<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, 1996

                                     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: $5.7 billion, computed on the basis of $26.88 per share,
closing price of the common stock on the New York Stock Exchange, Inc. on
December 2, 1996.

There were 212,577,062 shares of the registrant's common stock, $.16-2/3 par
value, outstanding as of December 2, 1996.




                      DOCUMENTS INCORPORATED BY REFERENCE

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





                                     -ii-
<PAGE>   3
                               TABLE OF CONTENTS


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

   ITEM 1.  BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
      General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
      North American Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
         COLLECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
         POST-COLLECTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
           Landfills  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
           Transfer Stations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
           Medical Waste  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
           Recycling  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
         SERVICES GROUP AND OTHER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
      International Operations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
      Waste-To-Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
      Regulation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
      Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
      Waste Disposal Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
      Corporate Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
      Capital Expenditures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
      Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

   ITEM 2. PROPERTIES.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15

   ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
      Environmental Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16

   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 CONDITIONS AND RESULTS OF OPERATIONS  . . . . . . . . .  23

   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  37

   ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . .  82

PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  82
</TABLE>




                                    -iii-
<PAGE>   4
<TABLE>
<S>                                                                                                                    <C>
PART IV.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  82

   ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.  . . . . . . . . . . . . . . . . . . . .  82
      Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  82
      Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  82
      Exhibits  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  83

SIGNATURES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  89
</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., a
Delaware corporation incorporated 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 450
locations in North America and approximately 300 locations outside North
America and employs approximately 43,000 persons.  No single customer or
operating location accounts for a material amount of BFI's revenue or net
income.

During fiscal 1996, the Company began implementing 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
support 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
for fiscal 1997 as compared to historic levels of such expenditures.  See below
and also "Corporate Development" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations."

In August 1996, the Company realigned its North American operating organization
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 the Company's chief
operating officer.  The Company's six North American regions and forty-five
divisions were consolidated into thirteen 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 realignment is intended to increase the expertise and
efficiency of each function, improve and integrate customer service,





                                      -1-
<PAGE>   6
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, and report to the Chairman of
BFI International, Inc. in Houston.  BFI Europe, from its regional office in
the Netherlands, oversees the Company's operations in Finland, Germany, Italy,
the Netherlands, Spain, Switzerland and the United Kingdom.  Management
oversight for operations in Australia, the Dominican Republic, 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 revised long-term financial goals are to: (i) generate cash
returns on assets in excess of the weighted average cost of capital; (ii)
increase profits at a faster pace than the increase in revenues; and (iii)
maintain a strong credit rating appropriate for supporting business operations.
To more closely align management interests to shareholder interests, the
Company has also revised its long-term incentive compensation plans for
management to reallocate a significant portion of their stock option
participation to performance-based restricted stock that will vest only as
certain performance measures are attained.

The Company's business is subject to extensive U.S. and foreign governmental
regulation and legislative initiative.  Further, in some jurisdictions, both in
the U.S. and foreign countries, its business is also subject to 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, 1996,
the total revenues contributed by the Company's principal lines of business
under the operating structuring in effect during such periods.





                                      -2-
<PAGE>   7
<TABLE>
<CAPTION>
                                        Contribution to Consolidated Revenues
                                                    (in millions)
                                               Year Ended September 30,
                                        -------------------------------------
                                          1996           1995           1994  
                                         ------         ------         ------
<S>                                      <C>            <C>            <C>
North American Operations                                          
-------------------------                                          
                                                                   
Collection Services - Solid Waste        $2,886         $2,758         $2,360
                                                                   
Transfer and Disposal - Solid Waste       1,050          1,026            885
                                                                   
Recycling Services                          531            675            359
                                                                   
Medical Waste Services                      200            189            161
                                                                   
Services Group and Other                     89             83             83
                                                                   
Elimination of Affiliated Companies'                               
  Revenues                                 (513)          (483)          (392)
                                         ------         ------         ------

Total North American Operations           4,243          4,248          3,456
                                                                   
International Operations                  1,536          1,531            859   
------------------------                 ------         ------         ------
                                                                   
Total Company                            $5,779         $5,779         $4,315   
                                         ======         ======         ====== 
</TABLE>                                                           



Total assets at September 30, 1996, 1995 and 1994 were $7,601 million, $7,460
million and $5,797 million, respectively.


In the fourth quarter of fiscal 1996, the Company reported pre-tax special
charges of $447 million ($362 million or $1.80 per share after income taxes).
The special charges during the fourth quarter resulted primarily from
management decisions to sell the Company's Italian operations, divest certain
domestic and international non-core business assets and operations, close
certain recycling facilities not expected to achieve desired performance
objectives, and write down to fair value the Company's investment in the Azusa,
California, landfill.  See Note (4) of Notes to Consolidated Financial
Statements.





                                     -3-
<PAGE>   8
                           NORTH AMERICAN OPERATIONS

COLLECTION

BFI collects solid waste in approximately 300 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 1
million containers and approximately 10,000 specially equipped collection
trucks in its North American waste collection operations.

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

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

The Company is the largest provider of medical waste services in North America
and collects infectious and pathological waste materials from approximately
153,000 customers.

The Company also collects recyclable materials, principally paperboard, office
paper and other paper products, in North American from approximately 7 million
households, including curbside customers, and for approximately 203,000
commercial and industrial customers.  The Company's recycling collection
contracts often provide for the customers' 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 104 solid waste landfill sites in North America, 18 of which
are operated under contracts with municipalities or others.  The Company has
approximately 16,000 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 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 103 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 30 treatment sites using either incineration or
autoclaving (steam sterilization) technology.  One additional treatment site is
in the permitting process.

Recycling

The Company currently operates 146 recycleries in North America which receive,
process and dispose of recyclable materials.  During fiscal 1996 the Company
closed 12 recycling facilities due to the continuing weakness in recycled
commodity prices, and plans to close additional facilities during fiscal 1997.
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 more than 40 organic processing centers.  BFI also
produces and markets decorative bark, mulch, compost and organic soils to
secure a market for organic materials collected.

SERVICES GROUP AND OTHER

The Company also rents and services 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





                                     -5-
<PAGE>   10
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

The Company is involved in waste collection, processing, disposal and/or
recycling operations in approximately 300 locations (including locations of
unconsolidated affiliates) in Australia, the Dominican Republic, Finland,
Germany, Hong Kong, Italy, 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 175 locations and
operates 60 landfill sites in its international operations (including, in each
case, locations of unconsolidated affiliates). The Company also has 56
recycleries and 56 transfer stations in its international operations and uses
approximately 310,000 containers and approximately 4,400 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 1996, the Company reported consolidated revenues of approximately
$662 million applicable to Otto Waste Services.

During fiscal 1996, the Company announced its intention to divest its Italian
operations.  Although the Company intends to complete the sale during fiscal
1997, the Company does not have an agreement to sell the operations and cannot
determine at present the timing, or terms of such divestiture.  See Note (4) of
Notes to Consolidated Financial Statements.

                                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).

In April 1996, Air Products announced its intention to divest its partnership
interests in American Ref-Fuel.  Air Products has advised the Company that it
does not currently have an agreement to sell its partnership interests and
cannot determine at the present the timing of any such sale.  Air Products has
the right (and the Company has a reciprocal right) under the buy-sell
provisions of an agreement between the companies to designate a price and to
submit offers to the Company which would require the Company to either purchase
Air Products' partnership interests in American Ref-





                                     -6-
<PAGE>   11
Fuel, or sell the Company's partnership interests to Air Products, in
either case, at the designated price.  In the event Air Products elected to
initiate the buy-sell procedure, the Company would have at least 180 days to
respond to the buy-sell offers.  Additionally, the agreement requires that Air
Products obtain the Company's consent before transferring its interest in
American Ref-Fuel, which consent can not be unreasonably withheld.

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

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

In June 1996, American Ref-Fuel completed its acquisition of a 90% interest in
the SEMASS Partnership, which owns the SEMASS Resource Facility in Rochester,
Massachusetts.  The facility, which has a capacity of approximately 1,300,000
tons per year, utilizes a shred-and-burn process developed by Energy Answers
Corporation, an Albany, New York based company which had been managing general
partner of the facility since the plant's design phase.

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 $192 million at September 30, 1996.
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 1997, 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."





                                      -7-
<PAGE>   12
                                   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.

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





                                      -8-
<PAGE>   13
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 in effect, except for the financial
assurance requirements which the EPA has deferred to April 1997, although many
states have already implemented financial assurance programs.  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.

Under the Clean Air Act, the EPA proposed regulations in May 1991 that require
extensive methane gas collection systems to be installed at many of the
Company's landfills.  These regulations, as revised, were finalized in 1996 and
will be phased in through the adoption of state regulations and implementation
plans.  The Company has proceeded to design, permit and install gas extraction
and control systems at many of its facilities and believes these systems
substantially comply with EPA regulations.  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
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 net income 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 a financial test and corporate guarantee
for use by private Subtitle D facilities, which, if adopted, would afford the
Company a cost effective method to satisfy the financial assurance
requirements.  The Company has also established a captive insurance company
that is being used to provide insurance as a recognized means of demonstrating
this financial assurance.  The Company has had success and is continuing its
efforts to secure acceptance of captive-issued insurance policies which serve
as a cost-effective alternative to certain other forms of financial assurance,
such as letters of credit.





                                      -9-
<PAGE>   14
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 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,
which can 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





                                      -10-
<PAGE>   15
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.  Compliance with the Subtitle D
regulations has required costly expenditures by the Company and may in the
future require additional expenditures.  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
income from 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.

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.





                                      -11-
<PAGE>   16
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.


                             CORPORATE DEVELOPMENT

The Company's corporate development program will evaluate opportunities to
expand its customer base by entering into new domestic and international
markets, broadening the type of services offered and acquiring businesses and
properties.  However, the Company expects a reduction in capital expenditures
for acquisitions and other corporate development activities during fiscal 1997
as compared to historic levels of such expenditures, with an increased 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 also intends to divest certain domestic and international business
assets and operations that are not expected to achieve desired performance
objectives.  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."


                              CAPITAL EXPENDITURES

Capital expenditures were approximately $1.2 billion in fiscal 1996, consisting
of $256 million for acquired businesses.  Approximately $391 million was
expended in connection with internal market development projects, municipal
contracts and investment in affiliates and $579 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.





                                      -12-
<PAGE>   17
                       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              47
                           and Director (1)                             
                                                                        
Norman A. Myers            Vice Chairman, Chief Marketing                  60
                           Officer and Director (1)                     
                                                                        
J. Gregory Muldoon         Executive Vice President and                    42
                           Chief Operating Officer                      
                                                                        
Jeffrey E. Curtiss         Senior Vice President and                       48
                           Chief Financial Officer                      
                                                                        
Hugh J. Dillingham, III    Senior Vice President                           47
                           Post Collection                              
                                                                        
Sandra D. Glatzau          Senior Vice President                           44
                           Marketing and Sales                          
                                                                        
J. Frederick Snyder        Senior Vice President                           43
                           Collection                                   
                                                                        
Rufus Wallingford          Senior Vice President                           56
                           and General Counsel                          
                                                                        
David R. Hopkins           Vice President, Controller                      53
                           and Chief Accounting Officer                 
                                                                        
Louis A. Waters            Chairman and Chief Executive Officer of BFI     58
                           International, Inc. and Director (1)(2)      
</TABLE>                
                        
________________
* As of December 3, 1996.
(1)      Serves on the Executive Committee of the Board of Directors.
(2)      Serves on the Finance 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 a director in 1978, Chief Marketing Officer in March 1981
and Vice Chairman of the Board in December 1982.  He was initially elected a
Vice President in December 1970 and became 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 as a market development representative and from 1983
to 1988 served as a district manager in several locations. From early 1989
until October 1990, he served as President of CECOS International, Inc., a
subsidiary of the Company, through the discontinuation of its hazardous waste
business.  He then served as Regional Vice President of one of the Company's
former regions from October 1990 to November 1991.

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.





                                      -14-
<PAGE>   19
Mr. Snyder was elected Senior Vice President, Collection in September, 1996.
From 1989 through May 1996, Mr. Snyder served as Regional Vice President in two
of the Company's former regions.  Mr. Snyder joined the Company in 1976 and
served as a District Manager from 1977 through 1989.

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

Mr. 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.

Mr. Waters has served as Chairman and Chief Executive Officer of BFI
International, Inc. since May 1991 and as President of BFI International, Inc.
from March 1993 to October 1996.  He also serves as Chairman of the Finance
Committee of the Company and as a member of the Executive Committee of the
Company.  He served as Chairman of the Executive Committee from September 1980
until 1988 and as Chairman of the Board of the Company from August 1969 to
September 1980.  Mr.  Waters serves as a director or trustee of several
business, educational and charitable organizations.

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 5, 1997 in Houston, Texas.

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, Australia and Italy.  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.





                                      -15-
<PAGE>   20
BFI believes that its property and equipment is well-maintained and adequate
for its current needs. Although during fiscal 1997 BFI expects a reduction in
capital expenditures when compared to historic levels of such expenditures,
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.

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.





                                      -16-
<PAGE>   21
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
98 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 69 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
67 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 22 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.

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."





                                      -17-
<PAGE>   22
Management believes that the ultimate disposition of these environmental
matters will not have a materially adverse effect upon the liquidity, capital
resources 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 April 27, 1992, a subsidiary of the Company paid the City of Philadelphia
$1,600,000 as restitution and in settlement of any claims the City might have
brought relating to the disposal at a City-owned treatment plant of
non-hazardous waste material alleged to have been inconsistent with the
authorization granted by the City.  The Environmental Protection Agency and the
United States Attorney for the Southern District of Pennsylvania (the "U.S.
Attorney") have continued to investigate this matter and the Company has
continued to fully cooperate with such investigation.  The subsidiary has
recently entered into a plea agreement with the U.S. Attorney calling for the
subsidiary to enter a plea of guilty to three felony counts, one of which
charges a violation of the Clean Water Act, and pay a fine of $3,000,000,
together with a contribution of $1,500,000 to a program or programs designed to
benefit the environment in the Southern Pennsylvania area.  The subsidiary will
also make restitution payments in the amount of $642,000 to various publicly
owned treatment works in the Philadelphia area.

On March 6, 1991, Region VI of the EPA filed an administrative proceeding
entitled In the Matter of Chemical Reclamation Services, Avalon, Texas. The
complaint alleged that Chemical Reclamation Services ("CRS"), a former
subsidiary of the Company, failed to comply with certain notification
requirements under RCRA and under regulations established under the Texas
hazardous waste management program.  The complaint sought a proposed monetary
sanction against CRS in the amount of $229,500 and a claim for indemnity had
been made against the Company. In September 1996, the Company agreed to pay a
monetary sanction of $32,250, which represents one-half of the total monetary
sanction imposed upon CRS, in full settlement of the alleged violations.





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

In 1991, American Ref-Fuel Company of Essex County ("Ref-Fuel"), a New Jersey
partnership, received notices from the New Jersey Department of Environmental
Protection and Energy ("NJDEPE") alleging violations of its stormwater
discharge permit.  On December 1, 1991, Ref-Fuel entered into an Administrative
Consent Order ("ACO") and has paid monetary sanctions in the amount of
$487,000.  On November 8, 1996, NJDEPE terminated the ACO stating that all
required obligations have been fulfilled.  A subsidiary of the Company owns a
50% interest in Ref-Fuel.

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, 1995 and 1996, 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 1995              Fiscal Year 1996
                       -------------------------     --------------------------
                        High               Low        High                Low
                       -------           -------     -------            -------
<S>                    <C>               <C>         <C>                <C>
First Quarter          $32-3/8           $25-5/8     $31-7/8            $27-3/8
Second Quarter          34-1/4            27-1/8      32-5/8             28
Third Quarter           37-7/8            32-3/4      32-7/8             27-7/8
Fourth Quarter          40-5/8            30          29-1/8             21-3/8
</TABLE>                                          

As of December 3, 1996, there were approximately 17,900 holders of record of
BFI Common Stock.





                                      -19-
<PAGE>   24
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 1995 and 1996, 68 cents
was paid in dividends on each share of Common Stock.  The most recently
declared quarterly cash dividend on the Common Stock was 17 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 Multicurrency Revolving
Credit Agreement and 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 Stock pursuant to the most restrictive of such limitations
was approximately $945 million on September 30, 1996, after giving effect to
cash dividends paid or declared through September 30, 1996.  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, 1996.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                       Year Ended September 30,              
                   ----------------------------------------------------------
                     1996        1995       1994        1993        1992     
-----------------------------------------------------------------------------
                           (In Thousands Except for Per Share Amounts)
<S>               <C>         <C>         <C>        <C>         <C>
Operating
 Statement Data:

Revenues          $5,779,277  $5,779,351  $4,314,541 $3,478,830  $3,277,635


Income before
 special charges
 and extra-
 ordinary item    $  273,014  $  384,561  $  283,973 $  213,910  $  175,607

Income (loss)
 before extra-
 ordinary item    $  (89,172) $  384,561  $  283,973 $  197,440  $  175,607


Net income
 (loss)           $ (101,331) $  384,561  $  278,710 $  197,440  $  175,607

Income (loss)
 per common and
 common equiv-
 alent share -

  Income (loss)
   before extra-
   ordinary item      $(0.44)      $1.93       $1.52      $1.15       $1.11

  Net income (loss)   $(0.50)      $1.93       $1.49      $1.15       $1.11

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





(Continued on Following Page)





                                      -21-
<PAGE>   26

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                       Year Ended September 30,              
                   ----------------------------------------------------------
                     1996        1995       1994        1993        1992     
-----------------------------------------------------------------------------
                           (In Thousands Except for Per Share Amounts)
<S>                          <C>         <C>         <C>         <C>
Balance Sheet Data:

Property and
 equipment, net  $3,920,721  $3,722,292  $3,049,767  $2,515,709  $2,263,653


Total assets     $7,600,906  $7,460,372  $5,796,955  $4,295,642  $4,067,524


Senior long-term
 debt            $2,766,885  $1,665,804  $  713,680  $  333,689  $  349,183


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


Common stock-
 holders' equity $2,510,278  $2,741,750  $2,391,680  $1,532,603  $1,460,406



Cash Flow Data:

Capital
 expenditures    $  935,382  $  929,596  $  694,475  $  606,240  $  531,239

Payments for
  businesses
  acquired       $  188,451  $  769,369  $  398,734  $   83,786  $   21,644

Cash flows from
 operating
 activities      $  856,843  $1,030,489  $  693,928  $  613,965  $  577,007
</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

     The Company's fiscal 1996 results were disappointing.  Annual results were
heavily influenced by the significant decline in worldwide recycling commodity
prices experienced over the course of the past fiscal year and pre-tax special
charges of $447 million ($362 million or $1.80 per share after income taxes)
taken in the fourth quarter.  As a result, the Company reported a net loss of
$101 million for fiscal 1996.  These fiscal 1996 results also include the
after-tax extraordinary item ($12 million or $.06 per share after income taxes)
associated with the $745 million of Convertible Subordinated Debentures
redeemed during the second quarter of fiscal 1996.  Before considering special
charges and the extraordinary item, net income for the current fiscal year was
$273 million.  These fiscal 1996 results compare with net income for the prior
fiscal year of $385 million.  Fiscal 1996 revenues were unchanged from the
prior fiscal year at $5.8 billion.

     As stated above, the decline in the average value of worldwide recycling
commodities in the current year had a significant negative impact on the
Company's fiscal 1996 results, particularly in North America and in Germany.
In North America, apart from the significant decline in earnings from recycling
operations, operating results were affected favorably by increased earnings in
the collection business, partially due to improved customer pricing, and by
reduced incentive compensation costs, as compared with the prior year.  Current
year results were also affected negatively by higher interest expense resulting
from increased indebtedness, principally associated with the prior year
acquisition of Attwoods plc ("Attwoods") and other acquisitions.  A
continuation of low recycling commodity prices is expected to continue to
negatively affect the Company's earnings into fiscal 1997.

     The special charges of $447 million included in the fiscal 1996 results of
operations 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.  This writedown was a result of the changing competitive nature of
waste disposal in the Los Angeles market area





                                      -23-
<PAGE>   28
and the continuing negative legal climate, including recent adverse decisions
by California judicial and regulatory authorities, bearing on the site's
ability to accept municipal solid waste.  See Note (4) of Notes to Consolidated
Financial Statements for further discussion of the special charges.

     During fiscal 1996, the Company acquired 102 businesses with a combined
annual revenue base of $333 million.  In the first half of fiscal year 1995,
the Company acquired Attwoods, the largest acquisition in the history of the
Company, with estimated annualized revenues of $450 million, net of divested
operations.  Approximately 80% of Attwoods revenues, net of divested
operations, was derived from collection and landfill operations with the
remainder derived from recycling, medical waste and mineral extraction
operations.  The Company paid approximately $580 million to acquire this
integrated service company with operations principally in the United States and
the United Kingdom.  Prior year results include the operating results of
Attwoods beginning in December 1994.

     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.  The new organization should better focus
the Company on customer service, improving asset utilization and controlling
costs.  There was no reorganization charge recorded to cover the estimated
future expenses associated with this announcement.  The costs associated with
this reorganization are being expensed as incurred and approximately $4.2
million of these costs was recorded as selling, general and administrative
expense through September 30, 1996.  The Company expects to incur additional
costs associated with the reorganization during fiscal year 1997.

     During the fourth quarter, the Company announced 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.  This strategic
shift is also what led the Company to make the organization changes announced
in June 1996 discussed above and to set new long- term financial goals.  These
revised goals and actions taken will more closely align the Company's
performance with its stockholders' interests.  The generation of cash flow in
excess of the weighted average cost of capital is the Company's highest
financial priority.  In addition, the Company's revised incentive compensation
plans link employees to common goals and reward them only as stockholders and
customers benefit from the improved performance by the Company.  Finally, the
fiscal 1997 capital spending program has been substantially reduced from $1.2
billion in fiscal 1996 to $790 million in fiscal 1997, and the decisions
involving capital spending are now centralized.





                                      -24-
<PAGE>   29
Revenues

     Revenues for fiscal 1996 were $5.8 billion, unchanged from fiscal 1995.
Fiscal 1994 revenues were  $4.3 billion.  The following table reflects the
contribution to total revenue of the Company's business segments for the last
three years (in millions):

<TABLE>
<CAPTION>
                                       Year Ended September 30,    
                                    -------------------------------
                                     1996      1995       1994   
                                    ------    ------     ------ 
<S>                                 <C>       <C>        <C>
North American Operations (1)

Collection Services -
  Solid Waste                       $2,886    $2,758     $2,360

Transfer and Disposal -
  Solid Waste
    Unaffiliated customers             537       543        493
    Affiliated companies               513       483        392
                                    ------    ------     ------
                                     1,050     1,026        885

Recycling Services                     531       675        359
Medical Waste Services                 200       189        161
Services Group and Other                89        83         83
Elimination of affiliated
  companies' revenues                 (513)     (483)      (392)
                                    ------    ------     ------ 
Total North American Operations      4,243     4,248      3,456
                                    ------    ------     ------
International Operations

Germany                                662       710        344
The Netherlands                        323       323        237
United Kingdom                         193       176         55
Other                                  358       322        223
                                    ------    ------     ------
Total International Operations       1,536     1,531        859
                                    ------    ------     ------

Total Company                       $5,779    $5,779     $4,315
                                    ======    ======     ======
Percentage Increase from
  Prior Year                           --%       34%        24%
</TABLE>

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

    (1)  Revenues from Canadian operations of $169 million, $178 million and
    $162 million for fiscal years 1996, 1995 and 1994, respectively, are
    included in North American revenues.

    The following table reflects changes in revenues for fiscal 1996 from
price, volume, acquisitions and foreign currency translation compared with
revenue changes for fiscal years 1995 and 1994.  The fiscal 1996 growth in
revenue from acquisitions was more than offset by the significant decrease in
revenues due to price.





                                      -25-
<PAGE>   30
<TABLE>
<CAPTION>
                                         Change in Revenues      
                                  --------------------------------
                                   1996         1995         1994  
                                  ------       ------       ------
<S>                               <C>          <C>          <C>
Price                             (5.9)%        5.9%         0.6%
Volume                             0.4          5.8          7.3
Acquisitions                       5.7         19.9         16.6
Foreign currency translation      (0.2)         2.4         (0.5)
                                  ----         ----         ---- 
Total Percentage Increase           --%        34.0%        24.0%
                                  ====         ====         ====
</TABLE>

     Current year 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 over the past year.

     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 last
year.  In North America, despite the mitigating impact of floor price
contracts, the average price of recycling commodities for the current fiscal
year 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 this year.  Paper prices have
historically been cyclical, but in the past year, unprecedented changes in
recycling commodity prices have been experienced.  During fiscal 1996, the
Company developed a mechanism to enable it to quickly adjust recycling customer
pricing in order to preserve acceptable margins when commodity values decline.
This mechanism was implemented over the latter half of fiscal 1996.  The timely
adjustment of customer fees to correspond with changing commodity prices should
lessen earnings volatility in the future.  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.

     Revenues increased slightly due to volume in fiscal 1996 compared with
last year due to increased volumes in recycling operations offset by reductions
in collection and third party disposal volumes.  Third party landfill volumes
were affected negatively in the current year by self-imposed restricted
volumes, the closing of certain sites and the loss of disposal contracts.

     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.





                                      -26-
<PAGE>   31
Cost of Operations

     Cost of operations increased $168 million (4%) in fiscal 1996, $1,024
million (33%) in fiscal 1995, and $598 million (24%) in fiscal 1994, in each
case 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 and 72.4%
in fiscal 1994. 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 last year. The fiscal
1995 increase in cost of operations was due principally to the Attwoods and
Otto acquisitions.  The fiscal 1994 increase was due largely to the Otto
acquisition. Included in cost of operations is depreciation and amortization
expense of approximately $491 million, $453 million and $371 million for fiscal
years 1996, 1995 and 1994, respectively.

Selling, General and Administrative Expense (SG&A)

     SG&A expenses increased $31 million (4%) in fiscal 1996, $196 million
(30%) in fiscal 1995 and $88 million (16%) in fiscal 1994, in each case
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 and 15.0%
in fiscal 1994. The current year increase in SG&A expense 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.
The current year increase in SG&A expense was offset partially by the reduction
in fiscal 1996 incentive compensation considering the lower earnings level
achieved in 1996. The Company continuously strives to reduce SG&A costs through
the consolidation of administrative functions and other cost control measures
resulting from the identification and application of best practices within its
operations.

     Increased SG&A expenses in fiscal years 1995 and 1994 over the prior years
were principally due to acquisition activities, including the Attwoods and Otto
acquisitions. Included in SG&A expense for fiscal years 1996, 1995 and 1994 was
depreciation and amortization expense of $112 million, $99 million and $73
million, respectively.

Special Charges

     Special charges of $447 million ($362 million or $1.80 per





                                      -27-
<PAGE>   32
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.  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 recent adverse decisions by
California judicial and regulatory authorities, bearing on the site's ability
to accept municipal solid waste.  See Note (4) of Notes to Consolidated
Financial Statements for further discussion of the special charges and
potential additional related expenses to be recorded in fiscal 1997.

Interest Expense and Income

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

<TABLE>
<CAPTION>
                                    1996      1995      1994  
                                  --------  --------  --------
  <S>                             <C>      <C>       <C>
  Gross interest expense          $195,605  $170,958  $104,759
  Interest capitalized             (16,306)  (11,429)  (11,600)
                                  --------  --------  -------- 
  Interest expense                $179,299  $159,529  $ 93,159
                                  ========  ========  ========
  Interest income                 $  8,842  $  7,422  $ 11,288
                                  ========  ========  ========
</TABLE>

     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.  The $66.4 million increase in interest expense in fiscal
1995 over fiscal 1994 was also due principally to acquisition activities,
including the impact in fiscal 1995 of the acquisitions of Otto (acquired in
February 1994) and Attwoods.

     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.

     Fiscal year 1995 interest income declined principally as a result of
adjustments in international operations related to interest income accrued in
fiscal year 1994 on notes receivable amounts which the Company subsequently
determined would not be collected.  The increase in interest income in fiscal
1996 is reflective in part of the negative adjustment recorded in fiscal 1995
discussed above.





                                      -28-
<PAGE>   33
Equity in Earnings of Unconsolidated 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 the equity
investees in Germany.  The decline in earnings from equity investees in Germany
was due to the acquisition of the remaining 50% ownership interest of
Pfitzenmeier & Rau by Otto Waste Services during the second quarter of fiscal
1996. Equity in earnings of unconsolidated affiliates increased $17 million
from fiscal 1994 to fiscal 1995 due principally to earnings improvement of
American Ref-Fuel and German affiliates.  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.

Minority Interest in Income of Consolidated Subsidiaries

     The changes in minority interest in income of consolidated subsidiaries
are reflective of changes in the net income of Otto Waste Services.  The
current year decline of $18.4 million was principally due to the negative
impact of lower recycling commodity prices received in Germany in the current
year as compared with the prior year.  The increase in minority interest in
income of consolidated subsidiaries of $14.6 million from fiscal 1994 to 1995
was due to increased earnings from Otto, which was acquired in February 1994.

Income Taxes

     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 are not deductible for income tax purposes or that deductible
amounts could expire prior to utilization by the Company.  The Company's
effective income tax rate for fiscal years 1995 and 1994 was 40.0%.

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.





                                      -29-
<PAGE>   34
<TABLE>
<CAPTION>
                                        Year Ended September 30,
                                       -------------------------
                                         1996     1995     1994 
                                        ------   ------   ------
  <S>                                   <C>     <C>       <C>
  Profitability margins:
    Gross profit                        25.3%    28.2%    27.6%
    Income from operations
      before special charges            10.2%    13.7%    12.6%
    Income from operations               2.5%    13.7%    12.6%
    Income before income taxes,
      minority interest and
      extraordinary item                 0.5%    12.0%    11.6%
    Net income before special charges
      and extraordinary item (1)         4.7%     6.7%     6.6%
    Net income (loss) (1)               (1.8)%    6.7%     6.5%

  Other financial information:
    Pre-tax, pre-interest return on
      average total assets, excluding
      special charges                    8.4%    12.2%    11.4%

    Return on Gross Assets              11.4%    13.9%    14.0%

    Ratio of earnings to fixed charges   1.02(2)  4.04     4.25
</TABLE>

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

    (1) Fiscal 1996 and 1995 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 1996 special charges of $447
    million, the ratio of earnings to fixed charges for fiscal 1996 was 2.77.

     Special charges of $447 million taken in the fourth quarter of fiscal 1996
had a significant negative impact on the profitability margins of the Company
other than the gross profit margin.  Exclusive of the impact of these charges,
fiscal 1996 results reflected declines in all of the profitability margins
presented above as compared with the prior year.  These profitability margins
were affected negatively by the significant worldwide decline in the average
value of recycling commodities in the current year.  Lower average recycling
commodity prices in the current year principally affected earnings and
profitability margins in the Company's North American and German operations.
These profitability margins were also negatively affected in the current year
by the relatively low profit margins in the Company's Italian operations and,
to a lesser extent, its Spanish and Australian operations.  Management has made
the decision to sell the Italian operations and is continuing to focus on
improving its Spanish and Australian operating results.

     Operating income as a percent of revenues in the North American collection
business improved in the current year over last year while the gross profit
margin remained relatively flat.  Improved pricing in the collection business
in fiscal 1996 had a





                                      -30-
<PAGE>   35
favorable impact on profitability margins.  Slight improvements were noted in
the transfer and disposal business operations in the current year as well.

     Profitability ratios improved in fiscal year 1995 principally due to
increased commodity prices and volumes in the Company's recycling business, the
continued focus on cost reductions and, to a lesser extent, improved pricing
and volumes in other business areas.  The increase in gross profit margin was
driven by the Company's North American operations.  An increase in operating
profit margins was achieved as a result of the higher gross profit margin in
North American operations and due to SG&A expenses increasing at a slower pace
than revenues throughout the Company's international operations.

     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.
During fiscal 1995, total assets of the Company increased by $1.7 billion from
fiscal 1994, primarily as a result of the acquisition of Attwoods and other
businesses, foreign currency translation and capital expenditures.  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 the current year.  Despite the significant increase in
total assets in fiscal 1995, pre-tax, pre-interest return on average total
assets increased to 12.2% for fiscal 1995 due to higher profitability.

     As stated above, management's focus has shifted 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 new
measurement for the Company representing 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 1996).

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
1996, 1995 and 1994 was 11.4%, 13.9% and 14.0%, respectively.  The Company's
goal for fiscal 1997 is to increase ROGA by 0.5% from fiscal 1996 to 11.9%.





                                      -31-
<PAGE>   36
     EBITDA (defined herein as income from operations plus depreciation and
amortization expense before considering special charges) was $1.19 billion for
fiscal 1996 compared with $1.34 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, 1996 and 1995, the Company's balance sheet included
accrued environmental costs of $666 million and $703 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 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





                                      -32-
<PAGE>   37
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 98 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 69 of these 98
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 67 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 22 sites
has not yet been determined.  The number of Superfund sites with which the
Company's subsidiaries are involved may increase or decrease depending upon the
EPA's findings from responses to these information requests and any future
information requests which may be received.  Superfund legislation permits
strict joint and several liability to be imposed without regard to fault, and
as a result, one company may be required to bear significantly more than its
proportional share 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





                                      -33-
<PAGE>   38
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 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,     
                                  -----------------------------------
                                     1996       1995          1994  
                                  ---------  ----------    ---------- 
  <S>                             <C>        <C>        <C>
  Working capital (in thousands)  $(10,695)  $    7,967    $    7,104
  Working capital ratios             1.0:1        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.

     In connection with the acquisition of Attwoods in December 1994, the
Company and three of its subsidiaries entered into a Multicurrency Revolving
Credit Agreement for a total facility of 500 million pounds sterling
(subsequently converted to U.S. $750 million).  The Company is currently
engaged in amending this facility, which matures in December 1997, into a
364-day agreement.





                                      -34-
<PAGE>   39
The Company had repaid the $550 million in U.S. dollars borrowed under this
agreement by March 31, 1995.

     In March 1995, Otto 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 plus a margin.  The agreement requires a
facility fee of .45% per annum (.30% per annum if Otto maintains certain net
worth requirements) on the total facility commitment, whether used or unused.
At September 30, 1996, Otto had outstanding borrowings under this facility of
250 million deutsche mark (approximately U.S. $163.9 million).

     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 the cash proceeds totalling over $400 million are
received by the Company.

     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 ("the Debentures") were being
called for redemption.  The redemption, which occurred on February 2, 1996,
resulted in a one-time extraordinary charge to the Company's net income of
approximately $12.2 million, after income taxes, or approximately $.06 per
share.  The Debentures have been refinanced with (i) the issuance of $400
million of notes discussed below and (ii) additional commercial paper
borrowings.  These transactions had a favorable effect on the Company's
weighted average interest rate.

     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.

     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.





                                      -35-
<PAGE>   40
Borrowings under the commercial paper program may not exceed the available
credit under the Company's two existing bank credit agreements. There were
approximately $438.3 million of commercial paper borrowings outstanding as of
September 30, 1996.

     As of September 30, 1996, the Company's unused committed borrowing
capacity under its Multicurrency Revolving Credit Agreement and its $1 billion
bank credit agreement was in excess of $1.3 billion.  Such capacity may be used
to refinance amounts outstanding under short-term facilities, for financing
requirements in connection with foreign exchange contracts or for other capital
requirements.  Of the $2.8 billion of the Company's long-term indebtedness
outstanding at September 30, 1996, 72% was at fixed interest rates for a period
of at least 12 months.  Management's long-term objective is to maintain most of
its indebtedness in fixed interest rate obligations, although variable rate
debt has been and will likely continue to be used to meet short-term and
certain longer term financing needs.  The Company's weighted average cost of
indebtedness declined to approximately 7.2% for fiscal 1996 from 7.6% for
fiscal year 1995.

     Long-term indebtedness (including $553.1 million of Otto Waste Services
debt, which has not been guaranteed by the Company) as a percentage of total
capitalization increased from 47% at September 30, 1995 to 52% at September 30,
1996, principally as a result of acquisition and other market development
activities and the special charges of $447 million taken in the fourth quarter
of fiscal 1996.

     The capital appropriations budget for fiscal year 1997 has been
established at $790 million, of which $514.6 million is intended to provide for
normal replacement requirements and to provide new assets to support planned
revenue growth within all consolidated businesses.  The remaining $275.4
million is designated for corporate market development activities which
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.

     Cash flows from operating activities declined to $856.8 million for fiscal
1996 from $1.03 billion reported for last year, principally as a result of
lower earnings and the decrease in cash associated with the changes in other
liabilities offset partially by increased depreciation and amortization.  The
use of cash associated with the decrease in other liabilities was principally
the result of the slight decline in fiscal 1996 income tax payments relating to
current year earnings compared with fiscal 1995 despite significantly reduced
taxable income, the reduction in the change in accounts payable between years
and increased bonus payments early in fiscal 1996 associated with fiscal 1995
earnings.  As of September 30, 1996, there were no significant changes in
balance sheet caption amounts from September 30, 1995 other than the redemption
of convertible subordinated debentures.

     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.





                                      -36-
<PAGE>   41
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,
1996 and 1995, 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, 1996.  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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1996, 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, 1996





                                      -37-
<PAGE>   42
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                  For The Three Years Ended September 30, 1996

                  (In Thousands Except for Per Share Amounts)

<TABLE>
<CAPTION>
  -------------------------------------------------------------------------
                                             Year Ended September 30,      
                                       ------------------------------------
                                           1996         1995         1994  
  -------------------------------------------------------------------------
  <S>                                  <C>          <C>          <C>
  Revenues                             $5,779,277   $5,779,351   $4,314,541
  Cost of operations                    4,315,615    4,147,303    3,123,375
                                       ----------   ----------   ----------

  Gross profit                          1,463,662    1,632,048    1,191,166
  Selling, general and
    administrative expense                874,069      842,861      647,256
  Special charges                         446,800           --           --
                                       ----------   ----------   ----------

  Income from operations                  142,793      789,187      543,910
  Interest expense                        179,299      159,529       93,159
  Interest income                          (8,842)      (7,422)     (11,288)
  Equity in earnings of
    unconsolidated affiliates             (55,370)     (53,996)     (37,084)
                                       ----------   ----------   ---------- 

  Income before income taxes,
    minority interest and
    extraordinary item                     27,706      691,076      499,123
  Income taxes                            105,188      276,430      199,649
  Minority interest in income
    of consolidated subsidiaries           11,690       30,085       15,501
                                       ----------   ----------   ----------
  Income (loss) before
    extraordinary item                    (89,172)     384,561      283,973

  Extraordinary item - loss on
    redemption of debt, net of
    income tax benefit of
    $4,467, $-- and $2,833                 12,159           --        5,263
                                       ----------   ----------   ----------
  Net income (loss)                    $ (101,331)  $  384,561   $  278,710
                                       ==========   ==========   ==========
  Number of common and common
    equivalent shares used in
    computing earnings per share          200,668      199,077      187,621
                                       ==========   ==========   ==========
</TABLE>




(Continued on Following Page)





                                      -38-
<PAGE>   43
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                  For The Three Years Ended September 30, 1996

                  (In Thousands Except for Per Share Amounts)


<TABLE>
<CAPTION>
  -------------------------------------------------------------------------
                                             Year Ended September 30,      
                                       ------------------------------------
                                           1996         1995         1994  
  -------------------------------------------------------------------------
  <S>                                     <C>          <C>          <C>
  Income (loss) per common and
    common equivalent share:

    Income (loss) before extraordinary
      item                                $  (.44)     $  1.93      $  1.52
    Extraordinary item                       (.06)          --         (.03)
                                          -------      -------      ------- 
    Net income (loss)                     $  (.50)     $  1.93      $  1.49
                                          =======      =======      =======
  Cash dividends per common share         $   .68      $   .68      $   .68
                                          =======      =======      =======
</TABLE>





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





                                      -39-
<PAGE>   44
                 BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                            CONSOLIDATED BALANCE SHEET

                                     ASSETS
                                 (In Thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------     
                                                     September 30,         
                                             --------------------------     
                                                  1996           1995      
-----------------------------------------------------------------------     
<S>                                          <C>             <C>
CURRENT ASSETS:
  Cash                                       $  110,224      $   92,808
  Short-term investments                         26,394         104,761
  Receivables -
    Trade, net of allowances of $40,622
      and $39,777 for doubtful accounts         929,316         926,791
    Other                                        42,543          57,015
  Inventories                                    51,536          50,090
  Deferred income taxes                         119,914         116,871
  Prepayments and other                         107,868          73,959
                                             ----------      ----------
    Total current assets                      1,387,795       1,422,295
                                             ----------      ----------



PROPERTY AND EQUIPMENT, at cost, less
  accumulated depreciation and amortization
  of $2,737,788 and $2,395,795                3,920,721       3,722,292
                                             ----------      ----------




OTHER ASSETS:
  Cost over fair value of net tangible
    assets of acquired businesses,
    net of accumulated amortization of
    $138,636 and $116,369                     1,671,461       1,768,391
  Other intangible assets, net of
    accumulated amortization of $110,835
    and $142,780                                110,925         116,303
  Deferred income taxes                         122,617          78,689
  Investments in unconsolidated affiliates      287,051         272,205
  Other                                         100,336          80,197
                                             ----------      ----------

    Total other assets                        2,292,390       2,315,785
                                             ----------      ----------

    Total assets                             $7,600,906      $7,460,372
                                             ==========      ==========
</TABLE>



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





                                      -40-
<PAGE>   45
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                  LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
                     (In Thousands Except for Share Amounts)
<TABLE>
<CAPTION>                                                                     
-----------------------------------------------------------------------       
                                                     September 30,            
                                             --------------------------       
                                                  1996           1995         
-----------------------------------------------------------------------       
<S>                                          <C>             <C>
CURRENT LIABILITIES:
  Current portion of long-term debt          $   59,806      $   62,463
  Accounts payable                              507,731         515,304
  Accrued liabilities -
    Salaries and wages                          129,203         122,656
    Taxes, other than income                     40,876          41,960
    Other                                       430,187         434,855
  Income taxes                                   35,586          53,045
  Deferred revenues                             195,101         184,045
                                             ----------      ----------
    Total current liabilities                 1,398,490       1,414,328
                                             ----------      ----------
DEFERRED ITEMS:
  Accrued environmental and landfill
    costs                                       541,838         568,644
  Deferred income taxes                         108,041         104,645
  Other                                         275,374         220,257
                                             ----------      ----------
    Total deferred items                        925,253         893,546
                                             ----------      ----------
LONG-TERM DEBT, net of current portion        2,766,885       1,665,804
                                             ----------      ----------
CONVERTIBLE SUBORDINATED DEBENTURES                  --         744,944
                                             ----------      ----------
COMMITMENTS AND CONTINGENCIES

COMMON STOCKHOLDERS' EQUITY:
  Common stock, $.16 2/3 par; 400,000,000
    shares authorized; 213,390,458 and
    213,440,672 shares issued                    35,572          35,581
  Additional paid-in capital                  1,730,612       1,801,407
  Retained earnings                           1,031,331       1,328,244
  Treasury stock, 1,027,278 and 1,001,407
    shares, at cost                             (11,926)        (10,494)
  Stock and Employee Benefit Trust,
    11,012,423 and 13,596,325 shares           (275,311)       (412,988)
                                             ----------      ---------- 
    Total common stockholders' equity         2,510,278       2,741,750
                                             ----------      ----------
    Total liabilities and common
      stockholders' equity                   $7,600,906      $7,460,372
                                             ==========      ==========
</TABLE>



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





                                      -41-
<PAGE>   46
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1996
                                 (In Thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
                                             Year Ended September 30,     
                                        ----------------------------------
                                          1996          1995        1994  
--------------------------------------------------------------------------
<S>                                  <C>           <C>          <C>
Shares of common stock:
  Beginning of year                      213,441      197,085      174,232
  Stock option exercises                     563          423          867
  Common stock issuances related to -
    Public offering                           --           --       15,525
    Dividend Reinvestment Plan               101           38           96
    BFI Employee Stock Ownership and
      Savings Plan                           754          318          597
    Acquisitions                             988          555        5,708
    Stock and Employee Benefit Trust          --       15,000           --
  Retirements of common stock             (2,584)          --           --
  Other                                      127           22           60
                                        --------     --------     --------
  End of year                            213,390      213,441      197,085
                                        ========     ========     ========


Common stock:
  Beginning of year                     $ 35,581     $ 32,854     $ 29,044
  Stock option exercises                      94           71          145
  Common stock issuances related to -                    
    Public offering                           --           --        2,588
    Dividend Reinvestment Plan                17            6           16
    BFI Employee Stock Ownership and
      Savings Plan                           126           53          100
    Acquisitions                             165           93          951
    Stock and Employee Benefit Trust          --        2,501           --
  Retirements of common stock               (431)          --           --
  Other                                       20            3           10
                                        --------     --------     --------
  End of year                             35,572       35,581       32,854
                                        --------     --------     --------
</TABLE>                                





(Continued on Following Page)





                                      -42-
<PAGE>   47
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1996
                                  (In Thousands)                             
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
                                             Year Ended September 30,     
                                        ----------------------------------
                                          1996          1995        1994  
--------------------------------------------------------------------------
<S>                                    <C>          <C>          <C>
Additional paid-in capital:
  Beginning of year                    1,801,407    1,351,919      743,265
  Stock option exercises and related
    income tax benefit                    13,868         (933)      17,528
  Common stock issuances related to -
    Public offering, net of issuance
      costs                                   --           --      431,307
    Dividend Reinvestment Plan             2,908        1,137        2,587
    BFI Employee Stock Ownership and
      Savings Plan                        21,404        9,459       16,628
    Acquisitions                          29,133        8,245      139,788
    Stock and Employee Benefit Trust          --      456,874           --
  Adjustment of Stock and Employee
    Benefit Trust to market              (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            (74,858)          --           --
  Other                                     (862)        (801)         816
                                      ----------   ----------   ----------
  End of year                          1,730,612    1,801,407    1,351,919
                                      ----------   ----------   ----------

Retained earnings:
  Beginning of year                    1,328,244    1,009,132      761,325
  Net income (loss)                     (101,331)     384,561      278,710
  Cash dividends                        (133,623)    (137,014)    (126,818)
  Foreign currency translation
    adjustment                           (61,959)      71,565       95,915
                                      ----------   ----------   ----------
  End of year                          1,031,331    1,328,244    1,009,132
                                      ----------   ----------   ----------
</TABLE>





(Continued on Following Page)





                                      -43-
<PAGE>   48
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                  For The Three Years Ended September 30, 1996
                                 (In Thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
                                             Year Ended September 30,     
                                        ----------------------------------
                                          1996          1995        1994  
--------------------------------------------------------------------------
<S>                                  <C>           <C>          <C>
Treasury stock:
  Beginning of year                      (10,494)      (2,225)      (1,031)
  Stock option exercises                  (1,649)      27,013       (1,192)
  Common stock issuances related to -
    Dividend Reinvestment Plan                --        1,106           --
    BFI Employee Stock Ownership and
      Savings Plan                            --        9,228           --
    Acquisitions                             303        3,223           --
  Reimbursement from Stock and
    Employee Benefit Trust                    --      (48,921)          --
  Other                                      (86)          82           (2)
                                      ----------   ----------   ---------- 
  End of year                            (11,926)     (10,494)      (2,225)
                                      ----------   ----------   ---------- 


Stock and Employee Benefit Trust:
  Beginning of year                     (412,988)          --           --
  Establishment of trust                      --     (459,375)          --
  Reimbursement of treasury stock             --       48,921           --
  Reimbursements of common stock          75,289           --           --
  Adjustment to market                    62,388       (2,534)          --
                                      ----------   ----------   ----------
  End of year                           (275,311)    (412,988)          --
                                      ----------   ----------   ----------
Total common stockholders' equity     $2,510,278   $2,741,750   $2,391,680
                                      ==========   ==========   ==========
</TABLE>





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





                                      -44-
<PAGE>   49
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                  For The Three Years Ended September 30, 1996
                              (In Thousands)                                  
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
                                                Year Ended September 30,    
                                            --------------------------------
                                                1996       1995       1994  
----------------------------------------------------------------------------
<S>                                                               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                         $(101,331) $  384,561  $ 278,710
                                            ---------  ----------  ---------
  Adjustments to reconcile net income (loss)
   to cash provided by operating activities:
    Depreciation and amortization -
     Property and equipment                   521,185     476,384    391,639
     Goodwill                                  47,374      43,519     19,277
     Other intangible assets                   33,966      31,967     33,276
    Special charges                           446,800          --         --
    Deferred income tax expense                 3,034      23,450     23,458
    Amortization of deferred investment
     tax credit                                  (706)       (706)      (706)
    Provision for losses on accounts
     receivable                                29,527      26,620     31,346
    Gains on sales of fixed assets             (4,512)     (4,724)    (5,167)
    Equity in earnings of unconsolidated
     affiliates, net of dividends received    (13,455)    (28,535)   (19,442)
    Minority interest in income of
     consolidated subsidiaries, net of
     dividends paid                            10,895      26,344     15,501
    Increase (decrease) in cash from
     changes in assets and liabilities
     excluding effects of acquisitions:
      Trade receivables                       (28,683)    (70,069)  (112,586)
      Inventories                               1,563      (5,466)     2,606
      Other assets                             29,991      52,625    (14,563)
      Other liabilities                      (118,805)     74,519     50,579
                                            ---------   ---------  ---------
    Total adjustments                         958,174     645,928    415,218
                                            ---------   ---------  ---------
  Net cash provided by operating activities   856,843   1,030,489    693,928
                                            ---------   ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                       (935,382)   (929,596)  (694,475)
  Payments for businesses acquired           (188,451)   (769,369)  (398,734)
  Investments in unconsolidated affiliates    (82,535)    (29,530)   (54,342)
  Proceeds from disposition of assets          57,742     159,217     74,797
  Purchases of short-term investments              --     (42,179)        --
  Sales of short-term investments             302,065     201,924    147,424
  Return of investment in unconsolidated
   affiliates                                  56,861      38,637     30,431
                                            ---------  ----------  ---------
  Net cash used in investing activities      (789,700) (1,370,896)  (894,899)
                                            ---------  ----------  --------- 
</TABLE>
(Continued on Following Page)





                                      -45-
<PAGE>   50
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                  For The Three Years Ended September 30, 1996
                              (In Thousands)                                  
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                                Year Ended September 30,     
                                           ----------------------------------
                                                1996       1995       1994   
-----------------------------------------------------------------------------
<S>                                         <C>       <C>          <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuances of stock             13,316      15,363    450,876
  Proceeds from issuances of
    indebtedness                              980,834   1,062,652    175,111
  Repayments of indebtedness                 (904,459)   (591,884)  (246,761)
  Dividends paid                             (137,944)   (134,139)  (122,944)
                                            ---------  ----------   -------- 
  Net cash provided by (used in)
   financing activities                       (48,253)    351,992    256,282
                                            ---------  ----------   --------

EFFECT OF EXCHANGE RATE CHANGES                (1,474)      2,092        949
                                            ---------  ----------   --------
NET INCREASE IN CASH                           17,416      13,677     56,260
CASH AT BEGINNING OF YEAR                      92,808      79,131     22,871
                                            ---------  ----------   --------
CASH AT END OF YEAR                         $ 110,224  $   92,808   $ 79,131
                                            =========  ==========   ========

SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
  Interest, net of capitalized amounts       $174,590    $153,576   $ 97,996
  Income taxes                               $163,251    $205,544   $174,005
</TABLE>





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





                                      -46-
<PAGE>   51
               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 14 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, 1996 and 1995, short-term investments
of approximately $26.4 million and $104.8 million, respectively, were invested
in time deposits.

Inventories.

     Inventories consisting principally of equipment parts, mate-rials 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 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





                                      -47-
<PAGE>   52
              BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

years 1996, 1995 and 1994 was $16,306,000, $11,429,000 and $11,600,000,
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 benefitted 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 1996, 1995 and 1994, maintenance and repairs charged to cost of
operations were $336,374,000, $325,658,000 and  $247,143,000, 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 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.





                                      -48-
<PAGE>   53
              BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Deferred income taxes.

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

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,
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.





                                      -49-
<PAGE>   54
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     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.

     Other deferred items -

     Deferred items as of September 30, 1996 and 1995 were as follows (in
thousands):

<TABLE>
<CAPTION>
                                            1996        1995  
                                          --------    --------
  <S>                                     <C>         <C>
  Self-insurance accruals                 $ 90,515    $ 82,508
  Minority interest in consolidated
    subsidiaries                            59,376      44,583
  Accrued pension costs                     39,734      34,798
  Unamortized investment tax credits        20,393      21,099
  Other                                     65,356      37,269
                                          --------    --------
                                          $275,374    $220,257
                                          ========    ========
</TABLE>

     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.
In addition to the above deferred items, included in other accrued liabilities
at September 30, 1996 and 1995 was the current portion of self-insurance
accruals of $87,274,000 and $83,971,000, respectively,





                                      -50-
<PAGE>   55
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

and accrued pension costs of $14,625,000 and $20,388,000, respectively.

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, 1996 or
1995.

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 1996 presentation.

New accounting pronouncement.

     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.  SFAS No. 121 is effective for the
Company's fiscal year 1997.  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 is not expected to have a material
effect on the Company's financial position or results of operations.

(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





                                      -51-
<PAGE>   56
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 being expensed as incurred and
approximately $4.2 million was recorded as selling, general and administrative
expense through September 30, 1996.

(4)  Special charges -

     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 to fair value of the Company's
investment in the Azusa, California landfill.  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 recent adverse
decisions by California judicial and regulatory authorities, bearing on the
site's ability to accept municipal solid waste.

     The Company has initiated a plan to sell its Italian operations, which has
been formally approved by the Company's Board of Directors.  The Company
expects to complete the sale of these operations during 1997. The difficult
political and economic environment and the inability to build the desired
operating infrastructure in Italy have negatively affected the Company's
ability to achieve adequate returns on invested capital and were significant
factors considered in reaching this decision.  The Company's investment in its
Italian operations, before considering special charges, was $206 million as of
September 30, 1996.  During the period that the sale of all or substantially
all of the Italian operations occurs, losses accumulated in the foreign
currency translation component of common stockholders' equity ($49 million at
September 30, 1996) must be reported as an additional loss on sale of these
operations.  Summary financial information related to the Company's Italian
operations is as follows (in thousands):

<TABLE>
<CAPTION>
                              For the Years Ended September 30,
                              ---------------------------------
                                1996         1995        1994  
                              ---------    --------    --------
    <S>                       <C>          <C>         <C>
    Revenues                  $ 122,782    $103,819    $ 55,489
    Income (loss) from
      operations and equity
      in earnings of uncon-
      solidated affiliates    $(182,584)   $     65    $ (7,831)
</TABLE>





                                      -52-
<PAGE>   57
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     The Company has also decided to divest of certain domestic and
international non-core business assets and operations and close certain
recycling facilities.  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 have been adversely affected by the
significant decline in commodity prices.  The special charges, which include
asset writedowns and related liabilities recorded for certain contractual
arrangements, do not consider future expenses associated principally with
severance and relocation costs which will occur as a result of these decisions.
These divestitures and closures are expected to be completed during 1997.
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 are not
material to the Company's consolidated results of operations as the aggregated
revenues and income (loss) from operations of these assets and operations
represent less than 4% of the Company's corresponding consolidated totals, on a
pre-special charges basis.

     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.  The Company has appealed this decision.  (See Note
(11).)  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 recent 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.

(5)  Business combinations -

     During the current 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.





                                      -53-
<PAGE>   58
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     On December 2, 1994, the Company acquired majority control of Attwoods plc
("Attwoods"), which was a provider of waste services operating principally in
the United States, the United Kingdom, the Caribbean and mainland Europe
(primarily Germany) and also had mineral extraction operations in the United
Kingdom.  The Company increased its ownership from 56.6% of the outstanding
ordinary shares (including ordinary shares represented by American Depository
Shares) of Attwoods and 80.8% of the convertible preference shares of Attwoods
(Finance) N.V., a finance subsidiary of Attwoods, at December 2, 1994 to 94.4%
of the outstanding ordinary shares and 83.2% of the convertible preference
shares as of December 31, 1994.  The Company acquired the remaining ordinary
shares that it did not own and certain additional preference shares during the
second quarter of fiscal 1995.  The Company paid approximately $580 million (in
pounds sterling except where requested to pay U.S. dollars by individual
shareholders) to acquire the ordinary and convertible preference shares of
Attwoods as discussed above.  Additionally, during the second quarter of fiscal
1995, the Company redeemed the remaining outstanding convertible preference
shares.  In connection with the acquisition, the Company sold in June 1995 the
portable sanitation and accommodation business of Attwoods in continental
Europe, primarily Germany.  As a result of this transaction, the Company
reduced the purchase price of this acquisition by the 80.5 million in deutsche
mark (U.S. $56.8 million) received and further adjusted the purchase price for
the 1.1 million in deutsche mark (U.S. $700,000) in contingent payments
received subsequent to December 31, 1995.  The Attwoods acquisition has been
accounted for as a purchase.

     In addition to the Attwoods transaction, during the prior fiscal year, the
Company paid approximately $191.5 million (including additional amounts
payable, principally to former owners, of $9.4 million and the issuance of
262,948 shares of the Company's common stock valued at $8.1 million) to acquire
102 solid waste businesses.  These businesses were accounted for as purchases
and included the acquisition of the remaining 50% ownership interest
outstanding of Servizi Industriali S.r.l., its joint venture in Italy.  In
connection with these acquisitions, the Company recorded additional
interest-bearing indebtedness of $17.8 million and other liabilities of $49.3
million.  The Company also exchanged 397,221 shares of its common stock and
assumed liabilities and equity of $5.6 million in connection with one business
combination that met the criteria to be accounted for as a
pooling-of-interests.  As the effect of this business combination was not
significant, prior period financial statements were not restated.

     The results of all businesses acquired in fiscal years 1996 and 1995 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





                                      -54-
<PAGE>   59
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

financial information included in the Company's consolidated financial
statements is subject to adjustment prospectively as subsequent revisions in
estimates of fair value, if any, are necessary.

     The Company's consolidated results of operations on an unaudited pro forma
basis for fiscal year 1995, as though the businesses acquired during fiscal
year 1995 had been acquired on October 1, 1994, are as follows (in thousands,
except per share amounts):

<TABLE>
  <S>                                       <C>
  Pro forma revenues                        $5,978,994
  Pro forma net income                      $  387,416
  Pro forma earnings per common
   and common equivalent share              $     1.94
</TABLE>

     These pro forma results are presented for informational purposes only and
do not purport to show the actual results which would have occurred had the
business combinations been consummated on October 1, 1994, nor should they be
viewed as indicative of future results of operations.

(6)  Property and equipment -

     Property and equipment at September 30, 1996 and 1995 was as follows (in
thousands):
<TABLE>
<CAPTION>
                                        1996           1995   
                                     ----------     ----------
   <S>                               <C>            <C>
   Land and improvements             $  340,034     $  303,848
   Buildings                            616,596        538,040
   Landfills                          1,897,206      1,737,975
   Vehicles and equipment             3,686,466      3,387,795
   Construction-in-progress             118,207        150,429
                                     ----------     ----------
     Total property and equipment     6,658,509      6,118,087
   Less accumulated depreciation
     and amortization                 2,737,788      2,395,795
                                     ----------     ----------
     Property and equipment, net     $3,920,721     $3,722,292
                                     ==========     ==========
</TABLE>

     Included in the landfill category of property and equipment, net are $78.1
million and $118.6 million as of September 30, 1996 and 1995, 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 invest-ments 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





                                      -55-
<PAGE>   60
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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%), Servizi Industriali Group (Italy) (50% - for the period through
December 1994, at which time the remaining 50% ownership interest was
acquired), 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).

<TABLE>
<CAPTION>
                                        1996           1995   
                                     ----------     ----------
<S>                                  <C>            <C>
Combined Balance Sheet Information
  as of Fiscal Yearend:
    Assets -
      Current assets                 $  233,891     $  241,787
      Noncurrent assets               1,528,799      1,118,959
                                     ----------     ----------
                                     $1,762,690     $1,360,746
                                     ==========     ==========
    Liabilities and Net Worth -
      Current liabilities            $  181,184     $  142,967
      Noncurrent liabilities          1,221,633        913,213
      Net worth                         359,873        304,566
                                     ----------     ----------
                                     $1,762,690     $1,360,746
                                     ==========     ==========
Company's Investments in and
  Advances to Equity Investees
  (including subordinated note
  and other receivables of
  $63,106 and $81,822,
  respectively)                      $  259,486     $  239,372
                                     ==========     ==========

<CAPTION>
                                      1996      1995      1994  
                                    --------  --------  --------
<S>                                 <C>       <C>       <C>
Combined Income Statement
  Information for the Fiscal
  Year Ended:
    Revenues                        $511,086  $500,989  $398,753
    Gross profit                    $213,236  $211,555  $162,870
    Net income                      $ 95,438  $ 94,463  $ 74,804

Company's Equity in Earnings
  of Equity Investees (1)           $ 55,370  $ 53,996  $ 37,084

Dividends Received from Equity
  Investees                         $ 41,915  $ 25,461  $ 17,642
</TABLE>





                                      -56-
<PAGE>   61
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

----------------
    (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.

(8)  Accrued environmental and landfill costs -

     Accrued environmental and landfill costs at September 30, 1996 and 1995
were as follows (in thousands):

<TABLE>
<CAPTION>
                                             1996           1995  
                                           --------       --------
Continuing operations -
<S>                                        <C>            <C>
  Accrued costs associated with open
    landfills (including landfills under
    expansion)                             $334,793       $343,746

  Accrued costs associated with closed
    landfills and corrective action
    costs (including Superfund sites)       223,781        232,169
                                           --------       --------
       Total                                558,574        575,915

  Less current portion (included in
    other accrued liabilities)               92,536        101,295
                                           --------       --------
       Total long-term                     $466,038       $474,620
                                           ========       ========

Discontinued operations -

  Accrued costs of closure, post-
    closure and certain other
    liabilities associated with
    discontinued operations                $107,832       $126,931

  Less current portion (included in
    other accrued liabilities)               32,032         32,907
                                           --------       --------
       Total long-term                     $ 75,800       $ 94,024
                                           ========       ========

Total long-term portion of accrued
 environmental and landfill costs          $541,838       $568,644
                                           ========       ========
</TABLE>


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





                                      -57-
<PAGE>   62
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Open landfills.

     The Company operates 100 solid waste landfills in the United States, 18 of
which are operated under contracts with municipalities or others.  The Company
also operates 64 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
1996, approximately $225-$250 million  of additional accruals are to be
provided over the remaining lives of these facilities. Estimated additional
environmental costs ranging from $425-$475 million, principally related to
capping and certain methane gas control and recovery activities expected to
occur during the operating lives of these sites, are also to be expensed over
the remaining lives of these landfill facilities.

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, 1996 and 1995 was as follows (in
thousands):





                                      -58-
<PAGE>   63
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                         1996           1995  
                                      ----------    ----------
<S>                                   <C>           <C>
Senior indebtedness:
  6.10% Senior Notes, net of
    unamortized discount of $1,838    $  198,162      $     --
  6.375% Senior Notes, net of
    unamortized discount of $2,051       197,949            --
  7.40% Debentures, net of
    unamortized discount of $2,082
    and $2,136                           397,918       397,864
  7 7/8% Senior Notes, net of
    unamortized discount of $783
    and $875                             299,217       299,125
  9 1/4% Debentures                      100,000       100,000
  Solid waste revenue bond
    obligations                          149,127       114,079
  Other notes payable, primarily
    5.0%-14.0%                           804,721       585,211
                                      ----------    ----------
                                       2,147,094     1,496,279
Commercial paper and short-term
  facilities to be refinanced            679,597       231,988
                                      ----------    ----------
Total long-term debt                   2,826,691     1,728,267
Less current portion                      59,806        62,463
                                      ----------    ----------
Long-term debt, net of current
  portion                             $2,766,885    $1,665,804
                                      ==========    ==========
</TABLE>

     The long-term portion of the debt outstanding at September 30, 1996,
matures as follows: 1998, $345,278,000; 1999, $159,767,000; 2000, $795,931,000;
2001, $27,137,000 and in subsequent years, $1,438,772,000.

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).

7.40% 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





                                      -59-
<PAGE>   64
              BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

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.

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.

8 1/2% Sinking Fund Debentures.

     In April 1994, the Company called for redemption its $100 million 8 1/2%
Sinking Fund Debentures due 2017 which were originally issued in January 1987.
As a result, the Company recorded an after-tax loss of $5,263,000, which has
been reflected as an extraordinary item in fiscal 1994 in the Company's
Consolidated Statement of Operations.

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, 1996 and 1995, the Company had no
outstanding borrowings under this bank credit agreement.

     In connection with the acquisition of Attwoods in December 1994, the
Company and three of its subsidiaries entered into a Multicurrency Revolving
Credit Agreement for a total facility of 500 million pounds sterling
(subsequently converted to U.S. $750 million).  The facility, which matures
December 31, 1997, can be





                                      -60-
<PAGE>   65
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

utilized to borrow U.S. dollars, pounds sterling or deutsche mark as determined
by the Company.  At the option of the Company, the loans bear a rate of
interest, generally for periods of six months or less, based on the prime rate
or LIBOR, a certificate of deposit rate or the federal funds rate, plus a
margin.  The Multicurrency Revolving Credit Agreement with Credit Suisse, as
administrative agent for a group of U.S. and international banks, currently
requires a facility fee of .12% per annum. This agreement contains a net worth
requirement of $1.5 billion which increases annually after September 30, 1995
by 25% of the consolidated net income of the preceding year and excludes the
effect of any foreign currency translations on net worth.  Prior to March 31,
1995, the Company had repaid the $550 million in U.S.  dollars borrowed during
December 1994.  Interest was payable on this indebtedness at an average
interest rate of approximately 6.5%.  At September 30, 1996 and 1995, 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, 1996 and 1995, Otto Waste
Services had outstanding borrowings under this facility of 250 million deutsche
mark (approximately U.S. $163.9 million) and 140 million deutsche mark
(approximately U.S. $98.1 million), respectively.

     As of September 30, 1996, distributions from retained earnings could not
exceed $945 million 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 agree-ments 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 5.89%.  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 is payable semi-annually on the senior notes at rates
ranging from 7.5 - 8.0%.  The senior notes mature between December 1997 and
March 1998.





                                      -61-
<PAGE>   66
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     Additionally, notes payable includes mortgages payable and other secured
debt, unsecured debt and capitalized lease obligations of the Company.
Approximately $336 million and $321 million of this indebtedness at September
30, 1996 and 1995, 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.

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.  At September 30, 1996 and 1995, the
Company had commercial paper and other short-term borrowings of $679,597,000
and $231,988,000, respectively, classified as long-term debt.  It is the
Company's intention to refinance certain commercial paper balances and other
outstanding 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 such commercial
paper balances and other outstanding borrowings to be refinanced as of
September 30, 1996 and 1995 is as follows (amounts in thousands):

<TABLE>
<CAPTION>
                              1996                  1995         
                       --------------------  --------------------
                         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%     $ 34,317       6%
  Germany                241,301    5-10%      197,671    5-10%
                        --------              --------         
                        $679,597              $231,988         
                        ========              ========
</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 ("the Debentures") were being
called for redemption.  The redemption, which occurred on February 2, 1996,
resulted in a one-time extraordinary charge to the Company's net income of
$12.2 million, after income taxes, or approximately $.06 per share.  The
Debentures were refinanced with (i) the net proceeds from the





                                      -62-
<PAGE>   67
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

issuance of $400 million of Senior Notes issued in January 1996 and (ii)
additional commercial paper borrowings to be refinanced through other long-term
financings.

(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.

     California judicial and regulatory authorities suspended the Company's
ability to accept municipal solid waste at certain portions of its Azusa,
California landfill in January 1991.  The Company has continued to use the
facility for the disposal of primarily inert waste. Since January 1991, the
Company has sought and  received  the  ability to dispose of certain additional
non- municipal solid waste streams at the facility.  In 1995, the Company was
allowed to continue to accept municipal solid waste in a portion of the
landfill dependent on the satisfaction of certain technical requirements
mandated by California authorities.  In October 1996 (pursuant to a judicial
order issued in September), California authorities again suspended the
Company's ability to accept municipal solid waste at its Azusa, California
landfill pending compliance with certain additional regulatory requirements.
Although this decision has been appealed, the Company determined that recovery
of its total investment in this facility was unlikely.  Accordingly, a special
charge of $98 million was recorded to reduce the carrying amount of this
investment to its estimated fair value.  See Note (4).

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

     While the final resolution of any matter may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes that the ultimate disposition





                                      -63-
<PAGE>   68
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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, 1996, 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 Com-pany 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 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:

  Hempstead, New York - Funding of 50% of periodic payments related to
     outstanding debt.  At September 30, 1996, $215 million of  total
     unamortized project debt was outstanding.  Average annual debt service on
     50% of the debt over the next five years is $11 million.





                                      -64-
<PAGE>   69
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

  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, 1996, 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, 1996, $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 $342 million (weighted average
     fixed rate of 9.7%) of non-recourse debt as of September 30, 1996. 
     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,
1996, total minimum rental commitments becoming payable under all
noncancellable operating leases are as follows (in thousands):

<TABLE>
   <S>        <C>              <C>                      <C>
   1997       $65,495          2001                     $31,455
   1998       $59,340          2002 - 2006              $94,397
   1999       $51,937          2007 - 2011              $63,893
   2000       $44,546          All years thereafter     $15,953
</TABLE>

    Total rental expenses for fiscal years 1996, 1995 and 1994, substantially
all of which related to fixed amount rental agreements, were $105,134,000,
$95,526,000 and $58,667,000, respectively.





                                      -65-
<PAGE>   70
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(12) Preferred stock -

     The Company is authorized by its Restated Certificate of In-corporation 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 number of common and
common equivalent shares used in computing primary earnings per share (in
thousands):





                                      -66-
<PAGE>   71
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                      Year Ended September 30,  
                                    ----------------------------
                                      1996      1995      1994 
                                    -------   -------   -------
<S>                                 <C>       <C>       <C>
Common shares outstanding, end
  of period                         212,363   212,439   196,341
Less - Shares held in the Stock
  and Employee Benefit Trust        (11,012)  (13,596)       --
                                    -------   -------   -------
Common shares outstanding for
  purposes of computing primary
  earnings per share, end of
  period                            201,351   198,843   196,341

Effect of using weighted average
  common and common equivalent
  shares outstanding                 (1,398)   (1,199)   (9,788)
Effect of shares issuable under
  stock option plans based on
  the treasury stock method             715     1,433     1,068
                                    -------   -------   -------
Shares used in computing
  primary earnings per share        200,668   199,077   187,621
                                    =======   =======   =======
</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 di-luted 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 7.25% Automatic
Common Exchange Securities had no effect on the computations for the periods
presented.





                                      -67-
<PAGE>   72
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 af-fording
employees, directors and other persons affiliated with the Company the right to
purchase shares of its common stock.  At September 30, 1996, options were
available for future grants only under five plans, the Company's 1987, 1990,
both 1993 plans and the 1996 plan (subject to stockholder approval). At
September 30, 1996, 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.  No option may be granted at a price less than the
stock's fair market value on the date of the grant.





                                      -68-
<PAGE>   73
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
     Transactions under all stock option plans are summarized below:

                                   Year Ended September 30,        
                           ----------------------------------------
                              1996           1995           1994   
                           ----------     ----------     ----------
 <S>                       <C>            <C>            <C>
 Options outstanding at
   beginning of year       10,172,917      9,905,868      9,708,547
 Options granted            2,688,600      1,758,400      1,697,000
 Options terminated          (285,980)      (204,395)      (632,870)
 Options exercised           (563,073)    (1,286,956)      (866,809)
                           ----------     ----------     ----------
 Options outstanding at
   end of year             12,012,464     10,172,917      9,905,868 
                           ==========     ==========     ==========
 Options exercisable at
   end of year              6,852,999      5,921,652      5,939,033
 Options available for
   future grants at
   end of year              2,423,544(1)   4,925,856      6,501,573
 Total option price of
   options outstanding
   at end of year        $330,267,919   $269,901,376   $249,683,713
 Option price range:
   Options granted       $25.56-$31.56  $28.00-$36.56  $25.44-$31.69
   Options terminated    $17.31-$40.44  $15.50-$40.44  $17.31-$43.38
   Options exercised     $12.81-$30.81  $ 9.34-$37.63  $ 7.00-$29.84
   Options outstanding
    at end of year       $17.31-$43.38  $12.81-$43.38  $ 9.34-$43.38
</TABLE>

----------
     (1)  Excludes 10 million under the 1996 Plan, which is subject to 
     stockholder approval.

     Under the 1993 and 1996 Stock Incentive Plans, restricted common stock of
the Company may be granted to officers, other key employees and certain
non-employee directors.  Shares granted are subject to certain restrictions on
ownership and transferability.  Such restrictions on current restricted stock
grants lapse two years from the date of grant for officers and 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 500,000 shares which may be awarded to officers and key employees as
restricted stock grants or stock awards (excluding 1,500,000 shares which are 
subject to stockholder approval), 94,655 restricted shares were issued during
the current year and 124,382 restricted shares were outstanding as of September
30, 1996.  In addition, 8,024 restricted shares issued to non-employee
directors were outstanding as of September 30,





                                      -69-
<PAGE>   74
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

1996.  No common stock awards had been granted as of September 30, 1996.

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.

(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,    
                                 --------------------------------
                                    1996       1995       1994   
                                 ---------- ---------- ----------
<S>                              <C>        <C>        <C>
Beginning cumulative
  translation adjustment         $  30,821  $ (40,744) $(136,659)

Translation adjustment
  for the fiscal year              (61,959)    71,565     95,915
                                 ---------  ---------  ---------
Ending cumulative translation
  adjustment                     $ (31,138) $  30,821  $ (40,744)
                                 =========  =========  ========= 
</TABLE>

(16) Income taxes -

     The components of (i) earnings before income taxes, minority interest and
extraordinary item 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>
                           1996             
             -------------------------------
             Excluding
              Special    Special       As
              Charges    Charges    Reported    1995      1994  
             --------   ---------   --------  --------  --------
<S>          <C>        <C>         <C>      <C>        <C>
Domestic     $429,705   $(187,087)  $242,618  $563,648  $421,620
Foreign (1)    44,801    (259,713)  (214,912)  127,428    77,503
             --------   ---------   --------  --------  --------
             $474,506   $(446,800)  $ 27,706  $691,076  $499,123
             ========   =========   ========  ========  ========
</TABLE>





                                      -70-
<PAGE>   75
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

----------
     (1)  Amounts are net of intercompany interest expense for fiscal years 
     1996, 1995 and 1994 of $53,660,000, $36,572,000 and  $23,838,000,
     respectively.  The Company maintains a capital structure with respect to
     its foreign operations designed to minimize worldwide income and other tax
     costs.

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

1994: Current         $116,164   $ 42,107   $ 18,626   $176,897
      Deferred          34,646       (220)   (10,968)    23,458
      Amortization
        of investment
        tax credit        (706)        --         --       (706)
                      --------   --------   --------   -------- 
                      $150,104   $ 41,887   $  7,658   $199,649
                      ========   ========   ========   ======== 
</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, 1996:





                                      -71-
<PAGE>   76
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                     1996       1995       1994 
                                    -------    -------    -------
<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                     (2.31)     (1.67)      (.54)
  Effect of foreign operations       (2.05)      (.20)       .89
  All other, net                      2.77       2.10       3.12
                                    ------      -----      -----
  Federal and foreign                33.41      35.23      38.47
  State income taxes                  6.59       4.77       1.53
                                    ------      -----      -----
  Effective income tax rate,
    excluding special charges        40.00      40.00      40.00
Effect of Special Charges           339.66         --         --
                                    ------      -----      -----
  Effective income tax rate         379.66%     40.00%     40.00%
                                    ======      =====      ===== 
</TABLE>

   The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities at September 30, 1996 and
1995, are as follows (in thousands):

<TABLE>
<CAPTION>
                               1996                    1995         
                       ---------------------   ---------------------
                       Deferred    Deferred    Deferred    Deferred
                          Tax        Tax         Tax         Tax
                        Assets   Liabilities    Assets   Liabilities
                       --------  -----------   --------  -----------
  <S>                  <C>        <C>          <C>        <C>
  Depreciation and
    amortization       $144,409   $468,326     $142,408   $460,444
  Accrued environ-
    mental and
    landfill costs      183,041         --      191,737         --
  Accruals related
    to discontinued
    operations            8,956         --       29,120         --
  Self-insurance
    accruals             56,457         --       52,310         --
  Assets and operations
    to be divested      107,247         --           --         --
  Net operating loss
    carryforwards       115,717         --      108,983         --
  Other                 318,449    138,649      231,550     88,505
                       --------   --------     --------   --------
  Deferred tax assets
    and liabilities     934,276   $606,975      756,108   $548,949
                                  ========                ========
  Valuation allowance  (192,811)               (116,244)
                       --------                -------- 
  Deferred tax
    assets, net of
    valuation
    allowance          $741,465                $639,864
                       ========                ========
</TABLE>





                                      -72-
<PAGE>   77
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     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 $180 million are available to
reduce future taxable income of the applicable foreign entities for periods
which generally range from 1997 to 2003.  Domestic state net operating loss
carryforwards of approximately $831 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 1997 to 2011.  The net change in the total valuation
allowance for the year ended September 30, 1996, was an increase of $76.6
million, principally due to the special charges taken in the fourth quarter of
fiscal 1996, compared with a decrease in the prior year of $3.2 million.

     Deferred income taxes have not been provided as of September 30, 1996, on
approximately $820 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 1996, 1995 and 1994
were $11,752,000, $10,545,000 and $9,430,000, 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.





                                      -73-
<PAGE>   78
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     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.

     The components of net annual pension cost for fiscal years 1996, 1995 and
1994 for the defined benefit plans were as follows (in thousands):
<TABLE>
<CAPTION>
                                     1996      1995      1994  
                                   --------  --------  --------
<S>                                <C>      <C>       <C>
U.S. Plans:
  Service cost (benefits earned
    during the period)             $ 12,260  $  9,933  $ 11,260
  Interest cost on projected
    benefit obligation               13,521    12,597    10,329
  Investment gain on plan
    assets                          (27,957)  (14,097)  (11,728)
  Net amortization and deferral      12,056      (110)   (1,534)
                                   --------  --------  -------- 
  Net annual pension cost          $  9,880  $  8,323  $  8,327
                                   ========  ========  ========


Non-U.S. Plans:
  Service cost (benefits earned
    during the period)              $ 1,949   $ 1,969   $ 1,118
  Interest cost on projected
    benefit obligation                2,163     1,748     1,004
  Investment gain on plan assets     (2,044)   (2,628)      (62)
  Net amortization and deferral        (454)       12    (1,766)
                                    -------   -------   ------- 
  Net annual pension cost           $ 1,614   $ 1,101   $   294
                                    =======   =======   =======
</TABLE>

     The following table sets forth the funded status and amounts recognized in
the Company's Consolidated Balance Sheet as of September 30, 1996 and 1995, and
the significant assumptions used in accounting for the defined benefit plans.
The measurement dates for the U.S. plans were June 30, 1996 and 1995 and for
non-U.S. plans were September 30, 1996 and 1995.





                                      -74-
<PAGE>   79
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                                     1996                 1995       
                             -------------------  -------------------
                                U.S.    Non-U.S.     U.S.    Non-U.S.
                             ---------  --------  ---------  --------
                                  (Dollar Amounts in Thousands)
<S>                         <C>
Actuarial present value
  of accumulated benefit
  obligations, including
  vested benefits of
  $161,986, $10,296,
  $141,572 and $18,787,
  respectively               $(180,639) $(10,644) $(150,450) $(19,385)
                             =========  ========  =========  ======== 
Actuarial present value
  of projected benefit
  obligation                 $(196,909) $(14,412) $(166,552) $(24,130)
Plan assets at fair value,
  primarily commercial
  paper, common stocks
  (including 22,000 shares
  of the Company's common
  stock for U.S. plans at
  both dates) and mutual
  funds                        193,951    20,234    159,140    30,415
                             ---------  --------  ---------  --------

Projected benefit obligation
  (in excess of) less than
  plan assets                   (2,958)    5,822     (7,412)    6,285
Contributions made after
  measurement date but
  before end of fiscal year      7,263        --      4,000        --
Unrecognized net gain          (13,784)      (80)   (13,653)     (128)
Unrecognized prior service
  cost                         (13,957)       --    (15,259)       --
Unrecognized net (asset)
  obligation at transition      (1,486)    1,891     (1,680)    2,448
                             ---------  --------  ---------  --------
Prepaid (accrued) pension
  costs                      $ (24,922) $  7,633  $ (34,004) $  8,605
                             =========  ========  =========  ======== 


Discount rate                     8.0%  6.5-8.5%      7.75%   6.5-8.5%
Rate of increase in
  compensation levels             4.0%  3.0-6.5%       4.5%   3.5-7.0%
Expected long-term rate of
  return on assets                9.5%  6.5-9.5%       9.5%  6.5-10.0%
</TABLE>


Termination indemnity plan.

     The employees of the Company's Italian operations are covered by a
termination indemnity plan.  Benefits under the plan, which are based on
periods of service and the  employee's  compensation,





                                      -75-
<PAGE>   80
              BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

are  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 for fiscal years 1996, 1995 and 1994 related to this
unfunded plan was $1,809,000, $1,798,000 and $1,203,000, 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 postretirement 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.

Postemployment benefits.

     The Company maintains no plans which provide significant ben-efits 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 relat-
ing 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>
                              1996          1995          1994   
                           ----------    ----------    ----------
<S>                        <C>           <C>           <C>
Revenues:
  United States and
    Puerto Rico            $4,073,558    $4,070,021    $3,293,297
                           ----------    ----------    ----------
  Foreign - Europe          1,425,390     1,433,923       786,252
          - Other             280,329       275,407       234,992
                           ----------    ----------    ----------
    Total foreign           1,705,719     1,709,330     1,021,244
                           ----------    ----------    ----------
  Consolidated             $5,779,277    $5,779,351    $4,314,541
                           ==========    ==========    ==========
</TABLE>





                                      -76-
<PAGE>   81
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<TABLE>
<CAPTION>
                            1996            1995         1994   
                          ----------     ----------   ----------
<S>                       <C>                         <C>
Combined income (loss)
 from operations and
 equity in earnings of
 unconsolidated
 affiliates:
  United States and
    Puerto Rico           $  327,421 (1) $  626,798   $  451,108
                          ----------     ----------   ----------
  Foreign - Europe          (118,411)(1)    186,251       91,035
          - Other            (10,847)(1)     30,134       38,851
                          ----------     ----------   ----------
    Total foreign           (129,258)       216,385      129,886
                          ----------     ----------   ----------
  Consolidated            $  198,163     $  843,183   $  580,994
                          ==========     ==========   ==========

Depreciation and
 amortization:
  United States and
    Puerto Rico           $  438,639     $  412,968   $  349,189
                          ----------     ----------   ----------
  Foreign - Europe           134,061        113,907       72,288
          - Other             29,825         24,995       22,715
                          ----------     ----------   ----------
    Total foreign            163,886        138,902       95,003
                          ----------     ----------   ----------
  Consolidated            $  602,525     $  551,870   $  444,192
                          ==========     ==========   ==========

Identifiable assets:
  United States and
    Puerto Rico           $4,803,978     $4,532,014   $3,626,134
                          ----------     ----------   ----------
  Foreign - Europe         2,435,541      2,599,797    1,903,141
          - Other            361,387        328,561      267,680
                          ----------     ----------   ----------
    Total foreign          2,796,928      2,928,358    2,170,821
                          ----------     ----------   ----------
  Consolidated (2)        $7,600,906     $7,460,372   $5,796,955
                          ==========     ==========   ==========
</TABLE>

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

    (1) Fiscal year 1996 earnings information for operations in (i) the
    United States and Puerto Rico, (ii) Europe and (iii) other foreign
    countries include special charges of $187,087,000, $234,773,000 and
    $24,940,000, respectively. See Note (4).

    (2) The Attwoods acquisition in the first quarter of fiscal 1995 and
    the Otto Waste Services acquisition in the second quarter of fiscal 1994
    each increased the identifiable assets of the Company by over $1.0 billion.





                                      -77-
<PAGE>   82
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(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.

<TABLE>
<CAPTION>
                                   As of September 30,          
                        ----------------------------------------
                               1996                  1995       
                        ------------------   -------------------
                           Book     Fair         Book     Fair
                          Value     Value       Value     Value 
                        --------  --------    --------  --------
                                     (In Thousands)
<S>                     <C>       <C>         <C>       <C>
Debt -
  6.10% Senior Notes    $198,162  $188,848    $     --  $     --
  6.375% Senior Notes    197,949   184,171          --        --
  7.40% Debentures       397,918   377,107     397,864   396,830
  7 7/8% Senior Notes    299,217   311,575     299,125   322,606
  9 1/4% Debentures      100,000   117,740     100,000   121,490
  Solid waste revenue
    bond obligations     149,127   151,601     114,079   119,444
  Other notes payable    804,721   837,174     585,211   608,435
  Commercial paper and
    short-term
    facilities to be
    refinanced           679,597   676,489     231,988   231,701
Convertible
  subordinated
  debentures                  --        --     744,944   742,806
</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 and convertible subordinated
debentures 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





                                      -78-
<PAGE>   83
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

under these financial instruments is minimal and expects no material losses to
occur in connection with these financial instruments.

(20) Related party transactions -

     One of the Company's directors is affiliated with Otto Holding
International B.V. ("OHI") which 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 $4.7 million and $5.0 million for
fiscal year 1996 and 1995, respectively, and $3.5 million for the period from
the acquisition date in February 1994 through the end of fiscal 1994.  The
Company, including Otto Waste Services, also purchased or entered into capital
leases for approximately $30.8 million and $29.3 million, respectively, of
containers from the OHI Group during fiscal years 1996 and 1995.  Included in
the Company's Consolidated Balance Sheet at September 30, 1996 and 1995, are
the following amounts relating to transactions with the OHI Group (in
thousands):

<TABLE>
<CAPTION>
                                       1996          1995   
                                    ----------    ----------
  <S>                                <C>           <C>
  Accounts payable                   $    --       $   613
  Other accrued liabilities            7,673            --
  Capital lease obligations           44,000        46,252
  Notes payable, interest
   payable at FIBOR plus 2%            3,131         3,613
</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 is included in the Company's
Consolidated Statement of Operations.  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.





                                      -79-
<PAGE>   84
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(21) Quarterly financial information (Unaudited) -

<TABLE>
<CAPTION>
                       First      Second         Third      Fourth
                      Quarter     Quarter       Quarter     Quarter 
                    ----------  ----------    ----------  ----------
                       (In Thousands Except for Per Share Amounts)
<S>                 <C>
Revenues      1996  $1,430,781  $1,373,887    $1,471,368  $1,503,241
              1995  $1,292,787  $1,409,366    $1,550,083  $1,527,115

Gross profit  1996  $  382,676  $  346,971    $  356,018  $  377,997
              1995  $  367,817  $  403,059    $  445,117  $  416,055

Income (loss)
 from
 operations   1996  $  174,162  $  134,414    $  134,802  $ (300,585)(2)
              1995  $  177,311  $  193,034    $  218,685  $  200,157

Income taxes  1996  $   58,118  $   42,205    $   42,417  $  (37,552)
              1995  $   65,010  $   66,109    $   76,724  $   68,587

Income (loss)
 before extra-
 ordinary
 item         1996  $   83,010  $   60,984    $   62,022  $ (295,188)
              1995  $   89,570  $   92,809    $  106,267  $   95,915

Net income
 (loss)       1996  $   83,010  $   48,825(1) $   62,022  $ (295,188)
              1995  $   89,570  $   92,809    $  106,267  $   95,915


Income (loss)
 per share:
  Income (loss)
   before
   extra-
   ordinary
   item       1996       $ .42       $ .30         $ .31      $(1.47)
              1995       $ .45       $ .47         $ .53      $  .48


  Net income
    (loss)    1996       $ .42       $ .24         $ .31      $(1.47)
              1995       $ .45       $ .47         $ .53      $  .48
</TABLE>





                                      -80-
<PAGE>   85
               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

(1) 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).

(2) 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).





                                      -81-
<PAGE>   86
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 income for the three years ended September
          30, 1996.

         Consolidated balance sheet--September 30, 1996 and 1995.

         Consolidated statement of common stockholders' equity for the three 
          years ended September 30, 1996.

         Consolidated statement of cash flows for the three years ended 
          September 30, 1996.

         Notes to consolidated financial statements.

SCHEDULES

         II    Allowance for doubtful accounts for the three years ended 
               September 30, 1996.

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.






                                      -82-
<PAGE>   87
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 September 6, 1995.
                
          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.
                
          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>                                                                   
                                                                           
                                                                           
                                                                           
                                                                           
                                                                           
                                                                           
                                     -83-                                  
<PAGE>   88
<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   Multicurrency Revolving Credit Agreement, dated December 5, 
                1994, between BFI Acquisition plc, BFI International, Inc.,
                Browning-Ferris Industries Europe, Inc., BFI and Credit Suisse 
                and the Banks specified  therein. (Exhibit 10 of Form 10-Q for
                the quarter ended December 31, 1994, 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.
                
          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>                                                                   
                                                                           
                                                                           
                                                                           
                                                                           
                                                                           
                                                                           
                                     -84-                                  
<PAGE>   89
<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.
                
          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. 1993 Stock Incentive Plan. 
                (Exhibit 4(d) to Registration Statement on Form S-8 No.
                33-53393 is hereby incorporated by reference.)
                
          10.13 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.)
                
          10.14 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.)
                
          10.15 Browning-Ferris Industries, Inc. 1987 Stock Option Plan.   
                (Exhibit  10.11 of Form 10-K for the fiscal year ended
                September 30, 1988, is hereby incorporated by reference.)
                
          10.16 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.)
                
          10.17 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.) 

</TABLE>  
          





                                     -85-
<PAGE>   90
<TABLE>
          <S>   <C>
          10.18 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.)
                
          10.19 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.)
                
          10.20 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.)
                
          10.21 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.)
                
          10.22 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.)
                
          10.23 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.)
                
         *10.24 Parent Agreement, dated as of January 25, 1991, between Air 
                Products and Chemicals, Inc. and BFI.
                
          10.25 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.)
                
          10.26 BFI Deferred Compensation Agreement.
                
          10.27 BFI Convertible Annual Incentive Award Plan.
                
          10.28 BFI Stock and Employee Benefit Trust Agreement, dated February 
                28,  1995, between BFI and Wachovia Bank of North Carolina,
                N.A., as trustee.
                
          10.29 Common Stock Purchase Agreement, dated February 28, 1995, 
                between BFI and Wachovia Bank of North Carolina, N.A., as
                trustee 

</TABLE>






                                     -86-
<PAGE>   91
<TABLE>
        <S>        <C>                                
        * 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

None.

____________________

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.






                                    -87-
<PAGE>   92
                                                                     SCHEDULE II




               BROWNING-FERRIS INDUSTRIES, INC. AND SUBSIDIARIES

                        ALLOWANCE FOR DOUBTFUL ACCOUNTS

                  For the Three Years Ended September 30, 1996
                                 (In Thousands)

<TABLE>
<CAPTION>
    ==============================================================
                              Additions
                 Balance       Charged     Deductions     Balance
                Beginning        to           from         End of
                 of Year       Income       Reserves        Year      
    ==============================================================
    <S>          <C>           <C>         <C>             <C>
    1996         $39,777       $29,527     $(28,682)       $40,622

    1995         $33,284       $26,620     $(20,127)       $39,777

    1994         $21,870       $31,346     $(19,932)       $33,284
</TABLE>





                                      -88-

<PAGE>   93





                                   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, 1996                  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/ Norman A. Myers
                                           ----------------------------------
                                                    Norman A. Myers
                                            Vice Chairman, Chief Marketing
                                                 Officer and Director
                                           
                                                /s/ Jeffrey E. Curtiss
                                           ----------------------------------
                                                  Jeffrey E. Curtiss,
                                              Senior Vice President and
                                               Chief Financial Officer






                                      -89-
<PAGE>   94


                                                /s/ David R. Hopkins
                                           ----------------------------------
                                                  David R. Hopkins,
                                           Vice President, Controller and
                                              Chief Accounting Officer
                                           
                                                /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/ Ulrich Otto
                                           ----------------------------------
                                               Ulrich Otto, Director,
                                           
                                             /s/ Harry J. Phillips, Sr.
                                           ----------------------------------
                                              Harry J. Phillips, Sr.,
                                                      Director
                                           
                                             /s/ Joseph L. Roberts, Jr.
                                           ----------------------------------
                                              Joseph L. Roberts, Jr.,
                                                      Director
                                           
                                                 /s/ Marc J. Shapiro
                                           ----------------------------------
                                              Marc J. Shapiro, Director
                                           
                                                /s/ Robert M. Teeter
                                           ----------------------------------
                                             Robert M. Teeter, Director
                                           
                                                 /s/ Louis A. Waters
                                           ----------------------------------
                                              Louis A. Waters, Director
                                           
                                               /s/ Marina v.N. Whitman
                                           ----------------------------------
                                            Marina v.N. Whitman, Director
                                           
December 4, 1996                                /s/ Peter S. Willmott
                                           ----------------------------------
                                             Peter S. Willmott, Director






                                    -90-