taxes, or approximately $0.01 per share in
       the third quarter.


                                       40
<PAGE>   45

            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. As a result of these
       redemptions, the Company recorded extraordinary charges to the Company's
       net income of $13.7 million, after income taxes, or approximately $0.07
       per share in the fourth quarter of fiscal 1997.

            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 $20.0 million of commercial paper borrowings outstanding as
       of September 30, 1997.

            As of September 30, 1997, the Company's unused committed borrowing
       capacity under its Multicurrency Revolving Credit Agreement and its $1
       billion bank credit agreement was in excess of $1.7 billion. Such
       capacity may be used to refinance amounts outstanding under short-term
       facilities, for financing the Company's $1.0 billion stock buyback
       program, for financing requirements in connection with foreign exchange
       contracts or for other capital requirements. Of the $1.8 billion of the
       Company's long-term indebtedness outstanding at September 30, 1997, 84%
       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
       of approximately 7.2% for fiscal 1997 is consistent with fiscal 1996.

            Long-term indebtedness (including $466.8 million of Otto Waste
       Services debt, which has not been guaranteed by the Company) as a
       percentage of total capitalization decreased from 53% at September 30,
       1996 to 41% at September 30, 1997, principally as a result of the debt
       redemptions discussed above. The ratio would have been 32% at September
       30, 1997, on a pro forma basis assuming that under the provisions related
       to the Automatic Common Exchange Securities, cash proceeds of $409.7
       million were paid to the Company to purchase common stock and such
       proceeds were utilized to repay long-term debt.


                                       41
<PAGE>   46

            As a result of cash flows from operations, proceeds from
       divestitures and reduced capital spending, the Company generated surplus
       cash during fiscal 1997. In September 1997, the Company announced its
       commencement of a common stock repurchase program, and initiated a Dutch
       auction tender offer for the purchase of up to 15 million shares of
       common stock. In accordance with the terms of the offer, which expired
       October 1, 1997, the Company accepted for purchase 15 million shares at a
       price of $39.00 per share in October 1997. This purchase of approximately
       $585 million of common stock in the Dutch auction was the first phase of
       the Company's two-part program to buy back $1 billion of its common
       stock. The second phase of this program, approximately $415 million in
       open market purchases of common stock or automatic common exchange
       security units, is expected to be completed by September 30, 1998. In
       addition, the Company increased its quarterly dividend rate from $.17 per
       share to $.19 per share in September 1997.

            As of September 30, 1997, there have been no significant changes in
       balance sheet caption amounts compared with September 30, 1996, and there
       have been no material changes in the Company's financial condition from
       that reported at September 30, 1996, except with respect to the declines
       in balance sheet amounts associated with the impact of foreign currency
       exchange resulting from the strengthening of the U.S. dollar against the
       German, Dutch and Spanish currencies, and except as disclosed herein.

            The capital appropriations budget for fiscal year 1998 has been
       established at $550 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 both
       North American and international operations.

            As previously discussed, in November 1997, the Company announced the
       signing of an agreement to merge its operations outside North America
       with SITA, a subsidiary of Suez Lyonnaise des Eaux. Under the terms of
       the agreement, the Company will receive cash totaling U.S. $1 billion and
       shares of SITA stock that will result in approximately a 20 percent
       ownership in SITA. The transaction is subject to satisfactory completion
       of due diligence, approval by regulatory authorities and authorization by
       SITA's shareholders of the issuance of additional ordinary shares.
       Closing of the transaction is anticipated by the end of the first quarter
       of calendar year 1998. The Company intends to use the proceeds from the
       transaction to continue its Board-approved financial strategy to pay down
       debt and buy back equity. Additionally, the Company will accelerate a
       prudent, results-driven, external growth strategy as a result of this
       transaction and the recent streamlining of North American operations.



                                       42
<PAGE>   47

            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.


                                       43
<PAGE>   48

       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, 1997 by expected
       maturity dates. Weighted average variable rates are based on implied
       forward rates in the yield curve at September 30, 1997. Implied forward
       rates should not be considered a predictor of actual future interest
       rates. The information is presented in U.S. dollar equivalents, the
       Company's reporting currency. The outstanding long-term debt amounts are
       presented in U.S. dollars and parenthetically in German deutsche mark,
       where applicable. Additionally, the U.S. dollar equivalent carrying value
       of German deutsche mark denominated debt is sensitive to foreign currency
       exchange rates.

<TABLE>
<CAPTION>
                                          Expected Maturity Date
                 -------------------------------------------------------------------------
                                                                                   There-                      Fair
                   1998         1999         2000         2001         2002        after         Total         Value
                 --------     --------     --------     --------     --------     --------      --------      --------
                                           (Amounts in millions except for percentages)
<S>              <C>          <C>          <C>          <C>          <C>          <C>           <C>           <C>     
Fixed Rate       $    115     $    116     $     11     $      5     $      8     $  1,017      $  1,272      $  1,330
  Average
    interest
    rate              9.4%         9.3%        10.4%        10.4%        10.4%         7.1%          7.6%

Fixed Rate
  (DM 366)       $      8     $     36     $    116     $     21     $     17     $     64      $    262      $    262
  Average
    interest
    rate              6.8%         6.8%         7.1%         6.8%         6.8%         6.8%          7.0%

Variable Rate    $     20           --           --           --           --     $     60      $     80      $     80
  Average
    interest
    rate              5.8%          --           --           --           --          5.6%          5.7%

Variable Rate
  (DM 360)             --           --     $    205           --           --           --      $    205      $    205
  Average
    interest
    rate               --           --          5.5%          --           --           --           5.5%
</TABLE>


                                       44
<PAGE>   49

       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, 1997 and 1996, 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,
       1997. 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 audit to
       obtain reasonable assurance about whether the financial statements are
       free of material misstatement. An audit includes examining, on a test
       basis, evidence supporting the amounts and disclosures in the financial
       statements. An audit also includes assessing the accounting principles
       used and significant estimates made by management, as well as evaluating
       the overall financial statement presentation. We believe that our audits
       provide a reasonable basis for our opinion.

       In our opinion, the financial statements referred to above present
       fairly, in all material respects, the financial position of
       Browning-Ferris Industries, Inc. and subsidiaries as of September 30,
       1997 and 1996, and the results of their operations and their cash flows
       for each of the three years in the period ended September 30, 1997, 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 the index of
       financial statements 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 4, 1997

                                       45
<PAGE>   50

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                  For The Three Years Ended September 30, 1997

                   (In Thousands Except for Per Share Amounts)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                  Year Ended September 30,
                                       --------------------------------------------
                                          1997             1996             1995
-----------------------------------------------------------------------------------
<S>                                   <C>              <C>              <C>        
Revenues                              $ 5,782,972      $ 5,779,277      $ 5,779,351
Cost of operations                      4,289,614        4,315,615        4,147,303
                                      -----------      -----------      -----------

Gross profit                            1,493,358        1,463,662        1,632,048
Selling, general and
  administrative expense                  812,242          874,069          842,861
Special charges, net                       81,879          446,800               --
                                      -----------      -----------      -----------

Income from operations                    599,237          142,793          789,187
Interest expense                          165,225          179,299          159,529
Interest income                            (7,142)          (8,842)          (7,422)
Equity in earnings of
  unconsolidated affiliates               (53,988)         (55,370)         (53,996)
                                      -----------      -----------      -----------

Income before income taxes,
  minority interest and
  extraordinary items                     495,142           27,706          691,076
Income taxes                              198,057          105,188          276,430
Minority interest in income
  of consolidated subsidiaries             13,390           11,690           30,085
                                      -----------      -----------      -----------
Income (loss) before
  extraordinary items                     283,695          (89,172)         384,561

Extraordinary items -
  Loss on redemption of
    debt by unconsolidated
    affiliate, net of
    income tax benefit of
    $1,677                                  3,124               --               --
  Loss on redemption of debt,
    net of income tax benefits of
    $8,269 and $4,467                      15,357           12,159               --
                                      -----------      -----------      -----------
Net income (loss)                     $   265,214      $  (101,331)     $   384,561
                                      ===========      ===========      ===========
Number of common and common
  equivalent shares used in
  computing earnings per share            203,745          200,668          199,077
                                      ===========      ===========      ===========
</TABLE>

(Continued on Following Page)

                                       46
<PAGE>   51


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                  For The Three Years Ended September 30, 1997

                   (In Thousands Except for Per Share Amounts)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                                Year Ended September 30,
                                                         -------------------------------------
                                                            1997          1996          1995
----------------------------------------------------------------------------------------------

Income (loss) per common and common equivalent share:
<S>                                                       <C>           <C>           <C>     
  Income (loss) before
    extraordinary items                                   $   1.39      $   (.44)     $   1.93
  Extraordinary items                                         (.09)         (.06)           --
                                                          --------      --------      --------
  Net income (loss)                                       $   1.30      $   (.50)     $   1.93
                                                          ========      ========      ========
Cash dividends per common share                           $    .70      $    .68      $    .68
                                                          ========      ========      ========
</TABLE>






























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

                                       47
<PAGE>   52


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                     ASSETS
                                 (In Thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
                                                        September 30,
                                                  -----------------------
                                                    1997           1996
-------------------------------------------------------------------------
<S>                                             <C>            <C>       
CURRENT ASSETS:
  Cash                                          $   78,746     $  110,224
  Short-term investments                             3,811         26,394
  Receivables -
    Trade, net of allowances of $38,376
      and $40,622 for doubtful accounts            820,678        929,316
    Other                                           71,547         42,543
  Inventories                                       40,414         51,536
  Deferred income taxes                            117,404        119,914
  Prepayments and other                            112,063        107,868
                                                ----------     ----------
    Total current assets                         1,244,663      1,387,795
                                                ----------     ----------


PROPERTY AND EQUIPMENT, at cost, less
  accumulated depreciation and amortization
  of $2,512,196 and $2,737,788                   3,567,155      3,920,721
                                                ----------     ----------

OTHER ASSETS:
  Cost over fair value of net tangible
    assets of acquired businesses,
    net of accumulated amortization of
    $168,401 and $138,636                        1,418,827      1,671,461
  Other intangible assets, net of
    accumulated amortization of $92,794
    and $110,835                                    81,208        110,925
  Deferred income taxes                             50,057        122,617
  Investments in unconsolidated affiliates         235,559        287,051
  Other                                             80,823        100,336
                                                ----------     ----------

    Total other assets                           1,866,474      2,292,390
                                                ----------     ----------

    Total assets                                $6,678,292     $7,600,906
                                                ==========     ==========
</TABLE>


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

                                       48
<PAGE>   53


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                   LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
                     (In Thousands Except for Share Amounts)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
                                                       September 30,
                                                 -------------------------
                                                   1997             1996
--------------------------------------------------------------------------
<S>                                           <C>              <C>        
CURRENT LIABILITIES:
  Notes payable and current portion
   of long-term debt                          $   151,736      $    59,806
  Accounts payable                                496,733          507,731
  Accrued liabilities -
    Salaries and wages                            115,477          129,203
    Taxes, other than income                       58,112           40,876
    Other                                         414,601          430,187
  Income taxes                                     19,204           35,586
  Deferred revenues                               178,661          195,101
                                              -----------      -----------
    Total current liabilities                   1,434,524        1,398,490
                                              -----------      -----------
DEFERRED ITEMS:
  Accrued environmental and landfill
    costs                                         505,278          541,838
  Deferred income taxes                           149,803          128,434
  Other                                           252,762          254,981
                                              -----------      -----------
    Total deferred items                          907,843          925,253
                                              -----------      -----------
LONG-TERM DEBT, net of current portion          1,675,162        2,766,885
                                              -----------      -----------
COMMITMENTS AND CONTINGENCIES

COMMON STOCKHOLDERS' EQUITY:
  Common stock, $.16 2/3 par; 400,000,000
    shares authorized; 213,387,697 and
    213,390,458 shares issued                      35,572           35,572
  Additional paid-in capital                    1,839,378        1,730,612
  Retained earnings                             1,080,810        1,031,331
  Treasury stock, 1,239,246 and 1,027,278
    shares, at cost                               (18,951)         (11,926)
  Stock and Employee Benefit Trust,
    7,252,452 and 11,012,423 shares              (276,046)        (275,311)
                                              -----------      -----------
    Total common stockholders' equity           2,660,763        2,510,278
                                              -----------      -----------
    Total liabilities and common
      stockholders' equity                    $ 6,678,292      $ 7,600,906
                                              ===========      ===========
</TABLE>


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

                                       49
<PAGE>   54


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                  For The Three Years Ended September 30, 1997
                                 (In Thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                                 Year Ended September 30,
                                                        ------------------------------------------
                                                          1997             1996             1995
--------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>              <C>        
 CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                 $   265,214      $  (101,331)     $   384,561
                                                     -----------      -----------      -----------
   Adjustments to reconcile net income (loss)
    to cash provided by operating activities:
     Depreciation and amortization -
      Property and equipment                             501,656          521,185          476,384
      Goodwill                                            43,215           47,374           43,519
      Other intangible assets                             24,799           33,966           31,967
     Special charges, net                                 81,879          446,800               --
     Deferred income tax expense                          81,146            3,034           23,450
     Amortization of deferred investment
      tax credit                                            (706)            (706)            (706)
     Provision for losses on accounts
      receivable                                          30,116           29,527           26,620
     Gains on sales of fixed assets                       (6,995)          (4,512)          (4,724)
     Equity in earnings of unconsolidated
      affiliates, net of dividends received
      and extraordinary item                               7,373          (13,455)         (28,535)
     Minority interest in income of consolidated
      subsidiaries, net of dividends paid                  6,059           10,895           26,344
     Increase (decrease) in cash from changes
      in assets and liabilities excluding
      effects of acquisitions and divestitures:
        Trade receivables                                (41,089)         (28,683)         (70,069)
        Inventories                                        4,103            1,563           (5,466)
        Other assets                                      42,430           29,991           52,625
        Other liabilities                                (40,100)        (118,805)          74,519
                                                     -----------      -----------      -----------
      Total adjustments                                  733,886          958,174          645,928
                                                     -----------      -----------      -----------
   Net cash provided by operating activities             999,100          856,843        1,030,489
                                                     -----------      -----------      -----------
 CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                 (494,725)        (935,382)        (929,596)
   Payments for businesses acquired                      (21,305)        (188,451)        (769,369)
   Proceeds from businesses divested                     372,202               --               --
   Investments in unconsolidated affiliates              (39,700)         (82,535)         (29,530)
   Proceeds from disposition of assets                    41,667           57,742          159,217
   Purchases of short-term investments                        --               --          (42,179)
   Sales of short-term investments                        21,539          302,065          201,924
   Return of investment in unconsolidated
    affiliates                                            69,286           56,861           38,637
                                                     -----------      -----------      -----------
   Net cash used in investing activities                 (51,036)        (789,700)      (1,370,896)
                                                     -----------      -----------      -----------
</TABLE>

(Continued on Following Page)

                                       50
<PAGE>   55




                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                  For The Three Years Ended September 30, 1997
                                 (In Thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                          Year Ended September 30,
                                                 ------------------------------------------
                                                   1997             1996             1995
-------------------------------------------------------------------------------------------
<S>                                            <C>                <C>              <C>      
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuances of stock                 68,761           13,316           15,363
  Proceeds from issuances of
    indebtedness                                  191,255          980,834        1,062,652
  Repayments of indebtedness                   (1,098,030)        (904,459)        (591,884)
  Dividends paid                                 (137,572)        (137,944)        (134,139)
                                              -----------      -----------      -----------
  Net cash provided by (used in)
   financing activities                          (975,586)         (48,253)         351,992
                                              -----------      -----------      -----------

EFFECT OF EXCHANGE RATE CHANGES                    (3,956)          (1,474)           2,092
                                              -----------      -----------      -----------
NET INCREASE (DECREASE) IN CASH                   (31,478)          17,416           13,677
CASH AT BEGINNING OF YEAR                         110,224           92,808           79,131
                                              -----------      -----------      -----------
CASH AT END OF YEAR                           $    78,746      $   110,224      $    92,808
                                              ===========      ===========      ===========

SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
  Interest, net of capitalized amounts        $   170,398      $   174,590      $   153,576
  Income taxes                                $   168,393      $   163,251      $   205,544
</TABLE>





















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

                                       51
<PAGE>   56


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1997
                                 (In Thousands)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
                                                  Year Ended September 30,
                                           --------------------------------------
                                             1997           1996           1995
---------------------------------------------------------------------------------
<S>                                         <C>            <C>            <C>    
Shares of common stock:
  Beginning of year                         213,390        213,441        197,085
  Stock option exercises                      2,918            563            423
  Common stock issuances related to -
    Dividend Reinvestment Plan                   67            101             38
    BFI Employee Stock Ownership and
      Savings Plan                              699            754            318
    Acquisitions                                 64            988            555
    Stock and Employee Benefit Trust             --             --         15,000
  Retirements of common stock                (3,760)        (2,584)            --
  Other                                          10            127             22
                                          ---------      ---------      ---------
  End of year                               213,388        213,390        213,441
                                          =========      =========      =========


Common stock:
  Beginning of year                       $  35,572      $  35,581      $  32,854
  Stock option exercises                        486             94             71
  Common stock issuances related to -
    Dividend Reinvestment Plan                   11             17              6
    BFI Employee Stock Ownership and
      Savings Plan                              117            126             53
    Acquisitions                                 11            165             93
    Stock and Employee Benefit Trust             --             --          2,501
  Retirements of common stock                  (627)          (431)            --
  Other                                           2             20              3
                                          ---------      ---------      ---------
  End of year                                35,572         35,572         35,581
                                          ---------      ---------      ---------
</TABLE>












(Continued on Following Page)

                                       52
<PAGE>   57


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1997
                                 (In Thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
                                                    Year Ended September 30,
                                            ----------------------------------------
                                              1997            1996            1995
------------------------------------------------------------------------------------
<S>                                        <C>             <C>             <C>      
Additional paid-in capital:
  Beginning of year                        1,730,612       1,801,407       1,351,919
  Stock option exercises and related
    income tax benefit                        81,140          13,868            (933)
  Common stock issuances related to -
    Dividend Reinvestment Plan                 1,954           2,908           1,137
    BFI Employee Stock Ownership and
      Savings Plan                            20,811          21,404           9,459
    Acquisitions                               1,718          29,133           8,245
    Stock and Employee Benefit Trust              --              --         456,874
  Adjustment of Stock and Employee
    Benefit Trust to market                  124,585         (62,388)          2,534
  Issuance costs and present value
    of contract fees payable to
    holders of Automatic Common
    Exchange Securities                           --              --         (27,027)
  Retirements of common stock               (123,223)        (74,858)             --
  Other                                        1,781            (862)           (801)
                                          ----------      ----------      ----------
  End of year                              1,839,378       1,730,612       1,801,407
                                          ----------      ----------      ----------

Retained earnings:
  Beginning of year                        1,031,331       1,328,244       1,009,132
  Net income (loss)                          265,214        (101,331)        384,561
  Cash dividends                            (142,266)       (133,623)       (137,014)
  Foreign currency translation
    adjustment                               (73,469)        (61,959)         71,565
                                          ----------      ----------      ----------
  End of year                              1,080,810       1,031,331       1,328,244
                                          ----------      ----------      ----------
</TABLE>











(Continued on Following Page)

                                       53
<PAGE>   58


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1997
                                 (In Thousands)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                                      Year Ended September 30,
                                           --------------------------------------------
                                              1997             1996             1995
---------------------------------------------------------------------------------------
<S>                                           <C>              <C>               <C>    
Treasury stock:
  Beginning of year                           (11,926)         (10,494)          (2,225)
  Stock option exercises                       (5,313)          (1,649)          27,013
  Common stock issuances related to -
    Dividend Reinvestment Plan                     --               --            1,106
    BFI Employee Stock Ownership and
      Savings Plan                                 --               --            9,228
    Acquisitions                               (1,468)             303            3,223
  Reimbursement from Stock and
    Employee Benefit Trust                         --               --          (48,921)
  Other                                          (244)             (86)              82
                                          -----------      -----------      -----------
  End of year                                 (18,951)         (11,926)         (10,494)
                                          -----------      -----------      -----------


Stock and Employee Benefit Trust:
  Beginning of year                          (275,311)        (412,988)              --
  Establishment of trust                           --               --         (459,375)
  Reimbursement of treasury stock                  --               --           48,921
  Reimbursements of common stock              123,850           75,289               --
  Adjustment to market                       (124,585)          62,388           (2,534)
                                          -----------      -----------      -----------
  End of year                                (276,046)        (275,311)        (412,988)
                                          -----------      -----------      -----------
Total common stockholders' equity         $ 2,660,763      $ 2,510,278      $ 2,741,750
                                          ===========      ===========      ===========
</TABLE>

















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

                                       54
<PAGE>   59



                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 in 12 foreign countries.
       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.

           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, 1997 and 1996, short-term
       investments of approximately $3.8 million and $26.4 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.

       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

                                       55
<PAGE>   60


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       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 1997, 1996 and 1995 was $9,714,000, $16,306,000 and $11,429,000,
       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 many 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 other 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: buildings, 20 to 40 years and vehicles
       and equipment, 3 to 12 years.

            Expenditures for major renewals and betterments are capitalized and
       expenditures for maintenance and repairs are charged to expense as
       incurred. During fiscal 1997, 1996 and 1995, maintenance and repairs
       charged to expense were $338,553,000, $336,374,000 and $325,658,000,
       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. The Company periodically evaluates
       whether events and

                                       56
<PAGE>   61

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       circumstances have occurred that indicate the remaining estimated useful
       lives of intangible assets should be revised or the remaining balances of
       intangible 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 business 
       as a measure of future recoverability of these assets.

       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.

       Deferred items.

             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 the site, site inspections, ground-water
       monitoring, leachate management,

                                       57
<PAGE>   62

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       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. Future cost requirements for closure and post-
       closure monitoring and maintenance of foreign operating landfills are
       determined based on the country or local 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 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.

                                       58
<PAGE>   63


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

           Other deferred items -

           Deferred items as of September 30, 1997 and 1996 were as follows (in
       thousands):

<TABLE>
<CAPTION>

                                                   1997         1996
                                                --------     --------
               <S>                             <C>          <C>     
                Self-insurance accruals         $121,722     $ 90,515
                Minority interest in
                  consolidated subsidiaries       57,035       59,376
                Accrued pension costs             31,792       39,734
                Other                             42,213       65,356
                                                --------     --------
                                                $252,762     $254,981
                                                ========     ========
</TABLE>

            In addition to the above deferred items, included in other accrued
       liabilities at September 30, 1997 and 1996 was the current portion of
       self-insurance accruals of $89,567,000 and $87,274,000, respectively, and
       accrued pension costs of $16,849,000 and $14,625,000, 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'
       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.

       Foreign exchange contracts.

            The Company enters into foreign exchange contracts as a hedge
       against certain of its net investments in foreign subsidiaries and
       purchase commitments from time to time. Realized and unrealized gains and
       losses on these contracts and the amortization of any premiums or
       discounts are deferred and included with translation adjustments in the
       separate component of common stockholders' equity or reflected as a
       deferred asset or liability associated with the anticipated purchase
       commitment. When deemed appropriate, the Company enters into foreign
       exchange contracts as a hedge against certain advances to foreign
       subsidiaries, which are to be repaid in the foreseeable future. Realized
       and unrealized gains and losses associated with these contracts are
       reflected in income for each period such contracts are outstanding. There
       were no significant foreign exchange contracts outstanding at September
       30, 1997 or 1996.

                                       59
<PAGE>   64


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       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 (5).

       Reclassifications.

            Certain reclassifications have been made in prior years' financial
       statements to conform to the fiscal year 1997 presentation.

       New accounting pronouncements.

            In March 1995, the Financial Accounting Standards Board issued
       Statement of Financial Accounting Standards ("SFAS") No. 121 -
       "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
       Assets to be Disposed Of". This statement sets forth standards for the
       recognition and measurement of impairment of long-lived assets, including
       certain identifiable intangible assets and goodwill related to those
       assets, to be held and used in an entity's operations or expected to be
       disposed of. As the Company's current accounting practices are
       substantially in compliance with the provisions of the new standard, the
       adoption of SFAS No. 121 in fiscal 1997 did not have a material effect on
       the Company's financial position or results of operations.

            In February 1997, the Financial Accounting Standards Board issued
       SFAS No. 128 - "Earnings Per Share". This statement, which establishes
       new standards for computing and presenting earnings per share, is
       effective for the Company's quarter ending December 31, 1997 and requires
       restatement for all periods presented. The Company believes that the
       adoption of SFAS No. 128 will not have a material effect on its earnings
       per share calculations.

       (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 organization divides
       North America into 13 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 are expensed as incurred

                                       60
<PAGE>   65

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       and are included in selling, general and administrative expenses.

       (4)  Special charges -

       Fiscal 1996 ($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. This writedown was a result of the changing competitive nature
       of waste disposal in the Los Angeles market area and the continuing
       negative legal climate, including adverse decisions by California
       judicial and regulatory authorities in fiscal 1996 and early fiscal 1997,
       bearing on the site's ability to accept municipal solid waste.

            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):

<TABLE>
<CAPTION>
                                     Year Ended September 30,
                         ---------------------------------------------
                            1997              1996              1995
                         ---------         ---------         ---------
<S>                      <C>               <C>               <C>      
Revenues                 $  81,926         $ 122,782         $ 103,819
Income (loss) from
  operations and
  equity in earnings
  of unconsolidated
  affiliates before
  special charges        $  (2,190)(1)     $  (4,019)(2)     $      65
</TABLE>


                                       61
<PAGE>   66

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       --------------
                (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 income (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 1997, the Company sold a number of these business
       operations and closed 35 recycling facilities.

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

                                       62
<PAGE>   67

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       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.

       (5)  Business combinations -

          During the current 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 are not material to the Company's consolidated results of
       operations or financial position.

          During the prior fiscal year, the Company paid approximately $243.4
       million (including additional amounts payable, principally to former
       owners, of $23.3 million and the issuance of 974,085 shares of the
       Company's common stock valued at $28.3 million) to acquire 102 solid
       waste businesses, which were accounted for as purchases, including the
       acquisition of the remaining 50% ownership interest of Pfitzenmeier & Rau
       ("P&R"), a joint venture previously owned 50% by Otto Waste Services, a
       50% owned subsidiary of the Company. In connection with these
       acquisitions, the Company recorded additional interest-bearing
       indebtedness of $69.3 million (including $55.0 million related to P&R)
       and other liabilities of $37.4 million. The results of these business
       combinations are not material to the Company's consolidated results of
       operations or financial position.

            The results of all businesses acquired in fiscal years 1997 and 1996
       have been included in the consolidated financial statements from the
       dates of acquisition. In allocating purchase price, the assets acquired
       and liabilities assumed in 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 

                                       63
<PAGE>   68

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       adjustment prospectively as subsequent revisions in estimates of fair
       value, if any, are necessary.

       (6)  Property and equipment -

            Property and equipment at September 30, 1997 and 1996 was as follows
       (in thousands):

<TABLE>
<CAPTION>
                                              1997           1996    
                                           ----------     ---------- 
<S>                                        <C>            <C>        
       Land and improvements               $  330,835     $  340,034 
       Buildings                              596,053        616,596 
       Landfills                            1,661,888      1,897,206 
       Vehicles and equipment               3,373,894      3,686,466 
       Construction-in-progress               116,681        118,207 
                                           ----------     ---------- 
         Total property and                                          
           equipment                        6,079,351      6,658,509 
       Less accumulated depreciation                               
         and amortization                   2,512,196      2,737,788 
                                           ----------     ---------- 
         Property and equipment, net       $3,567,155     $3,920,721 
                                           ==========     ========== 
</TABLE>

           Included in the landfill category of property and equipment, net are
       $35.7 million and $78.1 million as of September 30, 1997 and 1996,
       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.

       (7)  Investments in unconsolidated affiliates -

            The Company uses the equity method of accounting for investments in
       unconsolidated affiliates over which it exercises control of 20% - 50%.
       The summarized combined balance sheet and income statement information
       presented in the table below (and the Company's related investments and
       earnings) includes amounts primarily related to the following significant
       equity investees: 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%), 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%) (in thousands).

                                       64
<PAGE>   69

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                                 1997           1996      
                                              ----------     ----------   
       <S>                                    <C>            <C>          
       Combined Balance Sheet Information                                 
         as of Fiscal Yearend:                                            
           Assets -                                                       
             Current assets                   $  279,938     $  233,891   
             Noncurrent assets                 1,434,272      1,528,799   
                                              ----------     ----------   
                                              $1,714,210     $1,762,690   
                                              ==========     ==========   
           Liabilities and Net Worth -                                    
             Current liabilities              $  192,745     $  181,184   
             Noncurrent liabilities            1,200,656      1,221,633   
             Net worth                           320,809        359,873   
                                              ----------     ----------   
                                              $1,714,210     $1,762,690   
                                              ==========     ==========   
       Company's Investments in and                                       
         Advances to Equity Investees                                     
         (including subordinated note                                     
         and other receivables of $60,984                                 
         and $63,106, respectively)           $  215,761     $  259,486   
                                              ==========     ==========   
</TABLE>

<TABLE>
<CAPTION>
                                                     1997         1996         1995    
                                                   --------     --------     --------  
       <S>                                         <C>          <C>          <C>       
       Combined Income Statement                                                       
         Information for the Fiscal                                                    
         Year Ended:                                                                   
           Revenues                                $553,098     $511,086     $500,989  
           Gross profit                            $226,853     $213,236     $211,555  
           Income before extraordinary                                                 
             item                                  $ 93,465     $ 95,438     $ 94,463  
           Extraordinary item (2)                  $ (9,602) $        --     $     --  
           Net income                              $ 83,863     $ 95,438     $ 94,463  
                                                                                       
       Company's Income Statement Information:                                         
         Equity in Earnings                                                            
           of Equity Investees (1)                 $ 53,988     $ 55,370     $ 53,996  
         Extraordinary item,                                                           
           net of income tax benefit                                                   
           of $1,677 (2)                           $  3,124     $     --     $     --  
                                                                                       
       Dividends Received from Equity                                                  
         Investees                                 $ 56,560     $ 41,915     $ 25,461  
</TABLE>

       ------------------
                (1) 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 and the elimination of
                intercompany transactions.

                (2) During the second quarter of fiscal 1997, the 

                                       65
<PAGE>   70

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                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 $.02 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.

       (8)  Accrued environmental and landfill costs -

            Accrued environmental and landfill costs at September 30, 1997 and
       1996 were as follows (in thousands):

<TABLE>
<CAPTION>
                                             1997         1996
                                           --------     --------
<S>                                        <C>          <C>     
Continuing operations -

  Accrued costs associated with open
    landfills (including landfills
    under expansion)                       $248,820     $334,793

  Accrued costs associated with closed
    landfills and corrective action
    costs (including Superfund sites)       264,516      223,781
                                           --------     --------
       Total                                513,336      558,574

  Less current portion (included in
    other accrued liabilities)               81,291       92,536
                                           --------     --------
       Total long-term                     $432,045     $466,038
                                           ========     ========
Discontinued operations -

  Accrued costs of closure, post-
    closure and certain other
    liabilities associated with
    discontinued operations                $ 99,914     $107,832

  Less current portion (included in
    other accrued liabilities)               26,681       32,032
                                           --------     --------
       Total long-term                     $ 73,233     $ 75,800
                                           ========     ========

Total long-term portion of accrued
 environmental and landfill costs          $505,278     $541,838
                                           ========     ========
</TABLE>

                                       66
<PAGE>   71


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            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" - "Deferred items" - 
       "Accrued environmental and landfill costs".

       Open landfills.

            The Company operates 92 solid waste landfills in the United States,
       18 of which are operated under contracts with municipalities or others.
       The Company also operates 53 landfills outside of the United States. 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 1997, approximately
       $275-$325 million of additional accruals are to be provided over the
       remaining lives of these facilities. Estimated additional environmental
       costs ranging from $525-$575 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.

       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.

       (9)  Long-term debt -

            Long-term debt at September 30, 1997 and 1996 was as follows (in
       thousands):

                                       67
<PAGE>   72


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                                                 1997           1996    
                                                             ----------     ----------  
       <S>                                                  <C>            <C>          
       Senior indebtedness (maturing as set                                             
         forth in the following paragraphs):                                            
         6.10% Senior Notes, net of                                                     
           unamortized discount of                                                      
           $1,218 and $1,838                                 $  155,471     $  198,162  
         6.375% Senior Notes, net of                                                    
           unamortized discount of                                                      
           $1,507 and $2,051                                    159,693        197,949  
         7 7/8% Senior Notes, net of                                                    
           unamortized discount of $195                                                 
           and $783                                              69,306        299,217  
         7.40% Debentures, net of                                                       
           unamortized discount of                                                      
           $1,767 and $2,082                                    358,233        397,918  
         9 1/4% Debentures                                       99,500        100,000  
         Solid waste revenue bond obligations                   219,974        149,127  
         Other notes payable, primarily                                                 
           5.0%-15.5%                                           505,674        804,721  
                                                             ----------     ----------  
                                                              1,567,851      2,147,094  
       Commercial paper and short-term                                                  
         facilities to be refinanced                            259,047        679,597  
                                                             ----------     ----------  
       Total long-term debt                                   1,826,898      2,826,691  
       Less current portion                                     151,736         59,806  
                                                             ----------     ----------  
       Long-term debt, net of current portion                $1,675,162     $2,766,885  
                                                             ==========     ==========  
</TABLE>
       
            The long-term portion of the debt outstanding at September 30, 1997,
       matures as follows: 1999,  $152,890,000;  2000,  $331,130,000;  2001, 
       $25,999,000; 2002, $24,358,000 and in subsequent years, $1,140,785,000.

       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 (10).

       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.

                                       68
<PAGE>   73


                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.

       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. The agreement contains a
       net worth requirement of $1.5 billion, which increases annually after
       September 30, 1995 by 20% of the consolidated net income of the preceding
       year and excludes the effect of any foreign currency translation
       adjustments on net worth. At September 30, 1997 and 1996, the Company had
       no outstanding borrowings under this bank credit agreement.

            During December 1996, the Company amended the terms of its existing
       $750 million Multicurrency Revolving Credit Agreement which was
       originally established to fund the Company's acquisition of Attwoods plc
       in December 1994. 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 of December 1997. The
       facility can be utilized to borrow U.S. dollars, pounds sterling,

                                       69
<PAGE>   74


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       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 0.6% per annum on the total commitment,
       whether used or unused, and contains a net worth requirement consistent
       with the Company's $1 billion revolving credit agreement. At September
       30, 1997 and 1996, the Company had no outstanding borrowings under this
       agreement.

            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 is payable on loans
       under the facility at the Frankfurt Interbank Offered Rate ("FIBOR") plus
       a margin. This agreement requires 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 and 1996, Otto Waste Services had outstanding
       borrowings under this facility of 360 million deutsche mark
       (approximately U.S. $204.6 million) and 250 million deutsche mark
       (approximately U.S. $163.9 million), respectively.

            As of September 30, 1997,  distributions  from retained  earnings 
       could not exceed $1.188 billion under the most restrictive of the 
       Company's net worth maintenance requirements.

       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 5.85%.
       These issues mature at various dates through the year 2027. The solid
       waste revenue bond obligations of the subsidiaries are guaranteed by the
       Company.

       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. 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 obligations of the
       Company. Approximately $208 million and

                                       70
<PAGE>   75

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       $336 million of this indebtedness at September 30, 1997 and 1996,
       respectively, relates to a large number of separate company debt
       instruments of Otto Waste Services and its consolidated subsidiaries. A
       substantial portion of the Otto Waste Services debt is secured by assets 
       of the related companies and is payable in deutsche mark.

       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 $0.08 per share.

       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 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, 1997 and 1996 is as follows (amounts in
       thousands):

                                       71
<PAGE>   76


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>

                                        1997                      1996          
                              -----------------------   ----------------------- 
                                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     $     --          --%     $438,296          5.5%  
       Germany                 259,047        4-10%      241,301         5-10%  
                              --------                  --------                
                              $259,047                  $679,597                
                              ========                  ========                
</TABLE>
       
       (10) 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 $.06 per share.

       (11) 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 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.

                                       72
<PAGE>   77

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            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, 1997, 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.

       Waste-to-energy projects.

            Subsidiaries of the Company and Air Products and Chemicals, Inc.
       ("Air Products") each 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. 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 Air Products 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 Air
       Products 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:

                                       73
<PAGE>   78

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

           Hempstead, New York - Funding of 50% of periodic payments related to
               outstanding debt. At September 30, 1997, $210 million of total
               unamortized project debt was outstanding. Average annual debt
               service on 50% of the debt over the next five years is $10
               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.

           Preston, Connecticut - Funding of 50% of periodic payments related to
               outstanding debt. At September 30, 1997, total outstanding debt
               included $86 million of unamortized project debt and $44 million
               of additional partnership debt (of which $22 million is
               guaranteed by the Company). Average annual debt service on 50% of
               the debt over the next five years is $6 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, including debt service. At September 30, 1997, $165
               million of total unamortized project debt was outstanding.
               Average annual debt service on 50% of the debt over the next five
               years is $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
               borrowed approximately $300 million (weighted average fixed rate
               of 9.7%) of non-recourse debt as of September 30, 1997. Average
               annual debt service on 50% of the debt over the next five years
               is approximately $20 million.

       Operating leases.

            The Company and its subsidiaries lease substantial portions of their
       office and other facilities under various lease agreements. At September
       30, 1997, total minimum rental commitments becoming payable under all
       noncancellable operating leases are as follows (in thousands):


                                       74
<PAGE>   79

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
         <S>       <C>          <C>                     <C>      
          1998     $ 87,624     2002                     $ 38,952 
          1999     $ 71,175     2003 - 2007              $ 99,510 
          2000     $ 61,632     2008 - 2012              $ 59,920 
          2001     $ 48,603     All years thereafter     $150,477 
</TABLE>
          
           Total rental expenses for fiscal years 1997, 1996 and 1995,  
       substantially all of which related to fixed amount rental agreements, 
       were $107,622,000, $105,134,000 and $95,526,000, respectively.

       (12) 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.

       (13) Preferred Stock Purchase Rights Plan -

            In June 1988, the Board of Directors of the Company adopted a
       Preferred Stock Purchase Rights Plan (the "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. 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
       $110.00, subject to adjustment.

            The Plan, as subsequently amended in February 1996, provides that 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 stock
       having 20% or more of the Company's general voting power, 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 Plan also provides that upon the occurrence of certain other specific
       matters, each holder of a Right will have the right to receive, upon
       payment of the exercise price, shares 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 $.05 per Right (subject
       to adjustment) prior to the time they become exercisable. The Rights will
       expire on June 13, 1998.

       (14) Common stock -

       Earnings per share.

            The following table reconciles the number of common shares shown as
       outstanding on the consolidated balance sheet with the 

                                       75
<PAGE>   80

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       number of common and common equivalent shares used in computing primary
       earnings per share (in thousands):

<TABLE>
<CAPTION>
                                               Year Ended September 30,
                                        ------------------------------------
                                          1997          1996          1995
                                        --------      --------      --------
<S>                                      <C>           <C>           <C>    
Common shares outstanding,
  end of period                          212,148       212,363       212,439
Less - Shares held in the Stock
  and Employee Benefit Trust              (7,252)      (11,012)      (13,596)
                                        --------      --------      --------
Common shares outstanding for
  purposes of computing primary
  earnings per share, end of period      204,896       201,351       198,843

Effect of using weighted average
  common and common equivalent
  shares outstanding                      (2,096)       (1,398)       (1,199)
Effect of shares issuable under
  stock option plans based on
  the treasury stock method                  945           715         1,433
                                        --------      --------      --------
Shares used in computing
  primary earnings per share             203,745       200,668       199,077
                                        ========      ========      ========
</TABLE>

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

            The difference between shares for primary and fully diluted earnings
       per share was not significant in any year. Conversion of the 6 3/4%
       Convertible Subordinated Debentures due 2005, which were determined not
       to be common stock equivalents, was not assumed in the computation of
       fully diluted earnings per share because the debentures had an
       anti-dilutive effect in the periods prior to their redemption in February
       1996.

            Earnings per common and common equivalent share were computed by
       dividing net income (loss) by the weighted average number of shares of
       common stock and common stock equivalents outstanding during each year.
       Common stock equivalents include stock options, the Company's 6 1/4%
       Convertible Subordinated Debentures due 2012 (the "6 1/4% Debentures")
       which were redeemed in February 1996, and the 7.25% Automatic Common
       Exchange Securities. The effect of the 6 1/4% Debentures on earnings per
       share was not significant or was not dilutive in the periods prior to
       their redemption in February 1996 and, accordingly, has not been included
       in the computations. The 

                                       76
<PAGE>   81

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       7.25% Automatic Common Exchange Securities had no effect on the
       computations for the periods presented.

       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. Shares issued
       to the trust are valued at market 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 consists of (1) a
       purchase contract under which (a) the holder will 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 will 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 are pledged as collateral to secure the
       holder's obligation to purchase the Company's common stock under the
       purchase contract. The principal of the Treasury Notes underlying such
       securities, when paid at maturity, will automatically be applied to
       satisfy in full the holder's obligation to purchase the Company's common
       stock. These securities are not included on the Company's balance sheet;
       an increase in common stockholders' equity will be reflected when cash
       proceeds are received by the Company.

       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, 1997,
       options were available for future grants only under five plans, the
       Company's 1987, 1990, both 1993 plans and the 1996 plan. At September 30,
       1997, all of the options outstanding were non-qualified stock options.
       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 

                                       77
<PAGE>   82

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       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):

<TABLE>
<CAPTION>
                             1997                        1996                       1995
                   -------------------------    ----------------------     -----------------------
                                    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            12,012      $    27.49      10,173      $    26.53       9,906      $    25.21
Granted               1,974      $    26.91       2,689      $    30.46       1,758      $    28.28
Exercised            (2,918)     $    24.89        (564)     $    22.54      (1,287)     $    18.70
Terminated             (550)     $    29.04        (286)     $    30.90        (204)     $    26.62
                 ----------                     -------                  ----------
Outstanding
  at end of
  year               10,518      $    28.03      12,012      $    27.49      10,173      $    26.53
                 ==========                     =======                  ==========
Exercisable at
  end of year         5,787      $    27.71       6,853      $    26.77       5,922      $    26.99
Available for
  future grants
  at end of
  year                9,979                      12,424                       4,926
</TABLE>


       As of September 30, 1997, 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     588    $17.31        4.2        588     $17.31
   $20.01 - $30.00   6,372    $26.15        6.5      3,458     $25.63
   $30.01 - $40.00   3,191    $32.27        6.7      1,374     $33.87
   $40.01 - $43.38     367    $40.88        2.2        367     $40.88
</TABLE>

            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 

                                       78
<PAGE>   83

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       transferability. Such restrictions on current restricted stock grants 
       lapse two years from the date of grant for officers, two to three years 
       for key employees and three years for non-employee directors. 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, 5,750 restricted shares were
       issued during the current year and 109,842 restricted shares were
       outstanding as of September 30, 1997. In addition, 5,232 restricted 
       shares issued to non-employee directors were outstanding as of September
       30, 1997. Common stock awards totaling 2,552 shares were granted to
       non-employee directors during fiscal 1997. Shares of restricted stock
       granted for the two years ended September 30, 1997 were as follows:

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

            During fiscal 1997, 1,028,500 performance share awards were granted
       to officers and certain key employees pursuant to the Company's Long-Term
       Incentive Plan. After considering cancellation of 91,125 of these awards,
       937,375 of the performance share awards remained outstanding as of
       September 30, 1997. These performance shares will vest in increments of
       25% based upon the 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 Principle Board Opinion No. 25, "Accounting
       for Stock Issued to Employees". Compensation expense related to these
       plans during fiscal years 1997, 1996 and 1995 was $1,662,000, $1,771,000
       and $413,000, 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

                                       79
<PAGE>   84

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       for Stock-Based Compensation", are as follows (in thousands, except per
       share amounts):

<TABLE>
<CAPTION>
                                           Year Ended September 30,
                                          ---------------------------
                                            1997              1996
                                          --------          ---------
<S>                                       <C>               <C>       
       Pro forma income (loss) before
         extraordinary items              $278,698          $ (91,642)
       Pro forma net income (loss)        $260,217          $(103,801)

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

         Income (loss) before
           extraordinary items           $   1.37          $   (0.46)
         Net income (loss)               $   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 option pricing model with the following assumptions used
       for the grants:

<TABLE>
<CAPTION>
                                            Year Ended September 30,
                                       ---------------------------------
                                            1997               1996
                                       ---------------    --------------
<S>                                     <C>      <C>      <C>      <C>  
       Risk-free interest rate          6.10% -  6.89%    5.56% -  6.70%
       Expected lives (in years)              6                 6
       Expected volatility             19.26% - 24.48%   22.87% - 25.75%
       Expected dividend yields         1.84% -  2.57%    2.15% -  2.66%
</TABLE>

            The weighted average fair values of options grant during fiscal
       years 1997 and 1996 were $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.

                                       80
<PAGE>   85


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       (15) Foreign currency translation -

           Increases (decreases) in the equity component for each period's
       translation adjustments are as follows (in thousands):

<TABLE>
<CAPTION>
                                             Year Ended September 30,
                                         -------------------------------
                                            1997        1996       1995
                                         ---------   --------   --------
<S>                                      <C>         <C>        <C>      
       Beginning cumulative
         translation adjustment          $ (31,138)  $ 30,821   $(40,744)
       Translation adjustment
         for the fiscal year              (126,334)   (61,959)    71,565
       Sale of Italian operations           52,865         --         --
                                         ---------   --------   --------
       Ending cumulative translation
          adjustment                     $(104,607)  $(31,138)  $ 30,821
                                         =========   ========   ========
</TABLE>

       (16) Income taxes -

            The components of (i) earnings before income taxes, minority
       interest and extraordinary items 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>
                                          1997           1996           1995
                                       ---------      ---------      ---------
<S>                                          <C>            <C>            <C>
       Domestic:
         Excluding special charges     $ 498,141      $ 429,705      $ 563,648
         Special charges                  71,330       (187,087)            --
                                       ---------      ---------      ---------
         As reported                     569,471        242,618        563,648
                                       ---------      ---------      ---------
       Foreign (1):
         Excluding special charges        78,880         44,801        127,428
         Special charges                (153,209)      (259,713)            --
                                       ---------      ---------      ---------
         As reported                     (74,329)      (214,912)       127,428
                                       ---------      ---------      ---------
       Total:
         Excluding special charges       577,021        474,506        691,076
         Special charges                 (81,879)      (446,800)            --
                                       ---------      ---------      ---------
         As reported                   $ 495,142      $  27,706      $ 691,076
                                       =========      =========      =========
       -----------
</TABLE>

             (1) Amounts are net of intercompany interest expense for fiscal
             years 1997, 1996 and 1995 of $42,976,000, $53,660,000 and
             $36,572,000, respectively. The Company maintains a capital
             structure with respect to its foreign operations designed to
             minimize worldwide income and other tax costs.

                                       81
<PAGE>   86

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                                       State
                                Federal    Foreign    & Local     Total
                               --------   --------   --------   --------
   <S>                        <C>        <C>        <C>        <C>     
       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
                               ========   ========   ========   ========

       1995: Current           $183,876   $ 46,480   $ 23,330   $253,686
             Deferred            20,605     (6,764)     9,609     23,450
             Amortization
               of investment
               tax credit          (706)        --         --       (706)
                               --------   --------   --------   --------
                               $203,775   $ 39,716   $ 32,939   $276,430
                               ========   ========   ========   ========
</TABLE>

       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, 1997:

<TABLE>
<CAPTION>
                                            1997     1996     1995
                                           ------   ------   ------
<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                           (1.39)   (2.31)   (1.67)
         Effect of foreign operations        .06    (2.05)    (.20)
         All other, net                     2.35     2.77     2.10
                                           -----    -----    -----
         Federal and foreign               36.02    33.41    35.23
         State income taxes                 3.98     6.59     4.77
                                           -----    -----    -----
         Effective income tax rate,
           excluding special charges       40.00    40.00    40.00
       Effect of Special Charges              --   339.66       --
                                           -----   ------    -----
       Effective income tax rate           40.00%  379.66%   40.00%
                                           =====   ======    =====
</TABLE>


                                       82
<PAGE>   87


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            The tax effects of temporary  differences  that gave rise to 
       significant portions of the deferred tax assets and liabilities at
       September 30, 1997 and 1996, are as follows (in thousands):

<TABLE>
<CAPTION>
                                        1997                    1996
                               ---------------------  ---------------------
                                Deferred   Deferred   Deferred   Deferred
                                  Tax        Tax        Tax        Tax
                                 Assets  Liabilities   Assets   Liabilities
                               --------  -----------  --------  -----------
<S>                            <C>        <C>         <C>        <C>     
     Depreciation and
       amortization            $126,197   $535,195    $144,409   $468,326
     Accrued environmental
       and landfill costs       159,508         --     183,041         --
     Accruals related
       to discontinued
       operations                10,211         --       8,956         --
     Self-insurance
       accruals                  68,004         --      56,457         --
     Assets and operations
       to be divested            29,651         --     107,247         --
     Net operating loss
       carryforwards             82,843         --     115,717         --
     Other                      285,196    141,768     318,449    138,649
                               --------   --------    --------   --------
     Deferred tax assets
       and liabilities          761,610    676,963     934,276    606,975

     Unamortized investment
       tax credits                          19,716                 20,393

     Valuation allowance        (47,273)              (192,811)
                               --------   --------    --------   --------
     Deferred tax assets and
       liabilities, net of
       unamortized investment
       tax credits and
       valuation allowance     $714,337   $696,679    $741,465   $627,368
                               ========   ========    ========   ========
</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 $96
       million are available to reduce future taxable income of the applicable
       foreign entities for periods which generally range from 1998 to 2001.
       Domestic state net operating loss carryforwards of approximately $794
       million (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 1998 to 2012. The net change in the total valuation allowance

                                       83
<PAGE>   88


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       for the year ended September 30, 1997, was a decrease of $145.5 million,
       principally due to the sale of the Italian operations in the third
       quarter of fiscal 1997 compared with an increase in the prior year of
       $76.6 million, principally due to the special charges taken in the fourth
       quarter of fiscal 1996.

           Deferred income taxes have not been provided as of September 30,
       1997, on approximately $696 million of undistributed earnings of foreign
       affiliates which are considered to be permanently reinvested.

       (17) 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 five 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 1997, 1996 and
       1995 were $12,710,000, $11,752,000 and $10,545,000, respectively.

       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.

            The Company also has employees in various foreign countries that are
       covered by defined benefit pension plans. The benefits for these plans
       are based generally on years of service and the employee's compensation.
       Under the Company's funding policy, annual contributions are 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 are not material to the Company's
       consolidated financial statements.

                                       84
<PAGE>   89


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            The following table sets forth the funded status and amounts
       recognized in the Company's Consolidated Balance Sheet as of September
       30, 1997 and 1996, and the significant assumptions used in accounting for
       the U.S. defined benefit plans. The measurement dates for these plans
       were June 30, 1997 and 1996.

<TABLE>
<CAPTION>
                                               1997               1996
                                            ---------          ---------
                                            (Dollar Amounts in Thousands)
<S>                                         <C>                <C>       
       Actuarial present value of
         accumulated benefit obligations,
         including vested benefits of
         $186,856 and $161,986,
         respectively                       $(207,438)         $(180,639)
                                            =========          =========
       Actuarial present value
         of projected benefit
         obligation                         $(222,274)         $(196,909)
       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                         245,032            193,951
                                            ---------          ---------
       Projected benefit obligation
         (in excess of) less than
         plan assets                           22,758             (2,958)
       Contributions made after
         measurement date but
         before end of fiscal year              4,762              7,263
       Unrecognized net gain                  (32,020)           (13,784)
       Unrecognized prior service
         cost                                 (12,654)           (13,957)
       Unrecognized net asset
         at transition                         (1,292)            (1,486)
                                            ---------          ---------
       Accrued pension costs                $ (18,446)         $ (24,922)
                                            =========          =========

       Discount rate                            7.75%               8.0%
       Rate of increase in
         compensation levels                     4.0%               4.0%
       Expected long-term rate of
         return on assets                       10.5%               9.5%
</TABLE>

                                       85
<PAGE>   90


                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

            The components of net annual pension cost for fiscal years 1997,
       1996 and 1995 for the U.S. defined benefit plans were as follows (in 
       thousands):

<TABLE>
<CAPTION>
                                    1997          1996          1995
                                  --------      --------      --------
<S>                               <C>           <C>           <C>     
Service cost (benefits earned
  during the period)              $ 13,454      $ 12,260      $  9,933
Interest cost on projected
  benefit obligation                16,050        13,521        12,597
Investment gain on plan
  assets                           (42,564)      (27,957)      (14,097)
Net amortization and deferral       21,765        12,056          (110)
                                  --------      --------      --------
Net annual pension cost           $  8,705      $  9,880      $  8,323
                                  ========      ========      ========
</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 years 1996 and
       1995 related to this unfunded plan was $1,350,000, $1,809,000 and
       $1,798,000, 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 has chosen 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.

                                       86
<PAGE>   91

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       Postemployment benefits.

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

       (18) 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).

<TABLE>
<CAPTION>
                                  1997            1996           1995
                               ----------      ----------     ----------
<S>                            <C>             <C>            <C>       
       Revenues:
         United States and
           Puerto Rico         $4,148,647      $4,073,558     $4,070,021
                               ----------      ----------     ----------
         Foreign - Canada         176,009         169,077        178,417
                 - Europe       1,351,560       1,425,390      1,433,923
                 - Other          106,756         111,252         96,990
                               ----------      ----------     ----------
           Total foreign        1,634,325       1,705,719      1,709,330
                               ----------      ----------     ----------
         Consolidated          $5,782,972      $5,779,277     $5,779,351
                               ==========      ==========     ==========

       Combined income (loss)
        from operations and
        equity in earnings of
        unconsolidated
        affiliates:
         United States and
           Puerto Rico         $  653,866 (1)  $  327,421 (2) $  626,798
                               ----------      ----------     ----------
         Foreign - Canada          10,504          (7,857)        22,636
                 - Europe         (28,782)       (118,411)       186,251
                 - Other           17,637          (2,990)         7,498
                               ----------      ----------     ----------
           Total foreign             (641)(1)    (129,258)(2)    216,385
                               ----------      ----------     ----------
         Consolidated          $  653,225      $  198,163     $  843,183
                               ==========      ==========     ==========
</TABLE>

                                       87
<PAGE>   92

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                  1997            1996           1995
                               ----------      ----------     ----------
<S>                            <C>             <C>            <C>       
       Depreciation and
        amortization:
         United States and
           Puerto Rico         $  418,542      $  438,639     $  412,968
                               ----------      ----------     ----------
         Foreign - Canada          18,370          17,615         14,473
                 - Europe         121,270         134,061        113,907
                 - Other           11,488          12,210         10,522
                               ----------      ----------     ----------
           Total foreign          151,128         163,886        138,902
                               ----------      ----------     ----------
         Consolidated          $  569,670      $  602,525     $  551,870
                               ==========      ==========     ==========
       Identifiable assets:
         United States and
           Puerto Rico         $4,471,306      $4,803,978     $4,532,014
                               ----------      ----------     ----------
         Foreign - Canada         185,372         206,908        183,210
                 - Europe       1,894,597       2,435,541      2,599,797
                 - Other          127,017         154,479        145,351
                               ----------      ----------     ----------
           Total foreign        2,206,986       2,796,928      2,928,358
                               ----------      ----------     ----------
         Consolidated          $6,678,292      $7,600,906     $7,460,372
                               ==========      ==========     ==========
       -----------------
</TABLE>

           (1) 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).

           (2) 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).

       (19) 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.

                                       88
<PAGE>   93

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                         As of September 30,
                               ---------------------------------------
                                      1997                 1996
                               ------------------   ------------------
                                  Book     Fair        Book     Fair
                                 Value     Value      Value     Value
                               --------  --------   --------  --------
                                            (In Thousands)
<S>                           <C>       <C>        <C>       <C>     
       Debt -
         6.10% Senior Notes    $155,471  $152,671   $198,162  $188,848
         6.375% Senior Notes    159,693   154,879    197,949   184,171
         7.40% Debentures       358,233   365,835    397,918   377,107
         7 7/8% Senior Notes     69,306    74,086    299,217   311,575
         9 1/4% Debentures       99,500   123,073    100,000   117,740
         Solid waste revenue
           bond obligations     219,974   229,902    149,127   151,601
         Other notes payable    505,674   526,259    804,721   837,174
         Commercial paper and
           short-term
           facilities to be
           refinanced           259,047   258,365    679,597   676,489
</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.

       (20) Related party transactions -

            Otto Holding International B.V. ("OHI") owns the other 50% interest
       of Otto Waste Services. The Company, primarily through its 50% ownership
       of Otto Waste Services, is 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
       $3.6 million, $4.7 million and $5.0 

                                       89
<PAGE>   94

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

       million for fiscal years 1997, 1996 and 1995, 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 1997. Included in the Company's Consolidated Balance Sheet at
       September 30, 1997 and 1996, are the following amounts relating to
       transactions with the OHI Group (in thousands):

<TABLE>
<CAPTION>
                                                  1997        1996
                                                -------     -------
<S>                                             <C>         <C>    
         Other accrued liabilities              $    --     $ 7,673
         Capital lease obligations               30,014      44,000
         Notes payable, interest
          payable at FIBOR plus 2%                8,077       3,131
</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.

       (21) 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          1997   $1,495,137   $1,413,731    $1,471,252    $1,402,852
                       1996   $1,430,781   $1,373,887    $1,471,368    $1,503,241

     Gross profit      1997   $  383,839   $  359,381    $  376,051    $  374,087
                       1996   $  382,676   $  346,971    $  356,018    $  377,997

     Income (loss)
      from operations  1997   $  163,802   $  152,754    $   97,657(3) $  185,024 (3)
                       1996   $  174,162   $  134,414    $  134,802    $ (300,585)(5)

     Income taxes      1997   $   50,507   $   47,955    $   30,688    $   68,907
                       1996   $   58,118   $   42,205    $   42,417    $  (37,552)
</TABLE>

                                       90
<PAGE>   95

                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>
     Income (loss)
      before extra-
      ordinary
      items           1997       $  71,880     $  70,955     $  41,926      $  98,934
                      1996       $  83,010     $  60,984     $  62,022      $(295,188)

     Net income
      (loss)          1997       $  71,880     $  67,831(1)  $  40,241(4)   $  85,262(4)
                      1996       $  83,010     $  48,825(2)  $  62,022      $(295,188)

     Income (loss)
      per share:
       Income (loss)
        before extra-
        ordinary
        items         1997           $ .36         $ .35         $ .21         $  .48
                      1996           $ .42         $ .30         $ .31         $(1.47)
       Net income
         (loss)       1997           $ .36         $ .33         $ .20         $  .41
                      1996           $ .42         $ .24         $ .31         $(1.47)
</TABLE>

     -------------
           (1) 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 (7).

           (2) In the second quarter of fiscal year 1996, the Company recorded
           an after-tax loss of $12.2 million associated with redemption of
           debt, which was reflected in the Company's Consolidated Statement of
           Operations as an extraordinary item. See Note (10).

           (3) 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 $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).

                                       91
<PAGE>   96

                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

           (4) 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 (9).

           (5) In the fourth quarter of fiscal year 1996, the Company incurred
           special charges of $446.8 million related to decisions to sell the
           Company's Italian operations, divest non-core business assets and
           operations, close certain recycling facilities and writedown the
           investment in its Azusa, California landfill. See Note (4).

       (22)  Events Subsequent to Date of Financial Statements -

       Common stock repurchase program.

            In September 1997, the Company announced its commencement of a
       common stock repurchase program, and initiated a Dutch auction tender
       offer for the purchase of up to 15 million shares of common stock at a
       price that could range from $34.00 to $39.00 per share. In accordance
       with the terms of the offer, which expired on October 1, 1997, the
       Company accepted for purchase 15 million shares at a price of $39.00 per
       share in October 1997. This purchase of approximately $585 million of
       common stock in the Dutch auction was the first phase of the Company's
       two-part program to buy back $1 billion of its common stock. The second
       phase of this program, approximately $415 million in open market
       purchases and privately negotiated transactions of common stock or
       automatic common exchange security units, is expected to be completed by
       September 30, 1998.

       Merger of operations outside North America.

            In November 1997, the Company announced the signing of an agreement
       to merge its operations outside North America with SITA, a subsidiary of
       Suez Lyonnaise des Eaux. Under the terms of the agreement, the Company
       will receive cash totaling U.S. $1 billion and ordinary shares of SITA
       stock that will result in approximately a 20 percent ownership in SITA.
       Upon completion of the transaction, Suez Lyonnaise des Eaux will own more
       than 50 percent of SITA. The transaction has been approved by the boards
       of the Company and SITA, and is subject to satisfactory completion of due
       diligence, approval by regulatory authorities and authorization by SITA's
       shareholders of the issuance of additional ordinary shares. Closing of
       the transaction is anticipated by the end of the first quarter of
       calendar year 1998. Paris-based 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.

                                       92
<PAGE>   97
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, 1997.

         Consolidated balance sheet--September 30, 1997 and 1996.

         Consolidated statement of cash flows for the three years ended
         September 30, 1997.

         Consolidated statement of common stockholders' equity for the three
         years ended September 30, 1997.

         Notes to consolidated financial statements.

SCHEDULES

         II      Allowance for doubtful accounts for the three years ended 
                 September 30, 1997.

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.





                                      -93-
<PAGE>   98
                                  EXHIBITS


<TABLE>
<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 March 5, 1997. (Exhibit 3 of 
               Form 10-Q for the quarter ended March 31, 1997, is hereby
               incorporated by reference.)

      4.1      Rights Agreement, dated June 1, 1988, between BFI and Texas 
               Commerce Bank National Association. (Exhibit 3.3 of Form 10-K for
               the fiscal year ended September 30, 1988, is hereby incorporated
               by reference.)

      4.2      First Amendment, dated March 1, 1989, to Rights Agreement,
               dated as of June 1, 1988, between BFI and Texas Commerce Bank
               National Association. (Exhibit 10.1 of Form 10-Q for the quarter
               ended June 30, 1989, is hereby incorporated by reference.)

      4.3      Second Amendment, dated March 7, 1990, to Rights Agreement,
               dated as of June 1, 1988, between the Registrant and First
               Chicago Trust Company of New York as successor Rights Agent.
               (Exhibit 4.1 of Form 10-Q for the quarter ended March 31, 1990,
               is hereby incorporated by reference.)

      4.4      Third Amendment, dated February 20, 1996, to Rights
               Agreement, dated as of June 1, 1988, between the Company and
               First Chicago Trust Company of New York as successor Rights
               Agent. (Exhibit 4 of Form 10-Q for the quarter ended March 31,
               1996, is hereby incorporated by reference.)

      4.5      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.)

      4.6      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.)

      4.7      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.)
</TABLE>



                                      -94-
<PAGE>   99

<TABLE>
<S>           <C>                                                        
      4.8      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.)

      4.9      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).

      4.10     Purchase Contract Agreement, dated as of June 28, 1995,
               between BFI and The First National Bank of Chicago, as Purchase
               Contract Agent. (Exhibit 4(i) of Form 8-K dated July 3, 1995, is
               hereby incorporated by reference.)

      4.11     Pledge Agreement, dated as of June 28, 1995, among BFI, Texas
               Commerce Bank National Association, as Collateral Agent, and The
               First National Bank of Chicago, as Purchase Contract Agent.
               (Exhibit 4(j) of Form 8-K dated July 3, 1995, 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.)
</TABLE>


                                      -95-
<PAGE>   100

<TABLE>
<S>           <C>
     10.7      Employment Agreement, dated as of November 1, 1991 between BFI 
               and Louis A. Waters. (Exhibit 10.7 of Form 10-K for the fiscal
               year ended September 30, 1991, is hereby incorporated by
               reference.)

     10.8      First Amendment, dated December 7, 1993, to the Employment 
               Agreement, dated as of November 1, 1991, between BFI and Louis A.
               Waters. (Exhibit 10 of the Form 10-Q for the quarter ended
               December 31, 1993, is hereby incorporated by reference.)

     10.9      Second Amendment, dated March 1, 1995, to Employment Agreement,
               dated as of November 1, 1991, between BFI and Louis A. Waters.
               (Exhibit 10.9 of Form 10-K for the fiscal year ended September
               30, 1995, is hereby incorporated by reference.)

     10.10     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.)

     10.11     Trust Agreement, dated September 7, 1988, between BFI and Texas 
               Commerce Bank, National Association with Louis A. Waters as
               Beneficiary. (Exhibit 10.9 of Form 10-K for the fiscal year ended
               September 30, 1988, is hereby incorporated by reference.)

     10.12     Browning-Ferris Industries, Inc. 1996 Stock Incentive Plan 
               (Exhibit 10.1 of Form 10-Q for the quarter ended March 31, 1997,
               is hereby incorporated by reference.)

     10.13     Browning-Ferris Industries, Inc. 1993 Stock Incentive Plan.
               (Exhibit 4(d) to Registration Statement on Form S-8 No. 33-53393
               is hereby incorporated by reference.)

     10.14     Browning-Ferris Industries, Inc. 1993 Non-Employee Director Stock
               Plan (Exhibit 4(e) to Registration Statement on Form S-8 No.
               33-53393 is hereby incorporated by reference.)

     10.15     Browning-Ferris Industries, Inc. 1990 Stock Option Plan. (Exhibit
               10.9 of Form 10-K for the fiscal year ended September 30, 1991,
               is hereby incorporated by reference.)

     10.16     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.)
</TABLE>



                                      -96-
<PAGE>   101

<TABLE>
<S>           <C>
     10.17     Browning-Ferris Industries, Inc. 1983 Stock Option Plan, as
               amended on December 2, 1986. (Exhibit 10.7 of Form 10-K for the
               fiscal year ended September 30, 1986, is hereby incorporated by
               reference.)

     10.18     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.)

     10.19     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.)

     10.20     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.)

     10.21     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.)

     10.22     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.)

     10.23     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.)

     10.24     Amended and Restated Partnership Agreement, dated as of 
               January 25, 1991, between Air Products Ref-Fuel, Inc. and BFI
               Ref-Fuel, Inc. (Exhibit 10.23 of Form 10-K for the fiscal year
               ended September 30, 1993, is hereby incorporated by reference.)

     10.25     Parent Agreement, dated as of January 25, 1991, between Air
               Products and Chemicals, Inc. and BFI. (Exhibit 10.24 of Form 10-K
               for the fiscal year ended September 30, 1996, is hereby
               incorporated by reference.)

     10.26     Purchase and Transfer Agreement between Otto Holding 
               International B.V., the Registrant and BFI Atlantic GmbH, dated
               September 27, 1993. (Exhibit 10.25 of Form 10-K for the fiscal
               year ended September 30, 1993, is hereby incorporated by
               reference.)
</TABLE>



                                      -97-
<PAGE>   102

<TABLE>
<S>           <C>
     10.27     BFI Deferred Compensation Agreement (Exhibit 10.26 of Form 10-K 
               for the fiscal year ended September 30, 1995, is hereby
               incorporated by reference.)

     10.28     BFI Convertible Annual Incentive Award Plan. (Exhibit 10.27
               of Form 10-K for the fiscal year ended September 30, 1995, is
               hereby incorporated by reference.)

     10.29     BFI Stock and Employee Benefit Trust Agreement, dated 
               February 28, 1995, between BFI and Wachovia Bank of North
               Carolina, N.A., as trustee. (Exhibit 10.28 of Form 10-K for the
               fiscal year ended September 30, 1995, is hereby incorporated by
               reference.)

     10.30     Common Stock Purchase Agreement, dated February 28, 1995,
               between BFI and Wachovia Bank of North Carolina, N.A., as
               trustee. (Exhibit 10.29 of Form 10-K for the fiscal year ended
               September 30, 1995, is hereby incorporated by reference.)

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

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

   * 10.33     Agreement, dated as of November 8, 1997, among BFI, BFI 
               International, Inc., Suez Lyonnaise Des Eaux, S.A. and SITA, S.A.

   * 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.

   * 27.1      Financial Data Schedule.
</TABLE>

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

Reports on Form 8-K

A Current Report on Form 8-K dated October 9, 1997 was filed pursuant to 
"Item 5. Other Events," relating to the Company's announcement of the final 
results of its Dutch Auction tender Offer. 

                                      -98-
<PAGE>   103

A Current Report on Form 8-K dated October 1, 1997 was filed pursuant to "Item
5. Other Events," relating to the Company's announcement of the Preliminary 
results of its Dutch auction tender offer.


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

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.

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


                                     -99-

<PAGE>   104

                                   SCHEDULE II




                BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                         ALLOWANCE FOR DOUBTFUL ACCOUNTS

                  For the Three Years Ended September 30, 1997
                                 (In Thousands)

<TABLE>
<CAPTION>
-----------------------------------------------------------
                       Additions
           Balance      Charged     Deductions      Balance
          Beginning       to           from         End of
           of Year      Income       Reserves        Year
-----------------------------------------------------------

<S>       <C>          <C>          <C>             <C>     
1997      $40,622      $30,116      $(32,362)       $38,376

1996      $39,777      $29,527      $(28,682)       $40,622

1995      $33,284      $26,620      $(20,127)       $39,777
</TABLE>








                                      100
<PAGE>   105
                                   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, 1997                          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/ David R. Hopkins
                                                    ----------------------------
                                                          David R. Hopkins,
                                                  Vice President, Controller and
                                                        Chief Accounting Officer




                                    -101-
<PAGE>   106
                                                      /s/ Gregory D. Brenneman
                                                    ----------------------------
                                                  Gregory D. Brenneman, Director

                                                      /s/ William T. Butler
                                                    ----------------------------
                                                          William T. Butler,
                                                               Director

                                                     /s/ C. Jackson Grayson, Jr.
                                                    ----------------------------
                                                        C. Jackson Grayson, Jr.,
                                                               Director

                                                      /s/ Gerald Grinstein
                                                    ----------------------------
                                                     Gerald Grinstein, Director,

                                                     /s/ Harry J. Phillips, Sr.
                                                    ----------------------------
                                                         Harry J. Phillips, Sr.,
                                                               Director


                                                    ----------------------------
                                                         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, 1997                                        Marina v.N. Whitman, 
                                                            Director




                                    -102-
<PAGE>   107
                                EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                      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 March 5, 1997. (Exhibit 3 of 
               Form 10-Q for the quarter ended March 31, 1997, is hereby
               incorporated by reference.)

      4.1      Rights Agreement, dated June 1, 1988, between BFI and Texas 
               Commerce Bank National Association. (Exhibit 3.3 of Form 10-K for
               the fiscal year ended September 30, 1988, is hereby incorporated
               by reference.)

      4.2      First Amendment, dated March 1, 1989, to Rights Agreement,
               dated as of June 1, 1988, between BFI and Texas Commerce Bank
               National Association. (Exhibit 10.1 of Form 10-Q for the quarter
               ended June 30, 1989, is hereby incorporated by reference.)

      4.3      Second Amendment, dated March 7, 1990, to Rights Agreement,
               dated as of June 1, 1988, between the Registrant and First
               Chicago Trust Company of New York as successor Rights Agent.
               (Exhibit 4.1 of Form 10-Q for the quarter ended March 31, 1990,
               is hereby incorporated by reference.)

      4.4      Third Amendment, dated February 20, 1996, to Rights
               Agreement, dated as of June 1, 1988, between the Company and
               First Chicago Trust Company of New York as successor Rights
               Agent. (Exhibit 4 of Form 10-Q for the quarter ended March 31,
               1996, is hereby incorporated by reference.)

      4.5      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.)

      4.6      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.)

      4.7      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.)
</TABLE>



                                     
<PAGE>   108

<TABLE>
<S>           <C>                                                        
      4.8      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.)

      4.9      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).

      4.10     Purchase Contract Agreement, dated as of June 28, 1995,
               between BFI and The First National Bank of Chicago, as Purchase
               Contract Agent. (Exhibit 4(i) of Form 8-K dated July 3, 1995, is
               hereby incorporated by reference.)

      4.11     Pledge Agreement, dated as of June 28, 1995, among BFI, Texas
               Commerce Bank National Association, as Collateral Agent, and The
               First National Bank of Chicago, as Purchase Contract Agent.
               (Exhibit 4(j) of Form 8-K dated July 3, 1995, 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.)
</TABLE>


                                     
<PAGE>   109

<TABLE>
<S>           <C>
     10.7      Employment Agreement, dated as of November 1, 1991 between BFI 
               and Louis A. Waters. (Exhibit 10.7 of Form 10-K for the fiscal
               year ended September 30, 1991, is hereby incorporated by
               reference.)

     10.8      First Amendment, dated December 7, 1993, to the Employment 
               Agreement, dated as of November 1, 1991, between BFI and Louis A.
               Waters. (Exhibit 10 of the Form 10-Q for the quarter ended
               December 31, 1993, is hereby incorporated by reference.)

     10.9      Second Amendment, dated March 1, 1995, to Employment Agreement,
               dated as of November 1, 1991, between BFI and Louis A. Waters.
               (Exhibit 10.9 of Form 10-K for the fiscal year ended September
               30, 1995, is hereby incorporated by reference.)

     10.10     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.)

     10.11     Trust Agreement, dated September 7, 1988, between BFI and Texas 
               Commerce Bank, National Association with Louis A. Waters as
               Beneficiary. (Exhibit 10.9 of Form 10-K for the fiscal year ended
               September 30, 1988, is hereby incorporated by reference.)

     10.12     Browning-Ferris Industries, Inc. 1996 Stock Incentive Plan 
               (Exhibit 10.1 of Form 10-Q for the quarter ended March 31, 1997,
               is hereby incorporated by reference.)

     10.13     Browning-Ferris Industries, Inc. 1993 Stock Incentive Plan.
               (Exhibit 4(d) to Registration Statement on Form S-8 No. 33-53393
               is hereby incorporated by reference.)

     10.14     Browning-Ferris Industries, Inc. 1993 Non-Employee Director Stock
               Plan (Exhibit 4(e) to Registration Statement on Form S-8 No.
               33-53393 is hereby incorporated by reference.)

     10.15     Browning-Ferris Industries, Inc. 1990 Stock Option Plan. (Exhibit
               10.9 of Form 10-K for the fiscal year ended September 30, 1991,
               is hereby incorporated by reference.)

     10.16     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.)
</TABLE>



                                      
<PAGE>   110

<TABLE>
<S>           <C>
     10.17     Browning-Ferris Industries, Inc. 1983 Stock Option Plan, as
               amended on December 2, 1986. (Exhibit 10.7 of Form 10-K for the
               fiscal year ended September 30, 1986, is hereby incorporated by
               reference.)

     10.18     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.)

     10.19     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.)

     10.20     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.)

     10.21     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.)

     10.22     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.)

     10.23     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.)

     10.24     Amended and Restated Partnership Agreement, dated as of 
               January 25, 1991, between Air Products Ref-Fuel, Inc. and BFI
               Ref-Fuel, Inc. (Exhibit 10.23 of Form 10-K for the fiscal year
               ended September 30, 1993, is hereby incorporated by reference.)

     10.25     Parent Agreement, dated as of January 25, 1991, between Air
               Products and Chemicals, Inc. and BFI. (Exhibit 10.24 of Form 10-K
               for the fiscal year ended September 30, 1996, is hereby
               incorporated by reference.)

     10.26     Purchase and Transfer Agreement between Otto Holding 
               International B.V., the Registrant and BFI Atlantic GmbH, dated
               September 27, 1993. (Exhibit 10.25 of Form 10-K for the fiscal
               year ended September 30, 1993, is hereby incorporated by
               reference.)
</TABLE>



                                      
<PAGE>   111

<TABLE>
<S>           <C>
     10.27     BFI Deferred Compensation Agreement (Exhibit 10.26 of Form 10-K 
               for the fiscal year ended September 30, 1995, is hereby
               incorporated by reference.)

     10.28     BFI Convertible Annual Incentive Award Plan. (Exhibit 10.27
               of Form 10-K for the fiscal year ended September 30, 1995, is
               hereby incorporated by reference.)

     10.29     BFI Stock and Employee Benefit Trust Agreement, dated 
               February 28, 1995, between BFI and Wachovia Bank of North
               Carolina, N.A., as trustee. (Exhibit 10.28 of Form 10-K for the
               fiscal year ended September 30, 1995, is hereby incorporated by
               reference.)

     10.30     Common Stock Purchase Agreement, dated February 28, 1995,
               between BFI and Wachovia Bank of North Carolina, N.A., as
               trustee. (Exhibit 10.29 of Form 10-K for the fiscal year ended
               September 30, 1995, is hereby incorporated by reference.)

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

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

   * 10.33     Agreement, dated as of November 8, 1997, among BFI, BFI 
               International, Inc., Suez Lyonnaise Des Eaux, S.A. and SITA, S.A.

   * 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.

   * 27.1      Financial Data Schedule.
</TABLE>

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

Reports on Form 8-K

A Current Report on Form 8-K dated October 9, 1997 was filed pursuant to 
"Item 5. Other Events," relating to the Company's announcement of the final 
results of its Dutch Auction tender Offer.