##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549




---

Form 20-F

|           |  |                                                                                                         
|---------- |  | --------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                         
|o          |  | REGISTRATION STATEMENT PURSUANT TO
    SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF
    1934
|          
|or        
|          
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                
|          
|           |  | For the fiscal year ended December 31,
    2003                                                         
|or        
|          
|o          |  | 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 000-25595

Capital Environmental Resource Inc.

(Exact name of Registrant as Specified in Its
Charter)


N/A


(Translation of Registrants Name Into
English)


Ontario

(Jurisdiction of Incorporation or
Organization)


1122 International Blvd., Suite 601,
Burlington, Ontario L7L 6Z8

(Address of Principal Executive
Offices)


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

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange On Which Registered
|                    |  |                                          
|None                |  | None                                     

Securities registered or to be registered
pursuant to Section 12(g) of the Act:

Common Shares, no par value

(Title of Class)


Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:

Common Shares, no par value

(Title of Class)


Indicate the number
of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by
the Annual Report: 68,338,828 Common Shares Issued and
Outstanding

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.

Yesþ          Noo

Indicate by check mark which financial statement
item the registrant has elected to follow.

Item 17oItem 18þ



---






---










TABLE OF CONTENTS

|                                                 |  |                                                                                  |  |      |    | 
|------------------------------------------------ |  | -------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                 |  |                                                                                  |  | Page
|                                                 |  |                                                                                  |  |     
|Item 1.                                          |  | Identity of Directors,
    Senior Management and Advisors                        |  |      | 2  | 
|Item 2.                                          |  | Offer Statistics and
    Expected Timetable                                      |  |      | 2  | 
|Item 3.                                          |  | Key Information                                                                  |  |      | 2  | 
|Item 4.                                          |  | Information on the
    Company                                                   |  |      | 13 | 
|Item 5.                                          |  | Operating and Financial
    Review and Prospects                                 |  |      | 27 | 
|Item 6.                                          |  | Directors, Senior Management
    and Employees                                   |  |      | 47 | 
|Item 7.                                          |  | Major Shareholders and
    Related Party Transactions                            |  |      | 57 | 
|Item 8.                                          |  | Financial Information                                                            |  |      | 59 | 
|Item 9.                                          |  | Listing                                                                          |  |      | 60 | 
|Item 10.                                         |  | Additional Information                                                           |  |      | 61 | 
|Item 11.                                         |  | Quantitative and Qualitative
    Disclosures about Market Risk                   |  |      | 72 | 
|Item 12.                                         |  | Description of Securities
    Other Than Equity Securities                       |  |      | 72 | 
|Item 13.                                         |  | Defaults, Dividend
    Arrearages and Delinquencies                              |  |      | 72 | 
|Item 14.                                         |  | Material Modifications to
    the Rights of Security Holders and Use of Proceeds |  |      | 72 | 
|Item 15.                                         |  | Controls and Procedures                                                          |  |      | 72 | 
|Item 16.                                         |  | Reserved                                                                         |  |      | 73 | 
|Item 16A.                                        |  | Audit Committee Financial
    Expert                                             |  |      | 73 | 
|Item 16B.                                        |  | Code of Ethics                                                                   |  |      | 73 | 
|Item 16C.                                        |  | Principal Accountant Fees
    and Services                                       |  |      | 73 | 
|Item 18.                                         |  | Financial Statements and
    Schedule to Financial Statements                    |  |      | 74 | 
|Item 19.                                         |  | Exhibits                                                                         |  |      | 75 | 
|Employment Agreement with Ronald Rubin          
|Employment Agreement with Brian Goebel          
|Employment Agreement with William Hulligan      
|List of Subsidiaries                            
|Certification of David Sutherland-Yoest, CEO    
|Certification of Ronald Rubin, CFO              
|Sec. 906 Certification of David Sutherland-Yoest
|Sec. 906 Certification of Ronald Rubin          
|Consent of BDO Dunwoody LLP                     
|Consent of PricewaterhouseCoopers LLP           



i



---



##### Table of Contents



PART I

FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains
certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934, or the Exchange Act. Some of these forward-looking
statements include forward-looking phrases such as
anticipates, believes,
could, estimates, expects,
foresees, intends, may,
should or will continue, or similar
expressions or the negatives thereof or other variations on
these expressions, or similar terminology, or discussions of
strategy, plans or intentions. These statements also include
descriptions in connection with, among other things:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our anticipated revenues, capital expenditures,
    future cash flows and financing requirements, and those of
    companies or assets we acquire;
|
| |  | the implementation of our business strategy;                                                                                                      
|
| |  | completion of our migration transaction and any
    acquisition transactions;                                                                     
|
| |  | descriptions of the expected effects of our
    competitive strategies; and                                                                       
|
| |  | the impact of actions taken by our competitors
    and other third parties, including courts and other governmental
    authorities.              

Such statements reflect our current views
regarding future events and are subject to certain risks,
uncertainties and assumptions. Many factors could cause the
actual results, performance or achievements to be materially
different from any future results, performance or achievements
that forward-looking statements may express or imply, including,
among others:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in inflation;                                                                                                                                                                                       
|
| |  | changes in regulations affecting our business and
    costs of compliance;                                                                                                                                  
|
| |  | revocation of existing permits and licenses or
    the refusal to renew or grant new permits and licenses, which
    are required to enable us to operate our business or implement
    our growth strategy;
|
| |  | our ability to successfully implement our
    corporate strategy, including our migration transaction and
    integrate any acquisitions we undertake;                                                      
|
| |  | the outcome of pending legal claims against us;                                                                                                                                                             
|
| |  | changes in general business and economic
    conditions and in the financial markets; and                                                                                                                   
|
| |  | changes in accounting standards or pronouncements.                                                                                                                                                          

Some of these factors are discussed in more
detail in this annual report, including under Item 3.
Key Information  Risk Factors. If one or
more of these risks or uncertainties affects future events and
circumstances, or if underlying assumptions do not materialize,
actual results may vary materially from those described in this
annual report as anticipated, believed, estimated or expected,
and this could have a material adverse effect on our business,
financial condition and the results of our operations. Further,
any forward-looking statement speaks only as of the date on
which it is made, and except as required by law we undertake no
obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to
reflect the occurrence of anticipated or unanticipated events or
circumstances.

1



---



##### Table of Contents








|        |                                                          
|------- | ---------------------------------------------------------
|Item 1. | Identity of Directors, Senior Management
    and Advisors

Not applicable.






|        |                                            
|------- | -------------------------------------------
|Item 2. | Offer Statistics and Expected
    Timetable

Not applicable.






|        |                
|------- | ---------------
|Item 3. | Key Information



|   |                        
|-- | -----------------------
|A. | Selected Financial Data

The following tables set forth our selected
consolidated financial data for the periods indicated and are
qualified by reference to, and should be read in conjunction
with, our consolidated financial statements and the notes
thereto, which are included elsewhere in this annual report, and
Item 5. Operating and Financial Review and
Prospects.

The financial data as of December 31, 1999,
2000, 2001, 2002 and 2003 and for the years then ended have been
derived from our audited consolidated financial statements.

The selected consolidated financial data as of
December 31, 1999, 2000, 2001, 2002 and 2003 and for each
of the years presented have been prepared in accordance with
United States generally accepted accounting principles, or
U.S. GAAP. All financial information presented herein is in
thousands of dollars except share and per share data or as
otherwise indicated. All references to $ or
dollars means U.S. dollars and all references
to C$ means Canadian dollars.



| |                    
| | -------------------
| | Recent Developments

We expect to enter into an agreement to exchange
the Nassau Landfill and related assets which we acquired from
Allied Waste Industries, Inc., or Allied in December 2003, for a
collection operation in the greater Orlando, Florida
metropolitan area and net cash proceeds of $10.0 million,
subject to working capital adjustments. We expect to close this
transaction in April 2004.

2



---



##### Table of Contents



Statement of operations and balance sheet data is
as follows for the periods presented, in thousands:

|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |        |  
|-------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------ | ------ | ------ | - | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                   |                                                            |                                     
|                                                                                                   |                                                            | For the Years Ended December 31,    
|                                                                                                   |                                                            |                                     
|                                                                                                   |                                                            | 1999                                 |        | 2000   |   | 2001 |         | 2002   |  | 2003
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |     
|                                                                                                   |                                                            |                                     
|                                                                                                   |                                                            | (In thousands except per share data)
|Statement of Operations Data(1):                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Revenue                                                                                            |                                                            | $                                    | 97,551 |        |   | $    | 117,008 |        |  | $    | 93,241  |        |  | $ | 98,846  |        |   | $ | 126,750 |       
|Operating and other expenses:                                                                      |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|                                                                                                   | Cost of operations                                         |                                      |        | 66,190 |   |      |         | 79,327 |  |      |         | 63,140 |  |   |         | 61,250 |   |   |         | 79,992 |  
|                                                                                                   | Selling, general and administrative                        |                                      |        | 13,118 |   |      |         | 18,622 |  |      |         | 18,208 |  |   |         | 19,470 |   |   |         | 35,117 |  
|                                                                                                   | Depreciation, depletion and amortization                   |                                      |        | 8,134  |   |      |         | 12,181 |  |      |         | 11,276 |  |   |         | 10,718 |   |   |         | 14,927 |  
|                                                                                                   | Goodwill impairment                                        |                                      |        |       |   |      |         | 13,500 |  |      |         | 3,400  |  |   |         |       |   |   |         |       |  
|                                                                                                   | Loss (recovery) related to disposal of U.S.
    operations |                                      |        |       |   |      |         |       |  |      |         | 4,885  |  |   |         | (718   | ) |   |         | (155   | )
|                                                                                                   | Gain on property and equipment                             |                                      |        | (1,199 | ) |      |         |       |  |      |         |       |  |   |         |       |   |   |         |       |  
|                                                                                                   | Foreign exchange loss (gain) and other                     |                                      |        |       |   |      |         |       |  |      |         | 1,003  |  |   |         | (1,441 | ) |   |         | 1,915  |  
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Income (loss) from operations                                                                      |                                                            |                                      | 11,308 |        |   |      | (6,622  | )      |  |      | (8,671  | )      |  |   | 9,567   |        |   |   | (5,046  | )     
|                                                                                                   | Interest expense(2)                                        |                                      |        | 6,232  |   |      |         | 10,649 |  |      |         | 10,029 |  |   |         | 5,727  |   |   |         | 18,439 |  
|                                                                                                   | Income tax provision (benefit)                             |                                      |        | 2,053  |   |      |         | 1,010  |  |      |         | 968    |  |   |         | 1,713  |   |   |         | (587   | )
|                                                                                                   | Cumulative effect of change in accounting
    principle    |                                      |        |       |   |      |         |       |  |      |         |       |  |   |         |       |   |   |         | (518   | )
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Net income (loss)                                                                                  |                                                            |                                      | 3,023  |        |   |      | (18,281 | )      |  |      | (19,668 | )      |  |   | 2,127   |        |   |   | (22,380 | )     
|Deemed dividend on Series 1 preferred shares                                                       |                                                            |                                      |       |        |   |      |        |        |  |      |        |        |  |   | (14,717 | )      |   |   | (54,572 | )     
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Net income (loss) attributable to common
    shareholders                                          |                                                            | $                                    | 3,023  |        |   | $    | (18,281 | )      |  | $    | (19,668 | )      |  | $ | (12,590 | )      |   | $ | (76,952 | )     
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Basic net income (loss) per share before
    cumulative effect of change in accounting principle   |                                                            | $                                    | 0.60   |        |   | $    | (2.54   | )      |  | $    | (1.60   | )      |  | $ | (0.39   | )      |   | $ | (1.99   | )     
|Cumulative effect of change in accounting
    principle                                            |                                                            |                                      |       |        |   |      |        |        |  |      |        |        |  |   |        |        |   |   | 0.01    |       
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Basic net income (loss) per share                                                                  |                                                            | $                                    | 0.60   |        |   | $    | (2.54   | )      |  | $    | (1.60   | )      |  | $ | (0.39   | )      |   | $ | (1.98   | )     
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Diluted net income (loss) per share before
    cumulative effect of change in accounting principle |                                                            | $                                    | 0.51   |        |   | $    | (2.54   | )      |  | $    | (1.60   | )      |  | $ | (0.39   | )      |   | $ | (1.99   | )     
|Cumulative effect of change in accounting
    principle                                            |                                                            |                                      |       |        |   |      |        |        |  |      |        |        |  |   |        |        |   |   | 0.01    |       
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Diluted net income (loss) per share                                                                |                                                            | $                                    | 0.51   |        |   | $    | (2.54   | )      |  | $    | (1.60   | )      |  | $ | (0.39   | )      |   | $ | (1.98   | )     
|                                                                                                   |                                                            |                                      |        |        |   |      |         |        |  |      |         |        |  |   |         |        |   |   |         |       
|Shares used in calculating basic net income
    (loss) per share                                   |                                                            |                                      | 5,069  |        |   |      | 7,197   |        |  |      | 12,260  |        |  |   | 32,414  |        |   |   | 38,782  |       
|Shares used in calculating diluted net income
    (loss) per share                                 |                                                            |                                      | 5,977  |        |   |      | 7,197   |        |  |      | 12,260  |        |  |   | 32,414  |        |   |   | 38,782  |       

3



---



##### Table of Contents



|                                                                                                                                |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                                                                                |  |                   
|                                                                                                                                |  | As of December 31,
|                                                                                                                                |  |                   
|                                                                                                                                |  | 1999               |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                                                                                                |  |                    |         |      |  |      |         |      |  |     
|Balance Sheet Data(1):                                                                                                          |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents                                                                                                       |  | $                  | 1,398   |      |  | $    |        |      |  | $    | 2,469   |  |  | $ | 1,775   |  |  | $ | 21,062  | 
|Restricted cash(3)                                                                                                              |  |                    |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   | 14,433  | 
|Property, equipment and landfill sites, net                                                                                     |  |                    | 40,692  |      |  |      | 50,899  |      |  |      | 36,708  |  |  |   | 58,994  |  |  |   | 192,062 | 
|Goodwill and intangible assets                                                                                                  |  |                    | 98,081  |      |  |      | 80,609  |      |  |      | 55,089  |  |  |   | 66,596  |  |  |   | 163,380 | 
|Total assets                                                                                                                    |  |                    | 162,314 |      |  |      | 152,959 |      |  |      | 110,652 |  |  |   | 149,022 |  |  |   | 470,998 | 
|Total debt and capital lease obligations
    (excluding mandatorily redeemable shares of preferred stock of
    Waste Services) |  |                    | 89,129  |      |  |      | 100,834 |      |  |      | 53,005  |  |  |   | 53,645  |  |  |   | 177,449 | 
|Mandatorily redeemable shares of preferred stock
    of Waste Services at liquidation preference value                          |  |                    |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   | 61,763  | 
|Total shareholders equity                                                                                                      |  |                    | 58,320  |      |  |      | 38,655  |      |  |      | 45,913  |  |  |   | 77,817  |  |  |   | 201,117 | 



---



|    |                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See also Note 3 to our consolidated
    financial statements.                                                                                                             
|(2) | Interest expense for the year ended
    December 31, 2003 includes mandatorily redeemable preferred
    stock dividends and accretion of $10.2 million.                   
|(3) | Restricted cash represents funds held in escrow
    to finance the acquisition of the remaining northern and central
    Florida assets from Allied Waste Industries, Inc.

The following tables set forth:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | the rates of exchange for Canadian dollars
    expressed in U.S. dollars in effect at the end of each of the
    periods indicated
|
| |  | the average of exchange rates in effect during
    these periods                                                                  
|
| |  | the high and low exchange rates during the most
    recent six months                                                             

In each case, the exchange rates are based on the
noon foreign exchange rate as reported by The Bank of
Canadas website (www.bankofcanada.com).

Year-end and average rates for each of the last
five years:

|                    |  |      |      |      |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      | 
|------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- |  |  | - | ---- | 
|                    |  | 1999 |      | 2000 |  | 2001 |      | 2002 |  | 2003
|                    |  |      |      |      |  |      |      |      |  |     
|Rate at end of year |  | $    | 0.69 |      |  | $    | 0.67 |      |  | $    | 0.63 |  |  | $ | 0.63 |  |  | $ | 0.77 | 
|Average rate        |  |      | 0.67 |      |  |      | 0.67 |      |  |      | 0.65 |  |  |   | 0.64 |  |  |   | 0.72 | 

High and low rates for the previous six months:

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|               |  | High |      | Low
|               |  |      |      |    
|September 2003 |  | $    | 0.74 |     |  | $ | 0.72 | 
|October 2003   |  |      | 0.77 |     |  |   | 0.74 | 
|November 2003  |  |      | 0.77 |     |  |   | 0.75 | 
|December 2003  |  |      | 0.77 |     |  |   | 0.75 | 
|January 2004   |  |      | 0.79 |     |  |   | 0.75 | 
|February 2004  |  |      | 0.76 |     |  |   | 0.74 | 

On March 1, 2004, the buying rate for
Canadian dollars was $0.75 = C$1.00.

4



---



##### Table of Contents





|   |                                
|-- | -------------------------------
|B. | Capitalization and Indebtedness

Not applicable.



|   |                                          
|-- | -----------------------------------------
|C. | Reasons for Offer and Use of
    Proceeds

Not applicable.



|   |             
|-- | ------------
|D. | Risk Factors

You should carefully consider the risks
described in the following section. The risks described are not
the only ones facing us. Additional risks and uncertainties not
currently known to us or that we currently consider to be
immaterial may also materially and adversely affect our business
operations. Any of the following risks could materially
adversely affect our business, financial condition or results of
operations.



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our acquisition strategy may be
    unsuccessful if we are unable to identify and complete future
    acquisitions and integrate acquired assets or businesses and
    this subjects us to risks that may have a material adverse
    effect on our results of operations

Part of our strategy to expand our business and
increase our revenue and profitability is to pursue the
acquisition of disposal-based and collection assets and
businesses. We have identified a number of acquisition
candidates, both in the United States and Canada, that we
believe are suitable. However, we may not be able to acquire
these candidates at prices or on terms and conditions that are
favorable to us. Our ability to execute our acquisition strategy
also depends upon other factors, including the successful
integration of acquired businesses and our ability to
effectively compete in the new markets we enter.

If we are unable to identify suitable acquisition
candidates or successfully complete and integrate the
acquisitions, we may not realize the expected benefits from our
acquisition growth strategy, including any expected benefits
from the proposed vertical integration of acquired operations
and disposal facilities. Our acquisitions also involve numerous
risks, including:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in the assimilation and integration
    of the operations, technologies and personnel of the acquired
    company;         
|
| |  | the potential disruption of our ongoing business;                                                                                       
|
| |  | potential loss of employees;                                                                                                            
|
| |  | diversion of resources and of our
    managements attention away from other business concerns;                                         
|
| |  | the need to obtain third party consents and
    regulatory approval;                                                                    
|
| |  | expenses of any undisclosed or potential legal
    liabilities of the acquired company;                                                 
|
| |  | risks of entering markets in which we have no or
    limited prior experience;                                                          
|
| |  | the difficulty of managing the growth of a larger
    combined company; and                                                             
|
| |  | competition for acquisition candidates from other
    and better capitalized companies, which may increase the cost of
    acquisitions.

If we encounter any of these difficulties in
completing these acquisitions and integrating acquired
businesses, this could adversely affect our results of
operations. Many of these risks are particularly acute in the
fiscal quarters immediately following the completion of an
acquisition because that is when the operations of an acquired
business are integrated into our operations. Once integrated,
acquired operations may not achieve levels of revenue,
profitability or productivity comparable with those that our
existing operations achieve or may otherwise not perform as we
expected. We could, as a result, decide to change our strategy
for that market and sell the operations we have acquired at a
loss or recognize an impairment of goodwill or other long-lived
assets.

5



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our completed and pending acquisitions of
    the Allied assets and the pending acquisition of Florida
    Recycling make evaluating our operating results difficult given
    the significance of these acquisitions to our previous
    operations and our historical results may not give you an
    accurate indication of how we will perform in the
    future

Our completed and pending acquisitions of the
assets of Allieds northern and central Florida operations
and our pending acquisition of all of the shares of Florida
Recycling, Inc. or Florida Recycling may make it more difficult
for us to evaluate and predict our future operating performance.
Our historical results of operations do not give effect to the
completed and pending acquisitions of the Allied assets and the
pending acquisition of the shares of Florida Recycling.
Accordingly, the historical financial information in this annual
report does not necessarily reflect what our financial position,
operating results and cash flows will be in the future as a
result of these acquisitions.

We may not be able to successfully integrate or
realize the anticipated benefits of these completed and pending
acquisitions and may not be able to maintain or achieve
profitability of any of the acquired businesses or overall.
Consequently, our historical results of operations may not give
you an accurate indication of how we, together with the assets
from Allied and Florida Recycling, will perform in the future.



| |                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our recent agreement to acquire Florida
    Recycling is subject to financing conditions and other customary
    closing conditions which, if they are not met as a result of our
    default, will result in us forfeiting the deposit paid under
    that agreement and not completing the Florida Recycling
    acquisition

We entered into an agreement to acquire all of
the issued and outstanding shares of Florida Recycling for a
purchase price of $98.5 million in cash, subject to certain
changes in working capital, and the issuance of 9,250,000 common
shares. The transaction is subject to regulatory approval and
customary closing conditions, including financing conditions. As
part of this transaction, we have advanced deposits of
$3.75 million in cash and 1,000,000 in common shares. If
the closing is not completed on or before May 1, 2004 we
are required to make an additional advance of $1.0 million
and the sellers may terminate the agreement, at which point we
would forfeit all cash and common share advances.

The amount required to finance the payment of the
cash component of the purchase price for the Florida Recycling
acquisition is approximately $98.5 million. We currently
intend to raise the necessary funds for this payment through the
issuance of additional debt or equity securities. If we are not
able to obtain financing for the Florida Recycling acquisition
on terms acceptable to us, or if any of the other closing
conditions are not met for the acquisition as a result of our
default, then we would forfeit the deposit we paid under the
acquisition agreement.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We may be unable to attract sufficient
    capital to fund our acquisition strategy, which will limit our
    future growth

We expect to finance future acquisitions through
a combination of seller financing, cash from operations,
borrowings under our financing facilities or issuing additional
equity or debt securities. Seller financing depends upon the
sellers willingness to accept our shares as part of the
consideration for an acquisition and our willingness to issue
our common shares, which will be impacted by the market value of
our common shares. If seller financing is not available, we will
have to use cash from operations, borrowings under our financing
facilities or issue additional equity or debt securities. The
use of cash from operations to finance acquisitions may reduce
the funds we have available for other corporate purposes.
Additional borrowings from our lenders will increase interest
expenses and may require us to commit to additional covenants,
which further limit our financial and operational flexibility.
This could restrict our ability to obtain additional debt on
favorable terms, or at all, which would limit our ability to
finance our acquisitions. Accordingly, we may not be successful
in consummating future acquisitions on favorable terms or at all.

6



---



##### Table of Contents





| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our business is capital intensive and may
    consume cash in excess of cash flow from our operations and
    borrowings

Our ability to remain competitive, sustain our
growth and maintain our operations largely depends on our cash
flow from operations and our access to capital. We intend to
fund our cash needs through our operating cash flow, borrowings
and equity issuances. We may require additional equity or debt
financing to fund our growth and debt repayment obligations.

During 2003, we had capital expenditures of
$24.4 million. Separately, we have provided for our
liabilities related to our closure and post-closure obligations.
As we undertake acquisitions, expand our operations, and deplete
our landfills, our cash expenditures will increase. As a result,
working capital levels may decrease and require financing. In
addition, if we must close a landfill sooner than we currently
anticipate, or if we reduce our estimate of a landfills
remaining available air space, we may be required to incur such
cash expenditures earlier than originally anticipated.
Expenditures for closure and post-closure obligations may
increase as a result of any federal, state or local government
regulatory action taken to accelerate such expenditures. These
factors could substantially increase our cash expenditures and
therefore impair our ability to invest in our existing or new
facilities.

We will need to refinance our existing credit
facilities and may need to refinance other debt to pay the
principal amounts due at maturity. In addition, we may need
additional capital to fund future acquisitions and the
integration of the businesses that we acquire. Our business may
not generate sufficient cash flow, we may not be able to obtain
sufficient funds to enable us to pay our debt obligations and
capital expenditures or we may not be able to refinance on
commercially reasonable terms, if at all.



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | We may face significant exposure to unknown
    liabilities in connection with our acquisitions

While we have in place a due diligence process to
review the businesses we acquire, we may not identify or we may
underestimate our exposure for certain liabilities of the
businesses we acquire. As a result, we may become responsible
for liabilities of the businesses we acquire, including
liabilities for environmental claims that were not discovered or
fully quantified prior to completing the acquisition and for
which we are unable to recover from the seller. Although we seek
to minimize the impact of potential undiscovered liabilities by
structuring acquisitions to minimize liabilities and obtaining
indemnities and warranties from the selling party, these methods
may not fully protect us from the impact of all undiscovered
liabilities. For example, indemnities or warranties are often
limited in scope, amount or duration, and may not fully cover
the liabilities for which they were intended. In addition, even
if these undiscovered liabilities are covered by indemnities or
warranties, the selling parties may become insolvent and may be
unable to satisfy any claims we may have against them.



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may incur significant expenses in
    pursuing acquisitions or developing and expanding disposal
    sites, and costs that are expensed for failed undertakings of
    this nature could reduce our results of operations

We may incur significant expenses in pursuing an
acquisition or developing and expanding disposal sites. These
include professional and consulting fees paid to complete our
due diligence review of our acquisition targets. We capitalize
certain of these expenses, as well as the costs of disposal site
development and expansions. If an acquisition is no longer
considered probable, or if a disposal site development or
expansion is not completed or is determined to be impaired, we
would charge against earnings any unamortized capitalized
expenditures incurred in connection with that acquisition or
disposal site or expansion. In future periods, we may be
required to incur charges against earnings in accordance with
this policy or due to other events that cause impairments.
Depending upon the magnitude of the charges, this could
materially reduce our operating results and may negatively
impact our covenants to our lenders and to the preferred
stockholders of Waste Services, which could adversely affect our
liquidity.

Our
indebtedness may make us more vulnerable to unfavorable economic
conditions and competitive pressures, limit our ability to
borrow additional funds, require us to dedicate or reserve a
large portion of

7



---



##### Table of Contents



cash flow from operations to service debt,
and limit our ability to take actions that would increase our
revenue and execute our growth strategy


We have indebtedness under our
$220.0 million existing credit facilities, other
subordinated promissory notes, capital lease obligations, and
cumulative mandatory redeemable preferred stock issued by our
U.S. subsidiary, Waste Services, Inc. or Waste Services, to
a third party. Our existing credit facilities are comprised of a
$195.0 million term loan and a $25.0 million revolving
credit facility maturing on December 29, 2004. The existing
credit facilities are collateralized by a first priority
security interest in substantially all of our current and future
acquired assets and that of our subsidiaries.

The amount of indebtedness owed under our
existing credit facilities may have adverse consequences for us,
including making us more vulnerable to unfavorable economic
conditions and competitive pressures, limiting our ability to
borrow additional funds, requiring us to dedicate or reserve a
large portion of cash flow from operations to service debt,
limiting our ability to plan for or react to changes in our
business and industry and placing us at a disadvantage compared
to competitors with less debt in relation to cash flow. We
expect to refinance our existing credit facilities with other
sources of financing, which may include, but not be limited to
new senior credit facilities, a subordinated note offering and
other debt or equity offerings. If we are unable to access
capital or private equity markets in the next twelve months, we
would be required to extend the existing credit facilities at an
increased interest rate. The existing credit facilities bear
interest at 9.0% per annum and have an initial term of
364 days with an extension option. If the option is
exercised, the term of the existing credit facilities would
extend to July 2005 at a rate of 11.0% per annum. The
increased interest expense would have an adverse effect on our
profitability. See also Item 5B. Liquidity and
Capital Resources  Existing Credit Facilities.

In addition to our indebtedness under the
existing credit facilities, in May 2003, Waste Services issued
55,000 shares of its preferred stock to Kelso Investment
Associates VI, L.P. and KEP VI, LLC (collectively, Kelso). The
preferred stock of Waste Services entitles the holders to a
liquidation preference of $1,000 per share and a cumulative
cash dividend of 17.75% per annum (compounding and accruing
quarterly in arrears). The preferred stock, including all
accrued and unpaid dividends, must be redeemed in full by no
later than May 6, 2015. We have the option to redeem all or
any part of the preferred stock prior to that date, subject to
the payment of certain premiums if we elect to redeem the
preferred stock prior to May 6, 2006. If we do not exercise
our option to redeem all of the preferred stock by May 6,
2009, Kelso may require Waste Services to initiate a sale of
Waste Services or its assets on terms acceptable to its board of
directors consistent with the exercise by the board members of
their fiduciary obligations. If Kelso exercises this right, we
may lose control of Waste Services or be forced to sell it at a
lower price than we might otherwise expect to receive.

Certain actions of Waste Services and its
affiliates require the prior approval of the holders of a
majority of the preferred stock. All of these covenants and
restrictions could limit the manner in which we conduct our
operations and could adversely affect our ability to raise
additional capital. Any failure by us to comply with these
covenants and restrictions will, unless waived by Kelso, result
in an immediate obligation to redeem all of the then outstanding
preferred stock. If such events occurred, we would be required
to refinance Waste Services or obtain capital from other
sources, including sales of additional debt or equity or the
sale of assets, in order to meet our redemption obligations. We
may not be successful in obtaining alternative sources of
funding to repay this obligation should events of default occur.



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect to incur substantial costs and
    expenses related to our migration transaction and may also incur
    substantial penalties if we do not complete this transaction by
    June 30, 2004 such as a higher dividend rate that accrues
    on the preferred stock of our U.S. subsidiary Waste
    Services

We intend to complete a reorganization by way of
a plan of arrangement under the Business Corporations Act
(Ontario), which we refer to as our migration transaction. By
the terms of the plan of arrangement, Waste Services, which is
currently our U.S. subsidiary, will become the parent
company of our corporate group.

8



---



##### Table of Contents



In order to complete the migration transaction,
we must seek and obtain the approval of the Superior Court of
Justice (Ontario) as well as the approval of a special majority
of our shareholders. By the terms of the Business Corporations
Act (Ontario), shareholders may have a right to dissent from
approving the migration transaction. If shareholders are granted
a right to dissent, shareholders who properly dissent in
accordance with the Business Corporations Act (Ontario) are
entitled to be paid the fair value of their common shares,
determined as of the close of business on the date before the
resolution approving the migration transaction was adopted. We
must also seek and obtain certain regulatory approvals in both
the United States and Canada.

In completing the migration transaction, we
expect to incur substantial legal and accounting costs. These
costs must be expensed as they are incurred and will have a
negative effect on our profitability until the completion of the
migration transaction. The migration transaction may also divert
managements attention away from its day-to-day
responsibilities.

By the terms of our agreements with Kelso,
relating to the shares of preferred stock of Waste Services, if
we do not complete the migration transaction by June 30,
2004, the dividend payable on the preferred stock of Waste
Services issued to Kelso will increase by 1% per annum,
from 17.75%, for every month that the migration transaction is
delayed, up to a maximum increase of an additional 12% per
annum. We may also be required to issue to Kelso an additional
250,000 warrants per month for each month that the migration
transaction is delayed after June 30, 2004, up to an
additional 6,000,000 warrants to purchase common stock of Waste
Services, at an exercise price of $0.01 per share. The
increase in the dividend payable on the Waste Services preferred
stock issued to Kelso would increase the amount to be paid to
Kelso on the redemption of the preferred stock and would have a
material adverse effect on our financial condition by increasing
our liabilities. If the migration transaction is not completed
at all, Kelso may also require us to exchange the existing
7,150,000 warrants to purchase common stock of Waste Services,
and any of the additional warrants for common stock of Waste
Services issued as a result of us completing the migration
transaction after June 30, 2004, for warrants to purchase
our common shares. The issuance of additional common shares upon
the exercise of the warrants would result in a substantial
dilution of the existing shareholders holdings.



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To the extent our reserves or accruals are
    inadequate to cover landfill closing and post-closing care
    costs, these obligations could reduce our cash flow and
    profitability

We have significant financial obligations to pay
closure and post-closure care costs for the landfills we
currently own and will likely have similar obligations with
respect to any landfills that we acquire in the future. We rely
on internally performed studies in estimating our obligations
for future closure and post-closure care costs. These studies
could be inaccurate and this could result in the costs incurred
by us for closure and post-closure care being higher than those
estimated.

Actual future costs of construction materials and
third party labor could differ from the costs we have used in
estimating these closure and post-closure care costs, for
example, because of the impact of general economic conditions on
the availability of the required materials and labor. Technical
designs could be altered due to unexpected operating conditions
or legislative or regulatory changes resulting in higher costs
than currently estimated.

Changes in legislative or regulatory
requirements, including changes in capping, closure or
post-closure care, activities, types or quantities of materials
used, or the term of post-closure care, could result in higher
costs than those estimated by us. The actual rate at which
disposal capacity is utilized could differ from the projected
timing resulting in the landfill reaching capacity earlier or
later than projected and us thereby incurring closure and
post-closure care costs earlier or later than projected.

To the extent our reserves or accruals are
inadequate to cover the actual costs of these obligations, we
would have reduced cash flow and profitability.

9



---



##### Table of Contents





| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to obtain or maintain the
    environmental permits and approvals we need to operate our
    business, which could adversely affect our earnings and cash
    flow

We are subject to significant environmental and
land use laws and regulations. To own and operate solid waste
facilities, including landfills and transfer stations, we must
obtain and maintain licenses or permits, as well as zoning,
environmental and other land use approvals. It has become
increasingly difficult, costly and time-consuming to obtain
required permits and approvals to build, operate and expand
solid waste management facilities. The process often takes
several years, requires numerous hearings and compliance with
zoning, environmental and other requirements and is resisted by
citizen, public interest and other groups. The cost of obtaining
permits could be prohibitive. We may not be able to obtain and
maintain the permits and approvals needed to own, operate or
expand our solid waste facilities. Moreover, the enactment of
additional laws and regulations or the more stringent
enforcement of existing laws and regulations could increase the
costs associated with our operations. Any of these occurrences
could reduce our expected earnings and cash flow.

In some markets in which we operate, permitting
requirements may be prohibitive and may differ between those
required of us and those required of our competitors. Our
inability to obtain and maintain permits for solid waste
facilities may adversely affect our ability to service our
customers and compete in these markets, thereby resulting in
reduced operating revenue.

In addition, stringent controls on the design,
operation, closure and post-closure care of solid waste
facilities could require us to undertake investigative or
remedial activities, curtail operations, close a facility
temporarily or permanently, or modify, supplement or replace
equipment or facilities at substantial costs resulting in
reduced profitability and cash flow.



| |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any exposure to environmental liabilities,
    to the extent not adequately covered by insurance, could result
    in significant expenses, which would reduce the funds we have
    available for other purposes, including debt service and
    reduction and acquisitions

We could be held liable for environmental damage
at solid waste facilities that we own or operate, including
damage to neighboring landowners and residents for contamination
of the air, soil, groundwater, surface water and drinking water.
Our liability could extend to damage resulting from pre-existing
conditions and off-site contamination caused by pollutants or
hazardous substances that we or our predecessors arranged to
transport, treat or dispose of at other locations. We are also
exposed to liability risks from businesses that we acquire
because these businesses may have liabilities that we fail or
are unable to discover, including noncompliance with
environmental laws. Our insurance program may not cover all
liabilities associated with environmental cleanup or remediation
or compensatory damages, punitive damages, fines, or penalties
imposed on us as a result of environmental damage caused by our
operations or those of any predecessor. The incurring of
liabilities for environmental damages that are not fully covered
by insurance could adversely affect our liquidity and could
result in significant expenses, which would reduce the funds we
have available for other purposes, including debt service and
reduction and acquisitions.



| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face competition from large and small
    solid waste services companies and may be unable to successfully
    compete with other solid waste companies reducing our operating
    margins

The markets in which we operate are highly
competitive and require substantial labor and capital resources.
We compete with large, national solid waste services companies
as well as smaller regional solid waste services companies. Some
of our competitors are better capitalized, have greater name
recognition and greater financial, operational and marketing
resources than us, and may be able to provide services at a
lower cost.

We also compete with operators of alternative
disposal facilities and municipalities that maintain their own
waste collection and disposal operations. Public sector
operators may have financial advantages over us because of their
access to user fees and similar charges as well as to tax
revenue. Responding to this competition may result in reduced
operating margins. Further, competitive pressures may make our

10



---



##### Table of Contents



internal growth strategy of improving service and
increasing sales penetration difficult or impossible to execute.




| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | The termination or non-renewal of existing
    customer contracts, or the failure to obtain new customer
    contracts, could result in declining revenue

We derive a portion of our revenue from municipal
contracts that require competitive bidding by potential service
providers. Although we intend to continue to bid on municipal
contracts and to rebid existing municipal contracts, such
contracts may not be maintained or won in the future. In the
past year, we have found that some municipalities in Canada, for
example, have imposed more restrictive bonding requirements as a
qualification to bid for some residential waste collection
contracts. We may be unable to meet such bonding requirements at
a reasonable cost to us or at all. These requirements may limit
our ability to bid for some municipal contracts and may favor
some of our competitors. If we are unable to compete
successfully for municipal contracts because of bonding
requirements, we may lose important sources of revenue.

We also derive a portion of our revenue from
non-municipal contracts, which generally have a term of one to
three years. Some of these contracts permit our customers to
terminate them before the end of the contractual term. Any
failure by us to replace revenue from contracts lost through
competitive bidding, termination or non-renewal within a
reasonable time period could result in a decrease in our
operating revenue and our earnings.



| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on third parties for disposal of
    solid waste and if we cannot maintain disposal arrangements with
    them we could incur significant costs that would result in
    reduced operating margins and revenue

We currently deliver a substantial portion of the
solid waste we collect to municipally owned disposal facilities
and to privately owned or operated disposal facilities. If
municipalities increase their disposal rates or if we cannot
obtain and maintain disposal arrangements with private owners or
operators, we could incur significant additional costs and, if
we are not able to pass these cost increases on to our customers
because of competitive pressures, this could result in reduced
operating margins and revenue.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Labor unions may attempt to organize our
    non-unionized employees, which may result in increased operating
    expenses

Some of our employees have chosen to be
represented by unions, and we have negotiated collective
bargaining agreements with them. Labor unions may make attempts
to organize our non-unionized employees. The negotiation of any
collective bargaining agreement could divert managements
attention away from other business matters. If we are unable to
negotiate acceptable collective bargaining agreements, we may
have to wait through cooling-off periods, which are
often followed by union-initiated work stoppages, including
strikes. Unfavorable collective bargaining agreements, work
stoppages or other labor disputes may result in increased
operating expenses.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Our operating margins and profitability may
    be negatively impacted by increased fuel and energy
    costs

Although fuel and energy costs account for a
relatively small portion of our total operating costs, sustained
increases in such costs, which we are unable to pass on to our
customers because of competitive pressures, could lower our
operating margins and negatively impact our profitability.



| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The industry in which we operate is
    seasonal and decreases in revenue during winter months may have
    an adverse effect on our results of operations, particularly for
    our Canadian operations

Our operating revenue tends to be somewhat lower
in the fall and winter months for our Canadian operations,
reflecting the lower volume of solid waste generated during
those periods. Our first and fourth quarter results typically
reflect this seasonality. In addition, particularly harsh
weather conditions may result in temporary slowdowns or
suspension of certain of our operations or higher labor and
operational costs, any of which could have a material adverse
effect on our results of operations.

11



---



##### Table of Contents





| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we lose our senior management or are
    unable to attract highly skilled personnel, we may be unable to
    successfully pursue our growth strategy

We are highly dependent on the experience,
abilities and continued efforts of our senior management team.
The loss of one or more of our senior management team could
limit our ability to execute our growth strategy. Our future
success will also depend on our ability to attract, retain and
motivate highly skilled personnel in various areas of our
business. Our inability to attract new high quality employees
could also limit our ability to carry out our growth strategy.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Canadian operations subject us to
    currency translation risk, which could cause our results to
    fluctuate significantly from period to period

For the year ended December 31, 2003, most
of our revenue was derived from our operations in Canada and as
such our primary functional currency is the Canadian dollar.
However, for each reporting period, we translate the results of
our Canadian operations and financial condition into
U.S. dollars. Therefore, our reported results of operations
and financial condition are subject to changes in the exchange
relationship between the two currencies. For example, as the
relationship of the Canadian dollar strengthened against the
U.S. dollar, as it did in 2003, our revenue is favorably
affected and conversely expenses are unfavorably affected. The
effects of translation are reported as a component of other
comprehensive income. Separately, monetary assets denominated in
U.S. dollars held by our Canadian operations are
re-measured from U.S. dollars into Canadian dollars and
then translated into U.S. dollars. The effects of
re-measurement are reported currently as a component of net
income (loss). We do not currently hedge our exposure to changes
in foreign exchange rates.



| |                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any failure to maintain the required
    financial assurance or insurance to support existing or future
    service contracts may prevent us from meeting our contractual
    obligations, and we might be unable to bid on new contracts or
    retain existing contracts resulting in reduced operating revenue
    and earnings

Municipal solid waste services contracts and
permits to operate transfer stations, landfills and recycling
facilities typically require us to obtain performance bonds,
letters of credit or other means of financial assurance to
secure our contractual performance. Such contracts and permits
also typically require us to maintain adequate insurance
coverage. Our ability to obtain performance bonds or letters of
credit is generally dependent on our creditworthiness. In
addition, substantially all of our bonding requirements are
provided by one surety for our Canadian operations and another
surety in the United States for our U.S. operations. Our
bonding arrangements are generally renewed annually. If we are
unable to renew our bonding arrangements on favorable terms or
at all or enter into arrangements with new surety providers, we
would be unable to meet our existing contractual obligations
that require the posting of performance bonds, and we would be
unable to bid on new contracts. This would reduce our operating
revenue and our earnings.



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes to patterns regarding disposal of
    waste could adversely affect our results of operations by
    reducing the volume of waste available for collection and thus
    reducing our earnings

Waste reduction programs may reduce the volume of
waste available for collection in some areas where we operate.
Some areas in which we operate offer alternatives to landfill
disposal, such as recycling and composting. In addition,
provincial, state and local authorities increasingly mandate
recycling and waste reduction at the source and prohibit the
disposal of certain types of waste, such as yard waste, at
landfills. Any significant adverse change in regulation or
patterns regarding disposal of waste could have a material
adverse effect on our earnings by reducing the level of demand
for our services, resulting in decreased revenue and the
earnings we are able to generate.

12



---



##### Table of Contents





| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not meet our growth objectives if we
    are unable to develop new landfill sites or enter into
    agreements that provide us with access to landfill sites and
    increased disposal costs could result in reduced profitability
    and cash flow

Our ability to meet our growth objectives depends
in part on our ability to acquire, lease or expand landfills,
develop new landfill sites or enter into agreements that will
give us long-term access to landfill sites in our markets. In
some areas in which we operate, suitable land for new sites or
expansion of existing landfill sites may be unavailable. Permits
to expand landfills are often not approved until the remaining
permitted disposal capacity of a landfill is very low. We may
not be able to purchase additional landfill sites, renew the
permits for or expand existing landfill sites or negotiate or
renegotiate agreements to obtain a long-term advantage for
landfill costs. If we were to exhaust our permitted capacity at
our landfills, our ability to expand internally could be
limited, and we could be required to cap and close our landfills
and dispose of collected waste at more distant landfills or at
landfills operated by our competitors or other third parties. In
Alberta, Canada, regulations require landfills to be re-approved
every 10 years, thereby providing the regulator an
opportunity to add potentially more stringent or costly design
or operating conditions to the permit or prevent the renewal of
the permit. Our landfill located in Alberta, Canada must
complete this re-approval process by October 2006. Any failure
by us to secure favorable arrangements (through ownership of
landfills or otherwise) for the disposal of collected waste
would increase our disposal costs and could result in the loss
of business to competitors with more favorable disposal options
thereby reducing our profitability and cash flow.

Changes in legislative or regulatory requirements
may cause changes in the landfill site permitting process. These
changes could make it more difficult or costly for us to obtain
or renew landfill permits. Technical design requirements, as
approved, may need modification at some future point in time,
which could result in higher development and construction costs
than projected. Our current estimates of future disposal
capacity may change as a result of changes in design
requirements prescribed by legislation, construction
requirements and changes in the expected waste density over the
life of a landfill site. The density of waste used to convert
the available airspace at a landfill into tons may be different
than estimated because of variations in operating conditions,
including waste compaction practices, site design, climate and
the nature of the waste.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Limits on export of waste and any
    disruptions to the cross-border flow of waste may adversely
    affect our results of operations by increasing our costs of
    disposal

There is limited disposal capacity available in
Ontario, Canada, a market in which we have significant
operations. As a result, a significant portion of the solid
waste collected in Ontario is transported to sites in the United
States for disposal. Disruptions in the cross-border flow of
waste, or periodic closures of the border to solid waste would
cause us to incur more costs due to the increased time our
trucks may be required to spend at border check-points or
increased processing or sorting requirements. Additionally, our
trucks might be required to travel further to dispose of their
waste in other areas of Ontario. Disruptions in the cross-border
flow of waste could also result in a lack of disposal capacity
available to our Ontario market at a reasonable price or at all.
These disruptions could have a material adverse effect on our
operating results by increasing our costs of disposal in the
Ontario market and thereby decreasing our operating margins and
could result in the loss of business to competitors with more
favorable disposal options.






|        |                           
|------- | --------------------------
|Item 4. | Information on the Company



|   |                                           
|-- | ------------------------------------------
|A. | History and Development of the
    Company

General

We are a multi-regional, integrated solid waste
services company, providing collection, transfer, landfill
disposal and recycling services for commercial, industrial and
residential customers in the United States and Canada.

13



---



##### Table of Contents



We were formed on the amalgamation of our
predecessor, Capital Environmental Resource Inc., with a number
of its wholly owned subsidiaries, pursuant to the Business
Corporations Act (Ontario) effective January 1, 2003. Our
predecessor was incorporated in May 1997 and began operations in
June 1997 when it acquired selected Canadian solid waste assets
and operations from Canadian Waste Services Inc. and its parent,
USA Waste Services, Inc. (now known as Waste
Management, Inc.). We completed our initial public offering
of 2,760,000 common shares in June of 1999.

Our corporate offices are located at 1122
International Blvd., Suite 601, Burlington, Ontario L7L
6Z8. Our telephone number is (905) 319-1237.

You may read and copy any materials that we file
with the SEC at the SECs address, SECs Public
Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. The internet address is www.sec.gov.

Acquisition History of the Company

We were founded in May 1997 and began operations
in June 1997 when we acquired selected solid waste assets and
operations in Canada from Canadian Waste Services Inc. and its
former parent, USA Waste Services, Inc. From the time of
commencing operations we acquired a number of solid waste
service operations in Canada and the United States. In the first
half of 2001, we sold our operations in the northeastern United
States and exited the U.S. market because those
U.S. operations were exclusively collection operations,
with no related disposal opportunity and did not provide
sufficient cash flow and investment returns.

Our corporate strategy changed substantially in
September 2001 when we appointed our current Chairman and CEO,
David Sutherland-Yoest, and new board members. Our new
management and board of directors identified an opportunity to
create a multi-regional, vertically integrated solid waste
company by expanding into high growth markets in the United
States. Since September 2001, we have raised approximately
$150 million of equity pursuing this strategy and have
invested in three newly permitted or to be permitted large
landfill disposal assets strategically located in high growth
U.S. markets. In addition, we have assembled a management
team with significant industry experience and invested in
information systems to support our growth plans.

We expect to continue to make strategic
acquisitions in the United States and Canada. These acquisitions
will be financed through all or a combination of cash on hand,
issuances of our common stock and other debt and equity
financings. Since we changed our management, board of directors
and strategy in September 2001, we have completed or signed
definitive agreements to acquire the operations described
further in this section.



| |                                                 
| | ------------------------------------------------
| | Summary of Acquisitions in the United
    States



| |                                               
| | ----------------------------------------------
| | Florida Completed and Pending
    Acquisitions

JED Landfill, Osceola
County.In May 2003, we acquired the
JED Landfill, a newly permitted landfill in central Florida for
$68.1 million in cash, assumed liabilities of
$6.2 million and the issuance of 2,050,000 common shares.
The landfill site, which began commercial operations in January
2004, is a 2,200 acre municipal solid waste landfill with
an initial permitted capacity of 24 million cubic yards. We
plan to pursue a vertical expansion that would increase the
initial permitted capacity by approximately 18.0 million
cubic yards.

Allied Northern and Central Florida
Operations.In November 2003, we
entered into an agreement to acquire from Allied, the assets of
Allieds northern and central Florida operations for a
purchase price of approximately $120.0 million plus working
capital. The primary markets currently serviced by the
operations are in Tampa, Sarasota and Jacksonville, Florida. To
date, we have acquired all operations

14



---



##### Table of Contents



except for certain operations in Jacksonville
which we expect to complete in May 2004 upon receipt of the
required municipal contract transfer consents and approvals.


Florida Recycling Services, Central
Florida.In November 2003, we entered
into an agreement, as amended in March 2004, to acquire all of
the issued and outstanding shares of Florida Recycling for a
purchase price of $98.5 million in cash, subject to certain
changes in working capital, and the issuance of 9,250,000 common
shares. The transaction is subject to customary closing
conditions, including financing conditions. As part of this
transaction, we have advanced deposits of $3.75 million in
cash and 1,000,000 in common shares. If the closing is not
completed on or before May 1, 2004 we are required to make
an additional advance of $1.0 million and the sellers may
terminate the agreement, at which point we would forfeit all
cash and common share advances. Florida Recyclings
operations are based in central Florida, primarily servicing the
Orlando, Daytona, Fort Myers and Tampa markets and will
provide substantial internalization benefits to our JED
landfill. Separately, one of our officers holds a 3% equity
interest in Florida Recycling, which was acquired prior to his
employment with us. In addition, under an agreement with the
sellers entered into prior to his employment with us, this
officer will receive a fee of approximately $2.5 million
from the sellers upon closing of the transaction. See
Item 7B. Related Party Transactions.



| |                     
| | --------------------
| | Arizona Acquisitions

Cactus Waste Landfill, Pinal
County.In July 2003, we purchased
Cactus Waste Systems, LLC, or Cactus Waste, for
$0.6 million in cash and a $1.2 million option, which
we exercised in September 2003, to purchase an 800 acre site in
Pinal County, Arizona, which has been zoned to permit the
development of a landfill. We expect the Cactus Waste landfill
site, which will serve the greater Phoenix and Tucson, Arizona
markets, to have a permitted capacity of 224 million cubic
yards. Additionally, we are developing a fully permitted
transfer station in Mesa, Arizona. Upon receipt of all permits
and authorizations for the operation of the landfill, which we
expect to occur in the second quarter of 2004, we will issue
1,250,000 common shares or $3.0 million to the sellers of
Cactus Waste, at their option. The sellers are entitled to
contingent payments based upon the landfill achieving certain
defined average tons of waste per day. Should the landfill
achieve a maximum 5,000 tons per day, the total contingent
payments would not exceed $18.0 million. Additionally, we
entered into a royalty agreement whereby we will pay the sellers
a royalty of $0.50 per ton on all waste deposited at the
Cactus Waste Landfill after the earlier to occur of July 2006 or
the receipt of 1,250 tons of waste per day at the landfill. We
currently expect to complete construction and open the landfill
and transfer station in the second half of 2004.

Collection Businesses, Phoenix
Arizona.To date, we have acquired the
assets of seven collection businesses for aggregate cash
consideration of approximately $18.1 million plus the
issuance of 1,511,370 common shares.



| |                  
| | -----------------
| | Texas Acquisition

Long Point Landfill, Fort Bend
County.In February 2004, we acquired
a new, fully permitted, municipal solid waste landfill site
currently under development in Fort Bend County, Texas,
approximately 15 miles southwest of metropolitan Houston.
The purchase price was comprised of a cash payment of
$5.0 million, a seller financed promissory note of
$5.0 million and the issuance of 4,375,000 common shares.
This approximately 2,600 acre site, which will serve the
greater Houston area, has a permitted capacity of
48 million cubic yards. It is currently anticipated that
the landfill will open for commercial operation in the second
half of 2004. In addition to the landfill, we acquired a
leasehold interest in a fully permitted transfer station site in
Houston, which we expect to construct and open by the fourth
quarter of 2004.

15



---



##### Table of Contents





| |                                      
| | -------------------------------------
| | Summary of Acquisitions in
    Canada



| |                               
| | ------------------------------
| | Waste Services Ottawa, Ontario

In February 2002, we purchased Ottawa,
Ontario-based Waste Services Inc., or Waste Services Ottawa, a
landfill and collection business for approximately
$25.5 million. Waste Services Ottawa consisted of two solid
waste collection companies, one landfill and one transfer
station, operating in the Ottawa and Brockville areas of
southeastern Ontario.



| |                            
| | ---------------------------
| | Other Collection Businesses

We also purchased five other solid waste
collection companies primarily in Western Canada during 2002 for
cash consideration aggregating approximately $4.3 million
and one solid waste collection company in Western Canada during
2003 for approximately $1.5 million.



| |                           
| | --------------------------
| | Gap Disposal, Saskatchewan

In January 2004, we acquired all outstanding
shares of Gap Disposal (2001), Ltd., a permitted industrial
waste landfill site in Saskatchewan. The purchase price was
comprised of a cash payment of approximately $1.1 million
and the issuance of 12,000 common shares.

U.S. Migration

As part of our business strategy to expand into
the United States, we propose to enter into a migration
transaction. Under the migration transaction, our corporate
structure will be reorganized so that Waste Services will become
the ultimate parent company of our corporate group. Waste
Services is currently our Delaware subsidiary.

The migration transaction will be effected
through a plan of arrangement under Section 182 of the
Business Corporations Act (Ontario) and must be approved by the
Ontario Superior Court of Justice and by our shareholders. We
will, through such plan of arrangement, effectively convert the
holders of our common shares into holders of shares of common
stock of Waste Services as follows:



| |   |                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Holders of our common shares who are
    U.S. residents will have their holdings automatically
    transferred to Capital Holdings (an intermediate company
    incorporated in Nova Scotia, Canada and a wholly owned
    subsidiary of Waste Services) in exchange for shares of common
    stock of Waste Services.
|
| |  | Holders of our common shares who are not
    U.S. residents and who do not elect to receive exchangeable
    shares will also have their holdings automatically transferred
    to Capital Holdings in exchange for shares of common stock of
    Waste Services.                                                     
|
| |  | Holders of our common shares who are not
    U.S. residents and who elect to receive exchangeable shares
    will have their common shares reclassified as exchangeable
    shares that are exchangeable for shares of common stock of Waste
    Services at an exchange ratio of 1:1.                                

The terms of the exchangeable shares will be the
economic and functional equivalent of the common stock of Waste
Services. Holders of exchangeable shares (i) will receive
the same dividends as holders of shares of common stock of Waste
Services and (ii) will be entitled to vote on the same
matters as holders of shares of common stock of Waste Services.
Such voting will be accomplished through the issuance of a
special voting share to a trustee who will vote on the
instructions of the holders of the exchangeable shares (one vote
for each exchangeable share).

The exchangeable shares will mandatorily be
exchanged for shares of common stock of Waste Services upon the
occurrence of certain events, such as our liquidation, or after
a redemption date. Such redemption date has not yet been
determined, but the date will be within a range of approximately
seven to twelve years after the issuance of the exchangeable
shares.

16



---



##### Table of Contents



B.     Business
Overview

We are a multi-regional, integrated solid waste
services company, providing collection, transfer, landfill
disposal and recycling services for commercial, industrial and
residential customers in the United States and Canada. We
believe that we are the second largest operator in Canada by
revenue, with leading market positions in Ontario, Alberta and
British Columbia. In 2003, we initiated a disposal-based growth
strategy to enter the U.S. solid waste market and establish
leading, vertically-integrated market positions. Under this
strategy, we enter geographic markets with attractive growth or
competitive characteristics by acquiring and developing landfill
disposal capacity, then acquiring and developing waste
collection and transfer operations. In the past 12 months,
we have implemented this strategy in three geographic markets in
the United States: northern and central Florida, including
Orlando and Tampa; Phoenix and Tucson, Arizona; and Houston,
Texas. We have acquired large municipal solid waste landfill
developments in each of these markets.

Business Strategy

Our goal is to be a highly profitable,
multi-regional solid waste services company in North America
with leading market positions in each of the markets we serve.
In order to achieve this goal, we intend to:

Maximize Density and Vertical Integration of
Operations.We believe that achieving
a high degree of density and vertical integration of operations
leads to higher profitability and returns on invested capital.
In each of our local markets, we seek to maximize the density of
our collection routes, which allows us to leverage our
facilities and vehicle fleet by increasing the number of
customers served and revenue generated by each route. In
addition, we seek to vertically integrate our operations where
possible, using transfer stations to link collection operations
with our landfills to increase internalization of waste volume.
By securing and controlling the solid waste stream from
collection through disposal, we are able to achieve higher
margins and greater, more stable cash flow than if we were
required to bring collected waste to a third party disposal
facility. The delivery of collected volume to our own transfer
stations and landfills represents significant cost savings for
our collection operations, while at the same time providing our
landfills with more stable and predictable waste volume and
enhancing returns on the capital invested in these facilities.

Provide Consistent, Superior Customer
Service.Our long-term growth and
profitability will be driven, in large part, by our ability to
provide consistent, superior service to our customers. We
believe that our local and regional operating focus allows us to
respond effectively to customer needs on a local basis, as well
as maintain strong relationships with commercial, municipal and
residential accounts. In each of our markets, customer retention
and new account generation are key areas of focus for our local
managers, and are important components of their performance
evaluation.

Maintain a Decentralized Operating Management
Structure with Centralized Controls and Information
Systems.The solid waste industry is a
local and regional business by nature, where we believe that
asset investment, customer relationships, pricing and
operational productivity are most effectively managed on a local
and regional basis. We have structured our operating management
team on a geographically decentralized basis, because we believe
that talented, experienced and incentivized local management are
in the best position to make effective, profitable decisions
regarding local operations and to provide strong customer
service. Our senior management team provides significant
oversight and guidance for our local management, developing
operating goals and standards tailored to each market, but does
not impose corporate directives regarding local operating
decisions, such as pricing.

While our operating management structure is
decentralized, all of our operations adhere to uniform corporate
policies and financial controls, as well as utilize integrated
information systems. Our information systems provide both
corporate and local management with comprehensive, consistent
and timely operating and financial data, enabling them to
maintain detailed, ongoing visibility of the performance and
trends in each of our local market operations.

17



---



##### Table of Contents



Execute a Disciplined, Disposal-Based Growth
Strategy.Our growth strategy consists
of both new geographic market entries, for which we first secure
disposal capacity, and tuck-in acquisitions within
an existing market, which typically consist of collection
operations or transfer stations. In either case, our focus is on
maximizing cash flow and return on invested capital.

For new market entries, we only pursue
opportunities where we can:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | benefit from (i) above-average underlying
    economic or population growth, or (ii) a changing
    competitive or regulatory environment that could lead to
    above-average growth for solid waste services;
|
| |  | establish a leading market position over time in
    the local markets in which we operate; and                                                                                                                
|
| |  | become vertically-integrated, with the ability to
    secure significant waste volume that we collect and transfer to
    our own landfills.                                                                   

We believe that each of the new markets we have
entered in the United States in the past 12 months have met
these criteria.

For tuck-in acquisitions, we only pursue
opportunities that:



| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | are complementary to our existing infrastructure,
    allowing us to increase the density of our collection routes or
    enhance asset utilization; or
|
| |  | increase the waste volume that can be
    internalized into our transfer stations and landfills.                                                       

Operations

We provide our services on a geographic basis in
two regions in Canada, Eastern and Western Canada, and in two
regions in the United States, Florida and the Southwest.



| |                    
| | -------------------
| | Collection Services

We provide collection services to approximately
52,000 commercial and industrial customers and approximately
810,000 residential customers. As of December 31, 2003, we
had a front-line collection fleet size of approximately 650
vehicles with an average fleet age of approximately
six years.

Commercial and Industrial
Collection.We provide collection
services to a variety of commercial and industrial customers in
all of our geographic markets where we have collection
operations. We perform such services principally under one to
three year service agreements, which typically contain
provisions for automatic renewal and which prohibit the customer
from terminating the agreement prior to its expiration date
without incurring a penalty. We provide roll-off containers to
customers for temporary services, such as for construction
projects, under short-term purchase orders. We also provide
stationary compactors to our customers, which allow them to
compact their waste at their premises prior to its collection.
Commercial and industrial collection vehicles normally require
one operator. We provide two to eight cubic yard containers to
commercial customers and ten to fifty cubic yard containers to
industrial customers, including our roll-off accounts.

We determine the fees we charge our customers by
a variety of factors, including collection frequency; level of
service; route density; the type, volume and weight of the waste
collected; type of equipment and containers furnished; the
distance to the disposal or processing facility; the cost of
disposal or processing; and prices charged by competitors for
similar services. Our contracts with commercial and industrial
customers typically allow us to pass on increased costs
resulting from variable items such as disposal and fuel costs
and surcharges. Our ability to pass on price increases is
sometimes limited by the terms of our contracts.

Residential
Collection.We provide residential
waste collection services in all of our geographic markets where
we have collection operations through a variety of contractual
arrangements, including contracts with municipalities, owners
and operators of large residential complexes and mobile home
parks,

18



---



##### Table of Contents



and homeowners associations. We also provide such
services through residential subscription arrangements with
individual homeowners in certain markets.


Our contracts with municipalities are typically
for a term of up to five years and contain a formula, generally
based on a pre-determined published price index, for automatic
adjustments to fees to cover increases in some, but not all, of
our operating costs. Certain of our contracts with
municipalities contain renewal provisions.

The fees we charge for residential solid waste
collection services provided on a subscription basis are based
primarily on route density, the frequency and level of service,
the distance to the disposal or transfer facility, the cost of
disposal or transfer and prices we charge in the market for
similar services.



| |                          
| | -------------------------
| | Transfer Station Services

We currently operate 14 transfer stations and are
constructing new transfer stations in Arizona and Texas. Our
transfer stations receive solid waste from our own operations
and from third parties, compact the waste and transfer it for
disposal to our own or third-party landfills. We charge third
parties fees to dispose their waste at our transfer stations.

We typically subcontract the transportation of
waste from our transfer stations to the landfill. Transfer
station fees are generally based on the cost of processing,
transportation and disposal. We believe that the benefits of
using our transfer stations include improved utilization of our
collection infrastructure and better relationships with
municipalities and private operators that deliver waste to our
transfer stations, which can lead to additional growth
opportunities. We believe that transfer stations will become
increasingly valuable as new landfills are opening further away
from metropolitan areas and waste needs to travel further for
disposal.



| |                                                  
| | -------------------------------------------------
| | Commercial and Residential Recycling
    Services

We offer collection and processing services to
our municipal, commercial and industrial customers for a variety
of recyclable materials, including cardboard, office paper,
plastic containers, glass bottles, fiberboard, and ferrous and
aluminum metals. We operate five material recovery facilities in
Ontario, Canada and seven in Florida. These facilities are used
to sort, bale and ship recyclable materials to market. We also
deliver recyclable materials that we collect to third parties
for processing and resale. In an effort to reduce our exposure
to commodity price fluctuations on recycled materials, where
competitive pressures permit, we charge collection or processing
fees for recycling volume collected from our customers. We
believe that recycling will continue to be an important
component of municipal solid waste management plans due to the
publics environmental awareness and regulations that
mandate or encourage recycling.



| |                           
| | --------------------------
| | Landfill Disposal Services

We charge our landfill and transfer station
customers a tipping fee on a per ton basis for disposing of
their solid waste at our transfer stations and landfills. We
generally base our landfill tipping fees on market factors and
the type and weight of or volume of the waste deposited. We
generally base our transfer station tipping fees on market
factors and the cost of processing the waste deposited at the
transfer station, the cost of transporting the waste to a
disposal facility and the cost of disposal.

We dispose of the solid waste we collect in one
of four ways: (i) at our own landfills; (ii) through
our own transfer stations; (iii) at municipally-owned
landfills; or (iv) at third-party landfills or transfer
stations. In markets where we do not have our own landfills, we
seek to secure favorable long-term disposal arrangements with
municipalities or private owners of landfills or transfer
stations. In those markets, our ability to maintain competitive
prices for our collection services is generally dependent upon
our ability to secure favorable disposal pricing. In some
markets we may enter into put or pay disposal arrangements with
third party operators of disposal facilities. These arrangements
require us to deliver a minimum tonnage of waste for disposal at
a fixed disposal rate, or pay a penalty equal to the minimum

19



---



##### Table of Contents



tonnage multiplied by that disposal rate. These
types of arrangements allow us to fix our disposal costs, but
also expose us to the risk that if our tonnage declines and we
are unable to deliver the minimum tonnage, we will be required
to pay the penalty.




| |                           
| | --------------------------
| | Other Specialized Services

We offer other specialized services consisting
primarily of sales and leasing of compactor equipment and
portable toilet services for special events or construction
sites.

Local/ Regional Operating Structure

We provide collection, transfer, recycling and
landfill services in several geographic regions in Canada and
the United States. In Canada, we operate in two geographic
regions, Eastern and Western Canada, and in the United States we
have two geographic regions, Florida and the Southwest region,
which includes our Phoenix operations and our recent entry into
the Houston market. Each of these regions also has a number of
operating districts where the business is managed on a local
basis.

From a management perspective, each district has
a District Manager who reports to a Regional Vice President
responsible for each of our four operating regions. Each of
these Regional Vice Presidents reports to our President and
Chief Operating Officer. District Managers are responsible for
the day-to-day operations of their districts, including
supervising their sales force, maintaining service quality,
implementing our health and safety and environmental programs
and overseeing contract administration. District Managers work
closely with Regional Vice Presidents to execute business plans
and identify business development opportunities. This structure
is designed to provide decision-making authority to our District
Managers who are closest to the needs of the customers they
serve in the community. This localized approach allows us to
quickly identify and address customer needs, manage local
operating dynamics and take advantage of market opportunities,
while also providing streamlined access to our President and
Chief Operating Officer for resource allocation and other major
strategic decisions.



| |       
| | ------
| | Canada

We have operations throughout Ontario and in
Saskatchewan, Alberta and British Columbia.

Eastern Canada.Our
Eastern Canada operations are based primarily in metropolitan
areas of southern Ontario. We currently operate in 16 districts
with 14 collection operations, eight transfer stations, five
material recovery facilities and one landfill. While our
southern Ontario operations other than Ottawa do not have
internal disposal facilities, we have disposal contracts in
place for a majority of our collected volume at favorable rates.

Our Waste Services landfill located in Ottawa,
Canada consists of 79 acres zoned for waste disposal and
another 21 acres of contiguous land. The 79 acre
landfill is permitted to accept up to 234,750 tonnes per year of
dry waste for disposal. We estimate that the 79 acre site
has a remaining capacity of 1.8 million cubic yards and
almost six years of remaining airspace on the 79 acre
parcel, at current disposal volumes.

Western Canada.Our
Western Canada operations are located in the three most western
Canadian provinces: Saskatchewan, Alberta and British Columbia.
Our hauling companies are located in the major metropolitan
areas of Alberta and British Columbia and our two landfills are
located in proximity to the industrial waste markets that they
serve. We currently operate in 11 districts with nine collection
operations, two transfer stations and two landfills. The two
landfills we own and operate in Western Canada primarily serve
industrial customers and while we do not have significant
internal disposal facilities, we have disposal contracts in
place for a majority of our collected volume.

Our Gap Landfill in Southern Saskatchewan was
acquired in January 2004 and is a fully permitted industrial
waste landfill which primarily services the oilfield industry.
At the time we acquired the landfill, it had been operating for
approximately two years and has an estimated remaining operating
life of 33 years.

20



---



##### Table of Contents



Our Paintearth Landfill, located in Coronation,
Alberta is permitted to accept non-hazardous solid waste,
construction and demolition waste and certain special wastes and
includes a composting facility, a bio-remediation facility and a
material recycling facility. The landfill consists of
approximately 160 acres zoned for waste disposal and
another approximately 320 acres of contiguous land that is
suitable for future expansion. We estimate that the
160 acre site has a total remaining capacity of
9.1 million cubic yards and 40 years of remaining
airspace in the current 160 acre parcel.



| |              
| | -------------
| | United States

In 2003, we initiated a disposal-based growth
strategy to enter the U.S. solid waste market. To date, we
have made strategic acquisitions of newly permitted or to be
permitted landfill sites and collection operations in northern
and central Florida, Phoenix, Arizona and Houston, Texas.

Florida Region.We
expect that upon the completion of our acquisition of
Allieds northern and central Florida operations and our
pending acquisition of Florida Recycling, our Florida region
will be organized into three districts with 13 collection
operations, seven transfer stations, five material recovery
facilities and three landfills.

The north Florida district, centered around the
Jacksonville metropolitan area, will be comprised of two
collection operations, two material recovery facilities and two
landfills. The Gulf district, concentrated in the Tampa/ St.
Petersburg market area, will have six collection operations, two
transfer stations and three material recovery facilities. The
central Florida district, focused on the Orlando metropolitan
area, will have five collection operations, two transfer
stations, two material recovery facilities and our JED landfill.

Our JED Landfill is located in Osceola County,
Florida (approximately 20 miles south of metropolitan
Orlando) and commenced operations in January 2004. This
municipal solid waste landfill has current permitted airspace of
24 million cubic yards. The site has no daily or annual
volume limits, and it is currently permitted to accept waste
from Osceola County and six surrounding counties (which include
the Orlando metropolitan area).

Southwest Region.Our southwest region includes our operations in Arizona and
Texas and includes new landfill sites outside Phoenix and
Houston and collection operations recently acquired in the
Phoenix metropolitan area.

Our Arizona operations are focused in the Phoenix
metropolitan area. The Cactus Waste Landfill is located between
Phoenix and Tucson, Arizona, and was acquired in September 2003.
This municipal solid waste landfill is expected to have an
initial capacity of approximately 224 million cubic yards.
Construction of the site is expected to begin in April 2004. The
site has no daily or annual volume limits and is expected to
begin accepting solid waste in the second half of 2004. We have
also obtained the required permits and zoning to operate and are
currently constructing a transfer station in Mesa, Arizona. We
expect the transfer station to commence operations in the second
half of 2004.

Since July 2003, we have acquired seven
collection companies that will be consolidated into a single
collection operation in the Phoenix market. We believe these
collection businesses will deliver significant volumes of
municipal solid waste to the Cactus Waste Landfill when it
begins to accept delivery of waste, which we expect to occur in
the second half of 2004.

Our Long Point Landfill is located approximately
15 miles southwest of metropolitan Houston, Texas, in
Fort Bend County and was acquired in February 2004. This
municipal solid waste landfill has a total area of approximately
2,600 acres with initial permitted capacity of
48 million cubic yards. Construction of the site is
expected to begin in April 2004. The site has no daily or annual
volume limits and is expected to begin accepting solid waste in
the second half of 2004. In addition to the landfill facility,
we acquired a leasehold interest of a site in Houston that is
fully permitted for the construction and operation of a solid
waste transfer station. The transfer station is expected to
commence operations in the fourth quarter of 2004.

21



---



##### Table of Contents



Sales and Marketing

We market our services on a decentralized basis
principally through our district managers and direct sales
representatives. Our sales representatives visit customers on a
regular basis and call upon potential new customers within a
specified territory or service area. These sales representatives
receive a portion of their compensation based on meeting certain
incentive targets.

In addition to our sales efforts directed at
commercial and industrial customers, we have municipal marketing
representatives in our markets in Canada and Florida who are
responsible for interfacing with each municipality or community
to which we provide residential service to ensure customer
satisfaction. Our municipal representatives organize and handle
bids for renewal and new municipal contracts in their service
areas.

Competition

The solid waste services industry is highly
competitive and fragmented. We compete with large, national
solid waste services companies, as well as smaller regional
solid waste services companies of varying sizes and resources.
Some of our competitors are better capitalized, have greater
name recognition and greater financial, operational and
marketing resources than we have, and may be able to provide
services at a lower cost. We also compete with operators of
alternative disposal facilities, and with municipalities that
maintain their own waste collection and disposal operations.
Public sector operators may have financial advantages over us
because of their access to user fees and similar charges as well
as to tax revenue.

The Canadian solid waste industry currently
includes one large national waste company: Waste
Management, Inc., operating through its Canadian
subsidiary, Canadian Waste. The U.S. solid waste industry
currently includes three large national waste companies: Waste
Management, Inc., Allied Waste Industries, Inc. and
Republic Services, Inc. There are also several other large
public solid waste services companies, including Waste
Connections, Inc., Casella Waste Systems, Inc., and
Waste Industries, Inc.

We compete for collection, transfer and disposal
volume based primarily on the price and quality of services.
From time to time, competitors may reduce the prices of their
services in an effort to expand their market share or service
areas or to win competitively bid municipal contracts. These
practices may cause us to reduce the prices of our services or,
if we elect not to do so, to lose business.

Competition exists not only for collection,
transfer and disposal volume, but also for acquisition
candidates. We generally compete for acquisition candidates with
publicly owned regional and large national solid waste services
companies.

Regulation

We are subject to significant federal,
provincial, state and local environmental and land use laws and
regulations in Canada and the United States. The enforcement of
both Canadian and U.S. environmental laws has become
increasingly stringent. We believe that we are currently in
substantial compliance with all material applicable
environmental laws, permits, orders and regulations, and
therefore we do not currently anticipate any significant
environmental costs necessary to bring our existing operations
into compliance. We anticipate that regulation, legislation and
regulatory enforcement actions related to the solid waste
services industry will continue to increase.

To transport and manage solid waste, we must
possess and comply with one or more permits from federal,
provincial, state or local agencies and government offices.
These permits must be periodically renewed and may be modified
or revoked by the issuing agency.

The principal statutes and regulations that
affect our operations are further described in this section.

22



---



##### Table of Contents





| |                    
| | -------------------
| | Canadian Regulation

Our Canadian operations are subject to
environmental statutes and regulations at each of the federal,
provincial and local levels. These laws impose restrictions
designed to control air, soil and water pollution and regulate
health and safety, zoning and land use and the handling of
hazardous and non-hazardous wastes, and often empower government
officials to issue administrative orders, including orders to
cease carrying out a specific activity. This regulatory
framework imposes significant compliance burdens and risks. The
contravention of these laws may result in substantial fines that
could equal or exceed the amount of monetary benefit acquired as
a result of the commission of the offense and which could
materially affect our business, results of operations and
financial condition. In addition, our Canadian operations are
subject to federal and provincial legislation regulating the
operation of our fleet of vehicles, as well as to provincial
occupational health and safety and workers compensation
statutes which establish employer responsibilities for worker
health and safety. The provisions of these statutes impose
compliance burdens and costs and may result in significant
penalties for failure to comply.

Canada.The Canadian
Environmental Protection Act, 1999 and the regulations passed
under the act regulate, among other things, the import and
export of waste into and out of Canada. The Transportation of
Dangerous Goods Act regulates the transport of wastes across
provincial and federal borders.

Ontario.Ontarios Environmental Protection Act and the regulations
passed under the act, regulate general waste management and new
or expanding landfill sites, prescribe the principal standards
for the location, maintenance and operation of waste management
systems, transfer and disposal sites, require the monitoring and
reporting of airborne contamination and create offenses for
spills, unlawful contaminant discharges or failure to comply
with environmental permits or approvals.

The operation of a waste management system or a
waste transfer or disposal site in Ontario requires a
Certificate of Approval or a Provisional Certificate of Approval
issued by the Ministry of the Environment under Part V of
the Ontario Environmental Protection Act. We have applied for
and obtained Certificates of Approval for the operation of all
of our existing waste management systems and waste transfer and
disposal sites in Ontario.

The Waste Diversion Act created the Waste
Diversion Organization, which has a mandate to develop,
implement and operate waste diversion programs, designed to
increase the diversion of waste from disposal. Programs
developed in 2003 included recycling (municipal Blue-box), waste
oil and used tires, with programs for organics, electronics and
household special wastes (i.e. paints and solvents) to follow in
later years.

The Ontario Water Resources Act prohibits
unlawful discharges into water and regulates wastewater systems
in Ontario, including leachate collection, treatment and
discharges at landfills.

In 2003, amendments were passed to the Municipal
Act that allow, in certain prescribed circumstances, the
formation of municipal businesses to compete directly in a
public competitive bidding process with the private sector waste
services industry for the collection, transfer, storage,
disposal or recycling of residential waste.

Saskatchewan.The
Environment Management and Protection Act of 2002 and the
regulations passed under the Act govern waste management
activities carried on in Saskatchewan, including the permitting
and operation of our Gap Disposal landfill.

Alberta.The
Environmental Protection and Enhancement Act comprehensively
regulates the management and control of waste, including
hazardous waste, and creates offenses for spills and other
matters of non-compliance. The Waste Control Regulation deals in
detail with the identification of wastes and requirements for
the handling, storage and disposal of waste. The waste control
legislation is currently under review. Waste management
facilities currently permitted under the Alberta Public Health
Act, including our landfill in Coronation, Alberta, must be
permitted by Alberta Environment no later than 2006 and the
permit must be renewed every 10 years thereafter. Renewal
of the Coronation, Alberta landfill site permit may result in
the imposition of additional permit conditions that may increase
the cell

23



---



##### Table of Contents



development and operating cost above current
levels, or may limit the type, quantity or quality of waste that
may be accepted. New landfill design standards are being
developed by Alberta Environment that may require us to
construct or operate future landfill cells and infrastructure to
a higher and potentially more costly standard than currently
permitted.


British Columbia.The Environmental Management Act creates offenses related to
spills, unlawful discharges and failure to comply. A new
Environmental Management Act and the Waste Management Act are
expected to be proclaimed in effect in the first half of 2004.
Among many changes, under the new act, a risk-based approach
will be applied to the permitting process for all businesses and
activities and regulations will be developed to increase the use
of administrative penalties as a compliance enforcement tool.
Various other provincial statutes, such as the Transportation of
Dangerous Goods Act deal generally with environmental matters
and could also impact our operations in British Columbia.

Municipal
Regulation.Many municipal governments
have passed local by-laws, including zoning and health measures
by-laws that limit our activities to prescribed sites or
activities, control the delivery of solid wastes to prescribed
sites, restrict or ban the movement of solid waste into a
municipality and regulate discharges into municipal sewers from
our solid waste facilities. There has been an increasing trend
to mandate and encourage waste reduction and separation at
source and waste recycling, and to prohibit or restrict the
disposal of certain solid waste, such as yard waste, leaves and
tires, in landfills. Such restrictions could affect the ability
of our transfer stations and landfills to operate at full
capacity.



| |                         
| | ------------------------
| | United States Regulation

The principal laws and regulations that affect
our U.S. operations (including those that were sold in 2001
and which could continue to result in liability to us), as well
as waste that we export from our Canadian operations to
landfills located in the United States are described below.

The Resource Conservation and Recovery Act of
1976.The Resource Conservation and
Recovery Act of 1976, or RCRA, regulates the generation,
treatment, storage, handling, transportation and disposal of
solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into
two groups, hazardous and non-hazardous. Wastes classified as
hazardous under RCRA are subject to much stricter regulation
than wastes classified as non-hazardous.

The Subtitle D Regulations, which govern
solid waste landfills, include location restrictions, facility
design standards, operating criteria, closure and post-closure
requirements, financial assurance requirements, groundwater
monitoring requirements, methane gas emission control
requirements, groundwater remediation standards and corrective
action requirements. The Subtitle D Regulations also
require new landfill sites to meet more stringent liner design
criteria to keep leachate out of groundwater. Each state is
required to revise its landfill regulations to meet these
requirements or these requirements will be automatically imposed
by the Environmental Protection Agency, or EPA, on landfill
owners and operators in that state. Each state is also required
to adopt and implement a permit program or other appropriate
system to ensure that landfills in each state comply with the
Subtitle D Regulations. Various states in which we
currently operate or in which we may operate in the future have
adopted regulations or programs as stringent as, or more
stringent than, the Subtitle D Regulations.

The Federal Water Pollution Control Act of
1972.The Federal Water Pollution
Control Act of 1972, or Clean Water Act, regulates the discharge
of pollutants from a variety of sources into waters of the
United States. If run-off from transfer stations or run-off or
collected leachate from landfills that we operate or own were
discharged into streams, rivers or other surface waters, the
Clean Water Act requires us to obtain a discharge permit,
conduct sampling and monitoring and, under certain
circumstances, reduce the quantity of pollutants in the
discharge. Also, virtually all landfills are required to comply
with the EPAs storm water regulations issued in November
1990, which are designed to prevent contaminated landfill storm
water run-off from flowing into surface waters. Various states
have adopted regulations that are more stringent than the
federal requirements.

24



---



##### Table of Contents



The Comprehensive Environmental Response,
Compensation, and Liability Act of
1980.The Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, or CERCLA,
established a regulatory and remedial program intended to
provide for the investigation and cleanup of facilities where or
from which a release of any hazardous substance into the
environment has occurred or is threatened. CERCLA imposes strict
joint and several liability for cleanup of facilities on current
owners and operators of the site, former owners and operators of
the site at the time of the disposal of the hazardous
substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the
transporters who select the disposal and treatment facilities.
CERCLA also imposes liability for the cost of evaluation and
remediation of any damage to natural resources.

The costs of a CERCLA investigation and cleanup
can be very substantial. Liability under CERCLA may be based on
the existence of small amounts of the more than 700
hazardous substances listed by the EPA, many of
which can be found in household waste. If we were found to be a
responsible party for a CERCLA cleanup, the enforcing agency
could hold us, or any other generator, transporter or the owner
or operator of the contaminated facility, responsible for all
investigative and remedial costs, even if others were also
liable. CERCLA gives a responsible party the right to bring a
contribution action against other responsible parties for their
allocable shares of investigative and remedial costs. Our
ability to obtain reimbursement from others for their allocable
shares of these costs would be limited by our ability to find
other responsible parties and prove the extent of their
responsibility and by the financial resources of these other
parties.

The Clean Air Act of
1970.The Clean Air Act of 1970, or
Clean Air Act, regulates emissions of air pollutants. The EPA
has developed standards that apply to certain landfills
depending on the date of the landfill construction, the location
of the landfill, the materials disposed at the landfill and the
volume of the landfill emissions. The EPA has also issued
standards regulating the disposal of asbestos containing
materials under the Clean Air Act. Air permits to construct may
be required for gas collection and flaring systems, and
operating permits may be required, depending on the estimated
volume of emissions.

All of the federal statutes described above
contain provisions authorizing, under certain circumstances, the
institution of lawsuits by private citizens to enforce the
provisions of the statutes. In addition to a penalty award to
the U.S. government, some of those statutes authorize an award
of attorneys fees to parties successfully advancing such
an action.

The Occupational Safety and Health Act of
1970.The Occupational Safety and
Health Act of 1970 is administered by the Occupational Safety
and Health Administration, or OSHA, and in many states by state
agencies whose programs have been approved by OSHA. The OSHA Act
establishes employer responsibilities for worker health and
safety, including the obligation to maintain a workplace free of
recognized hazards likely to cause death or serious injury, to
comply with adopted worker protection standards, to maintain
certain records, to provide workers with required disclosures
and to implement certain health and safety training programs.
Various OSHA standards may apply to our operations, including
standards concerning notices of hazards, the handling of
asbestos and asbestos-containing materials and worker training
and emergency response programs.

Flow Control/ Interstate Waste
Restrictions.Certain permits and
approvals, as well as certain state and local regulations, may
limit a landfill in accepting waste that originates from
specified geographic areas, restrict the importation of
out-of-state waste or otherwise discriminate against
out-of-state waste. These restrictions, generally known as flow
control restrictions, are controversial, and some courts have
held that some flow control schemes violate constitutional
limits on state or local regulation of interstate commerce. From
time to time, federal legislation is proposed that would allow
some local flow control restrictions. Although no such federal
legislation has been enacted to date, if this federal
legislation should be enacted in the future, states could act to
limit or prohibit the importation of out-of-state waste or
direct that waste be handled at specified facilities. These
state actions could adversely affect landfill owners and could
also result in higher disposal costs for collection operations.

Even in the absence of federal legislation,
certain state and local jurisdictions may seek to enforce flow
control restrictions through local legislation or contract.
These restrictions could result in the volume

25



---



##### Table of Contents



of waste going to landfills being reduced in
certain areas, which could affect the landfill owners
ability to operate the landfills at full capacity or reduce the
prices that it can charge for landfill disposal services. Any
such restrictions may also result in higher disposal costs for
collection operations.


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

Permits or other land use approvals with respect
to a landfill, as well as state or local laws and regulations,
may specify the quantity of waste that may be accepted at the
landfill during a given time period, or specify the types of
waste that may be accepted at the landfill. Once an operating
permit for a landfill is obtained, it must generally be renewed
periodically.

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

Some state and local authorities enforce certain
federal laws in addition to state and local laws and
regulations. For example, in some states, RCRA, the Occupational
Safety and Health Act, parts of the Clean Air Act and parts of
the Clean Water Act are enforced by local or state authorities
instead of by the EPA, and in some states those laws are
enforced jointly by state or local and federal authorities.

Public Utility
Regulation.The rates that landfill
operators may charge are also regulated in many states by public
authorities. The adoption of rate regulation or the reduction of
current rates in states in which solid waste management
companies operate could have an adverse effect on their
business, financial condition and results of operations.

26



---



##### Table of Contents





|   |                         
|-- | ------------------------
|C. | Organizational Structure

Our U.S. operations are conducted by our
direct and indirect wholly owned subsidiaries. Capital
Environmental Resource Inc. primarily conducts our Canadian
operations. Set forth below is certain information regarding our
significant subsidiaries:

|                                            |  |                              |  |                     |      | 
|------------------------------------------- |  | ---------------------------- |  | ------------------- | ---- | 
|                                            |  |                              |  | Proportion of      
|                                            |  |                              |  | Ownership Interest 
|Name                                        |  | Jurisdiction of Organization |  | Held by the Company
|                                            |  |                              |  |                    
|Ram-Pak Compaction Systems Ltd.             |  | Canada                       |  |                     | 100% | 
|Gap Disposal (2001) Ltd.                    |  | Saskatchewan, Canada         |  |                     | 100% | 
|Waste Services, Inc.                        |  | Delaware, United States      |  |                     | 100% | 
|Waste Services of Florida, Inc.             |  | Delaware, United States      |  |                     | 100% | 
|Jacksonville Florida
    Landfill, Inc.     |  | Delaware, United States      |  |                     | 100% | 
|Omni Waste of Osceola County LLC            |  | Ohio, United States          |  |                     | 100% | 
|Cactus Waste Systems, LLC                   |  | Arizona, United States       |  |                     | 100% | 
|Waste Services of Arizona, Inc.             |  | Delaware, United States      |  |                     | 100% | 
|Waste Services of Texas, Inc.               |  | Delaware, United States      |  |                     | 100% | 
|Jones Road Landfill and Recycling,
    Ltd. |  | Florida, United States       |  |                     | 100% | 



|   |                       
|-- | ----------------------
|D. | Property and Equipment

We currently own nine properties in Ontario,
Alberta and British Columbia, Canada, including three landfills
that occupy approximately 720 acres of land, of which
approximately 260 acres are permitted. We own nine
properties in Arizona, Florida and Texas, including five
landfills and one facility operated as a transfer station. Our
landfills in Arizona, Florida and Texas occupy approximately
5,700 acres of land, of which approximately
1,260 acres are permitted or have applications for permits
pending. Our other owned facilities are used by our collection
operations for administration, dispatch and maintenance. All of
our owned properties are subject to mortgages granted to our
lenders under our existing credit facilities.

Our principal executive offices are located at
1122 International Blvd., Suite 601, Burlington, Ontario
L7L 6Z8. They are leased for a term of 10.5 years, expiring
in 2016. Our U.S. corporate offices are located in
Scottsdale, Arizona and are leased for a term of two years,
expiring in 2006. We lease facilities in most locations in
Canada and the United States where we have operations.

As of December 31, 2003, we used
approximately 650 front-line waste collection vehicles. We
believe that our vehicles, equipment and operating properties
are adequate for our current operations. However, we expect to
continue to make investments in equipment and property for
expansion, replacement of assets and in connection with future
acquisitions.






|        |                                                 
|------- | ------------------------------------------------
|Item 5. | Operating and Financial Review and
    Prospects

The following discussion is based on, and should
be read in conjunction with Item 3. Key
Information, Item 4. Information on the
Company and our consolidated financial statements and
notes thereto contained in this annual report.

Sources of Revenue

Our revenue consists primarily of fees charged to
customers for solid waste collection, landfill disposal,
transfer and recycling services. We expect our percentage mix of
landfill and transfer station revenue to

27



---



##### Table of Contents



increase in 2004 relative to our collection
revenue as we commence commercial operations at our landfills in
Florida, Arizona and Texas. Our revenue mix for the year ended
December 31, 2003 is as follows:


|                             |  |        |       |  
|---------------------------- |  | ------ | ----- | -
|                             |  | Actual
|                             |  |       
|Collection                   |  |        | 81.1  | %
|Landfill disposal            |  |        | 8.1   |  
|Transfer station             |  |        | 6.3   |  
|Material recovery facilities |  |        | 3.8   |  
|Other specialized services   |  |        | 0.7   |  
|                             |  |        |       |  
|Total                        |  |        | 100.0 | %
|                             |  |        |       |  

We derive a substantial portion of our collection
revenue from services provided to commercial, industrial and
residential customers that are generally performed under service
agreements or pursuant to contracts with municipalities. We
recognize revenue when services are rendered. Amounts billed to
customers prior to providing the related services are reflected
as deferred revenue and reported as revenue in the periods in
which the services are rendered.

We provide collection services for commercial and
industrial customers under one to three year service agreements.
We determine the fees we charge our customers based on a variety
of factors, including collection frequency; level of service;
route density; the type, volume and weight of the waste
collected; type of equipment and containers furnished; the
distance to the disposal or processing facility; the cost of
disposal or processing; and prices charged by competitors for
similar services. Our contracts with commercial and industrial
customers typically allow us to pass on increased costs
resulting from variable items such as disposal and fuel costs
and surcharges. Our ability to pass on price increases is
sometimes limited by the terms of our contracts.

We provide residential waste collection services
through a variety of contractual arrangements, including
contracts with municipalities, landlords and homeowners
associations or subscription arrangements with homeowners. Our
contracts with municipalities are typically for a term of up to
five years and contain a formula, generally based on a
pre-determined published price index, for automatic adjustments
to fees to cover increases in some, but not all, of our
operating costs. Certain of our contracts with municipalities
contain renewal provisions. The fees we charge for residential
solid waste collection services provided on a subscription basis
are based primarily on route density, the frequency and level of
service, the distance to the disposal or processing facility,
the cost of disposal or processing and prices we charge in the
market for similar services.

We charge our landfill and transfer station
customers a tipping fee on a per ton basis for disposing of
their solid waste at our transfer stations and landfills. We
generally base our landfill tipping fees on market factors and
the type and weight of or volume of the waste deposited. We
generally base our transfer station tipping fees on market
factors and the cost of processing the waste deposited at the
transfer station, the cost of transporting the waste to a
disposal facility and the cost of disposal.

Material recovery facilities generate revenue
from the sale of recyclable commodities. In an effort to reduce
our exposure to commodity price fluctuations on recycled
materials, where competitive pressures permit, we charge
collection or processing fees for recycling volume collected
from our customers.

Expense Structure

Our cost of operations primarily includes tipping
fees and related disposal costs, labor and related benefit
costs, equipment maintenance, fuel, vehicle insurance and
landfill closure and post-closure costs. Our strategy is to
create vertically integrated operations in each of our markets
which will allow us to internalize our own collection volume
into our landfills and transfer stations. Internalization lowers
our disposal costs by allowing us to eliminate tipping fees
otherwise paid to an independent landfill operator. We believe
internalization provides us with a competitive advantage by
allowing us to be a low cost

28



---



##### Table of Contents



provider in our markets. Historically, our
internalization has been relatively low. However, we expect our
internalization will increase in 2004 and beyond in connection
with our disposal based acquisition strategy and our recent
landfill acquisitions in Florida, Arizona and Texas. We expect
that as our internalization increases our operating margins will
improve.


In markets where we do not have our own
landfills, we seek to secure long-term disposal arrangements
with municipalities or private owners of landfills or transfer
stations. In these markets, our ability to maintain competitive
prices for our collection services is generally dependent upon
our ability to secure low cost disposal pricing. If owners of
third party disposal sites discontinue our arrangements, we
would have to seek alternative disposal sites which could impact
our profitability and cash flow. In addition, if third party
disposal sites increase their tipping fees and we are unable to
pass these increases on to our collection customers, our
profitability and cash flow would be negatively impacted.

We believe the age and condition of a fleet has a
significant impact on operating costs including, but not limited
to, repairs and maintenance, insurance and driver training and
retention costs. Through capital investment, we seek to maintain
an average fleet age of five to six years. We believe this
enables us to minimize our repair and maintenance costs, safety
and insurance costs and employee turnover related costs.

Selling, general and administrative expense
includes managerial costs, information systems, sales force,
administrative expenses and professional fees. We have made a
significant investment in information systems and in assembling
our management team to support our growth strategy. As such, our
selling, general and administrative expense as a percentage of
our revenue has increased over prior periods. We expect selling,
general and administrative expense to decline as a percentage of
revenue as we complete and integrate acquisitions and commence
operations at our new landfill sites.

Depreciation, depletion and amortization expense
includes depreciation of fixed assets over their estimated
useful lives using the straight-line method, depletion of
landfill costs, including closure and post closure obligations,
using life cycle accounting and the units-of-consumption method,
and amortization of intangible assets including customer
relationships and contracts and covenants not-to-compete which
are amortized over the expected benefit to be received by such
intangibles.

We capitalize certain third party costs related
to pending acquisitions or development projects. These costs
remain deferred until we cease to be engaged on a regular and
ongoing basis with completion of the proposed acquisition, at
which point they are charged currently in earnings. In the event
that the target is acquired, these costs are incorporated in the
cost of the acquired business. We currently expense indirect and
internal costs including executive salaries, overhead and travel
costs related to acquisitions.

Critical Accounting Policies



| |        
| | -------
| | General

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of the financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue, expenses and
related disclosure of contingent assets and liabilities. On an
ongoing basis we evaluate our estimates, including those related
to areas that require a significant level of judgments or are
otherwise subject to an inherent degree of uncertainty. These
areas include allowances for doubtful accounts, landfill
airspace, intangible and long-lived assets, closure and
post-closure liabilities, revenue recognition, income taxes and
commitments and contingencies. We base our estimates on
historical experience, our observance of trends in particular
areas, information or valuations and various other assumptions
that we believe to be reasonable under the circumstances and
which form the basis for making judgments about the carrying
value of assets and liabilities that may not be readily apparent
from other sources. Actual amounts could differ significantly
from amounts previously estimated.

29



---



##### Table of Contents



We believe that of our significant accounting
policies (refer to Note 2 of our consolidated financial
statements contained elsewhere in this annual report) the
following may involve a higher degree of judgment and complexity:



| |                    
| | -------------------
| | Revenue Recognition

We recognize revenue when services, such as
providing collection services and accepting waste at our
disposal facilities, are rendered. Amounts billed to customers
prior to providing the related services are reflected as
deferred revenue and reported as revenue in the period in which
the services are rendered.



| |                                                            
| | -----------------------------------------------------------
| | Accounts Receivable and Allowance for
    Doubtful Accounts

We specifically analyze accounts receivable and
also analyze historical bad debts, customer concentrations,
customer creditworthiness, current economic trends and changes
in customer payment terms, and various other factors when
evaluating the adequacy of the allowance for doubtful accounts
in any accounting period. Differences may result in the amount
and timing of expenses for any period if management makes
different judgments or uses different estimates.



| |                                       
| | --------------------------------------
| | Business Acquisitions and
    Goodwill

We account for business acquisitions using the
purchase method of accounting. The total cost of an acquisition
is allocated to the underlying net assets based on their
respective estimated fair values. As part of this allocation
process, management must identify and attribute values and
estimated lives to the intangible assets acquired. Such
determinations involve considerable judgment, and often involve
the use of significant estimates and assumptions, including
those with respect to future cash inflows and outflows, discount
rates and asset lives. These determinations will affect the
amount of amortization expense recognized in future periods.

We fully adopted SFAS No. 142,
Goodwill and Other Intangible Assets, effective
January 1, 2002, or SFAS No. 142. We test
goodwill for impairment using the two-step process prescribed in
SFAS No. 142. The first step is a screen for potential
impairment, while the second step measures the amount of the
impairment, if any. The first step of the goodwill impairment
test compares the fair value of a reporting unit with its
carrying amount, including goodwill. In determining the fair
value, we may utilize: (i) discounted future cash flows;
(ii) operating results based upon a comparative multiple of
earnings or revenues; (iii) offers from interested
investors, if any; or (iv) appraisals. Significant
estimates used in the fair value calculation utilizing
discounted future cash flows include, but are not limited to:
(i) estimates of future revenue and expense growth by
reporting unit (ii) future estimated effective tax rates,
which we estimate to range between 37% and 40%;
(iii) future estimated rate of capital expenditures as well
as future required investments in working capital;
(iv) estimated average cost of capital, which we estimated
to range between 8.0% and 10.0%; and (v) the future
terminal value of our reporting unit, which is based upon its
ability to exist into perpetuity. Significant estimates used in
the fair value calculation utilizing market value multiples
include but are not limited to: (i) estimated future growth
potential of the reporting unit; (ii) estimated multiples
of revenue or earnings a willing buyer is likely to pay; and
(iii) estimated control premium a willing buyer is likely to pay.

In the first quarter of 2002, we performed the
first of the required impairment tests of goodwill based on the
carrying values as of January 1, 2002. As a result of
performing the test for potential impairment, we determined that
no impairment existed as of January 1, 2002. We performed
the goodwill impairment test during 2003 and 2002 and also
determined that no goodwill impairment existed for these periods.

Judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and
operational performance of the acquired businesses. Future
events could cause us to conclude that impairment indicators
exist and that goodwill associated with the acquired businesses
is impaired. Additionally, as the valuation of identifiable
goodwill requires significant estimates and judgment about
future performance, cash flows and fair value, our future
results could be affected if these current

30



---



##### Table of Contents



estimates of future performance and fair value
change. Any resulting impairment loss could have a material
adverse impact on our financial condition and results of
operations.




| |                  
| | -----------------
| | Long-Lived Assets

We periodically evaluate whether events and
circumstances have occurred that may warrant revision of the
estimated useful life of property and equipment or whether the
remaining balance of property and equipment, or other long-lived
assets including amortizing intangible assets, should be
evaluated for possible impairment. Instances that may lead to an
impairment include: (i) a significant decrease in the
market price of a long-lived asset group; (ii) a
significant adverse change in the extent or manner in which a
long-lived asset or asset group is being used or in its physical
condition; (iii) a significant adverse change in legal
factors or in the business climate that could affect the value
of a long-lived asset or asset group, including an adverse
action or assessment by a regulator; (iv) an accumulation
of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived
asset or asset group; (v) a current-period operating or
cash flow loss combined with a history of operating or cash flow
losses or a projection or forecast that demonstrates continuing
losses associated with the use of a long-lived asset or asset
group; or (vi) a current expectation that, more likely than
not, a long-lived asset or asset group will be sold or otherwise
disposed of significantly before the end of its previously
estimated useful life.

We use an estimate of the related undiscounted
cash flows, excluding interest, over the remaining life of the
property and equipment and long-lived assets in assessing their
recoverability. We measure impairment loss as the amount by
which the carrying amount of the asset(s) exceeds the fair value
of the asset(s). We primarily employ two methodologies for
determining the fair value of a long-lived asset: (i) the
amount at which the asset could be bought or sold in a current
transaction between willing parties or (ii) the present
value of estimated expected future cash flows grouped at the
lowest level for which there are identifiable independent cash
flows.



| |               
| | --------------
| | Landfill Sites

Landfill sites are recorded at cost. Capitalized
landfill costs include expenditures for land, permitting costs,
cell construction costs and environmental structures.
Capitalized permitting and cell construction costs are limited
to direct costs relating to these activities, including legal,
engineering and construction costs associated with excavation,
liners and site berms, leachate management facilities and other
costs associated with environmental management equipment and
structures.

Costs related to acquiring land, excluding the
estimated residual value of un-permitted, non-buffer land, and
costs related to permitting and cell construction are depleted
as airspace is consumed using the units-of-consumption method.
Environmental structures, which include leachate collection
systems, methane collection systems and groundwater monitoring
wells, are charged to expense over the shorter of their useful
life or the life of the landfill.

Capitalized landfill costs may also include an
allocation of the purchase price paid for landfills. For
landfills purchased as part of a group of several assets, the
purchase price assigned to the landfill is determined based upon
the discounted expected future cash flows of the landfill
relative to the other assets within the acquired group. If the
landfill meets our expansion criteria, the purchase price is
further allocated between permitted airspace and expansion
airspace based upon the ratio of permitted versus probable
expansion airspace to total available airspace. Landfill sites
are amortized using the units-of-consumption method over the
total available airspace including probable expansion airspace
where appropriate.

We assess the carrying value of our landfill
sites in accordance with the provisions of
SFAS No. 144. These provisions, as well as possible
instances that may lead to impairment, are addressed in
 Long-Lived Assets. There are certain
indicators previously discussed that require significant
judgment and understanding of the waste industry when applied to
landfill development or expansion.

31



---



##### Table of Contents



We identified three sequential steps that
landfills generally follow to obtain expansion permits. These
steps are as follows: (i) obtaining approval from local
authorities; (ii) submitting a permit application to state
or provincial authorities; and (iii) obtaining permit
approval from state or provincial authorities.

Before expansion airspace is included in our
calculation of total available disposal capacity, the following
criteria must be met: (i) the land associated with the
expansion airspace is either owned by us or is controlled by us
pursuant to an option agreement; (ii) we are committed to
supporting the expansion project financially and with
appropriate resources; (iii) there are no identified fatal
flaws or impediments associated with the project, including
political impediments; (iv) progress is being made on the
project; (v) the expansion is attainable within a
reasonable time frame; and (vi) based upon senior
managements review of the status of the permit process to
date we believe it is more likely than not the expansion permit
will be received within the next five years. Upon meeting our
expansion criteria, the rates used at each applicable landfill
to expense costs to acquire, construct, close and maintain a
site during the post-closure period are adjusted to include
probable expansion airspace and all additional costs to be
capitalized or accrued associated with the expansion airspace.

Once expansion airspace meets the criteria for
inclusion in our calculation of total available disposal
capacity, management continuously monitors each sites
progress in obtaining the expansion permit. If at any point it
is determined that an expansion area no longer meets the
required criteria, the probable expansion airspace is removed
from the landfills total available capacity and the rates
used at the landfill to expense costs to acquire, construct,
close and maintain a site during the post-closure period are
adjusted accordingly.

32



---



##### Table of Contents



The following table reflects landfill capacity
activity for permitted landfills owned by us for the years ended
December 31, 2003, 2002 and 2001 (in thousands of cubic
yards).

|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |        | 
|---------------- | --------------------------- | ---------- |  | --------- |  | ------- |  | ----------- |  | -------- |  | ---------- |  |  |  | --- |  |  |  | ---- | - |  |  | ------ | 
|                 |                             | Balance at |  |           |  |         |  |             |  |          |  |           
|                 |                             | Beginning  |  |           |  |         |  | Change in   |  |          |  | Balance at
|                 |                             | of the     |  | Landfills |  | Permits |  | Engineering |  | Airspace |  | End of the
|                 |                             | Year       |  | Acquired  |  | Granted |  | Estimates   |  | Consumed |  | Year      
|                 |                             |            |  |           |  |         |  |             |  |          |  |           
|2003             |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|Canada           |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Permitted capacity          |            |  | 7,618     |  |         |  |            |  |          |  | 3,651      |  |  |  | 212 |  |  |  | (610 | ) |  |  | 10,871 | 
|                 | Probable expansion capacity |            |  |          |  |         |  |            |  |          |  |           |  |  |  |    |  |  |  |     |   |  |  |       | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Total available airspace    |            |  | 7,618     |  |         |  |            |  |          |  | 3,651      |  |  |  | 212 |  |  |  | (610 | ) |  |  | 10,871 | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Number of sites             |            |  | 2         |  |         |  |            |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  | 2      | 
|United States(1) |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Permitted capacity          |            |  |          |  |         |  | 26,084      |  |          |  |           |  |  |  |    |  |  |  |     |   |  |  | 26,084 | 
|                 | Probable expansion capacity |            |  |          |  |         |  | 18,300      |  |          |  |           |  |  |  |    |  |  |  |     |   |  |  | 18,300 | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Total available airspace    |            |  |          |  |         |  | 44,384      |  |          |  |           |  |  |  |    |  |  |  |     |   |  |  | 44,384 | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Number of sites             |            |  |          |  |         |  | 3           |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  | 3      | 
|Total            |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Permitted capacity          |            |  | 7,618     |  |         |  | 26,084      |  |          |  | 3,651      |  |  |  | 212 |  |  |  | (610 | ) |  |  | 36,955 | 
|                 | Probable expansion capacity |            |  |          |  |         |  | 18,300      |  |          |  |           |  |  |  |    |  |  |  |     |   |  |  | 18,300 | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Total available airspace    |            |  | 7,618     |  |         |  | 44,384      |  |          |  | 3,651      |  |  |  | 212 |  |  |  | (610 | ) |  |  | 55,255 | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Number of sites             |            |  | 2         |  |         |  | 3           |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  | 5      | 
|2002             |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|Canada           |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Permitted capacity          |            |  | 5,832     |  |         |  | 2,167       |  |          |  |           |  |  |  |    |  |  |  | (381 | ) |  |  | 7,618  | 
|                 | Probable expansion capacity |            |  |          |  |         |  |            |  |          |  |           |  |  |  |    |  |  |  |     |   |  |  |       | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Total available airspace    |            |  | 5,832     |  |         |  | 2,167       |  |          |  |           |  |  |  |    |  |  |  | (381 | ) |  |  | 7,618  | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Number of sites             |            |  | 1         |  |         |  | 1           |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  | 2      | 
|2001             |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|Canada           |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Permitted capacity          |            |  | 5,984     |  |         |  |            |  |          |  |           |  |  |  |    |  |  |  | (152 | ) |  |  | 5,832  | 
|                 | Probable expansion capacity |            |  |          |  |         |  |            |  |          |  |           |  |  |  |    |  |  |  |     |   |  |  |       | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Total available airspace    |            |  | 5,984     |  |         |  |            |  |          |  |           |  |  |  |    |  |  |  | (152 | ) |  |  | 5,832  | 
|                 |                             |            |  |           |  |         |  |             |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  |       
|                 | Number of sites             |            |  | 1         |  |         |  |            |  |          |  |            |  |  |  |     |  |  |  |      |   |  |  | 1      | 



---



|    |                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes our Cactus Waste Landfill, which is
    expected to have permitted capacity of 224.0 million cubic
    yards. Also excludes our Gap Disposal Landfill and our Long
    Point Landfill which were acquired in the first quarter of 2004.



| |                                                 
| | ------------------------------------------------
| | Accrued Closure and Post-Closure
    Obligations

On January 1, 2003, we adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 143 Accounting for Asset
Retirement Obligations. SFAS No. 143 requires us
to change our methodology used to record liabilities related to
final capping, closure and post-closure of our landfill
operations. Under the provisions of the new statement, we
recognized, as an asset, the fair value of the liability for an
asset retirement obligation. The asset is then depleted,
consistently with other capitalized landfill costs, over the
remaining useful life of the site based upon units of
consumption as airspace in the landfill is consumed.
Additionally, we recognized a liability for the present value of
the estimated future

33



---



##### Table of Contents



asset retirement obligation. The liability will
be adjusted for (i) additional liabilities incurred or
settled, (ii) accretion of the liability to its future
value and (iii) revisions in the estimated cash flows
relative to closure and post-closure costs.


Accrued closure and post-closure obligations
represent an estimate of the future obligation associated with
closure and post-closure monitoring of the non-hazardous solid
waste landfills owned by us. Site-specific closure and
post-closure engineering cost estimates are prepared for the
landfills we own. The impact of changes in estimates, based on
an annual update, is accounted for on a prospective basis. We
calculate closure and post closure liabilities by estimating the
total future obligation in current dollars, inflating the
obligations based upon the expected date of the expenditure
using an inflation rate of 2.0% and discounting the inflated
total to its present value using an 8.5% credit-adjusted
risk-free discount rate. Accretion of discounted cash flows
associated with the closure and post closure obligations is
accrued over the estimated life of the landfill.



| |                            
| | ---------------------------
| | Accounting for Income Taxes

We use the asset and liability method to account
for income taxes. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets
and liabilities and any valuation allowance recorded against net
deferred tax assets. In preparing the consolidated financial
statements, we are required to estimate the income taxes in each
of the jurisdictions in which we operate. This process involves
estimating the actual current tax liability together with
assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, property, plant
and equipment and losses for tax and accounting purposes. These
differences result in deferred tax assets, which include tax
loss carry-forwards, and liabilities, which are included within
the consolidated balance sheet. We then assess the likelihood
that deferred tax assets will be recovered from future taxable
income, and to the extent that recovery is not likely or there
is insufficient operating history, a valuation allowance is
established. To the extent a valuation allowance is established
or increased in a period, we include an expense within the tax
provision of the consolidated statement of operations.

A.     Operating
Results



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Results of Operations for the Three Years
    Ended December 31, 2001, 2002 and 2003

The majority of our operations for the three
years ended December 31, 2003 were domiciled in Canada. As
such, our primary functional currency is the Canadian dollar.
However, for each reporting period, we translate the results of
our operations and financial condition into U.S. dollars.
Therefore, our reported results of operations and financial
condition are subject to changes in the exchange relationship
between the two currencies. For example, as the relationship of
the Canadian dollar strengthens against the U.S. dollar our
revenue is favorably affected and conversely our expenses are
unfavorably affected. Assets and liabilities of Canadian
operations have been translated from Canadian dollars into
U.S. dollars at the exchange rates in effect at the
relevant balance sheet date, and revenue and expenses of
Canadian operations have been translated from Canadian dollars
into U.S. dollars at the average exchange rates prevailing
during the period. Unrealized gains and losses on translation of
the Canadian operations into U.S. dollars are reported as a
separate component of shareholders equity and are included
in comprehensive income (loss). Separately, monetary assets and
liabilities denominated in U.S. dollars held by the
Canadian operation are re-measured from U.S. dollars into
Canadian dollars and then translated into U.S. dollars. The
effects of re-measurement are reported currently as a component
of net income (loss). We do not hedge our exposure to changes in
foreign exchange rates.

34



---



##### Table of Contents



The following table sets forth our consolidated
results of operations for the three years ended
December 31, 2001, 2002 and 2003 (in thousands):

|                                       |                                          |      |        |        |  |      |       |      |  |   |        |        |   |  |       |      |   |   |         |        |   |  |       |      |  
|-------------------------------------- | ---------------------------------------- | ---- | ------ | ------ |  | ---- | ----- | ---- |  | - | ------ | ------ | - |  | ----- | ---- | - | - | ------- | ------ | - |  | ----- | ---- | -
|                                       |                                          |      |        |        |  |     
|                                       |                                          | 2001 |        | 2002   |  | 2003
|                                       |                                          |      |        |        |  |     
|                                       |                                          |      |        |        |  |      |       |      |  |  
|Revenue                                |                                          | $    | 93,241 |        |  |      | 100.0 | %    |  | $ | 98,846 |        |   |  | 100.0 | %    |   | $ | 126,750 |        |   |  | 100.0 | %   
|Operating expenses:                    |                                          |      |        |        |  |      |       |      |  |   |        |        |   |  |       |      |   |   |         |        |   |  |       |     
|                                       | Cost of operations                       |      |        | 63,140 |  |      |       | 67.7 |  |   |        | 61,250 |   |  |       | 62.0 |   |   |         | 79,992 |   |  |       | 63.1 |  
|                                       | Selling, general and administrative      |      |        | 18,208 |  |      |       | 19.5 |  |   |        | 19,470 |   |  |       | 19.7 |   |   |         | 35,117 |   |  |       | 27.7 |  
|                                       | Depreciation, depletion and amortization |      |        | 11,276 |  |      |       | 12.1 |  |   |        | 10,718 |   |  |       | 10.8 |   |   |         | 14,927 |   |  |       | 11.8 |  
|                                       | Goodwill impairment                      |      |        | 3,400  |  |      |       | 3.7  |  |   |        |       |   |  |       |     |   |   |         |       |   |  |       |     |  
|Loss (recovery) related to disposal    |                                          |      |        |        |  |      |       |      |  |   |        |        |   |  |       |      |   |   |         |        |   |  |       |     
|                                       | of U.S. operations                       |      |        | 4,885  |  |      |       | 5.2  |  |   |        | (718   | ) |  |       | (0.7 | ) |   |         | (155   | ) |  |       | (0.1 | )
|Foreign exchange loss (gain) and other |                                          |      | 1,003  |        |  |      | 1.1   |      |  |   | (1,441 | )      |   |  | (1.5  | )    |   |   | 1,915   |        |   |  | 1.5   |     
|                                       |                                          |      |        |        |  |      |       |      |  |   |        |        |   |  |       |      |   |   |         |        |   |  |       |     
|Income (loss) from operations          |                                          | $    | (8,671 | )      |  |      | (9.3  | )%   |  | $ | 9,567  |        |   |  | 9.7   | %    |   | $ | (5,046  | )      |   |  | (4.0  | )%  
|                                       |                                          |      |        |        |  |      |       |      |  |   |        |        |   |  |       |      |   |   |         |        |   |  |       |     



| |        
| | -------
| | Revenue

A summary of our revenue for the three years
ended December 31, 2001, 2002 and 2003 is as follows (in
thousands):

|                             |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |         |  |  |  |       |  
|---------------------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ |  |  |  | ----- | - |  | - | ------- |  |  |  | ----- | -
|                             |  |      |        |      |  |     
|                             |  | 2001 |        | 2002 |  | 2003
|                             |  |      |        |      |  |     
|                             |  |      |        |      |  |      |       |   |  |  
|Collection                   |  | $    | 73,883 |      |  |      | 79.3  | % |  | $ | 77,675 |  |  |  | 78.6  | % |  | $ | 102,738 |  |  |  | 81.1  | %
|Landfill disposal            |  |      | 946    |      |  |      | 1.0   |   |  |   | 7,084  |  |  |  | 7.2   |   |  |   | 10,221  |  |  |  | 8.1   |  
|Transfer station             |  |      | 9,258  |      |  |      | 9.9   |   |  |   | 8,255  |  |  |  | 8.3   |   |  |   | 8,035   |  |  |  | 6.3   |  
|Material recovery facilities |  |      | 3,748  |      |  |      | 4.0   |   |  |   | 3,904  |  |  |  | 3.9   |   |  |   | 4,816   |  |  |  | 3.8   |  
|Other specialized services   |  |      | 5,406  |      |  |      | 5.8   |   |  |   | 1,928  |  |  |  | 2.0   |   |  |   | 940     |  |  |  | 0.7   |  
|                             |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |         |  |  |  |       |  
|                             |  | $    | 93,241 |      |  |      | 100.0 | % |  | $ | 98,846 |  |  |  | 100.0 | % |  | $ | 126,750 |  |  |  | 100.0 | %
|                             |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |         |  |  |  |       |  

Revenue for the three years ended
December 31, 2001, 2002 and 2003 by geographic segment is
as follows (in thousands):

|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |         |  |  |  |       |  
|------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ |  |  |  | ----- | - |  | - | ------- |  |  |  | ----- | -
|              |  |      |        |      |  |     
|              |  | 2001 |        | 2002 |  | 2003
|              |  |      |        |      |  |     
|              |  |      |        |      |  |      |       |   |  |  
|Canada        |  | $    | 85,496 |      |  |      | 91.7  | % |  | $ | 98,846 |  |  |  | 100.0 | % |  | $ | 124,985 |  |  |  | 98.6  | %
|United States |  |      | 7,745  |      |  |      | 8.3   |   |  |   |       |  |  |  |      |   |  |   | 1,765   |  |  |  | 1.4   |  
|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |         |  |  |  |       |  
|              |  | $    | 93,241 |      |  |      | 100.0 | % |  | $ | 98,846 |  |  |  | 100.0 | % |  | $ | 126,750 |  |  |  | 100.0 | %
|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |         |  |  |  |       |  

Revenue was $126.8 million for the year
ended December 31, 2003 and $98.8 million for the year
ended December 31, 2002, an increase of $28.0 million
or 28.2%. The favorable effects of foreign exchange movements
increased revenue by 14.0%, reflecting the strengthening of the
Canadian dollar versus the U.S. dollar during 2003.
Increased collection and landfill disposal volumes increased
revenue by 8.0%, which was primarily due to new residential
waste collection agreements in our Canadian operations. New
acquisitions increased revenue 5.1% and pricing increases
increased revenue by 1.1%. We expect revenue to increase in 2004
on a year over year basis primarily due to acquisitions and the
opening of operations at our new landfill sites.

Revenue was $98.8 million for the year
December 31, 2002 and $93.2 million for the year ended
December 31, 2001 an increase of $5.6 million or 6.0%.
Revenue increases were primarily due to new acquisitions, 14.3%,
pricing, 2.5%, offset by divestitures of the
U.S. collection operations, 8.3%, volume declines, 1.6%,
and the unfavorable effects of foreign exchanges movements,
approximately 0.9%. The

35



---



##### Table of Contents



majority of the growth in revenue from new
acquisitions was due to the acquisition of Waste Services Ottawa
which contributed $11.3 million while divestitures of the
U.S. collection operations decreased revenue
$7.7 million. Volume decrease was due to the loss of a
national brokerage customer, a reduction in compactor sales, the
loss of three municipal contracts for residential collection and
a loss of revenue from closing a transfer station.




| |                   
| | ------------------
| | Cost of Operations

Cost of operations for the three years ended
December 31, 2001, 2002 and 2003, by geographic segment is
as follows (in thousands):

|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  
|------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ |  |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|              |  |      |        |      |  |     
|              |  | 2001 |        | 2002 |  | 2003
|              |  |      |        |      |  |     
|              |  |      |        |      |  |      |       |   |  |  
|Canada        |  | $    | 56,871 |      |  |      | 90.1  | % |  | $ | 61,250 |  |  |  | 100.0 | % |  | $ | 78,693 |  |  |  | 98.4  | %
|United States |  |      | 6,269  |      |  |      | 9.9   |   |  |   |       |  |  |  |      |   |  |   | 1,299  |  |  |  | 1.6   |  
|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  
|              |  | $    | 63,140 |      |  |      | 100.0 | % |  | $ | 61,250 |  |  |  | 100.0 | % |  | $ | 79,992 |  |  |  | 100.0 | %
|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  

Cost of operations was $80.0 million for the
year ended December 31, 2003 and $61.3 million for the
year ended December 31, 2002. As a percentage of revenue,
cost of operations was 63.1% for the year ended
December 31, 2003, and 62.0% for the year ended
December 31, 2002. The increase in cost of operations as a
percentage of revenue was primarily related to higher costs of
labor on lower margin residential contracts that were in place
during 2003. The overall increase in cost of operations of 30.6%
was primarily due to the effects of foreign currency movements,
14.2%, increased costs of disposal, 7.6%, increased labor costs,
6.7%, and labor and disposal costs at our newly acquired
U.S. operations, 2.1%. The increase in Canadian operating
costs was primarily the result of new waste collection
agreements. We expect our cost of operations to increase on a
year over year basis in 2004 primarily due to acquisitions and
the opening of operations at our new landfill sites.

Cost of operations was $61.3 million for the
year ended December 31, 2002 and $63.1 million for the
year ended December 31, 2001. As a percentage of revenue,
cost of operations was 62.0% for the year ended
December 30, 2002, and 67.7% for the year ended
December 31, 2001. The decrease in cost of operations as a
percentage of revenue was primarily related to the sale of the
U.S. operations during 2001, eliminating lower margin
U.S. operations and replacing them with higher margin
landfill operations with the purchase of Waste Services Ottawa.
Excluding the U.S. operations, cost of operations as a
percentage of revenue decreased from 66.5% to 62.0% primarily
due to lower disposal costs associated with the Waste Services
Ottawa acquisition.



| |                                                
| | -----------------------------------------------
| | Selling, General and Administrative
    Expense

Selling, general and administrative expense for
the three years ended December 31, 2001, 2002 and 2003, by
geographic segment is as follows (in thousands):

|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  
|------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ |  |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|              |  |      |        |      |  |     
|              |  | 2001 |        | 2002 |  | 2003
|              |  |      |        |      |  |     
|              |  |      |        |      |  |      |       |   |  |  
|Canada        |  | $    | 17,244 |      |  |      | 94.7  | % |  | $ | 19,470 |  |  |  | 100.0 | % |  | $ | 30,500 |  |  |  | 86.9  | %
|United States |  |      | 964    |      |  |      | 5.3   |   |  |   |       |  |  |  |      |   |  |   | 4,617  |  |  |  | 13.1  | %
|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  
|              |  | $    | 18,208 |      |  |      | 100.0 | % |  | $ | 19,470 |  |  |  | 100.0 | % |  | $ | 35,117 |  |  |  | 100.0 | %
|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  

Selling, general and administrative expense was
$35.1 million for the year ended December 31, 2003 and
$19.5 million for the year ended December 31, 2002. As
a percentage of revenue, selling, general and administrative
expense was 27.7% for the year ended December 31, 2003 and
19.7% for the year ended December 31, 2002. The overall
increase in selling, general and administrative expense of
80.4%, as well as the increase as a percentage of revenue, was
primarily due to increased salaries, systems and other overhead
cost to build our infrastructure and enable us to execute our
acquisition strategy as well as increased professional and legal
fees relative to our migration transaction. We expect to
complete our migration in the first half of 2004. Also included
in selling, general and administrative expense was

36



---



##### Table of Contents



non-cash compensation expense related to warrants
issued to an executive officer in 2001 for which variable
accounting applies. Stock-based compensation expense, which was
based partially on changes in our stock price, was
$2.7 million versus $1.0 million for the years ended
December 31, 2003 and 2002, respectively. The unfavorable
effects of foreign exchange movements were 17.3%. We expect that
selling, general and administrative expense as a percentage of
revenue will decline in 2004 primarily due to the acquisition
and integration of the Allied assets and Florida Recycling.


Selling, general and administrative expense was
$19.5 million for the year ended December 31, 2002 and
$18.2 million for the year ended December 31, 2001. As
a percentage of revenue, selling, general and administrative
expense was 19.7% for the year ended December 31, 2002 and
19.5% for the year ended December 31, 2001. The
$1.3 million increase in selling, general and
administrative expense resulted from increases in management,
sales, and administrative personnel and related costs associated
with our growth strategy. Stock-based compensation expense was
$1.0 million versus $0.2 million for the years ended
December 31, 2002 and 2001, respectively. In 2001, we
incurred $3.9 million of expenses associated with
settlements of lawsuits, failed acquisitions, change in control,
restructuring costs and various other associated costs.



| |                                             
| | --------------------------------------------
| | Depreciation, Depletion and
    Amortization

Depreciation, depletion and amortization for the
three years ended December 31, 2001, 2002 and 2003 by
geographic segment is as follows (in thousands):

|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  
|------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ |  |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|              |  |      |        |      |  |     
|              |  | 2001 |        | 2002 |  | 2003
|              |  |      |        |      |  |     
|              |  |      |        |      |  |      |       |   |  |  
|Canada        |  | $    | 10,648 |      |  |      | 94.4  | % |  | $ | 10,718 |  |  |  | 100.0 | % |  | $ | 14,726 |  |  |  | 98.7  | %
|United States |  |      | 628    |      |  |      | 5.6   |   |  |   |       |  |  |  |      |   |  |   | 201    |  |  |  | 1.3   |  
|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  
|              |  | $    | 11,276 |      |  |      | 100.0 | % |  | $ | 10,718 |  |  |  | 100.0 | % |  | $ | 14,927 |  |  |  | 100.0 | %
|              |  |      |        |      |  |      |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |       |  

Depreciation, depletion and amortization was
$14.9 million for the year ended December 31, 2003 and
$10.7 million for the year ended December 31, 2002. As
a percentage of revenue, depreciation, depletion and
amortization was 11.8% for the year ended December 31, 2003
and 10.8% for the year ended December 31, 2002. The
increase in depreciation, depletion and amortization of
$4.2 million or 39.3% was due to unfavorable effects of
foreign exchange movements of 15.2%, depreciation on our trucks
and containers of 10.7%, depletion of approximately 10.5%,
depreciation at our newly acquired U.S. operations of 1.9%
and amortization and other of 1.0%. Depreciation on our trucks
and containers increased primarily due to an increase in our
fleet size and number of containers. Depletion increased
primarily due to increased disposal volumes as well as depleting
of costs related to our closure and post-closure obligations.
Landfill depletion rates during the year ended December 31,
2003 for our two Canadian operating landfills ranged from C$4.00
to C$14.06 per tonne. We had no operating landfills in the
United States during 2003. For the year ended December 31,
2002, landfill depletion rates ranged from C3.00 to
C11.19 per tonne. We expect amortization of intangible
assets to increase as a result of our acquisition of the
northern and central Florida assets of Allied and other
acquisitions.

Depreciation, depletion and amortization was
$10.7 million for the year ended December 31, 2002,
and $11.3 million for the year ended December 31,
2001. As a percentage of revenue depreciation, depletion and
amortization was 10.8% for the year ended December 31,
2002, and 12.1% for the year ended December 31, 2001. The
composition of depreciation, depletion and amortization expense
changed as there was an approximately $1.8 million
reduction in goodwill amortization between 2002 and 2001 as a
result of our adoption of the non-amortization provisions of
SFAS No. 142. This was offset by depletion of the
newly acquired Waste Services Ottawa landfill, depreciation of
new capital expenditures and amortization of customer contracts
and lists.

37



---



##### Table of Contents





| |                                                           
| | ----------------------------------------------------------
| | Loss (Recovery) Related to Disposal of
    U.S. Operations

The years ended December 31, 2003 and 2002
included a recovery of $0.2 million and $0.7 million,
respectively, on the disposal of the U.S. collection
operations related to the settlement of a lease obligation and
the payment of a receivable and receipt of a hold back payment,
all of which had been provisioned for in 2001. During the year
ended December 31, 2001, we recognized a loss on the
disposal of the U.S. collection operations of
$4.9 million.



| |                                           
| | ------------------------------------------
| | Foreign Exchange Loss (Gain) and
    Other

Foreign exchange loss (gain) and other was
$1.9 million for the year ended December 31, 2003,
$(1.4 million) for the year ended December 31, 2002,
and $1.0 million for the year ended December 31, 2001.
The foreign exchange loss in 2003 was the result of re-measuring
U.S. dollar denominated cash balances into Canadian
dollars. The foreign exchange gains in 2002 were the result of
re-measuring our U.S. dollar denominated debt balances into
Canadian dollars. As part of the June 2002 refinancing of our
senior credit facility, our U.S. dollar denominated debt
was repaid.



| |                 
| | ----------------
| | Interest Expense

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

|                                                              |  |      |        |      |  |      |       |  |  |   |        | 
|------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ------ | 
|                                                              |  | 2001 |        | 2002 |  | 2003
|                                                              |  |      |        |      |  |     
|Preferred Stock dividends and amortization of
    issue costs |  | $    |       |      |  | $    |      |  |  | $ | 10,161 | 
|Credit facility interest                                      |  |      | 7,141  |      |  |      | 3,330 |  |  |   | 4,011  | 
|Amortization of debt issue costs                              |  |      | 1,814  |      |  |      | 1,855 |  |  |   | 3,281  | 
|Other                                                         |  |      | 1,074  |      |  |      | 542   |  |  |   | 986    | 
|                                                              |  |      |        |      |  |      |       |  |  |   |        | 
|                                                              |  | $    | 10,029 |      |  | $    | 5,727 |  |  | $ | 18,439 | 
|                                                              |  |      |        |      |  |      |       |  |  |   |        | 

Interest expense was $18.4 million for the
year ended December 31, 2003, and $5.7 million for the
year ended December 31, 2002. The increase in interest
expense of $12.7 million, or in excess of 100%, was due
primarily to the accrual of preferred stock dividends related to
Waste Services shares of cumulative mandatorily redeemable
preferred stock, or Waste Services preferred stock, including
amortization of discount and issue costs of approximately
$10.2 million. Separately, as a result of refinancing our
previous senior credit facilities in the fourth quarter of 2003,
we expensed the then remaining debt-issue-costs of
$2.5 million. The slightly higher average borrowings over
the relative period were offset primarily by a decrease in the
weighted average interest rate (excluding amortization of
deferred financing expense). For the year ended
December 31, 2003, the weighted average interest rate was
6.9% as compared to 7.4% for the year ended December 31,
2002. We expect interest expense will increase on a year over
year basis primarily due to increased borrowings to finance our
growth plans. We incurred and capitalized $8.8 million of
issue costs relative to our existing credit facility, which are
being charged to interest expense over the 364-day life of the
facility in 2004. If we are successful in refinancing the
existing credit facility in 2004, any remaining capitalized
issue costs will be fully amortized at such time. See
 Liquidity and Capital Resources.

Interest expense was $5.7 million for the
year ended December 31, 2002, and $10.0 million for
the year ended December 31, 2001. The decrease in interest
expense of $4.3 million was due primarily to lower average
debt balances outstanding and lower interest rates. During the
year ended December 31, 2002, the average debt outstanding
was approximately $34.3 million lower than that for the
year ended December 31, 2001. In addition, the weighted
average interest rate (excluding amortization of deferred
financing expense) for the year ended December 31, 2002,
was 7.4% as compared to 9.5% for the year ended
December 31, 2001. The decrease was primarily the result of
the lower fixed margin rate for Canadian Eurodollar rate loans
charged under the senior credit facility compared to the rate
that was charged under the previous senior debt facility.

38



---



##### Table of Contents





| |                               
| | ------------------------------
| | Income Tax Provision (Benefit)

The reconciliation of the difference between
income taxes at the statutory rate and the income tax provision
(benefit) before cumulative effect of change in accounting
principle for the three years ended December 31, 2001, 2002
and 2003 is as follows (in thousands):

|                                                                                     |  |      |        |      |  |      |       |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                                                                     |  | 2001 |        | 2002 |  | 2003
|                                                                                     |  |      |        |      |  |     
|Tax provision (benefit) at combined federal and
    provincial/state statutory rates |  | $    | (7,916 | )    |  | $    | 1,482 |   |  | $ | (8,675 | )
|Effect of lower tax rates applicable to
    U.S. income                              |  |      | 133    |      |  |      |      |   |  |   |       |  
|Effect of change in enacted rates on deferred
    taxes                              |  |      | 1,655  |      |  |      | 96    |   |  |   | (478   | )
|Non-deductible warrant expense                                                       |  |      |       |      |  |      | 404   |   |  |   | 903    |  
|Non-deductible interest expense and preferred
    stock dividends                    |  |      | (260   | )    |  |      | 59    |   |  |   | 3,790  |  
|Non-deductible foreign exchange (gains) and
    losses                               |  |      | 65     |      |  |      | (558  | ) |  |   | 366    |  
|Other non-deductible expense                                                         |  |      | 2,377  |      |  |      | 13    |   |  |   | 509    |  
|Valuation allowance                                                                  |  |      | 4,663  |      |  |      |      |   |  |   | 2,641  |  
|Large corporations tax                                                               |  |      | 251    |      |  |      | 217   |   |  |   | 357    |  
|                                                                                     |  |      |        |      |  |      |       |   |  |   |        |  
|Income tax provision (benefit)                                                       |  | $    | 968    |      |  | $    | 1,713 |   |  | $ | (587   | )
|                                                                                     |  |      |        |      |  |      |       |   |  |   |        |  

As of December 31, 2003, we had
$47.2 million of gross net-operating loss carry-forwards,
of which, $7.7 million related to U.S. operations.
Refer to Note 14 of our consolidated financial statements
for the amount of net operating loss carry-forwards expiring in
each future year. We have determined that the realization of the
future tax benefit related to the Canadian loss carryforwards
totaling $39.5 million is more likely than not and
accordingly, have not provided a tax valuation allowance against
the benefit of these tax loss carryforwards as they are expected
to be utilized through future operations and certain tax
planning strategies. Due to the start-up nature of our
U.S. operations, we have provided a valuation allowance for
our net operating loss carryforwards generated in the United
States. Separately, changes in our ownership structure may
result in limitations on the utilization of loss carry-forwards,
as imposed by Section 382 of the U.S. Internal Revenue Code.



|   |                                
|-- | -------------------------------
|B. | Liquidity and Capital Resources

Our principal capital requirements are to fund
capital expenditures, primarily related to landfill site
development, business and asset acquisitions and debt service.
Significant sources of liquidity are cash on hand, net working
capital, borrowings from our existing credit facilities, our
ability to issue performance bonds and letters of credit, as
well as proceeds from equity issuances.

As of December 31, 2003, our cash and cash
equivalents were $21.1 million and net working capital
deficit, defined as current assets less restricted cash and
current liabilities was $132.0 million. As of
December 31, 2003, restricted cash representing funds held
in escrow to finance the acquisition of certain assets from
Allied totaled $14.4 million. As of December 31, 2003,
prepaid expenses and other assets included $9.9 million of
cash collateral deposits for letters of credit. Our existing
credit facilities (described further in this section) have been
included in the calculation of net working capital deficit as of
December 31, 2003. We intend to refinance our existing
credit facilities through the issuance of more permanent debt
and/or equity securities.

We expect to expand our business through
acquisitions of existing businesses and landfill sites domiciled
in the United States and Canada. We expect that we will fund
these business acquisitions through cash on hand, issuances of
our common shares and other external sources of financing which
may include, but not be limited to, certain debt and equity
offerings.

39



---



##### Table of Contents





| |                           
| | --------------------------
| | Existing Credit Facilities

In December 2003, our U.S. subsidiary Waste
Services entered into the $220.0 million senior secured
credit facilities comprised of a $195.0 million term loan
and a $25.0 million revolving credit facility, which is
secured by substantially all of our current and future acquired
assets. Initial borrowings under the existing credit facilities
were used to finance the acquisition of certain assets of Allied
and to repay our prior senior credit facility in full.
Currently, the existing facilities bear interest at
9.0% per annum and have an initial term of 364 days
with an extension option. If the option is exercised, the term
of the existing credit facilities would extend to July 2005 at a
rate of 11.0% per annum.

As of December 31, 2003, we had
$172.1 million outstanding under the term loan with no
amounts drawn on the revolving credit facility. We intend to
refinance our existing credit facilities with other sources of
financing, which may include but not be limited to new senior
credit facilities, a subordinated note offering and other debt
or equity offerings. However, there can be no assurance that we
will be successful in obtaining alternative sources of funding
to refinance this obligation or that any funding will be
obtainable on terms that are favorable to us. As such, we may
incur greater interest expense and financing costs in future
periods. If we are unable to refinance the existing credit
facilities or otherwise obtain alternative sources of funding we
may be required to sell additional debt, equity, or assets in
order to meet our repayment obligations, which may not be
possible.

The existing credit facilities contain certain
financial and other covenants that restrict our ability to,
among other things, make capital expenditures, incur
indebtedness, incur liens, dispose of property, repay debt, pay
dividends, repurchase shares and make certain acquisitions. Our
financial covenants primarily relate to: (i) a maximum
leverage ratio, (ii) a minimum interest coverage ratio and
(iii) a minimum EBITDA, as defined in the agreement
governing the existing credit facilities. The following table
sets forth our financial covenant levels for each of the next
four quarters (in thousands of U.S. dollars):

|               |  |                      |           |                       |  |              |           |  |  |   |        | 
|-------------- |  | -------------------- | --------- | --------------------- |  | ------------ | --------- |  |  | - | ------ | 
|               |  |                      |           | Minimum               |  | Minimum     
|               |  | Maximum Consolidated |           | Consolidated Interest |  | Consolidated
|Fiscal Quarter |  | Leverage Ratio       |           | Coverage Ratio        |  | EBITDA(1)   
|               |  |                      |           |                       |  |             
|FQ1 2004       |  |                      | 5.60:1.00 |                       |  |              | 1.75:1.00 |  |  | $ | 35,000 | 
|FQ2 2004       |  |                      | 5.60:1.00 |                       |  |              | 1.90:1.00 |  |  | $ | 36,000 | 
|FQ3 2004       |  |                      | 5.45:1.00 |                       |  |              | 2.00:1.00 |  |  | $ | 37,500 | 
|FQ4 2004       |  |                      | 5.25:1.00 |                       |  |              | 2.00:1.00 |  |  | $ | 39,000 | 



---



|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|(1) | Based upon a trailing twelve month period,
    subject to adjustment for certain acquisitions.

These covenants and restrictions limit the manner
in which we conduct our operations and could adversely affect
our ability to raise additional capital. Any failure by us to
comply with these covenants and restrictions will, unless waived
by the lenders, result in an inability to borrow under the
existing credit facilities or an immediate obligation to repay
all amounts outstanding. In such event, we would be required to
refinance our debt or obtain capital from other sources,
including sales of additional debt or equity or sales of assets,
in order to meet our repayment obligations, which may not be
possible.



| |                                                                          
| | -------------------------------------------------------------------------
| | Previous Senior Credit Facility (repaid in
    full on December 31, 2003)

In June 2002, we completed a refinancing of our
former senior debt facility by entering into a new senior
secured credit facility, or our senior credit facility, with a
syndicate of financial institutions. The senior credit facility
was a revolving credit facility denominated in Canadian dollars
and provided for borrowings of up to the lesser of
$88.0 million or C$131.0 million, as amended in 2003.
The senior credit facility was collateralized by a first
priority perfected security interest in substantially all of our
current and future acquired assets and those of our
subsidiaries. The senior credit facility contained certain
financial and other covenants that restricted our ability to,
among other things, make capital expenditures, pay dividends,
repurchase shares and make certain acquisitions. Interest rates
were based on current market rates plus a fixed margin based on
the form of borrowing (Canadian Eurodollar or prime). The fixed
margins ranged from 2.75% to 3.75% per annum for Canadian
Eurodollar rate loans and 1.25% to

40



---



##### Table of Contents



2.25% per annum for prime rate loans. Within
the ranges, the fixed margin was determined based on our
leverage ratio. The interest rate on the senior credit facility
prior to its repayment was 5.75% per annum compared to
6.06% per annum as of December 31, 2002.




| |                                                                
| | ---------------------------------------------------------------
| | Cumulative Mandatorily Redeemable Shares of
    Preferred Stock

In May 2003, our U.S. subsidiary Waste
Services issued 55,000 shares of preferred stock, or Waste
Services preferred stock, to Kelso Investment Associates VI,
L.P. and KEP VI, LLC, or Kelso, pursuant to the terms of an
agreement dated as of May 6, 2003, as amended, or the Waste
Services Subscription Agreement, at a price of $1,000 per
share. Waste Services also issued to Kelso 7,150,000 warrants to
purchase shares of common stock (on a one-for-one basis) of
Waste Services for $3.00 per share. The warrants are
exercisable at any time following our migration transaction, as
further described in Item 3 Key Information.
The issuance of the Waste Services preferred stock resulted in
proceeds of approximately $49.5 million, net of fees of
approximately $5.5 million. The shares of Waste Services
preferred stock are non-voting. The Waste Services preferred
stock entitles the holders to a liquidation preference of
$1,000 per share and a cumulative cash dividend of
17.75% per annum (compounding and accruing quarterly in
arrears). The liquidation preference approximated
$61.8 million as of December 31, 2003. As we are not
permitted to declare and pay cash dividends pursuant to the
terms of the existing credit facilities, the dividend payments
will accrue. The Waste Services preferred stock, including all
accrued and unpaid dividends, must be redeemed in full by no
later than May 6, 2015. Until May 6, 2006, we may
redeem all or any part of the Waste Services preferred stock on
payment of the sum of $1,000 per share plus accrued and
unpaid dividends calculated as if the Waste Services preferred
stock were redeemed on May 6, 2006 or approximately
$92.7 million. If we do not exercise the option to redeem
all of the Waste Services preferred stock by May 6, 2009,
Kelso may require Waste Services to initiate a sale of Waste
Services or its assets on terms acceptable to its board of
directors consistent with the exercise by the board members of
their fiduciary obligations.

Under the Waste Services Subscription Agreement,
which we amended in February 2004, if we do not complete the
migration transaction by June 30, 2004, the dividend
payable on the Waste Services preferred stock issued to Kelso
will increase by 1% per annum, from 17.75%, for every month
that the migration transaction is delayed, up to a maximum
increase of an additional 12% per annum. We may also be
required to issue to Kelso an additional 250,000 warrants per
month for each month that the migration transaction is delayed
after June 30, 2004, up to an additional 6,000,000 warrants
to purchase Waste Services common stock, at an exercise price of
$0.01 per share. The increase in the dividend payable on
the Waste Services preferred stock issued to Kelso would
increase the amount to be paid to Kelso on the redemption of the
Waste Services preferred stock and would have a material adverse
effect on our financial condition. By the terms of the
agreement, as amended, if the migration transaction is not
completed at all, Kelso may also require us to exchange the
existing 7,150,000 warrants to purchase common stock of Waste
Services, and any of the additional warrants for common stock of
Waste Services issued as a result of our completing the
migration transaction after June 30, 2004, for warrants to
purchase our common shares.

Additionally, Kelso, as the holder of the Waste
Services preferred stock, has the exclusive right to elect two
directors of Waste Services so long as 25,000 or more shares of
Waste Services preferred stock are outstanding, or one director
so long as there are 5,000 or more shares of Waste Services
preferred stock outstanding. Certain actions of Waste Services
and its affiliates, including incurring certain indebtedness,
also require the prior approval of the holders of a majority of
the Waste Services preferred stock. All of these covenants and
restrictions could limit the manner in which we conduct our
operations and could adversely affect our ability to raise
additional capital. Any failure by us to comply with these
covenants and restrictions will, unless waived by Kelso, result
in an immediate obligation to redeem all of the then outstanding
Waste Services preferred stock. If such events occurred, we
would be required to refinance Waste Services or obtain capital
from other sources, including sales of additional debt or equity
or the sale of assets, in order to meet our redemption
obligations.

41



---



##### Table of Contents



We adopted SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, and
accordingly classified the Waste Services preferred stock as a
liability. We also allocated the relative fair value of the
proceeds to the Waste Services preferred stock and warrants. The
7,150,000 warrants have an allocated value on the date of issue
of approximately $14.8 million. The value allocated to the
warrants was treated as a component of equity, with an
offsetting amount treated as a discount which will accrete to
interest expense using the effective interest method over the
life of the Waste Services preferred stock to the earliest
redemption date of May 6, 2006.



| |                                         
| | ----------------------------------------
| | Surety Bonding and Letters of
    Credit

Municipal solid waste services contracts, permits
and licenses to operate transfer stations and recycling
facilities may require performance or surety bonds, letters of
credit or other means of financial assurance to secure
contractual performance. As of December 31, 2003, we had
provided customers and various regulatory authorities with such
bonds and letters of credit amounting to approximately
$19.6 million to collateralize our obligations. If we were
unable to obtain performance or surety bonds or letters of
credit in sufficient amounts or at acceptable rates, we could be
precluded from entering into additional municipal solid waste
services contracts or obtaining or retaining landfill, transfer
station, recycling facility or operating permits and licenses.
We expect that our surety and letter of credit needs will
increase as we continue to expand through acquisitions or
internal growth.

We expect that as a result of acquiring the
northern and central Florida assets of Allied, we will need to
obtain additional performance or surety bonds of approximately
$9.4 million.



| |                 
| | ----------------
| | Equity Issuances

Common Shares.In
May 2003, we issued 2,050,000 common shares as part of the
purchase price of the JED Landfill, located in Osceola County,
Florida. In conjunction with the JED Landfill acquisition, we
issued 1,200,000 common shares in consideration for transaction
related services.

In November 2003, we issued 1,000,000 common
shares pursuant to the Florida Recycling acquisition as a
deposit into escrow. In December 2003, we issued 600,000 common
shares as part of the purchase price on the acquisition of a
Phoenix, Arizona collection business. During the first quarter
of 2004, we issued a total of 5,298,370 common shares as part of
the purchase price for certain acquisitions in the United States
and Canada.

Series 1 Preferred
Shares.The following table sets forth
the varied tranches of Series 1 preferred shares issued
during 2003, all of which were converted to common shares
(amounts in thousands except share and per share amounts):

|             |  |                  |            |           |  |          |      |          |  |           |        |                |  |   |        |     |  |  |           |  |  |   |      | 
|------------ |  | ---------------- | ---------- | --------- |  | -------- | ---- | -------- |  | --------- | ------ | -------------- |  | - | ------ | --- |  |  | --------- |  |  | - | ---- | 
|             |  | Number of        |            |           |  |          |      |          |  | Number of |        | Warrant       
|             |  | Series 1         |            | Price Per |  | Gross    |      | Net      |  | Warrants  |        | Exercise Price
|Period       |  | Preferred Shares |            | Share     |  | Proceeds |      | Proceeds |  | Issued    |        | per Share     
|             |  |                  |            |           |  |          |      |          |  |           |        |               
|March  June |  |                  | 10,241,666 |           |  | $        | 3.00 |          |  | $         | 30,725 |                |  | $ | 28,925 |     |  |  | 2,048,333 |  |  | $ | 3.00 | 
|June(a)      |  |                  | 5,000,000  |           |  | $        | 3.00 |          |  |           | 15,000 |                |  |   | 14,100 |     |  |  | 1,000,000 |  |  | $ | 3.00 | 
|July(b)      |  |                  | 4,154,667  |           |  | $        | 3.00 |          |  |           | 12,464 |                |  |   | 11,600 |     |  |  | 830,933   |  |  | $ | 3.00 | 
|September(b) |  |                  | 8,750,000  |           |  | $        | 3.20 |          |  |           | 28,000 |                |  |   | 27,877 |     |  |  | 1,575,000 |  |  | $ | 3.20 | 
|             |  |                  |            |           |  |          |      |          |  |           |        |                |  |   |        |     |  |  |           |  |  |   |      | 
|             |  |                  | 28,146,333 |           |  |          |      |          |  | $         | 86,189 |                |  | $ | 82,502 | (c) |  |  | 5,454,266 |  |  |   |      | 
|             |  |                  |            |           |  |          |      |          |  |           |        |                |  |   |        |     |  |  |           |  |  |   |      | 



---



|    |  |                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The proceeds from this issue were received and
    recorded as of June 25, 2003; the Series 1 shares
    were issued July 8, 2003.                                              
|   
|(b) |  | A shareholder and certain of our officers and
    directors and their affiliates, purchased 1,762,500
    Series 1 preferred shares in these private placement
    transactions.
|   
|(c) |  | Separately, we recorded a tax asset of
    $1.3 million for the deductible portion of the fees paid.                                                                            

42



---



##### Table of Contents



We account for the issuance of the Series 1
preferred shares as the issuance of three differing securities
(i) Series 1 preferred shares convertible into common
shares; (ii) warrants exercisable for common shares; and
(iii) a beneficial conversion feature embedded in the
Series 1 preferred shares. The gross proceeds from the
offering were allocated based upon the relative fair value of
the Series 1 preferred shares on the commitment date (date
of issue), and the warrants. The fair value of the common shares
at the commitment date was compared to the gross proceeds
allocated to the Series 1 preferred shares based upon their
relative fair value. The excess of fair value of the common
shares over the gross proceeds allocated to the Series 1
preferred shares was deemed to be the value associated with the
beneficial conversion feature of the Series 1 preferred
shares and was recorded as a non-cash dividend on the
Series 1 preferred shares. Value ascribed to the beneficial
conversion feature of the Series 1 preferred shares and the
allocated fair value of the warrants approximated
$54.6 million for the year ended December 31, 2003,
which was recognized as a deemed dividend to the Series 1
preferred shareholders.

At our annual meeting held in December 2003, the
shareholders voted in favor of the conversion of the
Series 1 preferred shares to common shares thereby
effecting the conversion on the basis of one common share for
each Series 1 preferred share held and the exercisability
of the warrants that were issued with the Series 1
preferred shares.

Warrants.During the
year ended December 31, 2003, we issued 147,500 common
shares on exercise of warrants and options for cash proceeds of
approximately $0.6 million.



| |           
| | ----------
| | Cash Flows

The following discussion relates to the major
components of the changes in cash flows for the years ended
December 31, 2003 and 2002.



| |                                         
| | ----------------------------------------
| | Cash Flows from Operating
    Activities

Cash provided by operating activities was
$9.4 million for the year ended December 31, 2003, and
$13.7 million for the year ended December 31, 2002.
The $4.3 million decrease in cash provided by operating
activities is primarily due to increase overhead spending, as
previously discussed, partly offset by increased cash from our
working capital.



| |                                            
| | -------------------------------------------
| | Cash Flows Used in Investing
    Activities

Cash used in investing activities was
$195.6 million for the year ended December 31, 2003,
and $39.8 million for the year ended December 31,
2002. The increase in cash used in investing activities during
2003 was primarily due to our acquisition activity. During the
year ended December 31, 2003, we purchased certain assets
from Allied for $81.1 million, all the membership interests
in the entity which owns the JED Landfill for $68.1 million
in cash, and we acquired a number of smaller companies for an
aggregate cash purchase price of approximately
$12.2 million. Capital expenditures also increased by
$12.3 million for the year ended December 31, 2003
versus 2002 primarily due to increased spending related to
landfill development, and in the prior year, approximately
$1.8 million in capital expenditures was financed with
capital leases. In addition, cash deposits for pending business
acquisitions increased $9.9 million over the prior year.

We expect our capital expenditures to increase as
a result of acquisitions and continued development of our
recently acquired landfill sites. We currently anticipate our
capital expenditures, including capital expenditures for our
recent 2004 acquisitions, in the range of approximately $40.0 to
$45.0 million in 2004. This amount is subject to change
based on the timing and extent of our acquisitions in 2004. We
intend to finance capital expenditures and business acquisitions
through operating cash flow, borrowings under our existing
credit facilities and the issuance of equity and other debt
securities.

43



---



##### Table of Contents





| |                                         
| | ----------------------------------------
| | Cash Flows from Financing
    Activities

Cash flows provided by financing activities were
$205.1 million for the year ended December 31, 2003,
and $25.4 million for the year ended December 31,
2002. As previously discussed, the increase in cash flows from
financing activities is primarily due to proceeds from our
existing credit facilities and the issuance of Series 1
preferred shares, Waste Services preferred stock, and our common
shares, the proceeds of which were primarily used to finance
acquisitions and repayment of our previous senior secured credit
facility.

In 2003, we incurred the following fees in
connection with financing activities (in thousands):

|                                                                     |       |   |       |        | 
|-------------------------------------------------------------------- | ----- | - | ----- | ------ | 
|Debt issue costs relative to the existing credit
    facilities      |       | $ | 8,829 |       
|Waste Services preferred stock issue costs                           |       |   | 5,503 |       
|Series 1 preferred shares issue costs                                |       |   | 3,687 |       
|Debt issue costs relative to the previous senior
    credit facility |       |   | 948   |       
|                                                                     |       |   |       |       
|                                                                     | Total |   | $     | 18,967 | 
|                                                                     |       |   |       |       



| |                              
| | -----------------------------
| | New Accounting Pronouncements

We will be impacted by the adoption of new
accounting pronouncements, details of which are more fully
described in Note 2 of our consolidated financial
statements elsewhere in this annual report. Recent significant
changes are as follows:

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, or SFAS No. 150, effective for financial
instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. This statement
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). We have adopted
the provisions of SFAS No. 150 and as a result, have
classified the Waste Services preferred stock as a liability.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, or FIN 46. In
December 2003, the FASB issued a revision to FIN 46, or
Revised Interpretation, to clarify some of the provisions of
FIN 46. FIN 46 provides guidance on how to identify a
variable interest entity, or VIE, and determine when the assets,
liabilities, non-controlling interests, and results of
operations of a VIE must be included in a companys
consolidated financial statements. A company that holds variable
interests in an entity is required to consolidate the entity if
the companys interest in the VIE is such that the company
will absorb a majority of the VIEs expected losses or receive a
majority of the entitys expected residual returns, if any.
VIEs created after January 31, 2003, but prior to
January 1, 2004, may be accounted for either based on the
original interpretation or the Revised Interpretations. However,
the Revised Interpretations must be applied no later than the
first quarter of fiscal year 2004. VIEs created after
January 1, 2004, must be accounted under the Revised
Interpretations. There has been no material impact to our
financial statements from potential VIEs entered into after
January 31, 2003, and there is no expected impact from the
adoption of the deferred provisions in the first quarter of
fiscal year 2004.

44



---



##### Table of Contents





|   |                                                  
|-- | -------------------------------------------------
|C. | Research and Development Patents and
    Licenses

Not applicable.



|   |                  
|-- | -----------------
|D. | Trend Information



| |            
| | -----------
| | Seasonality

We expect the results of our Canadian operations
to vary seasonally, with revenue typically lowest in the first
quarter of the year, higher in the second and third quarters,
and lower in the fourth quarter than in the third quarter. The
seasonality is attributable to a number of factors. First, less
solid waste is generated during the late fall, winter and early
spring because of decreased construction and demolition
activity. Second, certain operating costs are higher in the
winter months because winter weather conditions slow waste
collection activities, resulting in higher labor costs, and rain
and snow increase the weight of collected waste, resulting in
higher disposal costs, which are calculated on a per ton basis.
Also, during the summer months, there are more tourists and
part-time residents in some of our service areas, resulting in
more residential and commercial collection. Consequently, we
expect operating income to be generally lower during the winter.
We believe that the effect of seasonality on our results of
operations from our U.S. operations, which are located in
warmer climates than our Canadian operations, will be less
significant than that of our Canadian operations.



|   |                               
|-- | ------------------------------
|E. | Off Balance Sheet Arrangements

Except as discussed, we have no off-balance sheet
debt or similar obligations, other than our performance and
surety bonds discussed previously, which are not debt. We have
no transactions or obligations with related parties that are not
disclosed, consolidated into or reflected in our reported
results of operations or financial position. We do not guarantee
any third party debt.

Separately, under a Put or Pay Disposal Agreement
that we entered into in November 2002, we agreed to deliver to
certain landfill sites and transfer stations of Intersan Inc.,
or Intersan, a specified tonnage of waste during the first
five-year term of the agreement. We also agreed to deliver a
specified tonnage of waste for the two years following the
initial term. If we along with another party to the agreement
fail to deliver the required tonnage, we are jointly and
severally required to pay to Intersan, C$23.67 per metric
tonne for every tonne below the required tonnage. If a portion
of the annual tonnage commitment is not delivered to a specific
site, we are also required to pay $8.00 per metric tonne
for every tonne below the site specific allocation. Our
obligations to Intersan are secured by a letter of credit for
C$4.0 million. No payments were made or required to be made
to Intersan pursuant to the Put or Pay Disposal Agreement in the
period from January 1, 2003 to March 31, 2004. For a
further description of this agreement, see Item 7B.
Related Party Transactions. Additionally, we do not
anticipate material future payments under the Put or Pay
Disposal Agreement and, accordingly, we have not provided for a
liability pursuant to this agreement.

Concurrently with the Put or Pay Disposal
Agreement, we entered into a three year agreement with Canadian
Waste Services Inc. to allow us to deliver up to 75,000 tons in
year one and up to 100,000 tons in years two and three of
non-hazardous solid waste to their landfill in Michigan at
negotiated fixed rates per ton.



|   |                                                  
|-- | -------------------------------------------------
|F. | Tabular Disclosure of Contractual
    Obligations

We have various commitments primarily related to
funding of short-term debt, Waste Services preferred stock,
closure and post-closure obligations and capital and operating
lease commitments. The

45



---



##### Table of Contents



following table provides details regarding our
contractual obligations and other commercial commitments
subsequent to December 31, 2003 (in thousands):


|                              |                                                                    |      |         |         |  |      |       |       |  |      |       |         |  |       |       |       |  |   |       |       |  |   |         |         |  |   |         |         | 
|----------------------------- | ------------------------------------------------------------------ | ---- | ------- | ------- |  | ---- | ----- | ----- |  | ---- | ----- | ------- |  | ----- | ----- | ----- |  | - | ----- | ----- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                                                                    |      |         |         |  |      |       |       |  |      |       | Beyond  |  |      
|                              |                                                                    | 2004 |         | 2005    |  | 2006 |       | 2007  |  | 2008 |       | 5 Years |  | Total
|                              |                                                                    |      |         |         |  |      |       |       |  |      |       |         |  |      
|Contractual cash obligations: |                                                                    |      |         |         |  |      |       |       |  |      |       |         |  |       |       |       |  |   |       |       |  |   |         |         |  |   |         |        
|                              | Existing credit facilities(1)                                      |      | $       | 172,125 |  |      | $     |      |  |      | $     |        |  |       | $     |      |  |   | $     |      |  |   | $       |        |  |   | $       | 172,125 | 
|                              | Capital lease obligations                                          |      |         | 1,128   |  |      |       | 525   |  |      |       | 386     |  |       |       |      |  |   |       |      |  |   |         |        |  |   |         | 2,039   | 
|                              | Other long-term debt                                               |      |         | 155     |  |      |       | 166   |  |      |       | 177     |  |       |       | 189   |  |   |       | 203   |  |   |         | 2,395   |  |   |         | 3,285   | 
|                              | Operating lease commitments                                        |      |         | 2,564   |  |      |       | 1,882 |  |      |       | 1,392   |  |       |       | 1,306 |  |   |       | 1,107 |  |   |         | 5,867   |  |   |         | 14,118  | 
|                              | Cumulative mandatorily redeemable shares of
    preferred stock(2) |      |         |        |  |      |       |      |  |      |       |        |  |       |       |      |  |   |       |      |  |   |         | 156,142 |  |   |         | 156,142 | 
|                              | Committed amount for construction-in-progress                      |      |         | 4,446   |  |      |       |      |  |      |       |        |  |       |       |      |  |   |       |      |  |   |         |        |  |   |         | 4,446   | 
|                              | Closure and post-closure obligations(3)                            |      |         | 371     |  |      |       | 40    |  |      |       | 192     |  |       |       | 622   |  |   |       | 705   |  |   |         | 16,944  |  |   |         | 18,874  | 
|                              |                                                                    |      |         |         |  |      |       |       |  |      |       |         |  |       |       |       |  |   |       |       |  |   |         |         |  |   |         |        
|                              |                                                                    | $    | 180,789 |         |  | $    | 2,613 |       |  | $    | 2,147 |         |  | $     | 2,117 |       |  | $ | 2,015 |       |  | $ | 181,348 |         |  | $ | 371,029 |        
|                              |                                                                    |      |         |         |  |      |       |       |  |      |       |         |  |       |       |       |  |   |       |       |  |   |         |         |  |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | If we do not refinance our existing credit
    facilities, we expect cash required to service interest expense
    for these facilities will approximate or exceed $15.5 million
    for 2004.                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | This table includes the cumulative mandatorily
    redeemable shares of preferred stock issued by Waste Services,
    which must be redeemed in full no later than May 2015. The
    future payment of $156.1 million represents the principal,
    plus accrued dividends at 17.75% compounded quarterly to
    May 6, 2009, which is the earliest date Kelso may require
    Waste Services to repay the obligation. If we do not redeem by
    May 6, 2009, Kelso may require us to initiate a sale of
    Waste Services or its assets on terms acceptable to its board of
    directors.
|   
|(3) | Future payments on closure and post-closure
    obligations are undiscounted and contemplate full utilization of
    current and probable expansion airspace. The amount also
    excludes the undiscounted value of the closure and post-closure
    obligations of our JED Landfill, which began operations in
    January 2004.                                                                                                                                                                                                                                                           

Other
Contractual Arrangements

In connection with a certain acquisition and the
issuance of the 600,000 common shares, we entered into a
reimbursement agreement whereby for a period of one year after
the first anniversary of the closing date we will reimburse the
seller for the loss on sale of shares below $4.75 per share.

In the normal course of our business, we have
other commitments and contingencies relating to environmental
and legal matters. For a further discussion of commitments and
contingencies, see Note 12 to our consolidated financial
statements contained elsewhere in this annual report.



|   |            
|-- | -----------
|G. | Safe Harbor

All information that is not historical in nature
disclosed under Item 5. Operating and Financial
Review and Prospects  Off-Balance Sheet
Arrangements and  Tabular Disclosure of
Contractual Obligations is deemed to be a forward-looking
statement. See Forward-Looking Statements for
additional information.

46



---



##### Table of Contents








|        |                                               
|------- | ----------------------------------------------
|Item 6. | Directors, Senior Management and
    Employees



|   |                                
|-- | -------------------------------
|A. | Directors and Senior Management

The following table sets forth certain
information with respect to our directors and executive officers
as of March 1, 2004:

|                        |  |     |    |          |  |                                                                                |  |         |      |  |  |  |      | 
|----------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------ |  | ------- | ---- |  |  |  | ---- | 
|                        |  |     |    |          |  | Year                                                                           |  | Year   
|                        |  |     |    |          |  | Appointed                                                                      |  | Term   
|Name                    |  | Age |    | Position |  | to Board                                                                       |  | Expires
|                        |  |     |    |          |  |                                                                                |  |        
|David Sutherland-Yoest  |  |     | 47 |          |  | Director(1), Chairman and Chief Executive Officer                              |  |         | 2001 |  |  |  | 2005 | 
|Gary W. DeGroote        |  |     | 48 |          |  | Director(1)(2)(3)                                                              |  |         | 2001 |  |  |  | 2004 | 
|R. John (Jack) Lawrence |  |     | 69 |          |  | Director                                                                       |  |         | 2003 |  |  |  | 2005 | 
|George E. Matelich      |  |     | 47 |          |  | Director(2)                                                                    |  |         | 2003 |  |  |  | 2004 | 
|Lucien Rémillard        |  |     | 56 |          |  | Director(3)                                                                    |  |         | 2001 |  |  |  | 2004 | 
|Don A. Sanders          |  |     | 67 |          |  | Director(1)(2)(3)                                                              |  |         | 2001 |  |  |  | 2005 | 
|Stanley A. Sutherland   |  |     | 72 |          |  | Director, Executive Vice President, Chief
    Operating Officer Western Canada |  |         | 2001 |  |  |  | 2004 | 
|Larry D. Henk           |  |     | 43 |          |  | President, Chief Operating Officer                                             |  |         |      |  |  |  |      | 
|Ivan R. Cairns          |  |     | 58 |          |  | Executive Vice President, General Counsel and
    Secretary                    |  |         |      |  |  |  |      | 
|William P. Hulligan     |  |     | 61 |          |  | Executive Vice President, North American
    Operations                        |  |         |      |  |  |  |      | 
|Mark A. Pytosh          |  |     | 39 |          |  | Executive Vice President                                                       |  |         |      |  |  |  |      | 
|Ronald L. Rubin         |  |     | 38 |          |  | Executive Vice President, Chief Financial Officer                              |  |         |      |  |  |  |      | 
|Brian A. Goebel         |  |     | 36 |          |  | Vice President, Chief Accounting Officer and
    Corporate Controller          |  |         |      |  |  |  |      | 



---



|    |                                      
|--- | -------------------------------------
|(1) | Member of the Executive Committee.   
|   
|(2) | Member of the Audit Committee.       
|   
|(3) | Member of the Compensation Committee.

Biographical information regarding each of our
directors and executive officers is set forth below:

David Sutherland-Yoesthas been Chairman and Chief Executive
Officer and a director since September 6, 2001.
Mr. Sutherland-Yoest also held the position of Chairman and
Chief Executive Officer of H2O Technologies, Ltd., a
water purification company, from March 2000 to October 2003 and
served as a director of H2O Technologies, Ltd. from
March 2000 to January 2004. Mr. Sutherland-Yoest served as
the Senior Vice President  Atlantic Area of Waste
Management, Inc. from July 1998 to November 1999. From
August 1996 to July 1998, he was the Vice Chairman and Vice
President  Atlantic Region of USA Waste
Services, Inc., or USA Waste, and the President of Canadian
Waste Services Inc., which, during such time, was a subsidiary
of USA Waste. From May 1994 to August 1996, he was President,
Chief Operating Officer and a director of USA Waste. Prior to
joining USA Waste, Mr. Sutherland-Yoest was President,
Chief Executive Officer and a director of Envirofil, Inc.
Between 1981 and 1992, he served in various capacities at
Laidlaw Waste Systems Ltd. and Browning-Ferris Industries Ltd.
Mr. Sutherland-Yoest is the son-in-law of Stanley A.
Sutherland, a director and our Executive Vice President, Chief
Operating Officer, Western Canada.

Gary W. DeGrootehas
been a director since September 6, 2001. Mr. DeGroote
has been the President and sole director of GWD Management Inc.,
a private investment holding company, since 1981. From 1991 to
1995, Mr. DeGroote was President and a director of Republic
Environmental Systems Ltd.

47



---



##### Table of Contents



From 1976 through 1989, Mr. DeGroote served
in various positions at Laidlaw Waste Systems, Ltd. and its
affiliates, including as Vice President and served as a member
of the board of directors of Laidlaw Inc. from 1983 to 1989.


R. John (Jack) Lawrencehas been a director since
June 19, 2003. Mr. Lawrence has been Chairman of
Lawrence & Company, Inc., an investment advisory,
money management and merchant banking firm, since October 1995.
Before founding Lawrence & Company, Inc.,
Mr. Lawrence held progressively senior executive positions
with Nesbitt Burns, Inc. and its predecessor serving as its
Chairman and Chief Executive Officer from November 1980 to
September of 1994 and then as its Deputy Chairman until October
of 1998. Mr. Lawrence serves as a director of Methanex
Corporation and Indigo Books and Music Inc.

George E. Matelichhas been a director since
June 19, 2003. Mr. Matelich has been a Managing
Director of Kelso & Company since 1990.
Mr. Matelich has been affiliated with Kelso &
Company since 1985. Mr. Matelich serves as a director of
FairPoint Communications, Inc. and as a Trustee of the
University of Puget Sound.

Lucien Rémillardhas been a director since
September 6, 2001. Mr. Rémillard has been the
President and Chief Executive Officer of RCI Environment Inc., a
waste management company, since 1997. From 1981 to 1995,
Mr. Rémillard was the President and Chief Executive
Officer of Intersan Inc., a waste management company.
Mr. Rémillard has also served as a director of the
Greater Montreal Area Committee Paritaire des Boueurs, the
organization regulating labor relations for the Montreal solid
waste removal industry, since 1983. Mr. Rémillard is
also Chairman of the Board of Directors of Remstar Corporation,
an independent distribution and film production company.

Don A. Sandershas
been a director since September 6, 2001. Mr. Sanders
has been the Vice Chairman and a director of Sanders Morris
Harris Group Inc., or SMHG, a financial services holding company
formerly known as Pinnacle Global Group, Inc., since
February 2000. He is the Chairman of the Executive Committee of
Sanders Morris Harris Inc., or SMH (formerly known as Sanders
Morris Mundy Inc.), an investment banking firm and a wholly
owned subsidiary of SMHG. Mr. Sanders co-founded SMH in
1987 and served as its President from 1987 to 1996. Before
joining SMH, he was employed by E.F. Hutton & Co. Inc.,
where he served from 1959 to 1987 in various capacities,
including as an Executive Vice President from 1982 to 1987 and
as a member of its Board of Directors from 1983 to 1987.
Mr. Sanders has over 40 years of experience in the
securities industry.

Stanley A. Sutherlandhas been a director since
November 19, 2001 and Executive Vice President and Chief
Operating Officer, Western Canada, since December 1, 2001.
Mr. Sutherland has over 35 years of management
experience in the solid waste services industry, having
previously held executive positions with Canadian Waste Services
Inc. and Browning-Ferris Industries Ltd. Mr. Sutherland is
the father-in-law of David Sutherland-Yoest.

Larry D. Henkwas
appointed as President and Chief Operating Officer on
July 11, 2003. Mr. Henk formerly held an equivalent
position at Allied Waste Industries, Inc., prior to his
departure in October 2001. During his ten years with Allied in
senior management, he played a key role in Allieds growth
from $75 million to $5.5 billion in annualized
revenue. Prior to joining Allied, Mr. Henk served in a
variety of management and operating capacities for several solid
waste services companies, contributing to 20 years of
industry experience.

Ivan R. Cairnswas
appointed as Executive Vice President, General Counsel, and
Corporate Secretary effective January 5, 2004. Prior to
joining us, Mr. Cairns served as Senior Vice President and
General Counsel at Laidlaw International Inc. and was Senior
Vice President and General Counsel at its predecessor, Laidlaw
Inc., for over 20 years.

William P. Hulliganwas appointed Executive Vice
President, North American Operations on June 1, 2003. He
has extensive operational and executive experience having held
several positions throughout his 20-year career with Waste
Management, Inc. His last position with Waste
Management, Inc. was as its Executive Vice President.

48



---



##### Table of Contents



Mark A. Pytoshwas
appointed Executive Vice President effective February 23,
2004. Prior to joining us, Mr. Pytosh was a Managing
Director in Investment Banking at Lehman Brothers where he
focused on working with clients in the industrial sector,
including leading the firms banking efforts in the solid
waste industry. Before joining Lehman Brothers in 2000,
Mr. Pytosh had 15 years of investment banking
experience at Donaldson, Lufkin & Jenrette and Kidder,
Peabody.

Ronald L. Rubinwas
appointed as Executive Vice President and Chief Financial
Officer in August 2003. Prior to joining us, Mr. Rubin, a
Certified Public Accountant, held the position of Vice
President, Chief Accounting Officer and Controller, for Paxson
Communications Corporation, which owns and operates the largest
broadcast television distribution system in the United States
and the PAX TV network. Prior to joining Paxson, Mr. Rubin
held the position of Vice President, Controller for AutoNation
Inc., a Fortune 100 company and the former parent of
Republic Services, Inc., a provider of solid waste
collection, transfer and disposal services in the United States.

Brian A. Goebelwas
appointed Vice President, Chief Accounting Officer and Corporate
Controller in October 2003. From December 1999 until joining us,
Mr. Goebel, a Certified Public Accountant, held the
position of Assistant Controller, ANC Rental Corporation, which
owned Alamo and National Car Rental. From January 1997 to
December 1999, Mr. Goebel was a Director of Corporate
Accounting for AutoNation, Inc. Prior to joining
AutoNation, Inc, Mr. Goebel spent eight years in the
Business Assurance practice of Coopers & Lybrand, LLP.



|   |             
|-- | ------------
|B. | Compensation

Director
Compensation Policy

In July, 2003, following the recommendation of
the Compensation Committee, the Board of Directors authorized
the following option grants to non-employee directors for their
service on the Board in fiscal 2003:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | 50,000 options to each non-employee director who
    served as a director throughout 2003;                                
|
| |  | 35,000 options to each non-employee director who
    joined the Board of Directors during 2003;                           
|
| |  | an additional 5,000 options for each committee on
    which a non-employee director serves in 2003; and                   
|
| |  | a further 5,000 options to the chair of each
    committee who is a non-employee director for serving as such in
    2003.

All of these options have an exercise price equal
to the closing price of our common shares as quoted on Nasdaq on
the close of business on July 10, 2003, the date the
Compensation Committee approved the grants. These options fully
vest on July 15, 2004 and expire upon the earlier of five
years after the grant date or one year after the director ceases
to be a member of the Board of Directors (18 months in the
case of retirement, death or mental or physical disability).

Executive
Compensation

During 2003, our directors and executive officers
described in this section received aggregate compensation of
approximately $2.7 million, (consisting of salary, bonus,
other benefits and severance) and options to acquire an
aggregate of 3,600,000 common shares.

49



---



##### Table of Contents



The following table sets forth the compensation
paid and the benefits in kind (including options) granted to
certain of our directors and executive officers during 2003:

|                       |  |                                                                                                 |  |                |       |       |  |        |  |                  |  |                                                                                                                       
|---------------------- |  | ----------------------------------------------------------------------------------------------- |  | -------------- | ----- | ----- |  | ------ |  | ---------------- |  | ----------------------------------------------------------------------------------------------------------------------
|Name                   |  | Title                                                                                           |  | Salary         |       | Bonus |  | Other  |  | Benefits in Kind
|                       |  |                                                                                                 |  |                |       |       |  |        |  |                 
|                       |  |                                                                                                 |  |                |       |      
|                       |  |                                                                                                 |  | (in thousands) |       |      
|David Sutherland-Yoest |  | Chairman and Chief Executive Officer                                                            |  | $              | 223.1 |       |  | $428.3 |  | $21.3            |  | 1,000,000 options to purchase common shares at an
    exercise price of C$6.96 per share. Expire November 5,
    2008.
|Larry D. Henk          |  | President and Chief Operating Officer effective
    July 11, 2003                               |  |                | 188.3 |       |  | 183.3  |  | 5.0              |  | 1,000,000 options to purchase common shares at an
    exercise price of $3.89 per share. Expire June 19,
    2008.    
|Ronald L. Rubin        |  | Executive Vice President, Chief Financial Officer
    effective September 2, 2003               |  |                | 98.5  |       |  | 80.0   |  | 156.0            |  | 500,000 options to purchase common shares at an
    exercise price of $5.23 per share. Expire November 5,
    2008.   
|Thomas E. Durkin III   |  | Executive Vice President, General Counsel and
    Corporate Secretary until January 4, 2004     |  |                | 224.4 |       |  | 321.2  |  |                 |  | 250,000 options to purchase common shares at an
    exercise price of C$6.96 per share. Expire November 5, 2008.      
|Ivan R. Cairns         |  | Executive Vice President, General Counsel and
    Corporate Secretary effective January 5, 2004 |  |                |      |       |  |       |  |                 |  |                                                                                                                      
|Mark A. Pytosh         |  | Executive Vice President effective March 12,
    2004                                           |  |                |      |       |  |       |  |                 |  |                                                                                                                      
|William P. Hulligan    |  | Executive Vice President, North American
    Operations, effective June 1, 2003                 |  |                | 176.5 |       |  | 175.0  |  |                 |  | 500,000 options to purchase common shares at an
    exercise price of $3.89 per share. Expire June 19,
    2008.      
|Brian A. Goebel        |  | Vice President, Chief Accounting Officer and
    Corporate Controller effective October 1, 2003 |  |                | 43.9  |       |  | 24.4   |  | 31.2             |  | 75,000 options to purchase common shares at an
    exercise price of $5.52 per share. Expire December 16, 2008.       
|Gary W. DeGroote       |  | Director                                                                                        |  |                |      |       |  |       |  |                 |  | 70,000 options to purchase common shares at an
    exercise price of C$5.40 per share. Expire July 15, 2008.          
|George E. Matelich     |  | Director                                                                                        |  |                |      |       |  |       |  |                 |  | 45,000 options to purchase common shares at an
    exercise price of C$5.40 per share. Expire July 15, 2008.          

50



---



##### Table of Contents



|                        |  |                                                                                 |  |                |       |       |  |       |  |                  |  |                                                                                                             
|----------------------- |  | ------------------------------------------------------------------------------- |  | -------------- | ----- | ----- |  | ----- |  | ---------------- |  | ------------------------------------------------------------------------------------------------------------
|Name                    |  | Title                                                                           |  | Salary         |       | Bonus |  | Other |  | Benefits in Kind
|                        |  |                                                                                 |  |                |       |       |  |       |  |                 
|                        |  |                                                                                 |  |                |       |      
|                        |  |                                                                                 |  | (in thousands) |       |      
|Don A. Sanders          |  | Director                                                                        |  |                |      |       |  |      |  |                 |  | 70,000 options to purchase common shares at an
    exercise price of C$5.40 per share. Expire July 15, 2008.
|R. John (Jack) Lawrence |  | Director                                                                        |  |                |      |       |  |      |  |                 |  | 35,000 options to purchase common shares at an
    exercise price of C$5.40 per share. Expire July 15, 2008.
|Stanley Sutherland      |  | Director, Executive Vice President, Chief
    Operating Officer, Western Canada |  |                | 196.2 |       |  | 92.8  |  | 12.8             |  |                                                                                                            
|Lucien Rémillard        |  | Director                                                                        |  |                |      |       |  |      |  |                 |  | 55,000 options to purchase common shares at an
    exercise price of C$5.40 per share. Expire July 15, 2008.

C.     Board
Practices

We have an Executive Committee, a Compensation
Committee and an Audit Committee. The directors appointed to the
Executive Committee, Compensation Committee and Audit Committee
following the 2003 annual shareholders meeting are as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Don A. Sanders, David Sutherland-Yoest
    and Gary W. DeGroote were appointed to the Executive Committee
    of the Board of Directors, with Mr. Sanders appointed
    Chairman of the Executive Committee. The Executive Committee has
    all the powers of the Board of Directors in respect of the
    management and direction of our business and affairs (save and
    except those set out in Section 127(3) of the Business
    Corporations Act (Ontario)) in all cases in which specific
    directions have not been given by the Board of Directors.                                                                                                                                                                          
|
| | (b) Gary W. DeGroote, Don A. Sanders and
    Lucien Rémillard were appointed to the Compensation
    Committee, with Mr. DeGroote appointed as Chairman of the
    Compensation Committee. All of the members of the Compensation
    Committee are non-employee directors. The Compensation Committee
    determines the compensation of executive officers subject, if
    the Board of Directors so directs, to the Board of
    Directors further ratification of such compensation;
    determines the compensation for other officers or delegates such
    determinations to an executive officer or officers; and grants
    options, stock or other equity interests under our stock option
    or other equity-based incentive plans.
|
| | (c) George Matelich, Gary DeGroote and Don
    A. Sanders were appointed to the Audit Committee, with
    Mr. Matelich appointed Chairman of the Audit Committee. All
    of the members of the Audit Committee are non-employee directors
    and the Board of Directors has determined that all members of
    the Audit Committee meet the independence requirements of
    Nasdaq. The Audit Committee makes recommendations to the Board
    of Directors concerning the engagement of independent auditors;
    reviews with the independent auditors the plans and results of
    the audit engagement; considers the range of audit and non-audit
    fees; verifies that auditors are independent of                                   

51



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | management and are objective in their findings;
    reviews recommendations on internal controls and related
    management response; reviews the audit reports with management
    and the auditor; and monitors managements efforts to
    correct deficiencies described in any audit examination.

We do not have service contracts with our
directors.

Employment
Agreements

David
Sutherland-Yoest.David
Sutherland-Yoest entered into an employment agreement with us on
September 7, 2001, which is the effective date. The
agreement has a term of three years, which term is automatically
extended each day by one day from the effective date until
notice is given that the employment term will not be extended.
Under this employment agreement, Mr. Sutherland-Yoest is
entitled to a current base salary of $500,000 or such higher
rate as may be determined from time to time by the Board of
Directors, plus an annual bonus of up to 100% of his base salary
subject to satisfaction of annual performance objectives
mutually agreed upon by the Board of Directors and
Mr. Sutherland-Yoest at the beginning of each year. The
employment agreement provides for the following benefits upon
termination: (a) if the agreement is terminated upon death
or total disability or by Mr. Sutherland-Yoest within six
months following a change of control Mr. Sutherland-Yoest
or his beneficiaries will be paid his base salary for a period
of three years from the effective date of termination plus a
lump sum payment equal to three times the average of the cash
bonuses paid to him in each of the two most recently completed
fiscal years, he will receive company benefits for a period of
three years, and any stock options granted will continue to vest
as if Mr. Sutherland-Yoest were still employed; (b) if
the agreement is terminated for cause, Mr. Sutherland-Yoest
will be entitled to receive all accrued but unpaid expenses and
any earned benefits; (c) if the agreement is terminated by
Mr. Sutherland-Yoest voluntarily, Mr. Sutherland-Yoest
will be entitled to receive any accrued but unpaid expenses and
any earned benefits; and (d) if the agreement is terminated
without cause, Mr. Sutherland-Yoest will continue to
receive his base salary and will receive company benefits until
the later of September 7, 2004 or the first anniversary of
the effective date of termination, and any stock options will
vest and be exercisable until the end of the option term as set
out in the option grant. Mr. Sutherland-Yoests
employment agreement also provides for other customary benefits
and perquisites and prohibits him from competing with us during
the term of his employment and for a specified period following
termination.

Larry D. Henk.Larry
D. Henk entered into an employment agreement with us and our
U.S. subsidiary, Waste Services effective as of
July 11, 2003 for an indeterminate term. Under the
employment agreement, Mr. Henk is entitled to a base salary
of $400,000 or such higher rate as may be determined from time
to time by the Board of Directors plus an annual cash bonus of
up to 100% of his base salary. The employment agreement provides
for the following termination benefits: (a) if the
agreement is terminated upon death or total disability,
Mr. Henk or his beneficiaries will be paid his base salary
for a period of three years from the effective date of
termination plus three times his average annual bonus in equal
installments over 36 months, he or his dependents will
continue to receive company benefits for a period of three
years, and any outstanding stock options shall vest in
accordance with the terms of our stock option plan then in
effect; (b) if the agreement is terminated without cause or
by Mr. Henk for good reason, as defined in the agreement,
Mr. Henk will be paid his base salary for a period of two
years from the effective date of termination, plus two times his
average annual bonus in equal installments over 24 months,
he will continue to receive company benefits for a period of
three years and any outstanding stock options shall vest in
accordance with the terms of our stock option plan then in
effect; (c) if the agreement is terminated by Mr. Henk
for good reason or by us without cause and a change of control
has occurred within the two-year period preceding or within the
one-year period following the effective date of termination,
Mr. Henk will be paid a lump sum equal to three times the
sum of his base salary at the rate in effect immediately prior
to the effective date of termination, and his average annual
bonus paid in the three most recently completed fiscal years, he
will continue to receive company benefits for a period of three
years, and any outstanding stock options shall vest and be
exercisable in accordance with the terms of our stock option
plan then in effect; (d) if the agreement is terminated for
cause or by Mr. Henk voluntarily and without good reason,
Mr. Henk is entitled to receive any accrued but unpaid base
salary,

52



---



##### Table of Contents



expenses and any earned benefits. The employment
agreement also provides for other customary benefits and
perquisites and prohibits Mr. Henk from competing with us
during the term of his employment and for a specified period
following termination.


Ronald L. Rubin.Ronald L. Rubin entered into an employment agreement with us and
our U.S. subsidiary, Waste Services effective
September 2, 2003. The agreement is for an initial term of
two years and automatically renews thereafter for successive one
year terms. Mr. Rubin is entitled to receive a base salary
of $300,000 and a discretionary annual cash bonus of up to 80%
of his base salary. Mr. Rubin also received a one-time
payment of $150,000 on signing his employment agreement. The
employment agreement provides for the following termination
benefits: (a) if the agreement is terminated upon
Mr. Rubins death or total disability or by us without
cause or by Mr. Rubin for good reason, Mr. Rubin or
his beneficiaries will continue to be paid his base salary for
the remainder of his employment term and all outstanding options
granted to Mr. Rubin prior to his termination shall vest
and be exercisable in accordance with the terms of the stock
option plan pursuant to which the options were granted;
(b) if the agreement is terminated by us without cause or
by Mr. Rubin for good reason and a change of control has
occurred within the two year period preceeding or within the one
year period following the effective date of termination,
Mr. Rubin is entitled to receive a lump sum payment equal
to his base salary then in effect immediately upon termination
and Mr. Rubins options will vest as described above;
(c) if the agreement is terminated for cause or by
Mr. Rubin voluntarily and without good reason,
Mr. Rubin is entitled to receive any accrued but unpaid
base salary, expenses and any unearned benefits. The employment
agreement also provides for other customary benefits and
perquisites and prohibits Mr. Rubin from competing with us
during the term of his employment and for a specified period
following termination.

William P. Hulligan.William P. Hulligan has entered into an employment agreement
with us for a two-year term, expiring June 1, 2005. Under
the employment agreement, Mr. Hulligan is entitled to
receive a base salary of $300,000 and a discretionary annual
cash bonus of up to 100% of his base salary. The employment
agreement provides for the following termination benefits:
(a) if the agreement is terminated upon
Mr. Hulligans death or total disability or by us
without cause, we will continue to pay Mr. Hulligan his
base salary for the greater of six months or the balance of the
term of his employment agreement and all outstanding options
granted to Mr. Hulligan prior to his termination shall vest
and be exercisable for the remainder of the unexpired term of
such options; (b) if the agreement is terminated by us
without cause or by Mr. Hulligan within six months
following a change of control, Mr. Hulligan will be
entitled to the payments described in subsection (a), plus
the cash bonus paid to him in the most recently completed fiscal
year prior to his termination, paid over the same period as his
salary continuance; (c) if the agreement is terminated for
cause or by Mr. Hulligan voluntarily and without good
reason, Mr. Hulligan is entitled to receive any accrued but
unpaid base salary, expenses and any unearned benefits. The
employment agreement also provides for other customary benefits
and perquisites and prohibits Mr. Hulligan from competing
with us during the term of his employment and for a specified
period following termination.

Brian A. Goebel.Brian A. Goebel entered into an employment agreement with us and
our U.S. subsidiary, Waste Services effective
October 1, 2003. The agreement is for an initial term of
two years and automatically renews thereafter for successive one
year terms. Mr. Goebel is entitled to receive a base salary
of $195,000 and a discretionary annual cash bonus of up to 60%
of his base salary. Mr. Goebel also received a one-time
payment of $30,000 on signing his employment agreement. The
employment agreement provides for the following termination
benefits: (a) if the agreement is terminated upon
Mr. Goebels death or total disability,
Mr. Goebel or his beneficiaries will continue to be paid
his base salary for the remainder of his employment term and all
outstanding options granted to Mr. Goebel prior to his
termination shall vest and be exercisable in accordance with the
terms of our stock option plan pursuant to which the options
were granted; (b) if the agreement is terminated by us
without cause or by Mr. Goebel for good reason,
Mr. Goebel will continue to receive his base salary for a
period of 12 months and all outstanding options granted to
Mr. Goebel prior to his termination shall vest and be
exercisable in accordance with the terms of our stock option
plan pursuant to which the options were granted; (c) if the
agreement is terminated for cause or by Mr. Goebel
voluntarily and without good reason, Mr. Goebel is

53



---



##### Table of Contents



entitled to receive any accrued but unpaid base
salary, expenses and any unearned benefits. The employment
agreement also provides for other customary benefits and
perquisites and prohibits Mr. Goebel from competing with us
during the term of his employment and for a specified period
following termination.


Directors
and Officers Liability Insurance

We have a directors and officers
liability insurance policy with a policy limit of
C$5.0 million, subject to a C$1.0 million deductible
in respect of any claim for a policy period expiring in November
2005. In addition, for a policy period expiring in November
2004, we have a directors and officers liability
insurance policy with a policy limit of $20.0 million,
subject to a $1.0 million deductible in respect of any
claim. In addition, we are a co-insurer for up to 20% of the
amount paid in respect of securities related claims under this
policy. These policies had total premiums of approximately
$3.2 million. The policies provide protection to our
directors and officers against liability incurred by them in
their capacities as directors and officers of us and our
subsidiaries.

D.     Employees

As of December 31, 2003, we employed
approximately 1,395 full-time employees, including
approximately 149 persons categorized as professionals or
managers, approximately 1,054 employees involved in collection,
transfer, disposal and recycling operations, and approximately
192 sales, clerical, data processing or other administrative
employees.

Approximately 512 of our employees are covered by
collective bargaining agreements, four of which expire in 2004.
We are not aware of any current organized efforts among our
employees and believe that relations with our employees are good.



|   |                
|-- | ---------------
|E. | Share Ownership

Information regarding share ownership as of
March 1, 2004 of our current directors and executive
officers is set forth below:

|                                                                 |  |                       |            |                |  |  |      |  
|---------------------------------------------------------------- |  | --------------------- | ---------- | -------------- |  |  | ---- | -
|Name                                                             |  | Outstanding Shares(1) |            | % of Shares(2)
|                                                                 |  |                       |            |               
|David Sutherland-Yoest(5)                                        |  |                       | 4,136,362  |                |  |  | 5.6  |  
|Don A. Sanders(4)                                                |  |                       | 3,677,238  |                |  |  | 5.0  |  
|Lucien Rémillard(6)                                              |  |                       | 3,018,497  |                |  |  | 4.1  |  
|Gary W. DeGroote(3)                                              |  |                       | 2,315,000  |                |  |  | 3.2  | %
|R. John (Jack) Lawrence(7)                                       |  |                       | 1,106,250  |                |  |  | 1.5  |  
|George E. Matelich                                               |  |                       | 728,797    |                |  |  | 1.0  |  
|Stanley A. Sutherland                                            |  |                       | 250,000    |                |  |  | *    |  
|Larry D. Henk                                                    |  |                       | 150,000    |                |  |  | *    |  
|William P. Hulligan                                              |  |                       | 140,000    |                |  |  | *    |  
|Ronald L. Rubin                                                  |  |                       | *          |                |  |  | *    |  
|Mark A. Pytosh                                                   |  |                       | *          |                |  |  | *    |  
|Ivan R.Cairns                                                    |  |                       | *          |                |  |  | *    |  
|Brian A. Goebel                                                  |  |                       | *          |                |  |  | *    |  
|All executive officers and directors as a group
    (13 persons) |  |                       | 15,522,144 |                |  |  | 20.4 |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Less than one (1%) percent.                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(1) | In general, a person who has voting power or
    investment power with respect to securities is treated as a
    beneficial owner of those securities. Shares of common stock
    subject to options and/or warrants currently exercisable or
    exercisable within 60 days of March 1, 2004 count as
    outstanding for computing the percentage beneficially owned by
    the person holding these options or warrants.

54



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Percentages based upon 73,104,898 common shares
    outstanding as of March 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Consists of 2,275,000 common shares owned by GWD
    Management Inc., and 40,000 common shares issuable upon exercise
    of currently exercisable options to purchase common shares
    issued to Mr. DeGroote. Mr. DeGroote is the controlling
    shareholder and director of GWD Management Inc.                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) | Consists of 1,139,142 common shares over which
    Mr. Sanders has sole voting and sole dispositive power and
    2,498,096 common shares with respect to which Mr. Sanders
    has shared dispositive power and 40,000 common shares issuable
    upon the exercise of currently exercisable options to purchase
    common shares.                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(5) | Consists of 1,949,497 common shares owned by
    D.S.Y. Investments Ltd., of which Mr. Sutherland-Yoest is
    the sole director and shareholder, as well as 751,665 common
    shares owned by Mr. Sutherland-Yoest personally and 670,000
    common shares issuable upon the exercise of currently
    exercisable warrants to purchase common shares, 500,000 common
    shares owned by Mr. Sutherland-Yoests wife and
    265,200 common shares owned by Mr. Sutherland-Yoests
    daughter, Christina Sutherland-Yoest, which
    Mr. Sutherland-Yoest may be deemed to beneficially own.
    Mr. Sutherland-Yoest disclaims beneficial ownership with
    respect to the shares owned by his wife and his daughter.
|   
|(6) | Consists of 1,500,000 common shares owned by
    Historia Investments Inc. and 1,478,497 shares owned by The
    Victoria Bank (Barbados) Incorporated. Mr. Rémillard
    is the controlling shareholder of Historia Investments Inc. and
    is indirectly the controlling shareholder of The Victoria Bank
    (Barbados) Incorporated, and is deemed to beneficially own the
    shares owned by each such entity and 40,000 common shares
    issuable upon the exercise of currently exercisable options to
    purchase common shares issued to Mr. Rémillard.
    Mr. Rémillard disclaims beneficial ownership of the
    shares owned by The Victoria Bank (Barbados) Incorporated and
    Historia Investments Inc. 
|   
|(7) | Consists of 812,500 common shares and 146,250
    common shares issuable upon the exercise of warrants owned by
    Lawrence Venture Fund and 125,000 common shares and 22,500
    common shares issuable upon the exercise of warrants owned by
    Lawrence & Company Inc., which Mr. Lawrence may be
    deemed to beneficially own. Mr. Lawrence disclaims
    beneficial ownership of the shares owned by Lawrence Venture
    Fund and Lawrence & Company Inc.                                                                                                                                                                                                                                                         

55



---



##### Table of Contents



Information regarding options and warrants held
as of March 1, 2004 by certain of our current directors and
executive officers is set forth below. We have issued options
and warrants with exercise prices denominated both in Canadian
dollars and in U.S. dollars.

|                        |  |         |           |          |  |                |           |                 |  |     |   |     |  |  |                    | 
|----------------------- |  | ------- | --------- | -------- |  | -------------- | --------- | --------------- |  | --- | - | --- |  |  | ------------------ | 
|Name                    |  | Options |           | Warrants |  | Exercise Price |           | Expiration Date
|                        |  |         |           |          |  |                |           |                
|David Sutherland-Yoest  |  |         |           |          |  |                | 1,000,000 |                 |  | US$ | 2 | .70 |  |  | September 10, 2011 | 
|                        |  |         | 1,000,000 |          |  |                |           |                 |  | C$  | 6 | .96 |  |  | November 5, 2008   | 
|Gary W. DeGroote        |  |         | 40,000    |          |  |                |          |                 |  | C$  | 4 | .05 |  |  | September 24, 2006 | 
|                        |  |         | 70,000    |          |  |                |           |                 |  | C$  | 5 | .40 |  |  | July 15, 2008      | 
|R. John (Jack) Lawrence |  |         | 35,000    |          |  |                |          |                 |  | C$  | 5 | .40 |  |  | July 15, 2008      | 
|George E. Matelich      |  |         | 45,000    |          |  |                |          |                 |  | C$  | 5 | .40 |  |  | July 15, 2008      | 
|Lucien Rémillard        |  |         | 40,000    |          |  |                |          |                 |  | C$  | 4 | .05 |  |  | September 24, 2006 | 
|                        |  |         | 55,000    |          |  |                |           |                 |  | C$  | 5 | .40 |  |  | July 15, 2008      | 
|Don A. Sanders          |  |         | 40,000    |          |  |                |          |                 |  | C$  | 4 | .05 |  |  | September 24, 2006 | 
|                        |  |         | 70,000    |          |  |                |           |                 |  | C$  | 5 | .40 |  |  | July 15, 2008      | 
|Stanley A. Sutherland   |  |         | 250,000   |          |  |                |          |                 |  | C$  | 5 | .19 |  |  | November 19, 2006  | 
|Larry D. Henk           |  |         | 1,000,000 |          |  |                |          |                 |  | US$ | 3 | .89 |  |  | June 19, 2008      | 
|Ivan R. Cairns          |  |         | 600,000   |          |  |                |           |                 |  | C$  | 8 | .40 |  |  | January 5, 2009    | 
|Thomas E. Durkin III    |  |         | 250,000   |          |  |                |           |                 |  | C$  | 5 | .19 |  |  | November 19, 2006  | 
|                        |  |         | 250,000   |          |  |                |           |                 |  | C$  | 6 | .96 |  |  | November 5, 2008   | 
|William P. Hulligan     |  |         | 500,000   |          |  |                |          |                 |  | US$ | 3 | .89 |  |  | June 19, 2008      | 
|Mark A. Pytosh          |  |         |          |          |  |                |          |                 |  |     |  |     |  |  |                   | 
|Ronald L. Rubin         |  |         | 500,000   |          |  |                |           |                 |  | US$ | 5 | .23 |  |  | November 5, 2008   | 
|Brian A. Goebel         |  |         | 75,000    |          |  |                |           |                 |  | US$ | 5 | .52 |  |  | December 16, 2008  | 



---



| |                       
| | ----------------------
| | 1997 Stock Option Plan

The Board of Directors adopted the 1997 stock
option plan effective as of July 30, 1997, and the
shareholders approved it on July 30, 1997. The 1997 stock
option plan was intended to provide officers, employees and
directors with additional incentives by increasing their
proprietary interests in us. Under the 1997 stock option plan,
we may grant options to acquire common shares up to a maximum of
10% of the issued and outstanding common shares. As of
March 1, 2004, we had outstanding options to purchase
76,158 common shares at a weighted average exercise price of
C$16.74 per share under the terms of the 1997 stock option
plan. All 1997 stock options outstanding on the date of our
initial public offering in June of 1999 vested on that date. No
further options are expected to be granted under the 1997 stock
option plan.

Under the 1997 stock option plan, if an officer,
employee or director with outstanding options retires or becomes
disabled or dies, he or she (or his or her estate) may exercise
his or her options, but only within the period ending on the
earlier of the expiration of the option or 18 months after
retirement, death or disability. If the option holder does not
exercise his or her options within that time period, the options
will terminate, and the common shares subject to the options
will become available for issuance under the 1999 stock option
plan. Unless otherwise determined by the Compensation Committee,
if the option holder ceases to be an officer, employee or
director of ours for any reason other than retirement, death or
disability, his or her vested options terminate 90 days
after this relationship terminates, and the common shares
subject to the options will become available for issuance under
the 1999 stock option plan. All other vested options are
exercisable for a period of 5 years from their vesting date.



| |                       
| | ----------------------
| | 1999 Stock Option Plan

The 1999 stock option plan was adopted by the
Board of Directors and approved by the shareholders in April
1999. Under the 1999 stock option plan, we may grant options for
a maximum of 19%, including

56



---



##### Table of Contents



stock options issued under the 1997 stock option
plan, of the issued and outstanding common shares and common
share equivalents. As of March 1, 2004, we had granted
8,373,041 options under the 1999 Plan. 4,196,000 options, or
50.1% of the options were denominated in Canadian dollars and
had a weighted average exercise price of C$6.29. The remaining
4,177,041 options were denominated in U.S. dollars and had
a weighted average exercise price of $4.58. The 1999 stock
option plan is intended to provide employees, officers,
consultants and directors with additional incentives by
increasing their proprietary interest in us.


The Compensation Committee, as the administrators
of the 1999 stock option plan have the authority to determine
the employees, officers, consultants and directors to whom
options are granted, the type, size and term of the options, the
grant date, the expiration date, the vesting schedule and other
terms and conditions of the options. Unless otherwise determined
by the Compensation Committee, options granted to directors
under the 1999 stock option plan generally vest one year from
the date of grant and expire upon the earlier of five years
after the date of grant or one year after the director ceases to
be a member of the Board of Directors. Options for non-directors
generally vest two years from the date of grant and generally
expire five years after the grant date, unless the Compensation
Committee determines otherwise. Upon a change of control event,
options vest immediately.

Under the 1999 stock option plan, if an employee,
officer, consultant or director with outstanding options retires
or becomes disabled or dies, he or she (or his or her estate),
may exercise his or her options, but only within the period
ending on the earlier of the expiration of the option or
18 months after retirement, death or disability. If the
option holder does not exercise his or her options within that
time period, the options will terminate, and the common shares
subject to the options will become available for re-issuance
under the 1999 stock option plan. Unless the Compensation
Committee determines otherwise, if the option holder ceases to
be an employee, officer, consultant or director of ours other
than because of retirement, death or disability, his or her
options terminate 90 days after the date this relationship
terminates, and the common shares subject to the options will
become available for re-issuance under the 1999 stock option
plan.






|        |                                                      
|------- | -----------------------------------------------------
|Item 7. | Major Shareholders and Related Party
    Transactions



|   |                   
|-- | ------------------
|A. | Major Shareholders

The following table sets forth information
regarding the beneficial ownership of our common shares as of
March 1, 2004, by each person or entity that we know owns
5% or more of our common shares. The voting rights attached to
common shares held by our major shareholders do not differ from
those that attach to common shares held by any other holder. As
of such date, the number of issued and outstanding common shares
in our capital stock was 73,104,898. Unless otherwise indicated,
the address of each beneficial holder listed below is
c/o Capital Environmental Resource Inc., 1122 International
Blvd., Suite 601, Burlington, Ontario L7L 6Z8.

|                            |  |                           |            |                     |  |  |      | 
|--------------------------- |  | ------------------------- | ---------- | ------------------- |  |  | ---- | 
|                            |  |                          
|                            |  | Shares Beneficially Owned
|                            |  |                          
|                            |  | Number of                 |            | Percentage of Total
|                            |  | Common                    |            | Issued Common      
|Name of Beneficial Owner(1) |  | Shares                    |            | Shares             
|                            |  |                           |            |                    
|Westbury (Bermuda) Ltd.(2)  |  |                           | 19,008,355 |                     |  |  | 25.2 | 
|David Sutherland-Yoest(3)   |  |                           | 4,136,362  |                     |  |  | 5.6  | 
|Don A. Sanders(4)           |  |                           | 3,677,238  |                     |  |  | 5.0  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Beneficial ownership is determined in accordance
    with the rules of the Securities and Exchange Commission. In
    general, a person who has voting power or investment power with
    respect to securities is treated as a beneficial owner of those
    securities. Shares of common stock subject to options or
    warrants currently exercisable or exercisable within
    60 days of March 1, 2004 count as outstanding for
    computing the percentage beneficially owned by the person
    holding these options or warrants.

57



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Consists of 16,650,022 common shares and
    2,358,333 common shares issuable upon the exercise of warrants.
    The shareholder of Westbury (Bermuda) Ltd. is Westbury Trust.
    The trustees of Westbury Trust are Robert Martyn, Gary W.
    DeGroote and Rick Burdick.                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | Consists of 1,949,497 common shares owned by
    D.S.Y. Investments Ltd., of which Mr. Sutherland-Yoest is
    the sole director and shareholder, 670,000 common shares
    issuable upon the exercise of currently exercisable warrants, as
    well as 751,665 common shares owned by Mr. Sutherland-Yoest
    personally, 500,000 common shares owned by
    Mr. Sutherland-Yoests wife and 265,200 common shares
    owned by Mr. Sutherland-Yoests daughter, which
    Mr. Sutherland-Yoest may be deemed to beneficially own.
    Mr. Sutherland-Yoest disclaims beneficial ownership with
    respect to the shares owned by his wife and his daughter.
|   
|(4) | Consists of 1,139,142 common shares over which
    Mr. Sanders has sole voting and sole dispositive power and
    2,498,096 common shares with respect to which Mr. Sanders
    has shared dispositive power and 40,000 common shares issuable
    upon the exercise of currently exercisable options to purchase
    common shares.                                                                                                                                                                                                                                                                                                                            

Based upon a list of record holders provided by
an outside source, we believe that, as of March 24, 2004,
at least 55% of our outstanding common shares was held of record
by U.S. residents and that we had approximately 1,830
record holders resident in the United States.

Except for changes in the percentage of ownership
of our common shares due to (i) issuances of common shares,
(ii) the initial purchases of common shares by SMH CERI,
LLC, Mr. Sutherland-Yoest, his wife and his daughter, and
entities controlled by Mr. Rémillard and
Mr. DeGroote in the September 2001 private
placement,(iii) issuances of convertible Series 1
preferred shares in 2003 and the subsequent conversion of those
shares into common shares, (iv) the transfer from Michael
DeGroote to Westbury (Bermuda) Ltd. of 8,666,667 Series 1
preferred shares, 1,233,000 warrants and 1,174,497 common
shares, (v) the vesting of currently exercisable warrants,
and (vi) the distribution of 9,868,868 common shares by SMH
CERI, LLC and SMH CERI II, LLC to the members of those entities
in September 2003 and February 2004 respectively, there has not
been any significant change in the percentage ownership of our
common shares held by any of the major stockholders listed above
during the past three years.

We are not directly or indirectly owned or
controlled by another corporation, foreign government or by any
other natural or legal person severally or jointly.

B.     Related Party
Transactions

Other than those listed in this section, we and
our subsidiaries have not entered into any material transactions
during the period beginning on January 1, 2003 through
March 31, 2004 in which any director, officer or any
associate of any director or officer of ours has or had any
interest.



| |                  
| | -----------------
| | Advisory Services

We paid Kelso & Company, L.P., an advisory
services fee of $1.65 million in connection with the
issuance of 55,000 shares of preferred stock of Waste
Services to Kelso in May 2003. In February 2004, we also paid
Kelso & Company a $0.5 million fee in connection with
services related to the arrangement of the existing credit
facilities that was entered into on December 31, 2003. One
of our directors is a Managing Director of Kelso &
Company.

Effective March 31, 2003, we entered into a
placement agent agreement with Sanders Morris Harris Inc., or
SMH, pursuant to which we agreed to pay SMH a fee for
Series 1 preferred shares sold through SMH. To date, we
have paid SMH fees of $1.9 million pursuant to the
agreement. SMH is a beneficial owner of our common shares and
Don Sanders, one of our directors is a principal of SMH.

During 2003, we purchased legal services for less
than $0.1 million from Durkin and Durkin. An executive
officer, Thomas E. Durkin III, is an inactive partner in
Durkin and Durkin.

58



---



##### Table of Contents





| |                                          
| | -----------------------------------------
| | Purchase of Series 1 Preferred
    Shares

Certain affiliates of our officers and directors
were purchasers of Series 1 preferred shares issued by us in
September 2003. An independent committee consisting of David
Sutherland-Yoest and George E. Matelich reviewed and approved
the terms of issuance of the Series 1 preferred shares in
which the shareholder, officers and directors or their
affiliates were purchasers.



| |                              
| | -----------------------------
| | Put or Pay Disposal Agreement

In November 2002, we entered into a Put or Pay
Disposal Agreement with RCI Environnement Inc., Centres de
Transbordement et de Valorisation Nord Sud Inc., RCM
Environnement Inc., collectively the RCI Companies, and Intersan
Inc., or Intersan, a subsidiary of Canadian Waste Services Inc.,
pursuant to which we and the RCI Companies agreed to deliver to
certain of Intersans landfill sites and transfer stations
in Quebec, Canada, over the next 5 years, 850,000 metric
tonnes of waste per year, and for the next two years after the
expiration of the first five-year term, 710,000 metric tonnes of
waste per year at a fixed disposal rate set out in the Put or
Pay Disposal Agreement. If we and the RCI Companies fail to
deliver the required tonnage, we are jointly and severally
required to pay to Intersan, C$23.67 per metric tonne for
every tonne below the required tonnage. If a portion of the
annual tonnage commitment is not delivered to a specific site,
we are also required to pay $8.00 per metric tonne for
every tonne below the site specific allocation. Our obligations
to Intersan are secured by a letter of credit for
C$4.0 million. No payments were made or required to be made
to Intersan pursuant to the Put or Pay Disposal Agreement in the
period from January 1, 2003 to March 31, 2004. One of
our directors, Lucien Rémillard, is also a director of and
controls the RCI Companies.

Concurrently with the Put or Pay Disposal
Agreement, we entered into a three year agreement with Canadian
Waste Services Inc. to allow us to deliver up to 75,000 tons in
years one and up to 100,000 tons in years two and three of
non-hazardous solid waste to their landfill in Michigan at
negotiated fixed rates per ton.



| |                  
| | -----------------
| | Lease of Premises

In 2003, we purchased furnishings and leasehold
improvements from H2O Technologies, Ltd. for
$0.3 million and assumed a lease of premises from David
Sutherland-Yoest. David Sutherland-Yoest, our Chairman and Chief
Executive Officer was, until October of 2003, Chairman and Chief
Executive Officer of H2O Technologies, Ltd. and,
until January 2004, a director of H20 Technologies,
Ltd. The lease expires on March 31, 2005 with annual rent
and operating costs of less than $0.1 million.



| |                              
| | -----------------------------
| | Florida Recycling Acquisition

Mr. Larry D. Henk, our President and Chief
Operating Officer, owns 3% of the common stock of Florida
Recycling which interest was acquired prior to his employment
with us. Further, under an agreement with the sellers entered
into prior to his employment with us, Mr. Henk will receive
a fee of approximately $2.5 million from the sellers upon
the closing of the Florida Recycling acquisition.

C.     Interests of
Experts and Counsel

Not applicable.






|        |                      
|------- | ---------------------
|Item 8. | Financial Information

See Item 18. Financial
Statements, Pages F-1 to F-39.

Legal Proceedings

In the normal course of our business and as a
result of the extensive governmental regulation of the solid
waste industry, we may periodically become subject to various
judicial and administrative proceedings involving federal,
provincial, state or local agencies. In these proceedings, an
agency may seek to impose fines on us or revoke or deny renewal
of an operating permit or license that is required for our
operations.

59



---



##### Table of Contents



From time to time, we may also be subject to
actions brought by citizens groups or adjacent landowners
or residents in connection with the permitting and licensing of
transfer stations and landfills or alleging environmental damage
or violations of the permits and licenses pursuant to which we
operate. We may become party to various lawsuits pending for
alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters
occurring during the normal operation of a solid waste
management business.


In December 2002, Canadian Waste Services Inc.,
or Canadian Waste, one of our competitors, commenced an action
in the Court of Queens Bench of Alberta against us and one
of our employees in Western Canada who had previously been
employed by Canadian Waste. The action alleges breach of the
employment contract between the employee and Canadian Waste, and
breach of fiduciary duties. The action also alleges that we
participated in those alleged breaches. The action seeks damages
in the amount of approximately C$14.5 million, and an
injunction enjoining the employee from acting contrary to his
alleged employment contract and fiduciary duties.

On February 7, 2003, Canadian Waste
commenced an action in the Court of Queens Bench of
Alberta against us alleging breach of a landfill tipping
agreement that we had entered into with Canadian Waste. The
action alleges that we have breached the agreement by not paying
certain amounts invoiced to us by Canadian Waste relating to
increased costs incurred by Canadian Waste in its operation of
the Ryley landfill and at which we deposited certain quantities
of waste pursuant to the agreement. Canadian Waste seeks damages
in the amount of approximately C$1.3 million. The agreement
contains an arbitration clause that prohibits court action and
requires arbitration with respect to certain disputes.

We intend to vigorously defend these actions both
with respect to liability and damages, and no provisions have
been made in these financial statements for the above matters.
No statements of defense have been filed, and documents have not
yet been exchanged.

As of the date of this report, we do not believe
that the reasonably possible losses in respect of all or any of
these matters would have a material adverse impact on our
business, financial condition, results of operations or cash
flows.

Policy on Dividend Distributions

We have not paid cash dividends on our common
shares since our initial public offering. Further, we currently
intend to retain our future earnings, if any, to finance the
growth, development and expansion of our business. Accordingly,
we do not intend to declare or pay any cash dividends on our
common shares in the immediate future. The declaration, payment
and amount of future cash dividends, if any, will be at the
discretion of our board of directors after taking into account
various factors. These factors include our financial condition,
results of operations, cash flows from operations, current and
anticipated capital requirements and expansion plans, the income
tax laws then in effect and the requirements of the law of
Ontario. In addition, the terms of our existing credit
facilities include, and any future financing arrangements we
enter into may also include, prohibitions on the payment of cash
dividends without the consent of the respective lenders.






|        |        
|------- | -------
|Item 9. | Listing

We completed an initial public offering of our
common shares on June 8, 1999. From June 8, 1999 until
September 22, 2000, our common shares traded on the Nasdaq
National Market under the symbol CERI. From
September 22, 2000 to March 2, 2004, our common shares
traded on the Nasdaq SmallCap Market. Effective March 8,
2004, our common shares began trading on the Nasdaq National

60



---



##### Table of Contents



Market. The following table provides the high and
low common share price information for the periods indicated
since our initial public offering:


|                                               |                                     |      |       |      |  |   |      |      | 
|---------------------------------------------- | ----------------------------------- | ---- | ----- | ---- |  | - | ---- | ---- | 
|                                               |                                     | High |       | Low 
|                                               |                                     |      |       |     
|Year Ended December 31, 1999                   |                                     | $    | 15.06 |      |  | $ | 4.88 |     
|Year Ended December 31, 2000                   |                                     | $    | 7.25  |      |  | $ | 1.44 |     
|Year Ended December 31, 2001                   |                                     | $    | 4.60  |      |  | $ | 1.55 |     
|Year Ended December 31, 2002                   |                                     |      |       |      |  |   |      |     
|                                               | First Quarter                       |      | $     | 6.45 |  |   | $    | 3.50 | 
|                                               | Second Quarter                      |      | $     | 5.90 |  |   | $    | 4.25 | 
|                                               | Third Quarter                       |      | $     | 5.20 |  |   | $    | 2.92 | 
|                                               | Fourth Quarter                      |      | $     | 5.00 |  |   | $    | 2.70 | 
|Year Ended December 31, 2003                   |                                     |      |       |      |  |   |      |     
|                                               | First Quarter                       |      | $     | 5.11 |  |   | $    | 3.71 | 
|                                               | Second Quarter                      |      | $     | 4.76 |  |   | $    | 2.98 | 
|                                               | Third Quarter                       |      | $     | 5.90 |  |   | $    | 3.10 | 
|                                               | Fourth Quarter                      |      | $     | 7.00 |  |   | $    | 5.05 | 
|Share price for the most recent six
    months |                                     |      |       |      |  |   |      |     
|                                               | September 2003                      |      | $     | 5.90 |  |   | $    | 4.76 | 
|                                               | October 2003                        |      | $     | 5.89 |  |   | $    | 5.15 | 
|                                               | November 2003                       |      | $     | 7.00 |  |   | $    | 5.05 | 
|                                               | December 2003                       |      | $     | 6.95 |  |   | $    | 5.05 | 
|                                               | January 2004                        |      | $     | 6.90 |  |   | $    | 5.69 | 
|                                               | February 2004                       |      | $     | 6.34 |  |   | $    | 5.50 | 
|                                               | March 2004 (through March 30, 2004) |      | $     | 6.06 |  |   | $    | 5.15 | 






|         |                       
|-------- | ----------------------
|Item 10. | Additional Information

A.     Description of
Capital Stock



| |              
| | -------------
| | Common Shares

Holders of common shares are entitled to one vote
for each common share held at all meetings of the shareholders,
except for meetings at which only holders of another specified
class or series of shares are entitled to vote separately as a
class or series. There are no cumulative voting rights. Holders
of common shares are entitled to dividends, if any, as and when
declared by the Board of Directors at its discretion out of
funds legally available therefor, subject to any prior rights of
the holders of another class of shares. In the event of our
liquidation, dissolution or winding up, the holders of common
shares would be entitled to receive, subject to the prior rights
of any holders of another class of shares, our remaining
property after payment of all debts and liabilities. Holders of
common shares have no pre-emptive, subscription, redemption or
conversion rights. The rights, preferences and privileges of
holders of common shares are subject to and may be adversely
affected by the rights of holders of any preferred shares issued
in the future.



| |                 
| | ----------------
| | Preferred Shares

The Board of Directors has the authority to issue
an unlimited number of preferred shares in one or more series
and to fix the designation, rights, privileges, restrictions and
conditions attaching to the series, including dividend rights,
conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of
shares constituting any series, without further vote or action
by the shareholders. The issuance of preferred shares may have
the effect of delaying, deferring or preventing a change in
control without further action by the shareholders. In addition,
the issuance of preferred shares

61



---



##### Table of Contents



with voting and conversion rights may adversely
affect the voting power of the holders of common shares. The
preferred shares of any series may also be given such other
preferences not inconsistent with the rights, privileges,
restrictions and conditions attached to the preferred shares as
a class over the common shares and over any other shares ranking
junior to the preferred shares as may be determined in the case
of such series of preferred shares. The preferred shares are
entitled to a preference over the common shares and over any
other shares ranking junior to the preferred shares with respect
to priority in payment of dividends and in the distribution of
assets in the event of our liquidation, dissolution or
winding-up.


On January 23, 2002, by Articles of
Amendment, we created the first series of preferred shares,
consisting of an unlimited number of shares designated as
Series 1 preferred shares. The Series 1 preferred
shares are non-voting, non-dividend bearing and convertible. The
Series 1 preferred shares are automatically convertible
into common shares on the basis of one common share for each
Series 1 preferred share held, such conversion to be
effected by, and only by, approval of the conversion by ordinary
resolution of the holders of the common shares.

There are no limitations on the right of
non-residents of Canada or foreign owners to hold or vote our
common shares or any of our other securities imposed by Canadian
or provincial laws or any of our constituent documents, subject
to the provisions of the Investment Canada Act (Canada), which
generally provides for notice and/or approval requirements in
respect of the acquisition of control of a Canadian business by
non-Canadians in certain circumstances.



| |                        
| | -----------------------
| | Shareholder Rights Plan

On September 2, 1999, we adopted a
shareholder rights plan, or the Rights Plan. Under the terms of
the Rights Plan, common share purchase rights, or the Rights,
were distributed at the rate of one Right for each common share
held. Each Right will entitle the holder to buy 1/100th of a
common share of us at an exercise price of $60.00. The Rights
will be exercisable and will trade separately from the common
shares only if a person or group acquires beneficial ownership
of 20% or more of our common shares or commences a tender or
exchange offer that would result in owning 20% or more of the
common shares (unless the Board of Directors determines that the
acquisition is fair to all shareholders and amends the Rights
Plan to permit the acquisition). If either of these events
occurs, the Rights will entitle each holder to receive, upon
exercise, a number of common shares (or, in certain
circumstances, a number of common shares in the acquiring
company) having a Current Market Price (as defined in the Rights
Plan) equal to approximately two times the exercise price of the
Right. The Rights are not exercisable with respect to the share
ownership of certain specified current shareholders, and
affiliates or associates thereof, as long as they do not acquire
beneficial ownership of 30% or more. The Rights Plan was amended
in July 2001, January 2002, March 2003, July 2003 and September
2003, to prevent the share acquisitions in the September 2001,
February 2002, March 2003, July 2003 and September 2003, private
placements, respectively, from triggering exercisability of the
Rights. The number of Rights outstanding is subject to
adjustment under certain circumstances and all Rights expire on
September 30, 2009.



| |                                                    
| | ---------------------------------------------------
| | Number of Directors; Removal; Filling
    Vacancies

Our Articles of Amalgamation, or Articles,
provide that, subject to any rights of holders of preferred
shares to elect additional directors under specified
circumstances, the number of directors comprising the entire
Board of Directors is fixed at a minimum of three and a maximum
of nine. Pursuant to the Business Corporations Act (Ontario) and
a special resolution passed by our voting shareholders, any
change in the minimum and maximum number of directors fixed in
the Articles requires the approval of two-thirds of the votes
cast by our voting shareholders at a properly called meeting and
the directors may from time to time change the fixed number of
directors within that range. We currently have a fixed number of
six directors. We have a staggered board. Four of our directors
have been elected to serve a two-year term expiring at the 2004
annual meeting of shareholders and three of our directors have
been elected to serve a two-year term expiring at the 2005
annual meeting of shareholders. Under the Business Corporations
Act (Ontario) and provided that a quorum of directors remains in
office, vacancies may be filled by the directors. However, where
the vacancy results from an increase by the directors in the
number of directors

62



---



##### Table of Contents



within the minimum and maximum fixed by the
Articles and if, after filling the vacancy, the number of
directors would be more than one and one-third times the number
of directors required to be elected at the last annual meeting
of the shareholders, or where the vacancy results from a failure
to elect the number of directors required to be elected at any
meeting of shareholders, then the vacancy must be filled by the
shareholders. If less than a quorum of directors remains in
office, or if there has been a failure to elect the required
fixed number of directors, any vacancy must be filled by the
shareholders and the directors are required to call a special
meeting of the shareholders to fill the vacancy.




| |                   
| | ------------------
| | Canadian Directors

Because we are an Ontario corporation subject to
the Business Corporations Act (Ontario), a majority of our
directors must be resident Canadians and directors cannot
transact business at a meeting of directors unless a majority of
directors present are Canadian directors unless (a) a
resident Canadian director who is unable to be present approves
in writing or by telephone or other communications facilities
the business transacted at the meeting; and (b) a majority
of resident Canadian directors would have been present had that
director been present at the meeting.

B.     Articles of
Amalgamation

The following brief description of provisions of
the Business Corporations Act (Ontario), our Articles of
Amalgamation and our by-laws does not purport to be complete and
is subject in all respects to the provisions of the Business
Corporations Act (Ontario), our Articles of Amalgamation and our
bylaws.



| |                     
| | --------------------
| | Conflict of Interest

The Business Corporations Act (Ontario) provides
that a director who is materially interested in a proposal,
arrangement or contract may not vote on any resolution to
approve the proposal, arrangement or contract unless the
proposal, arrangement or contract is (i) an arrangement by
way of security for money lent to or obligations undertaken by
the director for our benefit or an affiliate, (ii) one
relating primarily to the directors remuneration as a
director, officer, employee or agent of us or for the benefit of
an affiliate, (iii) for indemnity or insurance for the
director against liability incurred by the director acting in
his or her capacity as director, or (iv) with an affiliate.

Provided that these conflict of interest
provisions are complied with, there are no other limitations
contained in our Articles or by-laws on the directors
power to vote compensation to themselves or any member of the
board of directors.



| |                 
| | ----------------
| | Borrowing Powers

Our by-laws provide that the Board of Directors
may (i) borrow money on our credit, (ii) issue,
re-issue, sell or pledge our debt obligations, (iii) give a
guarantee on our behalf to secure performance of any present or
future indebtedness, liability or obligation of any person and,
(iv) charge, mortgage, hypothecate, pledge or otherwise
create a security interest in all or any of our currently owned
or subsequently acquired real or personal, movable or immovable,
property to secure any of our present or future indebtedness,
liabilities or other obligations.

The Business Corporations Act (Ontario) provides
that the Board of Directors may vary these borrowing powers by
passing a resolution to that effect and subsequently submitting
the amendment to our shareholders at the next meeting of
shareholders (at which point the shareholders may confirm,
reject or amend the amendment).



| |                                             
| | --------------------------------------------
| | Amendments with Approval of
    Shareholders

Our Articles provide that any changes to the
rights of the holders of our preferred shares must be approved
by the holders of preferred shares in the manner then required
by law which, at a minimum, must be by resolution signed by all
the holders of preferred shares or passed by an affirmative vote
of at

63



---



##### Table of Contents



least 2/3 of the votes cast at a meeting of the
holders of preferred shares. The Business Corporations Act
(Ontario) generally provides that such changes must also be
approved by the holders of the common shares in the same manner.




| |                       
| | ----------------------
| | Shareholders Meetings

The Business Corporations Act (Ontario) requires
our directors to call an annual meeting of shareholders at least
once every fifteen months and to call a special meeting upon the
requisition of at least 5 per cent of our issued shares
that carry the right to vote at the meeting being requisitioned
unless (i) a record date for a meeting of shareholders has
been fixed by the directors and notice of the record date has
been provided (unless such notice is waived in writing by every
holder of shares of the class or series affected) or
(ii) the business of the meeting as stated in the
requisition includes (a) a proposal submitted by a
shareholder primarily for the purpose of enforcing a personal
claim or redressing a personal grievance against us or any of
our directors, officers or security holders, or for a purpose
that is not related in any significant way to our business or
affairs, (b) a proposal in a management information
circular relating to a meeting of shareholders held within two
years preceding the receipt of the request, and the shareholder
failed to present the proposal, or (c) a proposal that is
substantially the same as a proposal that was previously
defeated and related to a meeting of shareholders held within
two years preceding the receipt of the shareholders
request. Upon receiving such a requisition, the directors must
call a meeting within 21 days. If the directors fail to do
so, any shareholder who signed the requisition may call the
meeting. In addition, our by-laws provide that our directors
must call a special meeting of shareholders upon the requisition
of at least 20 per cent of our then outstanding shares.

Our by-laws also provide that the directors must
provide notice to (i) each holder of shares carrying voting
rights at the close of business on the record date for such
notice, (ii) each director, and (iii) our auditor, of
the time, date and place of the meeting not less than 10 nor
more than 50 days before the meeting. If special business
is to be transacted, the notice must state or be accompanied by
a statement of the nature of that business in sufficient detail
to permit the shareholder to form a reasoned judgment on the
proposal. All business transacted at a special meeting of
shareholders except consideration of the minutes of an earlier
meeting, the financial statements and auditors report,
election of directors and reappointment of the auditor
constitutes special business.

Our by-laws provide that the holders of not less
than one third of the outstanding shares entitled to vote at any
meeting of shareholders constitutes a quorum.

The Business Corporations Act (Ontario) and our
by-laws further provide that the directors may fix a record date
in advance so long as the date is not more than 50 or less than
21 days before the date of the meeting. Where the record
date is fixed in advance, notice must be given at least
7 days beforehand by (i) publishing an advertisement
in a newspaper published or distributed in the place we have our
registered office and in each place in Canada where we have a
transfer agent or where a transfer of our shares may be recorded
and (ii) by providing written notice to each stock exchange
in Canada on which our shares are listed for trading. Where no
record date is fixed, the record date is the close of business
on the day immediately preceding the day notice is given or the
day of the meeting itself if no notice is given.

Our by-laws also state that only the following
persons are entitled to be present at a meeting of shareholders:
(i) persons who are entitled to vote at the particular
meeting, (ii) our directors, (iii) our auditors, and
(iv) persons entitled or required to attend the particular
meeting under any provision of the Business Corporations Act
(Ontario) or our Articles or by-laws.

C.     Material
Contracts



| |                                                                               
| | ------------------------------------------------------------------------------
| | Prior Senior Credit Facility Amendments
    (repaid in full December 31, 2003)

In June 2002, we completed a refinancing of our
former senior debt facility by entering into a new senior
secured credit facility, or the senior credit facility, with a
syndicate of financial institutions. The senior credit facility
was a revolving credit facility denominated in Canadian dollars
and provided for

64



---



##### Table of Contents



borrowings of up to the lesser of
$88.0 million or C$131.0 million, as amended in 2003.
The senior credit facility was collateralized by a first
priority perfected security interest in substantially all of our
current and future acquired assets and those of our
subsidiaries. The senior credit facility contained certain
financial and other covenants that restricted our ability to,
among other things, make capital expenditures, pay dividends,
repurchase shares and make certain acquisitions. Interest rates
were based on current market rates plus a fixed margin based on
the form of borrowing (Canadian Eurodollar or prime). The fixed
margins ranged from 2.75% to 3.75% per annum for Canadian
Eurodollar rate loans and 1.25% to 2.25% per annum for
prime rate loans. Within the ranges, the fixed margin was
determined based on our leverage ratio. The interest rate on the
senior credit facility prior to its repayment was 5.75% per
annum compared to 6.06% per annum as of December 31,
2002.


In May of 2003, we entered into an amendment to
the senior credit facility to permit the completion of the
acquisition of the membership interest of Omni Waste, provided
that we secured equity financing of not less than
$50.0 million. The equity financing obligation was met by
the issuance of preferred shares in Waste Services to Kelso and
the issuance of the Series 1 preferred shares in the March
to June 2003 private placement transactions.



| |                           
| | --------------------------
| | Existing Credit Facilities

On December 31, 2003, our
U.S. subsidiary Waste Services entered into the
$220.0 million credit facilities comprised of a
$195.0 million term loan and a $25.0 million revolving
credit facility. At that time, our prior senior secured credit
facility was repaid in full. The existing credit facilities are
collateralized by a first priority security interest in
substantially all of our current and future acquired assets and
those of our subsidiaries. The existing credit facilities bear
interest at 9.0% per annum and have an initial term of
364 days with an extension option. If the option is
exercised, the term of the existing credit facilities would
extend to July 2005 at a rate of 11.0% per annum.

The existing credit facilities contain certain
financial and other covenants that restrict our ability to,
among other things, make capital expenditures, incur
indebtedness, incur liens, dispose of property, repay debt, pay
dividends, repurchase shares and make certain acquisitions and
the ability of Waste Services to pay dividends or make advances
to us. Our financial covenants primarily relate to maintaining:
(i) a maximum leverage ratio; (ii) a minimum interest
coverage ratio; and (iii) a minimum EBITDA, as defined in
the agreement governing the existing credit facilities. These
covenants and restrictions could limit the manner in which we
conduct our operations and could adversely affect our ability to
raise additional capital. Any failure by us to comply with these
covenants and restrictions will, unless waived by the lenders,
result in an inability to borrow under the existing credit
facilities or an immediate obligation to repay all amounts
outstanding. In such event, we would be required to refinance
our debt or obtain capital from other sources, including sales
of additional debt or equity or sales of assets, in order to
meet our repayment obligations, which may not be possible.



| |                                   
| | ----------------------------------
| | Waste Services Preferred
    Stock

In May 2003, our U.S subsidiary Waste
Services issued 55,000 shares of preferred stock, or Waste
Services preferred stock, to Kelso Investment
Associates VI, L.P. and KEP VI, LLC (collectively
referred to as Kelso) pursuant to the terms of an agreement
dated as of May 6, 2003 (which we refer to as the Waste
Services Subscription Agreement). The Waste Services preferred
stock entitles the holders to a liquidation preference of
$1,000 per share and a cumulative cash dividend of
17.75% per annum (compounding and accruing quarterly in
arrears). In the event of liquidation, the liquidation
preference approximated $61.8 million as of
December 31, 2003. As we are not permitted to declare and
pay cash dividends pursuant to the terms of our existing credit
facilities, the dividend payments will accrue.

The Waste Services preferred stock, including all
accrued and unpaid dividends, must be redeemed in full by no
later than May 6, 2015. We have the option to redeem all or
any part of the Waste Services preferred stock prior to that
date, subject to the payment of certain premiums if we elect to
redeem the preferred shares prior to May 6, 2006. If we do
not exercise our option to redeem all of the Waste

65



---



##### Table of Contents



Services preferred stock by May 6, 2009,
Kelso may require Waste Services to initiate a sale of Waste
Services or its assets on terms acceptable to its board of
directors consistent with the exercise by the board members of
their fiduciary obligations.


Additionally, Kelso, as the holder of the Waste
Services preferred stock, has the exclusive right to elect two
directors of Waste Services so long as 25,000 or more Waste
Services preferred stock are outstanding or one director so long
as there are 5,000 or more Waste Services preferred stock
outstanding. Certain actions of Waste Services and its
affiliates also require the prior approval of the holders of a
majority of the Waste Services preferred stock. All of these
covenants and restrictions could limit the manner in which we
conduct our operations and could adversely affect our ability to
raise additional capital. Any failure by us to comply with these
covenants and restrictions will, unless waived by Kelso, result
in an immediate obligation to redeem all of the then outstanding
Waste Services preferred stock. If such events occurred, we
would be required to refinance Waste Services or obtain capital
from other sources, including sales of additional debt or equity
or the sale of assets, in order to meet our redemption
obligations. We may not be successful in obtaining alternative
sources of funding to repay this obligation should events of
default occur.

If we do not complete our migration transaction
by June 30, 2004, the dividend payable on the Waste
Services preferred stock issued to Kelso will increase by
1% per annum, from 17.75%, for every month that the
migration transaction is delayed, up to a maximum increase of an
additional 12% per annum. We may also be required to issue
to Kelso an additional 250,000 warrants per month for each month
that the migration transaction is delayed after June 30,
2004, up to an additional 6,000,000 warrants to purchase Waste
Services common stock, at an exercise price of $0.01 per
share. The increase in the dividend payable on the Waste
Services preferred stock issued to Kelso would increase the
amount to be paid to Kelso on the redemption of the Waste
Services preferred stock and would have a material adverse
effect on our financial condition. If the migration transaction
is not completed at all, Kelso may also require us to exchange
the existing 7,150,000 warrants to purchase common stock of
Waste Services, and any of the additional warrants for common
stock of Waste Services issued as a result of us completing the
migration transaction after June 30, 2004, for warrants to
purchase our common shares.



| |                       
| | ----------------------
| | Acquisition Agreements



| |             
| | ------------
| | JED Landfill

In January 2003, we entered into agreements to
purchase all of the membership interests in Omni Waste with the
issuance of 2,050,000 fully paid and non-assessable common
shares, $68.1 million cash and the assumption of
$6.2 million of indebtedness to third parties.



| |             
| | ------------
| | Cactus Waste

On July 3, 2003, we entered into an
agreement to purchase Cactus Waste for $0.6 million in cash
and a $1.2 million option, which we exercised in September
2003, to purchase an 800 acre site in Pinal County, Arizona,
which has been zoned to permit the development of a landfill.
Pursuant to the agreement, upon receipt of all permits and
authorizations for the operation of the landfill, we will issue
1,250,000 common shares or $3.0 million to the sellers of
Cactus Waste, at their option. The sellers are entitled to
contingent payments based upon the landfill achieving certain
defined average tons of waste per day. Should the landfill
achieve a maximum 5,000 tons per day, the total contingent
payments would not exceed $18.0 million. Additionally, we
entered into a royalty agreement whereby we will pay the sellers
a royalty of $0.50 per ton on all waste deposited at the
Cactus Waste Landfill after the earlier to occur of July 2006 or
the receipt of 1,250 tons of waste per day at the landfill.



| |                                                   
| | --------------------------------------------------
| | Allied Northern and Central Florida
    Operations

In November 2003, we entered into an agreement to
acquire from Allied Waste Industries, Inc., or Allied, the
assets of Allieds northern and central Florida operations
for a purchase price of approximately

66



---



##### Table of Contents



$120.0 million plus working capital. To
date, we have acquired all markets except for certain operations
in Jacksonville, which we expect to complete upon receipt of
required transfer consents and approvals.




| |                  
| | -----------------
| | Florida Recycling

In November 2003, we entered into a share
acquisition agreement, as amended in March 2004, for all of the
outstanding shares of common stock of Florida Recycling Services
Inc, or Florida Recycling. The aggregate consideration payable
for the common stock of Florida Recycling, subject to
adjustments, including a working capital adjustment, is
$98.5 million in cash and the issuance of 9,250,000 common
shares. Completion of the acquisition is subject to certain
customary conditions including, but not limited to, financing
conditions. In connection with the execution of the share
acquisition agreement, we made deposits of $3.75 million in
cash and issued 1,000,000 common shares.



| |                    
| | -------------------
| | Long Point Landfill

In February 2004, we entered into an agreement to
acquire a new, fully permitted, municipal solid waste landfill
site currently under development in Fort Bend County,
Texas. The purchase price was comprised of a cash payment of
$5.0 million, a seller financed promissory note of
$5.0 million and the issuance of 4,375,000 common shares.
In addition to the landfill, we acquired a leasehold interest in
a fully permitted transfer station site in Houston.



| |             
| | ------------
| | Gap Disposal

In January 2004, we entered into a share purchase
agreement to acquire all outstanding shares of Gap Disposal
(2001), Ltd., a permitted industrial waste landfill in
Saskatchewan. The purchase price was comprised of a cash payment
of approximately $1.1 million and the issuance of 12,000
common shares.

D.     Exchange
Controls

There are no limitations on the right of
non-residents of Canada or foreign owners to hold or vote our
common shares or any of our other securities imposed by Canadian
or provincial laws or any of our constating documents.

Except for the Investment Canada Act (Canada) and
Canadian withholding taxes described in
 Taxation  Canadian Federal Income
Tax Considerations for U.S. Investors, there are no
Canadian federal or provincial laws, decrees or regulations that
restrict the export or import of capital or affect the
remittance of dividends, interest or other payments to holders
of any of our securities who are not residents of Canada.

E.     Taxation

BECAUSE CANADIAN AND U.S. TAX CONSEQUENCES
MAY DIFFER FROM ONE HOLDER TO THE NEXT, THE DISCUSSION SET OUT
BELOW DOES NOT PURPORT TO DESCRIBE ALL OF THE TAX CONSIDERATIONS
THAT MAY BE RELEVANT TO YOU AND YOUR PARTICULAR SITUATION.
ACCORDINGLY, YOU ARE ADVISED TO CONSULT YOUR OWN TAX ADVISOR AS
TO THE UNITED STATES AND CANADIAN FEDERAL, PROVINCIAL, STATE AND
OTHER TAX CONSEQUENCES OF INVESTING IN OUR COMMON SHARES. THE
STATEMENTS OF UNITED STATES AND CANADIAN TAX LAW SET OUT BELOW
ARE BASED ON THE LAWS AND INTERPRETATIONS IN FORCE AS OF THE
DATE OF THIS ANNUAL REPORT, AND ARE SUBJECT TO ANY CHANGES
OCCURRING AFTER THAT DATE.



| |                                                                          
| | -------------------------------------------------------------------------
| | Canadian Federal Income Tax Considerations
    for Certain U.S. Investors

The statements of law and legal conclusions
regarding the significant Canadian federal income tax
considerations applicable to a person who is a U.S. holder
contained in this section are the opinion of

67



---



##### Table of Contents



Blake, Cassels & Graydon LLP, our
Canadian counsel. In this summary, a
U.S. holder means a person who, for the
purposes of the Canada-United States Income Tax Convention, or
the Convention, is a resident of the United States and who, for
the purposes of the Income Tax Act (Canada), or the Canadian Act:




| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | is not and has never been resident in Canada;                                                                                         
|
| |  | deals at arms length with us;                                                                                                        
|
| |  | is the beneficial owner of our common shares;                                                                                         
|
| |  | holds our common shares as capital property;                                                                                          
|
| |  | does not use or hold and is not deemed to use or
    hold our common shares in the course of carrying on a business
    in Canada; and
|
| |  | is not an insurer for whom our common shares
    constitute designated insurance property.                                            

Our common shares will generally be capital
property to a U.S. holder unless they are held in the
course of carrying on a business, in an adventure in the nature
of trade or as mark to market property for purposes
of the Canadian Act. This summary does not apply to a
U.S. holder that is a financial institution for
purposes of the Canadian Act.

This summary is based on the current provisions
of the Canadian Act and the regulations in force on the date of
this annual report, the Convention, counsels understanding
of the current published administrative and assessing practices
of the Canada Customs and Revenue Agency, or the CCRA, and all
specific proposals to amend the Canadian Act and the regulations
announced by the Canadian Minister of Finance prior to the date
of this Annual Report.

This summary is not exhaustive and, except for
the proposed amendments to the Canadian Act, does not take into
account or anticipate changes in the law or the administrative
or assessing practices of the CCRA, whether by judicial,
governmental or legislative action or interpretation, nor does
it take into account tax legislation or considerations of any
province or territory of Canada or of any foreign jurisdiction.
Because Canadian tax consequences may differ from one holder to
the next, this summary does not purport to describe all of the
tax considerations that may be relevant to you and your
particular situation. You are advised to consult your own tax
advisor.



| |          
| | ---------
| | Dividends

Dividends paid or deemed to be paid on our common
shares are subject to non-resident withholding tax under the
Canadian Act at the rate of 25%, although the provisions of an
applicable income tax treaty may reduce this rate. Under the
Convention, U.S. holders will generally be subject to a 15%
withholding tax on the gross amount of dividends we paid or are
deemed to be paid on our common shares. Also pursuant to the
Convention, in the case of a U.S. holder that is a
U.S. corporation which beneficially owns at least 10% of
our voting shares, the applicable rate of withholding tax on
dividends will generally be reduced to 5%.



| |             
| | ------------
| | Dispositions

A U.S. holder will not be subject to tax
under the Canadian Act in respect of a capital gain arising on a
disposition or deemed disposition of our common shares,
including our common shares that we purchase, unless
(1) the common shares constitute taxable Canadian
property within the meaning of the Canadian Act to the
U.S. holder, and (2) the capital gain is not exempt
from taxation in Canada under the Convention. Generally, our
common shares will not constitute taxable Canadian property of a
U.S. holder provided such common shares are listed on a
prescribed stock exchange for purposes of the Canadian Act,
which includes the NASDAQ, and the U.S. holder, alone or
together with persons with whom the U.S. holder does not
deal at arms length within the meaning of the Canadian
Act, has not owned 25% or more of the issued shares of any class
or series of our common shares at any time within the
60 month

68



---



##### Table of Contents



period ending at the time of disposition. Under
certain circumstances, however, our common shares may be deemed
to be taxable Canadian property of a U.S. holder. For
example, common shares received on the conversion of
Series 1 preferred shares are deemed to be taxable Canadian
property.


Under the Convention, capital gains derived by a
U.S. holder from the disposition of our common shares in
circumstances where they constitute taxable Canadian property to
the U.S. holder generally will not be taxable in Canada
unless the value of the common shares is derived principally
from real property situated in Canada.

A disposition or deemed disposition of our common
shares by a U.S. holder in respect of which our common
shares are taxable Canadian property and which is not exempt
from capital gains taxation in Canada under the Convention will
give rise to a capital gain (or a capital loss) equal to the
Canadian dollar amount, if any, by which the proceeds of
disposition, less the reasonable costs of disposition, exceed
(or are less than) the adjusted cost base of the common shares
to the U.S. holder at the time of the actual or deemed
disposition. Generally, one-half of any capital gain realized
will be required to be included in income as a taxable capital
gain and one-half of any capital loss will be deductible,
subject to certain limitations, against taxable capital gains in
the year of disposition or the three preceding years or any
subsequent year in accordance with the detailed provisions in
the Canadian Act including certain transitional rules.

Purchase of our common shares by us, other than
by a purchase in the open market in the manner in which shares
are normally purchased by a member of the public, will give rise
to a deemed dividend equal to the Canadian dollar amount we pay
on the purchase in excess of the paid-up capital of the common
shares, determined in accordance with the Canadian Act. This
deemed dividend will be subject to non-resident withholding tax,
as described above, and will reduce the proceeds of disposition
to a U.S. holder of its common shares for purposes of
computing the amount of any capital gain or loss arising on the
disposition.



| |                                                    
| | ---------------------------------------------------
| | United States Federal Income Tax
    Considerations

The following is a summary of the material United
States federal income tax considerations arising from the
acquisition, ownership and disposition of our common shares by a
United States holder. A United States holder is a beneficial
owner of our common shares that is:



| |   |                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an individual citizen or resident alien of the
    United States;                                                                                                                                                                                                                                      
|
| |  | a corporation or other entity that is taxable as
    a corporation, created or organized in or under the laws of the
    United States or of any state or the District of Columbia;                                                                                                                    
|
| |  | an estate the income of which is subject to
    United States federal income taxation regardless of its
    source; or                                                                                                                                                                                 
|
| |  | a trust (i) subject to the primary
    supervision of a court in the United States and one or more
    U.S. persons have authority to control all substantial
    decisions of the trust or (ii) where a valid election to be
    treated as a U.S. person is in effect with respect to such
    trust.

This summary deals only with common shares that
are held as a capital asset by a United States holder, and does
not address tax considerations applicable to United States
holders that may be subject to special tax rules, such as:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | dealers or traders in securities or currencies;                                                                                              
|
| |  | financial institutions or other United States
    holders that treat income in respect of our common shares as
    financial services income;
|
| |  | life insurance companies;                                                                                                                    
|
| |  | tax-exempt entities;                                                                                                                         
|
| |  | partners in partnerships that hold our common
    shares;                                                                                    

69



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | United States holders that hold our common shares
    as a part of a straddle or conversion transaction or other
    arrangement involving more than one position or that hedge
    against currency risks in respect of our common shares;
|
| |  | United States holders that own, or are deemed for
    United States tax purposes to own, 10% or more of the total
    combined voting power of all classes of our voting shares;                                                           
|
| |  | United States holders that have a principal place
    of business or tax home outside the United
    States; or                                                                                                                          
|
| |  | United States holders whose functional
    currency is not the United States dollar.                                                                                                                                                     

The discussion below is based upon the provisions
of the United States Internal Revenue Code of 1986, as amended,
or the Code, and regulations, rulings and judicial decisions as
of the date of this annual report; any authority may be
repealed, revoked or modified, perhaps with retroactive effect,
so as to result in federal income tax consequences different
from those discussed below.



| |              
| | -------------
| | Distributions

Distributions that we make with respect to our
common shares, other than distributions in liquidation and
distributions in redemption of shares that are treated as
exchanges, will be taxed to United States holders as ordinary
dividend income to the extent that the distributions do not
exceed our current and accumulated earnings and profits. The
amount treated as a dividend will include any Canadian
withholding tax deducted from the distribution. Distributions,
if any, in excess of our current and accumulated earnings and
profits will constitute a nontaxable return of capital to a
United States holder and will be applied against and reduce the
United States holders tax basis in the holders
common shares. To the extent that these distributions exceed the
tax basis of the United States holder in our common shares that
it holds, the excess generally will be treated as capital gain.

In the case of distributions in Canadian dollars,
the amount of the distributions generally will equal the United
States dollar value of the Canadian dollars distributed,
determined by reference to the spot currency exchange rate on
the date of receipt of the distribution by the United States
holder, and the United States holder will realize separate
foreign currency gain or loss only to the extent that gain or
loss arises on the actual disposition of the foreign currency
received. Any foreign currency gain or loss generally will be
treated as ordinary income or loss.

Dividends that we pay will not be eligible for
the dividends-received deduction generally allowed to United
States corporations under Section 243 of the Code in
respect of dividends received from other United States
corporations. Under recently enacted legislation, however,
certain United States holders, including individuals, may
qualify for preferential rates of United States federal income
tax in respect of dividends paid by us.



| |                                                          
| | ---------------------------------------------------------
| | Sale, Exchange or Other Taxable Disposition of
    Shares

Upon a sale, exchange or other taxable
disposition of our common shares to a person other than us, a
United States holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale
or exchange and the United States holders adjusted tax
basis in the common shares. Any gain or loss recognized will be
capital gain or loss and will be long-term capital gain or loss
if the United States holder has held our common shares for more
than one year. For non-corporate United States holders, certain
preferential tax rates may apply to gain recognized as long-term
capital gain. The deductibility of capital losses by United
States holders is subject to certain limitations.



| |                   
| | ------------------
| | Foreign Tax Credit

In general, in computing its United States
federal income tax liability, a United States holder may elect
for each taxable year to claim a deduction or, subject to
various limitations and conditions, a credit for foreign income
taxes paid or accrued by it, including any Canadian income taxes
withheld from

70



---



##### Table of Contents



distributions, if any, that we pay on our common
shares. For foreign tax credit purposes, under
Section 904(g) of the Internal Revenue Code, in the event
that at least 50 percent of our common shares (determined
by vote or value) is owned, directly, indirectly or by
attribution, by United States persons, and subject to the
limitations described below, a portion of the dividends that we
pay in each taxable year will be treated as United States-source
income, depending in general upon the ratio for that taxable
year of our United States-source earnings and profits to its
total earnings and profits. The remaining portion of our
dividends will be treated as foreign-source income and generally
will be treated as passive income, subject to the separate
foreign tax credit limitation for passive income. The
application of Section 904(g) is subject to two
limitations. First, if, in any taxable year, we have earnings
and profits and less than 10 percent of those earnings and
profits are from United States sources, then, in general,
dividends that we pay from our earnings and profits for that
year will be treated entirely as foreign-source income. Second,
because dividends that we pay are treated entirely as
foreign-source income under the Canada-United States Income Tax
Convention, a United States holder that qualifies for the
benefits of the Convention may elect to have the portion of
those dividends that would be treated as United States-source
income under Section 904(g) instead treated as
foreign-source income that is subject to a separate foreign tax
credit limitation. Special limitations will generally apply to
the calculation of foreign tax credits relating to dividends
that qualify for preferential United States federal income tax
rates under recently enacted legislation.


Gain or loss realized by a United States holder
on the sale or exchange of our common shares generally will be
treated as United States-source gain or loss for United States
foreign tax credit purposes.

The availability of foreign tax credits depends
on the particular circumstances of each United States holder.
You are advised to consult your own tax advisor.



| |                                                     
| | ----------------------------------------------------
| | Information Reporting and Backup Withholding
    Tax

Information reporting and backup withholding tax
at a rate of 28% may apply to payments of dividends and to
payments of proceeds of the sale or other disposition of our
common shares within the United States by a non-corporate United
States holder, if the holder fails to furnish a correct taxpayer
identification number or otherwise fails to comply with
applicable requirements of the backup withholding tax rules.
Backup withholding tax is not an additional tax and may be
credited against a United States holders United States
federal income tax liability, provided that correct information
is provided to the Internal Revenue Service.



|   |                            
|-- | ---------------------------
|F. | Dividends and Paying Agents

Not Applicable.



|   |                     
|-- | --------------------
|G. | Statement by Experts

Not Applicable.



|   |                     
|-- | --------------------
|H. | Documents on Display

The documents referred to herein can be obtained
from us at our registered office address 1122 International
Blvd., Suite 601, Burlington, Ontario L7L 6Z8.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 11. | Quantitative and Qualitative Disclosures
    about Market Risk

Quantitative and Qualitative Disclosures about
Market Risk

The majority of our operations are domiciled in
Canada. As such, our primary functional currency is the Canadian
dollar. However, for each reporting period, we translate the
results of our operations and financial condition into
U.S. dollars. Therefore, our reported results of operations
and financial condition are subject to changes in the exchange
relationship between the two currencies. For example, as the
relationship of the Canadian dollar strengthens against the
U.S. dollar our revenue is favorably affected

71



---



##### Table of Contents



and conversely our expenses are unfavorably
affected. Assets and liabilities of Canadian operations have
been translated from Canadian dollars into U.S. dollars at
the exchange rates in effect at the relevant balance sheet date,
and revenue and expenses of Canadian operations have been
translated from Canadian dollars into U.S. dollars at the
average exchange rates prevailing during the period. Unrealized
gains and losses on translation of the Canadian operations into
U.S. dollars are reported as a separate component of
shareholders equity and are included in comprehensive
income (loss). Separately, monetary assets and liabilities
denominated in U.S. dollars held by the Canadian operation
are re-measured from U.S. dollars into Canadian dollars and
then translated into U.S. dollars. The effects of
re-measurement are reported currently as a component of net
income (loss). Currently, we do not hedge our exposure to
changes in foreign exchange rates.


For the year ended December 31, 2003 we
estimate that a 5.0% increase or decrease in the relationship of
the Canadian dollar to the U.S. dollar would increase or
decrease loss from Canadian operations by less than
$0.1 million. For the year ended December 31, 2002 we
estimate that a 5.0% increase or decrease in the relationship of
the Canadian dollar to the U.S. dollar would increase or
decrease loss from Canadian operations approximately
$0.5 million. As of December 31, 2003 we had
$10.7 million of U.S. dollar denominated cash held by
our Canadian operations. We estimate that a 5.0% increase or
decrease in the relationship of the Canadian dollar to the
U.S. dollar would increase or decrease foreign exchange
loss or gain by approximately $0.5 million. As of
December 31, 2002 there were no monetary assets or
liabilities denominated in U.S. dollars held by our
Canadian operations.

As of December 31, 2003 we were not exposed
to variable interest rates; however as of December 31, 2002
we were exposed to interest rate fluctuations on our previous
financing facility, which was repaid.






|         |                                                           
|-------- | ----------------------------------------------------------
|Item 12. | Description of Securities Other Than Equity
    Securities

None.

PART II






|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Defaults, Dividend Arrearages and
    Delinquencies

None.






|         |                                                                                 
|-------- | --------------------------------------------------------------------------------
|Item 14. | Material Modifications to the Rights of
    Security Holders and Use of Proceeds

None.






|         |                        
|-------- | -----------------------
|Item 15. | Controls and Procedures

Disclosure Controls and Procedures/ Evaluation
of Disclosure Controls and Procedures

As of the end of the period covered by this
report, we carried out an evaluation under the supervision and
with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, or the Exchange Act. Based upon
this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were adequate and effective and designed to ensure that material
information relating to us (including our consolidated
subsidiaries) required to be disclosed by us in the reports we
file under the Exchange Act is recorded, processed, summarized
and reported within the required time periods.

Changes in Internal Controls

During the annual period covered by this
Form 20-F, there have been no changes in our internal
control over financial reporting that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting.

72



---



##### Table of Contents








|         |         
|-------- | --------
|Item 16. | Reserved






|          |                                     
|--------- | ------------------------------------
|Item 16A. | Audit Committee Financial
    Expert

The Board of Directors has determined that we
have at least one financial expert serving on our audit
committee and that George E. Matelich is that audit committee
financial expert. George E. Matelich is an independent audit
committee member.






|          |               
|--------- | --------------
|Item 16B. | Code of Ethics

The Board of Directors has not, as yet, adopted a
code of ethics for our chief executive officer, chief financial
officer, chief accounting officer or controller, or for persons
performing similar functions. The Board believes that our
existing internal control procedures and current business
practices are adequate to promote honest and ethical conduct and
to deter wrongdoing on the part of these executives.
Nonetheless, we are currently developing and will implement upon
completion of our migration transaction during our 2004 fiscal
year a code of ethics that will apply to these executives. In
accordance with applicable rules, the code of ethics, when
adopted, will be filed with the appropriate bodies and posted on
our website.






|          |                                           
|--------- | ------------------------------------------
|Item 16C. | Principal Accountant Fees and
    Services

In October 2003, we appointed BDO Dunwoody LLP,
Toronto, Ontario as auditors, effective for the fiscal year
commencing January 1, 2003. PricewaterhouseCoopers LLP,
Toronto, Ontario ceased being our auditors effective for the
fiscal year commencing January 1, 2003.

Audit Fees

Audit fees were $400,000 in 2003 and nil in 2002
for BDO Dunwoody LLP. Audit fees were $400,000 in 2003 and
$300,000 in 2002 for PricewaterhouseCoopers LLP.

Audit-Related Fees

Audit-related fees were less than $25,000 in 2003
for PricewaterhouseCoopers LLP and BDO Dunwoody LLP. These fees
were incurred in connection with certain financing transactions
and were nil in 2002.

Tax Fees

Tax fees were $100,000 in 2003 and nil in 2002
for PricewaterhouseCoopers LLP. Tax fees were de minimus in 2003
and 2002 for BDO Dunwoody LLP. These fees primarily relate to
the preparation of our tax returns as well as tax related due
diligence on potential acquisitions.

All Other Fees

All other fees were $500,000 in 2003 and $100,000
in 2002 for PricewaterhouseCoopers LLP. These fees primarily
relate to due diligence costs for potential acquisitions. All
other fees were de minimus in 2003 and 2002 for BDO Dunwoody LLP.

Pre-Approval Policies and Procedures

The audit committee approves all audit,
audit-related services, tax services and other services provided
by BDO Dunwoody LLP. Any services provided by BDO Dunwoody LLP
that are not specifically included within the scope of the audit
must be pre-approved by the audit committee in advance of any
engagement. Under the Sarbanes-Oxley Act of 2002, audit
committees are permitted to approve certain fees for
audit-related services, tax services and other services pursuant
to a de minimus exception prior to the completion of an
audit engagement. In 2003, none of the fees paid to BDO Dunwoody
LLP were approved pursuant to the de minimus exception.

73



---



##### Table of Contents



PART III






|         |                                                              
|-------- | -------------------------------------------------------------
|Item 18. | Financial Statements and Schedule to
    Financial Statements

The following consolidated financial statements,
together with the auditors report of BDO Dunwoody LLP, are
filed as part of this annual report.

|                                                                          |  |      |     | 
|------------------------------------------------------------------------- |  | ---- | --- | 
|Document Title                                                            |  | Page
|                                                                          |  |     
|Report of Independent
    Auditors                                        |  |      | F-1 | 
|Consolidated Balance
    Sheets                                           |  |      | F-3 | 
|Consolidated Statements of
    Operations and Comprehensive Income (Loss) |  |      | F-4 | 
|Consolidated Statements of
    Shareholders Equity                       |  |      | F-5 | 
|Consolidated Statements of
    Cash Flows                                 |  |      | F-6 | 
|Notes to Consolidated
    Financial Statements                            |  |      | F-7 | 

74



---



##### Table of Contents






Item 19.     Exhibits

Documents filed as exhibits to this Annual Report
or incorporated by reference:

| |   |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1 | .1 |  | Articles of Amalgamation of the Company
    (previously filed as Exhibit 1.1 to the Companys
    Form 20-F (No. 000-25955) filed July 15, 2003,
    and incorporated herein by reference).                                                                                                                                                                                                                                                                                       
| | 1 | .2 |  | By-Law No. 1 of the Company (previously
    filed as Exhibit 1.2 to the Companys Form 20-F
    (No. 000-25955) filed July 15, 2003, and incorporated
    herein by reference).                                                                                                                                                                                                                                                                                                   
| | 1 | .3 |  | Certificate of Designations of Waste
    Services, Inc. (previously filed as Exhibit 1.3 to the
    Companys Form 20-F (No. 000-25955) filed
    July 15, 2003, and incorporated herein by reference).                                                                                                                                                                                                                                                                           
| | 2 | .1 |  | Third Amendment dated as of March 27, 2003,
    to Rights Agreement dated as of September 2, 1999, between
    the Company and American Stock Transfer Company as Rights Agent
    (previously filed as Exhibit 2.1 to the Companys
    Form 20-F (No. 000-25955) filed July 15, 2003,
    and incorporated herein by reference).                                                                                                                                                
| | 2 | .2 |  | Amending Agreement No. 4 dated as of
    May 6, 2003, to Rights Agreement dated as of
    September 2, 1999, between the Company and American Stock
    Transfer Company, as Rights Agent (previously filed as
    Exhibit 2.2 to the Companys Form 20-F
    (No. 000-25955) filed July 15, 2003, and incorporated
    herein by reference).                                                                                                                                     
| | 2 | .3 |  | Fifth Amendment to Rights Agreement dated as of
    July 8, 2003, to Rights Agreement dated as of
    September 2, 1999, between the Company and American Stock
    Transfer Company, as Rights Agent (previously filed as
    Exhibit 2.3 to the Companys Form 20-F
    (No. 000-25955) filed July 15, 2003, and incorporated
    herein by reference).                                                                                                                         
| | 3 | .1 |  | Form of Voting Rights Agreement dated as of
    March 30, 2003, between the Company and certain
    shareholders (previously filed as Exhibit 3.1 to the
    Companys Form 20-F (No. 000-25955) filed
    July 15, 2003, and incorporated herein by reference).                                                                                                                                                                                                                  
| | 4 | .1 |  | Form of Series 1 Subscription Agreement
    dated as of March 31, 2003, between the Company and certain
    investors (previously filed as Exhibit 4.1 to the
    Companys Form 20-F (No. 000-25955) filed
    July 15, 2003, and incorporated herein by reference).                                                                                                                                                                                                             
| | 4 | .2 |  | Term of Warrants to Purchase Common Stock by and
    between the Company and certain investors (previously filed as
    Exhibit 4.2 to the Companys Form 20-F
    (No. 000-25955) filed July 15, 2003, and incorporated
    herein by reference).                                                                                                                                                                                                                                
| | 4 | .3 |  | Form of Registration Rights Agreement dated as of
    March 31, 2003, between the Company, and certain investors
    (previously filed as Exhibit 4.3 to the Companys
    Form 20-F (No. 000-25955) filed July 15, 2003,
    and incorporated herein by reference).                                                                                                                                                                                                              
| | 4 | .4 |  | Preferred Subscription Agreement dated as of
    May 6, 2003, among Waste Services, Inc., Capital
    Environmental Resource Inc., Kelso Investment
    Associates VI, L.P. and KEP VI LLC (previously
    filed as Exhibit 4.4 to the Companys Form 20-F
    (No. 000-25955) filed July 15, 2003, and incorporated
    herein by reference).                                                                                                                                    
| | 4 | .5 |  | Registration Rights Agreement dated as of
    May 6, 2003, among Waste Services, Inc. and certain
    investors (previously filed as Exhibit 4.5 to the
    Companys Form 20-F (No. 000-25955) filed
    July 15, 2003, and incorporated herein by reference).                                                                                                                                                                                                                   
| | 4 | .6 |  | Warrant Agreement dated as of May 6, 2003,
    between Waste Service Inc., and certain holders of the preferred
    shares (previously filed as Exhibit 4.6 to the
    Companys Form 20-F (No. 000-25955) filed
    July 15, 2003, and incorporated herein by reference).                                                                                                                                                                                                        
| | 4 | .7 |  | Amending Agreement No. 2 and Consent dated
    as of May 1, 2003, among Capital Environmental Resource
    Inc. various financial institutions as lenders, Bank of America,
    N.A. (Canada Branch) as Administrative Agent (previously filed
    as Exhibit 4.7 to the Companys Form 20-F
    (No. 000-25955) filed July 15, 2003, and incorporated
    herein by reference).                                                                                                  
| | 4 | .8 |  | Purchase Agreement dated as of January 15,
    2003, between Donald F. Moorehead, Jr., Omni
    Waste, Inc. and Capital Environmental Resource Inc. and
    Amendment to Purchase Agreement dated as of February 14,
    2003, between Donald F. Moorehead, Jr., Omni
    Waste, Inc., and Capital Environmental Resource Inc.
    (previously filed as Exhibit 4.8 to the Companys
    Form 20-F (No. 000-25955) filed July 15, 2003,
    and incorporated herein by reference).

75



---



##### Table of Contents



| |   |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4 | .9  |  | Purchase Agreement dated January 14, 2003,
    between certain sellers, Omni Waste, Inc. and Capital
    Environmental Resource Inc.; Amendment to Purchase Agreement,
    dated as of April 1, 2003, between certain sellers, Omni
    Waste, Inc. and Capital Environmental Resource Inc. and
    Second Amendment to Purchase Agreement, dated as of May 1,
    2003, between certain sellers, Waste Services, Inc., and
    Capital Environmental Resource Inc. (previously filed as
    Exhibit 4.9 to the Companys Form 20-F
    (No. 000-25955) filed July 15, 2003, and incorporated
    herein by reference).
| | 4 | .10 |  | Employment Agreement dated as of July 11,
    2003, between Waste Services, Inc., the Company and Larry
    D. Henk (previously filed as Exhibit 4.10 to the
    Companys Form 20-F (No. 000-25955) filed
    July 15, 2003, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                   
| | 4 | .11 |  | Capital Environmental Resource Inc. 1999 Stock
    Option Plan (incorporated by reference to Exhibit 4 to the
    Schedule 13D dated February 5, 2002 and filed by
    certain holders of the Companys common shares with the
    Commission on February 15, 2002).                                                                                                                                                                                                                                                                                                                                                   
| | 4 | .12 |  | Form of Registration Rights Agreement dated as of
    September 7, 2001, by and between the Company and certain
    investors (incorporated by reference to Exhibit 4.7 to the
    Companys Annual Report on Form 20-F, dated
    July 12, 2002 and filed with the Commission on
    July 12, 2002).                                                                                                                                                                                                                                                                                                                  
| | 4 | .13 |  | Warrant, dated July 27, 2001 issued by the
    Company to David Sutherland-Yoest (incorporated by reference to
    Exhibit 4.8 to the Companys Annual Report on
    Form 20-F, dated July 12, 2002 and filed with the
    Commission on July 12, 2002).                                                                                                                                                                                                                                                                                                                                                               
| | 4 | .14 |  | Employment Agreement dated as of
    September 7, 2001, between the Company and David
    Sutherland-Yoest (incorporated by reference to Exhibit 4.9
    to the Companys Annual Report on Form 20-F, dated
    July 12, 2002 and filed with the Commission on
    July 12, 2002).                                                                                                                                                                                                                                                                                                                                     
| | 4 | .15 |  | Employment Agreement dated as of
    September 24, 2001, between the Company and George Boothe
    (incorporated by reference to Exhibit 4.10 to the
    Companys Annual Report on Form 20-F, dated
    July 12, 2002 and filed with the Commission on
    July 12, 2002).                                                                                                                                                                                                                                                                                                                                            
| | 4 | .16 |  | Share Purchase Agreement dated December 11,
    2001, among Leo J. Dion, the trustees of the Dion Family Trust,
    1503549 Ontario Limited, Robert Dick, the trustees of the Dick
    Family Trust, 1503550 Ontario Limited, Robert Ross and the
    Company (incorporated by reference to Exhibit 4.11 to the
    Companys Annual Report on Form 20-F, dated
    July 12, 2002 and filed with the Commission on
    July 12, 2002).                                                                                                                                                                                 
| | 4 | .17 |  | Employment Agreement dated January 10, 2002
    between the Company and David J. Feals (incorporated by
    reference to Exhibit 4.13 to the Companys Annual
    Report on Form 20-F, dated July 12, 2002 and filed
    with the Commission on July 12, 2002).                                                                                                                                                                                                                                                                                                                                                        
| | 4 | .18 |  | Employment Agreement dated January 1, 2002
    between the Company and John D. McGarvey (incorporated by
    reference to Exhibit 4.14 to the Companys Annual
    Report on Form 20-F, dated July 12, 2002 and filed
    with the Commission on July 12, 2002).                                                                                                                                                                                                                                                                                                                                                       
| | 4 | .19 |  | Form of Registration Rights Agreement dated
    February 6, 2002, by and between the Company and certain
    investors (incorporated by reference to Exhibit 4.16 to the
    Companys Annual Report on Form 20-F, dated
    July 12, 2002 and filed with the Commission on
    July 12, 2002).                                                                                                                                                                                                                                                                                                                        
| | 4 | .20 |  | Employment Agreement dated May 1, 2002
    between the Company and Thomas E. Durkin III (incorporated
    by reference to Exhibit 4.18 to the Companys Annual
    Report on Form 20-F, dated July 12, 2002 and filed
    with the Commission on July 12, 2002).                                                                                                                                                                                                                                                                                                                                                       
| | 4 | .21 |  | Credit Agreement dated as of June 27, 2002,
    by and among the Company, various financial institutions, as
    Lenders, Bank of America, N.A. (Canada Branch) as Administrative
    Agent and Canadian Imperial Bank of Commerce, as Managing Agent
    (incorporated by reference to Exhibit 4.19 to the
    Companys Annual Report on Form 20-F, dated
    July 12, 2002 and filed with the Commission on
    July 12, 2002).                                                                                                                                                                                     
| | 4 | .22 |  | Amending Agreement No. 3 and consent dated
    as of November 14, 2003 among the Company, various
    financial institutions as lenders and Bank of America,
    N.A.  (Canada Branch) as Administrative Agent
    (incorporated by reference to Exhibit 10.1 to the
    Companys Form 6-K dated November 28, 2003).                                                                                                                                                                                                                                                                                                 

76



---



##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4  | .23 |  | Purchase Agreement dated as of November 13,
    2003 by and among Waste Services, Inc., certain affiliates
    of Waste Services, Inc., the Company, Allied Waste
    Industries, Inc. and certain affiliates thereof.
    (incorporated by reference to Exhibit 10.1 to the
    Companys Form 6-K dated January 20, 2004).                                                                                        
| | 4  | .24 |  | Credit Agreement dated as of December 31,
    2003 among the Company, Waste Services, Inc., the several
    lenders from time to time parties thereto, Lehman Brothers Inc.,
    as Arranger, Lehman Commercial Paper Inc., as Syndication Agent
    and Lehman Commercial Paper Inc., as Administrative Agent
    (incorporated by reference to Exhibit 10.1 to the
    Companys Form 6-K dated January 20, 2004).
| | 4  | .25 |  | Amendment No. 1 dated as of
    February 13, 2004 to the Preferred Subscription Agreement
    dated as of May 6, 2003, among Waste Services, Inc.,
    the Company, Kelso Investment Associates VI, L.P. and
    KEP VI LLC (incorporated by reference to
    Exhibit 4.1 to the Companys Form 6-K dated
    February 26, 2004).                                                                                   
| | 4  | .26 |  | Employment Agreement dated as of July 28,
    2003, between the Company and Ronald L. Rubin.                                                                                                                                                                                                                                                                                                                        
| | 4  | .27 |  | Employment Agreement dated as of October 1,
    2003, between the Company and Brian A. Goebel.                                                                                                                                                                                                                                                                                                                      
| | 4  | .28 |  | Employment Agreement dated as of June 1,
    2003, between the Company and William P. Hulligan.                                                                                                                                                                                                                                                                                                                     
| | 8  | .1  |  | Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                       
| | 12 | .1  |  | Certification of David Sutherland-Yoest, Chief
    Executive Officer.                                                                                                                                                                                                                                                                                                                                               
| | 12 | .2  |  | Certification of Ronald L. Rubin, Chief Financial
    Officer.                                                                                                                                                                                                                                                                                                                                                      
| | 13 | .1  |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the U.S. Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                     
| | 13 | .2  |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the U.S. Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                     
| | 14 | .1  |  | Consent of BDO Dunwoody LLP.                                                                                                                                                                                                                                                                                                                                                                                        
| | 14 | .2  |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                                                                                              

77



---



##### Table of Contents



SIGNATURES

The registrant hereby certifies that it meets all
of the requirements for filling on Form 20-F and that it
has duly caused and authorized the undersigned to sign this
Annual Report on its behalf.

|                                                 |  |                                                             |  |      |                |  |  | 
|------------------------------------------------ |  | ----------------------------------------------------------- |  | ---- | -------------- |  |  | 
|                                                 |  |                                                             |  |     
|Signature                                        |  | Title                                                       |  | Date
|                                                 |  |                                                             |  |     
|                                                
|/s/ DAVID SUTHERLAND-YOESTDavid Sutherland-Yoest |  | Chairman of the Board, Chief Executive Officer
    Director |  |      | March 31, 2004 | 
|                                                
|/s/ RONALD L. RUBINRonald L. Rubin               |  | Executive Vice President, Chief Financial Officer           |  |      | March 31, 2004 | 

78



---



##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

Capital Environmental Resource Inc.


We have audited the consolidated balance sheet of
Capital Environmental Resource Inc. (the Company) as
at December 31, 2003 and the consolidated statement of
operations and comprehensive income (loss), shareholders
equity and cash flows for the year then ended. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with
generally accepted auditing standards in Canada and the United
States. Those standards require that we plan and perform an
audit to obtain reasonable assurance 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.

In our opinion, these consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2003
and the results of its operations and its cash flows for the
year then ended in accordance with generally accepted accounting
principles in the United States.

BDO DUNWOODY LLP

Chartered Accountants

Toronto, Ontario


March 12, 2004


Comments by Auditor for U.S. Readers on
Canada-U.S. Reporting Difference

In the United States, reporting standards for
auditors require the addition of an explanatory paragraph when
there is a change in accounting principle that has a material
effect on the comparability of the Companys financial
statements, such as the change described in Note 2 to the
consolidated financial statements. Although we conducted our
audit in accordance with generally accepted auditing standards
in Canada and the United States, our report to the shareholders
dated March 12, 2004 is expressed in accordance with
Canadian reporting standards which do not require a reference to
such a change in accounting principles in the auditors
report when the change is properly accounted for and adequately
disclosed in the financial statements.

BDO DUNWOODY LLP

Chartered Accountants

Toronto, Ontario


March 12, 2004


F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

Capital Environmental Resource Inc.


We have audited the consolidated balance sheet of
Capital Environmental Resource Inc. (the Company) as
at December 31, 2002, and the consolidated statements of
operations and comprehensive income (loss), shareholders
equity and cash flows for each of the years in the two-year
period ended December 31, 2002. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
generally accepted auditing standards in Canada and the United
States. Those standards require that we plan and perform an
audit to obtain reasonable assurance 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.

In our opinion, these consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2002,
and the results of its operations and its cash flows for each of
the years in the two-year period ended December 31, 2002,
in accordance with generally accepted accounting principles in
the United States.

As described in Note 1 to the financial
statements included in the Companys 2002 Form 20-F/A
(Amendment No. 2), the Company has restated the
consolidated statements for the year ended December 31,
2002, to account for the beneficial conversion feature
associated with the issuance of the Series 1 Preferred
Shares. Accordingly, our previous audit report dated
March 20, 2003, has been withdrawn.

PRICEWATERHOUSECOOPERS LLP

Chartered Accountants

Toronto, Canada


March 20, 2003, except for the effect of the
restatement


related to the
beneficial conversion feature as described in Note 1


to the financial
statements included in the Companys 2002 Form 20-F/A


(Amendment
No. 2), which is as of November 4, 2003


Comments by Auditors for U.S. Readers on
Canada-United States Reporting Difference

In the United States, reporting standards for
auditors require the addition of an explanatory paragraph
(following the opinion paragraph) when there is a change in
accounting principles that has a material effect on the
comparability of the Companys financial statements, such
as the adoption of SFAS 142 described in Note 2 to the
consolidated financial statements. Our report to the
stockholders dated March 20, 2003, except for the effect of
the restatement related to the beneficial conversion feature as
described in Note 1 to the financial statements included in
the Companys 2002 Form 20-F/A (Amendment No. 2),
which is as of November 4, 2003, is expressed in accordance
with Canadian reporting standards, which do not require a
reference to such a change in accounting principles in the
auditors report when the change is properly accounted for
and adequately disclosed in the financial statements.

PRICEWATERHOUSECOOPERS LLP

Chartered Accountants

Toronto, Canada


March 20, 2003, except for the effect of the
restatement


related to the
beneficial conversion feature as described in Note 1


to the financial
statements included in the Companys 2002 Form 20-F/A


(Amendment
No. 2), which is as of November 4, 2003


F-2



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.



CONSOLIDATED BALANCE SHEETS


As of December 31,


|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |         |         | 
|----------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------- | ------- | ------- |  | ------ | ------- | ------- | 
|                                                                                    |                                                                                                                              | 2003                                           |         | 2002   
|                                                                                    |                                                                                                                              |                                                |         |        
|                                                                                    |                                                                                                                              |                                               
|                                                                                    |                                                                                                                              | (In thousands of                              
|                                                                                    |                                                                                                                              | US dollars except share                       
|                                                                                    |                                                                                                                              | amounts)                                      
|ASSETS                                                                             
|Current assets:                                                                     |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    | Cash and cash equivalents                                                                                                    |                                                | $       | 21,062  |         |  | $      | 1,775   |        
|                                                                                    | Restricted cash                                                                                                              |                                                |         | 14,433  |         |  |        |        |        
|                                                                                    | Accounts receivable (net of allowance for
    doubtful accounts of $620; 2002  $350)                                        |                                                |         | 26,999  |         |  |        | 15,264  |        
|                                                                                    | Prepaid expenses and other assets                                                                                            |                                                |         | 27,057  |         |  |        | 1,661   |        
|                                                                                    | Deferred income taxes                                                                                                        |                                                |         | 2,592   |         |  |        |        |        
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    |                                                                                                                              | Total current assets                           |         |         | 92,143  |  |        |         | 18,700  | 
|Property and equipment, net                                                         |                                                                                                                              |                                                | 74,521  |         |         |  | 45,910 |        
|Landfill sites, net                                                                 |                                                                                                                              |                                                | 117,541 |         |         |  | 13,084 |        
|Deferred income taxes                                                               |                                                                                                                              |                                                | 1,135   |         |         |  | 1,049  |        
|Other assets                                                                        |                                                                                                                              |                                                | 22,278  |         |         |  | 3,683  |        
|Goodwill and other intangible assets                                                |                                                                                                                              |                                                | 163,380 |         |         |  | 66,596 |        
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    |                                                                                                                              | Total assets                                   |         | $       | 470,998 |  |        | $       | 149,022 | 
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                   
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                           
|Current liabilities:                                                                |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    | Accounts payable                                                                                                             |                                                | $       | 12,074  |         |  | $      | 3,821   |        
|                                                                                    | Accrued expenses and other liabilities                                                                                       |                                                |         | 25,401  |         |  |        | 13,076  |        
|                                                                                    | Current portion of long-term debt and short-term
    financing                                                               |                                                |         | 172,280 |         |  |        | 63      |        
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    |                                                                                                                              | Total current liabilities                      |         |         | 209,755 |  |        |         | 16,960  | 
|Long-term debt                                                                      |                                                                                                                              |                                                | 3,130   |         |         |  | 50,710 |        
|Accrued closure, post-closure and other
    obligations                             |                                                                                                                              |                                                | 8,791   |         |         |  | 3,535  |        
|Cumulative mandatorily redeemable Preferred
    Shares (net of discount of $13,558) |                                                                                                                              |                                                | 48,205  |         |         |  |       |        
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    |                                                                                                                              | Total liabilities                              |         |         | 269,881 |  |        |         | 71,205  | 
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        
|Commitments and contingencies                                                       |                                                                                                                              |                                                |         |         |         |  |        |        
|Shareholders equity                                                                |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    | Common Stock, unlimited shares authorized; no par
    value 68,338,828 shares issued and outstanding
    (2002  35,194,995) |                                                |         | 215,395 |         |  |        | 113,549 |        
|                                                                                    | Options, warrants and deferred stock-based
    compensation                                                                  |                                                |         | 25,828  |         |  |        | 1,897   |        
|                                                                                    | Accumulated other comprehensive income (loss)                                                                                |                                                |         | 15,952  |         |  |        | (3,951  | )      
|                                                                                    | Accumulated deficit                                                                                                          |                                                |         | (56,058 | )       |  |        | (33,678 | )      
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    |                                                                                                                              | Total shareholders equity                     |         |         | 201,117 |  |        |         | 77,817  | 
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        
|                                                                                    |                                                                                                                              | Total liabilities and shareholders
    equity |         | $       | 470,998 |  |        | $       | 149,022 | 
|                                                                                    |                                                                                                                              |                                                |         |         |         |  |        |        

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

F-3



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.



CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)


For the Years Ended
December 31,


Statements of Operations

|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |        |  
|-------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                   |                                                                                                 | 2003                                    |         | 2002   |   | 2001
|                                                                                                   |                                                                                                 |                                         |         |        |   |     
|                                                                                                   |                                                                                                 |                                        
|                                                                                                   |                                                                                                 | (In thousands of US dollars, except per
|                                                                                                   |                                                                                                 | share amounts)                         
|Revenue                                                                                            |                                                                                                 | $                                       | 126,750 |        |   | $    | 98,846  |        |   | $ | 93,241  |       
|Operating and other expenses:                                                                      |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|                                                                                                   | Cost of operations                                                                              |                                         |         | 79,992 |   |      |         | 61,250 |   |   |         | 63,140 |  
|                                                                                                   | Selling, general and administrative                                                             |                                         |         | 35,117 |   |      |         | 19,470 |   |   |         | 18,208 |  
|                                                                                                   | Depreciation, depletion and amortization                                                        |                                         |         | 14,927 |   |      |         | 10,718 |   |   |         | 11,276 |  
|                                                                                                   | Goodwill impairment                                                                             |                                         |         |       |   |      |         |       |   |   |         | 3,400  |  
|                                                                                                   | Loss (recovery) related to disposal of US
    operations                                        |                                         |         | (155   | ) |      |         | (718   | ) |   |         | 4,885  |  
|                                                                                                   | Foreign exchange loss (gain) and other                                                          |                                         |         | 1,915  |   |      |         | (1,441 | ) |   |         | 1,003  |  
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|Income (loss) from operations                                                                      |                                                                                                 |                                         | (5,046  | )      |   |      | 9,567   |        |   |   | (8,671  | )     
|Interest expense                                                                                   |                                                                                                 |                                         | 18,439  |        |   |      | 5,727   |        |   |   | 10,029  |       
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|Income (loss) before income taxes                                                                  |                                                                                                 |                                         | (23,485 | )      |   |      | 3,840   |        |   |   | (18,700 | )     
|Income tax provision (benefit)                                                                     |                                                                                                 |                                         | (587    | )      |   |      | 1,713   |        |   |   | 968     |       
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|Net income (loss) before cumulative effect of
    change in accounting principle                   |                                                                                                 |                                         | (22,898 | )      |   |      | 2,127   |        |   |   | (19,668 | )     
|Cumulative effect of change in accounting
    principle, net of provision for income taxes of $256 |                                                                                                 |                                         | 518     |        |   |      |        |        |   |   |        |       
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|Net income (loss)                                                                                  |                                                                                                 |                                         | (22,380 | )      |   |      | 2,127   |        |   |   | (19,668 | )     
|Deemed dividend on Series 1 Preferred
    Shares                                                   |                                                                                                 |                                         | (54,572 | )      |   |      | (14,717 | )      |   |   |        |       
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|Net loss attributable to Common
    Shareholders                                                   |                                                                                                 | $                                       | (76,952 | )      |   | $    | (12,590 | )      |   | $ | (19,668 | )     
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|Basic and diluted loss per share:                                                                  |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|                                                                                                   | Basic and diluted loss per share before
    cumulative effect of change in accounting principle |                                         | $       | (1.99  | ) |      | $       | (0.39  | ) |   | $       | (1.60  | )
|                                                                                                   | Cumulative effect of change in accounting
    principle                                         |                                         |         | 0.01   |   |      |         |       |   |   |         |       |  
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|                                                                                                   | Basic and diluted loss per share                                                                |                                         | $       | (1.98  | ) |      | $       | (0.39  | ) |   | $       | (1.60  | )
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       
|                                                                                                   | Weighted average Common Shares
    outstanding  basic and diluted (in thousands)               |                                         |         | 38,782 |   |      |         | 32,414 |   |   |         | 12,260 |  
|                                                                                                   |                                                                                                 |                                         |         |        |   |      |         |        |   |   |         |       

Statements of Comprehensive Income
(Loss)

|                            |                                                                                  |      |         |        |  |      |       |     |  |   |         |        |  
|--------------------------- | -------------------------------------------------------------------------------- | ---- | ------- | ------ |  | ---- | ----- | --- |  | - | ------- | ------ | -
|                            |                                                                                  | 2003 |         | 2002   |  | 2001
|                            |                                                                                  |      |         |        |  |     
|Net income (loss)           |                                                                                  | $    | (22,380 | )      |  | $    | 2,127 |     |  | $ | (19,668 | )     
|                            | Other comprehensive income (loss) 
    foreign currency translation adjustments |      |         | 19,903 |  |      |       | 355 |  |   |         | (2,032 | )
|                            |                                                                                  |      |         |        |  |      |       |     |  |   |         |       
|Comprehensive income (loss) |                                                                                  | $    | (2,477  | )      |  | $    | 2,482 |     |  | $ | (21,700 | )     
|                            |                                                                                  |      |         |        |  |      |       |     |  |   |         |       

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

F-4



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.



CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


|                                                                              |  |                                                |        |                 |  |         |         |             |  |               |         |              |  |               |         |         |  |        |        |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ---------------------------------------------- | ------ | --------------- |  | ------- | ------- | ----------- |  | ------------- | ------- | ------------ |  | ------------- | ------- | ------- |  | ------ | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                              |  |                                                |        |                 |  |         |         |             |  |               |         |              |  | Accumulated   |         |         |  |       
|                                                                              |  |                                                |        |                 |  |         |         |             |  | Other         |         |              |  |              
|                                                                              |  | Common Stock                                   |        | Preferred Stock |  | Options |         | Deferred    |  | Comprehensive |         |              |  | Total        
|                                                                              |  |                                                |        |                 |  | and     |         | Stock-Based |  | Income        |         | Accumulated  |  | Shareholders
|                                                                              |  | Shares                                         |        | Amount          |  | Shares  |         | Amount      |  | Warrants      |         | Compensation |  | (Loss)        |         | Deficit |  | Equity
|                                                                              |  |                                                |        |                 |  |         |         |             |  |               |         |              |  |               |         |         |  |       
|                                                                              |  |                                               
|                                                                              |  | (In thousands of US dollars and share amounts)
|Balance at December 31, 2000                                                  |  |                                                | 7,197  |                 |  | $       | 57,066  |             |  |               |        |              |  | $             |        |         |  | $      |       |   |  | $ |       |   |  | $ | (2,274 | ) |  | $ | (16,137 | ) |  | $ | 38,655  |  
|Issuance of Common Stock, net of costs                                        |  |                                                | 16,500 |                 |  |         | 29,108  |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 29,108  |  
|Shortfall payment on Class B Special
    Stock                              |  |                                                |       |                 |  |         | (1,001  | )           |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | (1,001  | )
|Options granted                                                               |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        | 165    |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 165     |  
|Warrants granted                                                              |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        | 1,597  |   |  |   | (1,120 | ) |  |   |       |   |  |   |        |   |  |   | 477     |  
|Amortization of deferred stock-based compensation                             |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   | 209    |   |  |   |       |   |  |   |        |   |  |   | 209     |  
|Foreign currency translation adjustment                                       |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   | (2,032 | ) |  |   |        |   |  |   | (2,032  | )
|Net loss                                                                      |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   |       |   |  |   | (19,668 | ) |  |   | (19,668 | )
|                                                                              |  |                                                |        |                 |  |         |         |             |  |               |         |              |  |               |         |         |  |        |        |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                                  |  |                                                | 23,697 |                 |  |         | 85,173  |             |  |               |        |              |  |               |        |         |  |        | 1,762  |   |  |   | (911   | ) |  |   | (4,306 | ) |  |   | (35,805 | ) |  |   | 45,913  |  
|Issuance of Series 1 Preferred Stock                                          |  |                                                |       |                 |  |         |        |             |  |               | 11,321  |              |  |               | 28,068  |         |  |        |       |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 28,068  |  
|Conversion of Series 1 Preferred to Common
    Stock                          |  |                                                | 11,321 |                 |  |         | 28,068  |             |  |               | (11,321 | )            |  |               | (28,068 | )       |  |        |       |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   |        |  
|Exercise of options and warrants                                              |  |                                                | 177    |                 |  |         | 308     |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 308     |  
|Additional value of warrants and related
    stock-based compensation expense |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        | 690    |   |  |   | 356    |   |  |   |       |   |  |   |        |   |  |   | 1,046   |  
|Foreign currency translation adjustment                                       |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   | 355    |   |  |   |        |   |  |   | 355     |  
|Net income                                                                    |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   |       |   |  |   | 2,127   |   |  |   | 2,127   |  
|                                                                              |  |                                                |        |                 |  |         |         |             |  |               |         |              |  |               |         |         |  |        |        |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                                  |  |                                                | 35,195 |                 |  |         | 113,549 |             |  |               |        |              |  |               |        |         |  |        | 2,452  |   |  |   | (555   | ) |  |   | (3,951 | ) |  |   | (33,678 | ) |  |   | 77,817  |  
|Warrants issued in connection with Redeemable
    Preferred                   |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        | 13,774 |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 13,774  |  
|Issuance of Series 1 Preferred Stock                                          |  |                                                |       |                 |  |         |        |             |  |               | 28,146  |              |  |               | 76,236  |         |  |        | 7,586  |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 83,822  |  
|Issuance of Common Stock                                                      |  |                                                | 4,850  |                 |  |         | 24,812  |             |  |               |         |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 24,812  |  
|Issuance of warrants                                                          |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        | 138    |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 138     |  
|Conversion of Series 1 Preferred to Common
    Stock                          |  |                                                | 28,146 |                 |  |         | 76,236  |             |  |               | (28,146 | )            |  |               | (76,236 | )       |  |        |       |   |  |   |       |   |  |   |       |   |  |   |        |   |  |   |        |  
|Exercise of options and warrants                                              |  |                                                | 148    |                 |  |         | 798     |             |  |               |         |              |  |               |        |         |  |        | (244   | ) |  |   |       |   |  |   |       |   |  |   |        |   |  |   | 554     |  
|Additional value of warrants and related
    stock-based compensation expense |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        | 2,447  |   |  |   | 230    |   |  |   |       |   |  |   |        |   |  |   | 2,677   |  
|Foreign currency translation adjustment                                       |  |                                                |        |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   | 19,903 |   |  |   |        |   |  |   | 19,903  |  
|Net loss                                                                      |  |                                                |       |                 |  |         |        |             |  |               |        |              |  |               |        |         |  |        |       |   |  |   |       |   |  |   |       |   |  |   | (22,380 | ) |  |   | (22,380 | )
|                                                                              |  |                                                |        |                 |  |         |         |             |  |               |         |              |  |               |         |         |  |        |        |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                                  |  |                                                | 68,339 |                 |  | $       | 215,395 |             |  |               |        |              |  | $             |        |         |  | $      | 26,153 |   |  | $ | (325   | ) |  | $ | 15,952 |   |  | $ | (56,058 | ) |  | $ | 201,117 |  
|                                                                              |  |                                                |        |                 |  |         |         |             |  |               |         |              |  |               |         |         |  |        |        |   |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  

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

F-5



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.



CONSOLIDATED STATEMENTS OF CASH
FLOWS


For the Years Ended
December 31,


|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |         |        |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------- | -------- | ------ | ---- | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                                                 |                                                                                                 | 2003                                                                                            |          | 2002     |        | 2001
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |     
|                                                                 |                                                                                                 |                                                                                                
|                                                                 |                                                                                                 | (In thousands of US dollars)                                                                   
|Cash flows from operating
    activities:                        |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|                                                                 | Net income (loss)                                                                               |                                                                                                 | $        | (22,380  | )      |      | $       | 2,127   |        |   | $       | (19,668 | )     
|                                                                 | Adjustments to reconcile net income (loss) to net
    cash flows from operating activities     |                                                                                                 |          |          |        |      |         |         |        |   |         |         |       
|                                                                 |                                                                                                 | Depreciation and depletion                                                                      |          |          | 14,144 |      |         |         | 10,168 |   |         |         | 10,583 |  
|                                                                 |                                                                                                 | Amortization of intangible assets                                                               |          |          | 783    |      |         |         | 550    |   |         |         | 693    |  
|                                                                 |                                                                                                 | Dividends and accretion on redeemable Preferred
    Shares and amortization of debt issue costs |          |          | 13,442 |      |         |         | 1,855  |   |         |         | 1,814  |  
|                                                                 |                                                                                                 | Goodwill impairment losses                                                                      |          |          |       |      |         |         |       |   |         |         | 3,400  |  
|                                                                 |                                                                                                 | Deferred income taxes                                                                           |          |          | (990   | )    |         |         | (464   | ) |         |         | 687    |  
|                                                                 |                                                                                                 | Provision for (recovery of) losses related to
    disposal of US operations                     |          |          | (155   | )    |         |         | (469   | ) |         |         | 4,885  |  
|                                                                 |                                                                                                 | Foreign exchange (gain) loss and other                                                          |          |          | 1,915  |      |         |         | (1,441 | ) |         |         | 1,003  |  
|                                                                 |                                                                                                 | Non-cash compensation and settlement costs                                                      |          |          | 2,677  |      |         |         | 1,046  |   |         |         | 851    |  
|                                                                 |                                                                                                 | Cumulative effect of change in accounting
    principle, net of tax                             |          |          | (518   | )    |         |         |       |   |         |         |       |  
|                                                                 |                                                                                                 | Other non-cash items                                                                            |          |          | 455    |      |         |         | 844    |   |         |         | 321    |  
|                                                                 | Changes in operating assets and liabilities
    (excluding the effects of acquisitions)        |                                                                                                 |          |          |        |      |         |         |        |   |         |         |       
|                                                                 |                                                                                                 | Accounts receivable, net                                                                        |          |          | (1,749 | )    |         |         | (1,880 | ) |         |         | 2,641  |  
|                                                                 |                                                                                                 | Prepaid expenses and other current assets                                                       |          |          | (5,959 | )    |         |         | 1,267  |   |         |         | 281    |  
|                                                                 |                                                                                                 | Accounts payable                                                                                |          |          | 3,886  |      |         |         | (446   | ) |         |         | (512   | )
|                                                                 |                                                                                                 | Accrued expenses and other current liabilities                                                  |          |          | 3,895  |      |         |         | 497    |   |         |         | (294   | )
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|                                                                 |                                                                                                 |                                                                                                 | 9,446    |          |        |      | 13,654  |         |        |   | 6,685   |        
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|Cash flows from investing
    activities:                        |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|                                                                 | Net proceeds from sale of US operations                                                         |                                                                                                 |          | 151      |        |      |         | 249     |        |   |         | 19,092  |       
|                                                                 | Cash used in business combinations and
    significant asset acquisitions, net of cash acquired |                                                                                                 |          | (161,371 | )      |      |         | (27,197 | )      |   |         | (341    | )     
|                                                                 | Deposits for business acquisitions and other                                                    |                                                                                                 |          | (10,776  | )      |      |         | (895    | )      |   |         | (1,259  | )     
|                                                                 | Capital expenditures                                                                            |                                                                                                 |          | (24,438  | )      |      |         | (12,157 | )      |   |         | (3,778  | )     
|                                                                 | Proceeds from disposal of property and equipment                                                |                                                                                                 |          | 801      |        |      |         | 167     |        |   |         | 478     |       
|                                                                 | Loans and advances to employees                                                                 |                                                                                                 |          |         |        |      |         | 56      |        |   |         | 89      |       
|                                                                 | Shortfall payment on Class B Special
    Stock                                                |                                                                                                 |          |         |        |      |         |        |        |   |         | (1,001  | )     
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|                                                                 |                                                                                                 |                                                                                                 | (195,633 | )        |        |      | (39,777 | )       |        |   | 13,280  |        
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|Cash flows from financing
    activities:                        |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|                                                                 | Proceeds from issuance of debt                                                                  |                                                                                                 |          | 166,493  |        |      |         | 57,200  |        |   |         |        |       
|                                                                 | Principal repayments on debt                                                                    |                                                                                                 |          | (72,900  | )      |      |         | (56,509 | )      |   |         | (43,464 | )     
|                                                                 | Repayment of capital lease obligations                                                          |                                                                                                 |          | (1,351   | )      |      |         | (1,035  | )      |   |         | (1,882  | )     
|                                                                 | Proceeds from issuance of Common and Preferred
    Shares                                       |                                                                                                 |          | 86,743   |        |      |         | 30,308  |        |   |         | 29,108  |       
|                                                                 | Proceeds from mandatorily redeemable Preferred
    Shares                                       |                                                                                                 |          | 55,000   |        |      |         |        |        |   |         |        |       
|                                                                 | Fees paid for financing transactions                                                            |                                                                                                 |          | (18,967  | )      |      |         | (4,555  | )      |   |         | (559    | )     
|                                                                 | Cash collateral deposits for letters of credit                                                  |                                                                                                 |          | (9,929   | )      |      |         |        |        |   |         |        |       
|                                                                 | Short-term bank indebtedness                                                                    |                                                                                                 |          |         |        |      |         |        |        |   |         | (595    | )     
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|                                                                 |                                                                                                 |                                                                                                 | 205,089  |          |        |      | 25,409  |         |        |   | (17,392 | )      
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|Effect of exchange rate changes on cash and
    cash equivalents |                                                                                                 |                                                                                                 | 385      |          |        |      | 20      |         |        |   | (104    | )      
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|Increase (decrease) in cash and cash
    equivalents             |                                                                                                 |                                                                                                 | 19,287   |          |        |      | (694    | )       |        |   | 2,469   |        
|Cash and cash equivalents at beginning of the
    year           |                                                                                                 |                                                                                                 | 1,775    |          |        |      | 2,469   |         |        |   |        |        
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        
|Cash and cash equivalents at end of the
    year                 |                                                                                                 | $                                                                                               | 21,062   |          |        | $    | 1,775   |         |        | $ | 2,469   |        
|                                                                 |                                                                                                 |                                                                                                 |          |          |        |      |         |         |        |   |         |        

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

F-6



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(In thousands of US dollars unless otherwise
stated)




|   |                                                       
|-- | ------------------------------------------------------
|1. | Organization of Business and Basis of
    Presentation

The consolidated financial statements of Capital
Environmental Resource Inc. have been prepared in accordance
with accounting principles generally accepted in the United
States (US GAAP) and all figures are presented in
thousands of US dollars, except share and per share data, or
except where expressly stated as being in Canadian dollars
(C$) or in millions. The consolidated financial
statements include the accounts of Capital Environmental
Resource Inc. and its wholly owned subsidiaries (collectively,
the Company). All intercompany transactions and
balances have been eliminated in consolidation. Except as
indicated in Note 21, the consolidated financial statements
conform, in all material respects, with accounting principles
generally accepted in Canada (Canadian GAAP).
Certain 2002 and 2001 financial statement amounts have been
reclassified to conform with the 2003 presentation.

Capital Environmental Resource Inc. is a
multi-regional, integrated solid waste services company that
provides collection, transfer, landfill disposal and recycling
services to commercial, industrial and residential customers in
the United States and Canada. The Company was founded in May
1997 and began operations in June 1997 when it acquired selected
solid waste assets and operations in Canada from Canadian Waste
Services Inc. and its former parent, USA Waste
Services, Inc. From the time of commencing operations, the
Company acquired a number of solid waste service operations in
Canada and the United States. In the first half of 2001, the
Company divested its holdings in the United States. The Company
sold its collection operations in the northeastern United States
and exited the US market because those US operations were
exclusively collection operations, with no related disposal
opportunity in those markets. Accordingly, those US operations
did not provide any vertical integration opportunities and did
not fit within the Companys corporate strategy.

In 2003, the Company identified that there were
significant opportunities for disposal-based growth in certain
geographic markets in the United States which it wished to
pursue. Accordingly, the Company re-entered the United States
with the acquisition of a landfill in Osceola County, Florida.
The Company also completed acquisitions of certain assets in the
metropolitan Phoenix, Arizona area and recently acquired certain
assets located in Florida from Allied Waste Industries, Inc.

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates
include the allowance for doubtful accounts, depletion of
landfill development costs, liabilities for final capping,
closure and post-closure obligations, liabilities for potential
litigation, and deferred taxes.

For the three years ended December 31, 2003,
the majority of the Companys operations were domiciled in
Canada. As such, the Companys primary functional currency
is the Canadian dollar. However, for each reporting period, the
Company translates the results of operations and financial
condition into US dollars. Therefore, reported results of
operations and financial condition are subject to changes in the
exchange relationship between the two currencies. For example,
as the relationship of the Canadian dollar strengthens against
the US dollar, revenue is favorably affected and conversely
expenses are unfavorably affected. Assets and liabilities of
Canadian operations have been translated from Canadian dollars
into US dollars at the exchange rates in effect at the relevant
balance sheet date, and revenue and expenses of Canadian
operations have been translated from Canadian dollars into
United States dollars at the average exchange rates prevailing
during the period. Unrealized gains and losses on translation of
the Canadian operations into US dollars are reported as a
separate component of shareholders equity and are included
in comprehensive income (loss). Separately, monetary assets and
liabilities denominated in US dollars held by the Canadian
operations are re-measured from US dollars into Canadian dollars
and then

F-7



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


translated into US dollars. The effects of
re-measurement are reported currently as a component of net
income (loss). Currently, the Company does not hedge its
exposure to changes in foreign exchange rates.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies

Adoption of
New Accounting Standard

On January 1, 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 143 Accounting for Asset
Retirement Obligations. SFAS No. 143 required
the Company to change its methodology used to record liabilities
related to final capping, closure and post-closure of its
landfill operations. Under the provisions of the new statement,
the Company recognized, as an asset, the fair value of the
liability for an asset retirement obligation. The asset is then
depleted, consistently with other capitalized landfill costs,
over the remaining useful life of the site based upon units of
consumption as airspace in the landfill is consumed.
Additionally, the Company recognized a liability for the present
value of the estimated future asset retirement obligation. The
liability will be adjusted for (i) additional liabilities
incurred or settled; (ii) accretion of the liability to its
future value; and (iii) revisions in the estimated cash
flows relative to closure and post-closure costs.

The following table summarizes the adjustments to
net loss attributable to Common Shareholders and basic and
diluted loss per share for the years ended December 31,
2002, and 2001, as if SFAS No. 143 were effective
beginning in 2001:

|                                                             |  |      |         |      |  |   |         |  
|------------------------------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                                             |  | 2002 |         | 2001
|                                                             |  |      |         |     
|Net loss attributable to Common Shareholders as
    reported |  | $    | (12,590 | )    |  | $ | (19,668 | )
|SFAS No. 143 adjustment                                      |  |      | (245    | )    |  |   | (14     | )
|                                                             |  |      |         |      |  |   |         |  
|Adjusted net loss attributable to Common
    Shareholders    |  | $    | (12,835 | )    |  | $ | (19,682 | )
|                                                             |  |      |         |      |  |   |         |  
|Basic and diluted loss per share  as
    reported           |  | $    | (0.39   | )    |  | $ | (1.60   | )
|SFAS No. 143 adjustment                                      |  |      | (0.01   | )    |  |   |        |  
|                                                             |  |      |         |      |  |   |         |  
|Adjusted basic and diluted loss per share                    |  | $    | (0.40   | )    |  | $ | (1.60   | )
|                                                             |  |      |         |      |  |   |         |  

The following table summarizes the balance sheet
impact of adopting SFAS No. 143:

|                                             |  |                   |        |              |  |                 |       |   |  |   |        |  
|-------------------------------------------- |  | ----------------- | ------ | ------------ |  | --------------- | ----- | - |  | - | ------ | -
|                                             |  | Balance as of     |        | SFAS No. 143 |  | Balance as of  
|                                             |  | December 31, 2002 |        | Adjustment   |  | January 1, 2003
|                                             |  |                   |        |              |  |                
|Landfill sites                               |  | $                 | 16,788 |              |  | $               | 4,361 |   |  | $ | 21,149 |  
|Accumulated depletion                        |  |                   | (3,704 | )            |  |                 | (704  | ) |  |   | (4,408 | )
|                                             |  |                   |        |              |  |                 |       |   |  |   |        |  
|Landfill sites, net                          |  | $                 | 13,084 |              |  | $               | 3,657 |   |  | $ | 16,741 |  
|                                             |  |                   |        |              |  |                 |       |   |  |   |        |  
|Accrued closure and post-closure obligations |  | $                 | 1,925  |              |  | $               | 2,883 |   |  | $ | 4,808  |  
|                                             |  |                   |        |              |  |                 |       |   |  |   |        |  
|Deferred income tax asset (liability)        |  | $                 | 1,049  |              |  | $               | (256  | ) |  | $ | 793    |  
|                                             |  |                   |        |              |  |                 |       |   |  |   |        |  

Business
Combinations and Acquisitions

The Company allocates the purchase price of an
acquired business, on a preliminary basis, to the identified
assets acquired based on their estimated fair values at the
dates of acquisition, with any residual amounts allocated to
goodwill. The purchase price allocations are considered
preliminary until the Company has obtained all required
information to complete its allocation. Although the time
required to obtain the necessary information will vary with
circumstances specific to an individual acquisition, the
allocation period for finalizing purchase price
allocations generally does not exceed one year from the

F-8



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


date of consummation of an acquisition.
Adjustments to the allocation of purchase price may decrease
those amounts allocated to goodwill and, as such, may increase
those amounts allocated to other tangible or intangible assets,
which may result in higher depreciation or amortization expense
in future periods. The value of shares issued in connection with
an acquisition is based upon the average market price of the
Companys Common Stock during the five day period
consisting of the period two days before, the day of and the two
days after the terms of the acquisition are agreed to and/ or
announced.

Cash and Cash
Equivalents and Restricted Cash

Cash and cash equivalents are defined as cash and
short-term highly liquid deposits with initial maturities of
three months or less. As of December 31, 2003, restricted
cash of $14.4 million represents funds held in escrow to
finance the acquisition of certain assets from Allied Waste
Industries, Inc. or Allied (See Note 3).



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company places
its cash and cash equivalents only with high credit quality
financial institutions. The Companys customers are
diversified as to both geographic and industry concentrations.
Therefore, the Companys trade accounts receivable are not
subject to a concentration of credit risk.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

The Company maintains an allowance for doubtful
accounts based on the expected collectibility. The Company
performs credit evaluations of its significant customers and
establishes an allowance for doubtful accounts based on the
aging of its receivables, payment performance factors,
historical trends, and other information. In general, the
Company reserves a portion of those receivables that are
outstanding more than 90 days and 100% of those outstanding
over 120 days. The Company evaluates and revises its
reserve on a monthly basis based upon a review of specific
accounts outstanding and the Companys history of
uncollectible accounts. Credit losses have been within
managements expectations.

The changes to the allowance for doubtful
accounts for the years ended December 31, 2003, 2002 and
2001 are as follows:

|                                 |                                                  |      |     |      |   |      |     |      |   |   |     |      |  
|-------------------------------- | ------------------------------------------------ | ---- | --- | ---- | - | ---- | --- | ---- | - | - | --- | ---- | -
|                                 |                                                  | 2003 |     | 2002 |   | 2001
|                                 |                                                  |      |     |      |   |     
|Balance at beginning of the year |                                                  | $    | 350 |      |   | $    | 507 |      |   | $ | 319 |     
|                                 | Acquisitions                                     |      |     | 243  |   |      |     | 148  |   |   |     |     |  
|                                 | Provisions                                       |      |     | 229  |   |      |     | 425  |   |   |     | 679  |  
|                                 | Impact of foreign exchange fluctuations          |      |     | 73   |   |      |     | 3    |   |   |     | (13  | )
|                                 | Bad debts charged to reserves, net of recoveries |      |     | (275 | ) |      |     | (733 | ) |   |     | (478 | )
|                                 |                                                  |      |     |      |   |      |     |      |   |   |     |     
|Balance at end of the year       |                                                  | $    | 620 |      |   | $    | 350 |      |   | $ | 507 |     
|                                 |                                                  |      |     |      |   |      |     |      |   |   |     |     



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are recorded at cost less
accumulated depreciation. Improvements or betterments, which
extend the life of an asset, are capitalized. Expenditures for
maintenance and repair costs are expensed as incurred. Gains and
losses resulting from property and equipment retirements or

F-9



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


disposals are credited or charged to cost of
operations in the year of disposal. Depreciation is computed
over the estimated useful lives using the straight-line method
as follows:

|                                                              |  |  |                 | 
|------------------------------------------------------------- |  |  | --------------- | 
|Buildings                                                     |  |  | 10 to 25  years | 
|Vehicles                                                      |  |  | 10 years        | 
|Containers, compactors, landfill, and recycling
    equipment |  |  | 5 to 12 years   | 
|Furniture, fixtures and other office equipment                |  |  | 3 to 5 years    | 
|Leasehold improvements                                        |  |  | term of lease   | 



| |                  
| | -----------------
| | Long-Lived Assets

The Company periodically evaluates whether events
and circumstances have occurred that may warrant revision of the
estimated useful life of property and equipment or whether the
remaining balance of property and equipment, or other long-lived
assets, should be evaluated for possible impairment. Instances
that may lead to an impairment include: (i) a significant
decrease in the market price of a long-lived asset group;
(ii) a significant adverse change in the extent or manner
in which a long-lived asset or asset group is being used or in
its physical condition; (iii) a significant adverse change
in legal factors or in the business climate that could affect
the value of a long-lived asset or asset group, including an
adverse action or assessment by a regulator; (iv) an
accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of a
long-lived asset or asset group; (v) a current-period
operating or cash flow loss combined with a history of operating
or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a
long-lived asset or asset group; or (vi) a current
expectation that, more likely than not, a long-lived asset or
asset group will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life.

The Company uses an estimate of the related
undiscounted cash flows, excluding interest, over the remaining
life of the property and equipment and long-lived assets in
assessing their recoverability. The Company measures impairment
loss as the amount by which the carrying amount of the asset(s)
exceeds the fair value of the asset(s). The Company primarily
employs two methodologies for determining the fair value of a
long-lived asset: (i) the amount at which the asset could
be bought or sold in a current transaction between willing
parties or (ii) the present value of estimated expected
future cash flows grouped at the lowest level for which there
are identifiable independent cash flows.



| |               
| | --------------
| | Landfill Sites

Landfill sites are recorded at cost. Capitalized
landfill costs include expenditures for land, permitting costs,
cell construction costs and environmental structures.
Capitalized permitting and cell construction costs are limited
to direct costs relating to these activities, including legal,
engineering and construction costs associated with excavation,
liners and site berms, leachate manage facilities and other
costs associated with environmental equipment and structures.

Costs related to acquiring land, excluding the
estimated residual value of un-permitted, non-buffer land, and
costs related to permitting and cell construction are depleted
as airspace is consumed using the units-of-consumption method.
Environmental structures, which include leachate collection
systems, methane collection systems and groundwater monitoring
wells, are charged to expense over the shorter of their useful
life or the life of the landfill.

Capitalized landfill costs may also include an
allocation of the purchase price paid for landfills. For
landfills purchased as part of a group of several assets, the
purchase price assigned to the landfill is determined based upon
the discounted expected future cash flows of the landfill
relative to the other assets

F-10



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


within the acquired group. If the landfill meets
the Companys expansion criteria, the purchase price is
further allocated between permitted airspace and expansion
airspace based upon the ratio of permitted versus probable
expansion airspace to total available airspace. Landfill sites
are amortized using the units-of-consumption method over the
total available airspace including probable expansion airspace
where appropriate.

The Company assesses the carrying value of its
landfill sites in accordance with the provisions of
SFAS No. 144 Accounting for the Impairment of
Long-Lived Assets. These provisions, as well as possible
instances that may lead to impairment, are addressed in the
Long-Lived Assets discussion. There are certain indicators
previously discussed that require significant judgment and
understanding of the waste industry when applied to landfill
development or expansion.

The Company has identified three sequential steps
that landfills generally follow to obtain expansion permits.
These steps are as follows: (i) obtaining approval from
local authorities; (ii) submitting a permit application to
State or Provincial authorities; and (iii) obtaining permit
approval from state or provincial authorities.

Before expansion airspace is included in the
Companys calculation of total available disposal capacity,
the following criteria must be met: (i) the land associated
with the expansion airspace is either owned by the Company or is
controlled by the Company pursuant to an option agreement;
(ii) the Company is committed to supporting the expansion
project financially and with appropriate resources;
(iii) there are no identified fatal flaws or impediments
associated with the project, including political impediments;
(iv) progress is being made on the project; (v) the
expansion is attainable within a reasonable time frame; and
(vi) based upon senior managements review of the
status of the permit process to date, the Company believes it is
likely the expansion permit will be received within the next
five years. Upon meeting the Companys expansion criteria,
the rates used at each applicable landfill to expense costs to
acquire, construct, close and maintain a site during the
post-closure period are adjusted to include probable expansion
airspace and all additional costs to be capitalized or accrued
associated with the expansion airspace.

Once expansion airspace meets the Companys
criteria for inclusion in the Companys calculation of
total available disposal capacity, management continuously
monitors each sites progress in obtaining the expansion
permit. If at any point it is determined that an expansion area
no longer meets the required criteria, the probable expansion
airspace is removed from the landfills total available
capacity and the rates used at the landfill to expense costs to
acquire, construct, close and maintain a site during the
post-closure period are adjusted accordingly.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

The Company accounts for its goodwill in
accordance with the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. In general,
goodwill is tested for impairment on an annual basis. In testing
for impairment, the Company uses the two-step impairment test
prescribed by SFAS No. 142. The first step of the
goodwill impairment test compares the fair value of a reporting
unit with its carrying amount, including goodwill. In
determining the fair value, the Company may utilize:
(i) discounted future cash flows; (ii) operating
results based upon a comparative multiple of earnings or
revenues; (iii) offers from interested investors, if any;
or (iv) appraisals. If the fair value exceeds the carrying
amount, goodwill of the reporting unit is considered not
impaired, and the second step of the impairment test is
unnecessary. The second step, if necessary, compares the implied
fair value of goodwill with the carrying amount of that
goodwill. The implied fair value of goodwill is determined by
deducting the fair value of a reporting units identifiable
assets and liabilities from the fair value of the reporting unit
as a whole, as if that reporting

F-11



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


unit had just been acquired and the purchase
price were being initially allocated. If the implied fair value
is less than the carrying value, an impairment charge is
recorded to earnings.

In addition, the Company evaluates a reporting
unit for impairment if events or circumstances change between
annual tests, indicating a possible impairment. Examples of such
events or circumstances include: (i) a significant adverse
change in legal factors or in the business climate; (ii) an
adverse action or assessment by a regulator; (iii) a more
likely than not expectation that a reporting unit or a
significant portion thereof will be sold; or (iv) the
testing for recoverability under SFAS No. 144 of a
significant asset group within the reporting unit. The Company
incurred no impairment of goodwill upon its initial adoption of
SFAS No. 142, on January 1, 2002, or as a result
of its annual goodwill impairment test. During 2001, prior to
the adoption of SFAS No. 142 and as part of
managements periodic review of goodwill, the Company
determined that the related goodwill at two locations was
impaired and accordingly, as of December 31, 2001,
recognized an impairment loss of $3.4 million.

Amortization of goodwill for the year ended
December 31, 2001, was $1.8 million. Had the
non-amortization provisions of SFAS No. 142 been
applied retroactively, the Companys net loss and basic and
diluted loss per share for the year ended December 31,
2001, would have been $17.9 million and $1.46, respectively.

Other intangible assets primarily include
customer relationships and contracts and covenants
not-to-compete. Other intangible assets are recorded at their
cost, less accumulated amortization and are amortized over the
expected benefit to be received by such intangibles. The Company
periodically evaluates the carrying value and remaining
estimated useful life of its other intangible assets subject to
amortization in accordance with the provisions of SFAS No.
144.



| |                         
| | ------------------------
| | Other Non-Current Assets

Acquisition deposits and deferred acquisition
costs include capitalized incremental direct costs associated
with proposed business combinations that are currently being
negotiated. These costs remain deferred until the Company ceases
to be engaged on a regular and ongoing basis with completion of
the proposed acquisition, at which point they are charged
currently in operations. In the event that the target is
acquired, these costs are incorporated in the cost of the
acquired business. Indirect and internal costs, including
executive salaries, overhead and travel costs related to
acquisitions, are expensed as incurred. Costs associated with
arranging financing are deferred and expensed over the related
financing arrangement using the effective interest method.
Should the Company repay an obligation earlier then its
contractual maturity, any remaining deferred financing costs are
charged to operations.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The book values of the cash and cash equivalents,
accounts receivable and accounts payable approximate their
respective fair values due to the short-term nature of these
instruments. The Companys long-term debt and redeemable
Preferred Stock that are outstanding as at December 31,
2003, have carrying values that approximate their respective
fair values based on the current rate offered to the Company for
instruments with similar market risk and maturities.



| |                    
| | -------------------
| | Environmental Costs

The Company accrues for costs associated with
environmental remediation obligations when such costs are
probable and can be reasonably estimated. Accruals for estimated
losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility
study.

F-12



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


Such accruals are adjusted as further information
develops or circumstances change. Cost of future expenditures
for environmental remediation obligations are not discounted to
their present value.



| |                                                 
| | ------------------------------------------------
| | Accrued Closure and Post-Closure
    Obligations

Accrued closure and post-closure costs represent
an estimate of the current value of the future obligations
associated with closure and post-closure monitoring of
non-hazardous solid waste landfills. 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 consider site
inspection, groundwater monitoring, leachate management, methane
gas management and recovery, and operating and maintenance costs
to be incurred during the period after the facility closes.
Certain of these environmental costs, principally capping and
methane gas management costs, are also incurred during the
operating life of the site in accordance with the landfill
operating requirements. Site specific closure and
postclosure engineering cost estimates are prepared
annually. The impact of changes in estimates is accounted for on
a prospective basis.

Landfill closure and post-closure liabilities are
calculated by estimating the total obligation in current
dollars, inflating the obligation based upon the expected date
of the expenditure using an inflation rate of 2.0% and
discounting the inflated total to its present value using an
8.5% credit-adjusted risk-free discount rate. Accretion of
discounted cash flows associated with the closure and post
closure obligations is accrued over the life of the landfill.



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue when services,
such as providing hauling services and accepting waste at the
Companys disposal facilities, are rendered. Amounts billed
to customers, prior to providing the related services, are
reflected as deferred revenue and reported as revenues in the
period in which the services are rendered.



| |                     
| | --------------------
| | Royalty Arrangements

It is customary in the waste industry for
landfill acquisition agreements to include royalty arrangements.
Amounts paid under these royalty arrangements are charged to
operations based upon a systematic and rational allocation of
the royalty over the period in which the royalty is incurred.



| |                  
| | -----------------
| | Advertising Costs

The Company expenses advertising costs as they
are incurred. Advertising expense for the year ended
December 31, 2003, was $0.5 million (2002 
$0.3 million; 2001  $0.2 million), which is
included in selling, general and administrative expense on the
accompanying Statements of Operations.



| |                                   
| | ----------------------------------
| | Stock-based Compensation
    Plans

The Company has stock-based compensation plans
accounted for under the recognition and measurement principles
of Accounting Principles Board Opinion (APB)
No. 25 Accounting for Stock Issued to
Employees, and related interpretations. Pro forma
information regarding the impact of stock-based compensation on
net income and earnings per share is required by
SFAS No. 123 Accounting for Stock-Based
Compensation, and SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure.
Such pro forma information, determined as if the Company had
accounted for its

F-13



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


employee stock options under the fair value
recognition provisions of SFAS No. 123, is illustrated
in the following table:

|                                                             |                                                                                          |      |         |        |   |      |         |        |   |   |         |       |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ----- | -
|                                                             |                                                                                          | 2003 |         | 2002   |   | 2001
|                                                             |                                                                                          |      |         |        |   |     
|Net loss attributable to Common Shareholders as
    reported |                                                                                          | $    | (76,952 | )      |   | $    | (12,590 | )      |   | $ | (19,668 | )    
|                                                             | Less: stock-based employee compensation expense
    pursuant to SFAS No. 123, net of tax |      |         | (3,483 | ) |      |         | (1,632 | ) |   |         | (983  | )
|                                                             |                                                                                          |      |         |        |   |      |         |        |   |   |         |      
|Pro forma net loss available to Common
    Shareholders      |                                                                                          | $    | (80,435 | )      |   | $    | (14,222 | )      |   | $ | (20,651 | )    
|                                                             |                                                                                          |      |         |        |   |      |         |        |   |   |         |      
|Basic and diluted net loss per share:                        |                                                                                          |      |         |        |   |      |         |        |   |   |         |      
|                                                             | As reported                                                                              |      | $       | (1.98  | ) |      | $       | (0.39  | ) |   | $       | (1.60 | )
|                                                             |                                                                                          |      |         |        |   |      |         |        |   |   |         |      
|                                                             | Pro forma                                                                                |      | $       | (2.07  | ) |      | $       | (0.44  | ) |   | $       | (1.68 | )
|                                                             |                                                                                          |      |         |        |   |      |         |        |   |   |         |      

The fair value of options granted up to
December 31, 2003, was estimated using the Black-Scholes
option pricing model using the following assumptions:

|                                        |  |      |               |      |  |      |               |  |  |  |               | 
|--------------------------------------- |  | ---- | ------------- | ---- |  | ---- | ------------- |  |  |  | ------------- | 
|                                        |  | 2003 |               | 2002 |  | 2001
|                                        |  |      |               |      |  |     
|Annual dividend yield                   |  |      |              |      |  |      |              |  |  |  |              | 
|Weighted-average expected lives (years) |  |      | 3 years       |      |  |      | 3 years       |  |  |  | 3 years       | 
|Risk-free interest rate                 |  |      | 3.05%  3.47% |      |  |      | 3.46%  4.62% |  |  |  | 3.79%  4.96% | 
|Volatility                              |  |      | 72%           |      |  |      | 72%           |  |  |  | 72%           | 

The weighted-average grant-date fair value of
options granted was $2.42 for the year ended December 31,
2003 (2002  $2.68; 2001  $2.46).

Compensation expense recognized for stock options
subject to variable accounting is based on the intrinsic value
(the difference between the exercise price and quoted market
price) of the options at the end of each reporting period.
Changes in the intrinsic value are recognized until such options
are exercised, expired or forfeited.



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes in
accordance with SFAS No. 109, Accounting for
Income Taxes. Accordingly, deferred income taxes have been
provided to show the effect of temporary differences between the
recognition of revenue and expenses for financial and income tax
reporting purposes and between the tax basis of assets and
liabilities and their reported amounts in the financial
statements. In assessing the realizability of deferred tax
assets, management assesses the likelihood that deferred tax
assets will be recovered from future taxable income, and to that
extent that recovery is not likely or there is insufficient
operating history, a valuation allowance is established. The
Company adjusts the valuation allowance in the period management
determines it is more likely than not that deferred tax assets
will or will not be realized.



| |                                            
| | -------------------------------------------
| | Net Income (Loss) Per Share
    Information

Basic earnings (loss) per share is calculated by
dividing income (loss) available to common shareholders by the
weighted average number of Common Shares outstanding for the
period. Diluted earnings (loss) per share is calculated based on
the weighted average shares of Common Stock outstanding during
the year plus the dilutive effect of Common Stock purchase
warrants and stock options using the treasury stock method and
the dilutive effects of the Convertible Series 1 Preferred
Shares using the if-converted method. Contingently issuable
shares are included in the computation of basic earnings

F-14



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


(loss) per share when issuance of the shares is
no longer contingent. Due to the net losses attributable to
Common Shareholders for the years ended December 31, 2003,
2002 and 2001, basic and diluted loss per share were the same,
as the effect of potentially dilutive securities would have been
anti-dilutive.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under
SFAS No. 133. The Statement requires that contracts
with comparable characteristics be accounted for similarly and
clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003, except in certain
circumstances, and for hedging relationships designated after
June 30, 2003. The adoption of this standard did not have a
material effect on the Companys financial position or
results of operations.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, effective for financial instruments entered into
or modified after May 31, 2003, and otherwise effective at
the beginning of the first interim period beginning after
June 15, 2003. This statement establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a freestanding financial instrument that
is within its scope as a liability (or an asset in some
circumstances). The Company has adopted the provisions of
SFAS No. 150 and as a result, has classified the
mandatorily redeemable Preferred Shares as a liability.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. In December 2003, the
FASB issued a revision to FIN 46, or Revised
Interpretation, to clarify some of the provisions of
FIN 46. FIN 46 provides guidance on how to identify a
variable interest entity, or VIE, and determine when the assets,
liabilities, non-controlling interests, and results of
operations of a VIE must be included in a companys
consolidated financial statements. A company that holds variable
interests in an entity is required to consolidate the entity if
the companys interest in the VIE is such that the company
will absorb a majority of the VIEs expected losses and/or
receive a majority of the entitys expected residual
returns, if any. VIEs created after January 31, 2003, but
prior to January 1, 2004, may be accounted for either based
on the original interpretation or the Revised Interpretations.
However, the Revised Interpretations must be applied no later
than the first quarter of fiscal year 2004. VIEs created after
January 1, 2004, must be accounted under the Revised
Interpretations. There has been no material impact to the
Companys financial statements from potential VIEs entered
into after January 31, 2003, and there is no expected
impact from the adoption of the deferred provisions in the first
quarter of 2004.



|   |                                                                                      
|-- | -------------------------------------------------------------------------------------
|3. | Business Combinations, Significant Asset
    Acquisitions and Disposals of Businesses



| |                                                             
| | ------------------------------------------------------------
| | Business Combinations and Significant Asset
    Acquisitions



| |                  
| | -----------------
| | 2003 Acquisitions

In May 2003, the Company acquired the JED
Landfill, a newly permitted landfill in central Florida for
$68.1 million in cash, assumed liabilities of
$6.2 million and the issuance of 2,050,000 Common Shares
valued at approximately $9.7 million. The landfill site,
which began commercial operations in January 2004, is a
2,200 acre municipal solid waste landfill with an initial
permitted capacity of 24 million cubic yards. The Company
plans to pursue a vertical expansion that would increase the JED
Landfill permitted

F-15



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


capacity by approximately 18.0 million cubic
yards. In addition, the Company issued 1,200,000 Common Shares
valued at approximately $4.8 million in consideration for
transaction related services provided to the Company in
connection with the acquisition. The purchase was completed by
the Companys US incorporated subsidiary, Waste
Services, Inc., or WSI. Fair value of the shares issued for
transaction related services rendered in connection with the
acquisition were valued on the date of issuance of the Common
Shares.

In July 2003, the Company purchased Cactus Waste
Systems, LLC, or Cactus Waste, for $0.6 million in cash and
a $1.2 million option, which was exercised in September
2003, to purchase an 800 acre site in Pinal County, Arizona,
which has been zoned to permit the development of a landfill.
The Company expects the Cactus Waste landfill site, which will
serve the greater Phoenix and Tucson, Arizona markets, to have a
permitted capacity of 224 million cubic yards.
Additionally, the Company is developing a fully permitted
transfer station in Mesa, Arizona. Upon receipt of all permits
and authorizations for the operation of the landfill, which we
expect to occur in the second quarter of 2004, the Company will
issue 1,250,000 Common Shares or $3.0 million to the
sellers of Cactus Waste, at their option. The sellers are
entitled to contingent payments based upon the landfill
achieving certain defined average tons of waste per day. Should
the landfill achieve a maximum 5,000 tons per day, the total
contingent payments would not exceed $18.0 million. The
amounts paid or the value of the Common Shares to be issued on
the date the contingency is resolved, will be capitalized as a
cost of the landfill and depleted over its remaining useful
life. Additionally, the Company entered into a royalty agreement
whereby it will pay the sellers a royalty of $0.50 per ton
on all waste deposited at the Cactus Waste Landfill after the
earlier to occur of July 2006 or the receipt of 1,250 tons of
waste per day at the landfill. The Company currently expects to
complete construction and open the landfill and transfer station
in the second half of 2004.

In November 2003, the Company entered into an
agreement to acquire from Allied, the assets of Allieds
northern and central Florida operations for a purchase price of
approximately $120.0 million plus working capital. The
primary markets currently serviced by the operations are in
Tampa, Sarasota and Jacksonville, Florida. On December 31,
2003, the Company completed the first phase of the Allied
acquisition, which included the assets for which all required
transfer consents and approvals had been obtained. The cash
purchase price for the first phase of the acquisition was
approximately $81.1 million. Additional phases of the
acquisition totaling approximately $11.3 million have been
completed through February 15, 2004. The Company expects to
obtain the remaining consents and approvals necessary to
complete the remainder of the Allied acquisition by the end of
the second quarter of 2004.

The Company also acquired the assets of five
other collection businesses during the year ended
December 31, 2003 for aggregate cash consideration of
approximately $11.6 million plus the issuance of 600,000
Common Shares valued at approximately $3.9 million.
Concurrent with the issuance of the 600,000 Common Shares, the
Company entered into a reimbursement agreement whereby for a
period of one year after the first anniversary of the closing
date the Company will reimburse the seller for the loss on sale
of shares below $4.75 per share.

2002
Acquisitions

In February 2002, the Company purchased Ottawa,
Ontario-based Waste Services Inc., or Waste Services Ottawa, a
landfill and collection business, for approximately
$25.5 million. Waste Services Ottawa consists of two solid
waste collection companies and one landfill, operating in the
Ottawa and Brockville area of southeastern Ontario. The Company
also purchased five other solid waste collection companies,
primarily in Western Canada, during 2002 for cash consideration
aggregating approximately $4.3 million. The Company
incurred acquisition costs of approximately $0.8 million in
connection with these acquisitions.

F-16



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


The operating results of the acquired businesses
are included in the consolidated statements of operations from
the dates of the acquisition. The assets acquired and
liabilities assumed were accounted for by the purchase method of
accounting.

Details of the net assets acquired and cash used
in asset and business acquisitions are as follows:

|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |        |  
|---------------------------------------------------------------- | ----------------------------------------------------------- | -------- | ------ | --------- | - | -------- | ------ | ------ | - | ---------- | ------ | ------ | - | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                 |                                                             |          |        |          
|                                                                 |                                                             | 2003     |        |          
|                                                                 |                                                             |          |        |          
|                                                                 |                                                             | JED      |        |           |   |         
|                                                                 |                                                             | Landfill |        | Allied(1) |   | Other(1) |        | Total  |   | Total 2002
|                                                                 |                                                             |          |        |           |   |          |        |        |   |           
|Purchase Price:                                                  |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|Cash                                                             |                                                             | $        | 68,090 |           |   | $        | 81,107 |        |   | $          | 12,174 |        |   | $ | 161,371 |        |   | $ | 30,607 |       
|Common stock issued                                              |                                                             |          | 14,506 |           |   |          |       |        |   |            | 3,876  |        |   |   | 18,382  |        |   |   |       |       
|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|Total purchase price                                             |                                                             | $        | 82,596 |           |   | $        | 81,107 |        |   | $          | 16,050 |        |   | $ | 179,753 |        |   | $ | 30,607 |       
|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|Allocated as follows:                                            |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|                                                                 | Working capital (deficit) assumed:                          |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |        |  
|                                                                 | Cash and cash equivalents                                   |          | $      |          |   |          | $      |       |   |            | $      |       |   |   | $       |       |   |   | $      | 1,184  |  
|                                                                 | Accounts receivable                                         |          |        |          |   |          |        | 5,083  |   |            |        | 1,593  |   |   |         | 6,676  |   |   |        | 1,371  |  
|                                                                 | Prepaid expenses and other assets                           |          |        |          |   |          |        | 279    |   |            |        | 45     |   |   |         | 324    |   |   |        | 74     |  
|                                                                 | Accounts payable                                            |          |        |          |   |          |        |       |   |            |        | (976   | ) |   |         | (976   | ) |   |        | (822   | )
|                                                                 | Accrued expenses and other liabilities                      |          |        | (1,814    | ) |          |        | (3,869 | ) |            |        | (1,247 | ) |   |         | (6,930 | ) |   |        | (463   | )
|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|                                                                 | Net working capital (deficit)                               |          |        | (1,814    | ) |          |        | 1,493  |   |            |        | (585   | ) |   |         | (906   | ) |   |        | 1,344  |  
|Property, equipment and landfill sites                           |                                                             |          | 88,839 |           |   |          | 9,754  |        |   |            | 4,531  |        |   |   | 103,124 |        |   |   | 18,041 |       
|Deferred tax asset                                               |                                                             |          |       |           |   |          |       |        |   |            |       |        |   |   |        |        |   |   | 578    |       
|Long-term debt assumed                                           |                                                             |          | (4,429 | )         |   |          |       |        |   |            |       |        |   |   | (4,429  | )      |   |   |       |       
|Accrued closures, post-closure and other
    obligations assumed |                                                             |          |       |           |   |          | (1,483 | )      |   |            |       |        |   |   | (1,483  | )      |   |   | (896   | )     
|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|                                                                 | Net book value of assets acquired/(liabilities)
    assumed |          |        | 82,596    |   |          |        | 9,764  |   |            |        | 3,946  |   |   |         | 96,306 |   |   |        | 19,067 |  
|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|Excess purchase price to be allocated                            |                                                             | $        |       |           |   | $        | 71,343 |        |   | $          | 12,104 |        |   | $ | 83,447  |        |   | $ | 11,540 |       
|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|Allocated as follows:                                            |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|                                                                 | Goodwill                                                    |          | $      |          |   |          | $      | 56,034 |   |            | $      | 10,605 |   |   | $       | 66,639 |   |   | $      | 9,348  |  
|                                                                 | Customer relationships and contracts                        |          |        |          |   |          |        | 14,490 |   |            |        | 995    |   |   |         | 15,485 |   |   |        | 1,927  |  
|                                                                 | Non-competition agreements                                  |          |        |          |   |          |        | 819    |   |            |        | 504    |   |   |         | 1,323  |   |   |        | 265    |  
|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       
|                                                                 | Total allocated                                             |          | $      |          |   |          | $      | 71,343 |   |            | $      | 12,104 |   |   | $       | 83,447 |   |   | $      | 11,540 |  
|                                                                 |                                                             |          |        |           |   |          |        |        |   |            |        |        |   |   |         |        |   |   |        |       



---



| |     |                                                                                              
| | --- | ---------------------------------------------------------------------------------------------
| | (1) | Currently, these purchase price allocations are
    preliminary and may be subject to change.

The Company believes the primary value of an
acquisition is the opportunities made available by vertically
integrating operations within a certain geographic market.

F-17



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


The following unaudited condensed pro forma
consolidated statement of operations data shows the results of
the Companys operations for the years ended
December 31, 2003 and 2002 as if Allied and other 2003
business combinations had occurred at the beginning of the years
presented:

|                                                                |                                              |      |   |         |   |  |   |         |  
|--------------------------------------------------------------- | -------------------------------------------- | ---- | - | ------- | - |  | - | ------- | -
|                                                                |                                              | 2003 |   | 2002   
|                                                                |                                              |      |   |        
|Statement of operations data (unaudited):                       |                                              |      |   |         |   |  |   |        
|                                                                | Revenue                                      |      | $ | 186,822 |   |  | $ | 165,583 |  
|                                                                | Net loss attributable to Common Shareholders |      |   | (76,115 | ) |  |   | (8,963  | )
|                                                                | Basic and diluted net loss per Common Share  |      | $ | (1.93   | ) |  | $ | (0.27   | )
|Pro forma weighted average number of shares (in
    thousands): |                                              |      |   |         |   |  |   |        
|                                                                | Basic and diluted                            |      |   | 39,382  |   |  |   | 33,014  |  

These unaudited condensed pro forma consolidated
results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations
had the acquisitions taken place as of the beginning of the
respective periods or the results of future operations of the
Company. Furthermore, the pro forma results do not give effect
to all cost savings or incremental costs that may occur as a
result of the integration and consolidation of the acquisitions.



| |                          
| | -------------------------
| | Disposal of US Operations

On April 2, 2001, the Company entered into
an agreement with Waste Management Inc. for the sale of a
substantial majority of its assets used in connection with its
operations in Rochester and Syracuse, New York and
Williamsport, Pennsylvania, for a total sale price of
approximately $20.6 million. The net cash proceeds (after
taking into account a holdback of approximately
$1.0 million at December 31, 2001, plus transaction
and other related costs) from the transaction amounted to
approximately $18.1 million. In June 2001, the Company
entered into agreements to sell the remaining assets then used
in connection with its operations in the US for a combined sales
price of approximately $1.5 million. The net cash proceeds
(after taking into account transaction and other related costs)
from these transactions were approximately $1.0 million.
The overall loss on disposition of the operations in the US
recorded in 2001 was approximately $4.9 million. During
2003, the Company received recoveries of approximately
$0.2 million (2002  $0.7 million) in
connection with the disposal of its US operations.



|   |                                              
|-- | ---------------------------------------------
|4. | Prepaid Expenses and Other Current
    Assets

Prepaid expenses and other current assets consist
of the following as of December 31, 2003 and 2002:

|                                                                           |  |      |        |      |  |   |       | 
|-------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ----- | 
|                                                                           |  | 2003 |        | 2002
|                                                                           |  |      |        |     
|Prepaid expenses                                                           |  | $    | 6,623  |      |  | $ | 1,155 | 
|Cash collateral deposits for letters of credit                             |  |      | 9,929  |      |  |   |      | 
|Debt issue costs related to the 364-day senior
    secured credit facility |  |      | 8,829  |      |  |   |      | 
|Other current assets                                                       |  |      | 1,676  |      |  |   | 506   | 
|                                                                           |  |      |        |      |  |   |       | 
|Total                                                                      |  | $    | 27,057 |      |  | $ | 1,661 | 
|                                                                           |  |      |        |      |  |   |       | 

The debt issue costs related to the
Companys 364-day senior secured credit facility will be
amortized during 2004 over the term of the facility.

F-18



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)




|   |                       
|-- | ----------------------
|5. | Property and Equipment

Property and equipment consist of the following
as of December 31, 2003 and 2002:

|                                                                           |  |      |         |      |  |   |         |  
|-------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                                           |  | 2003 |         | 2002
|                                                                           |  |      |         |     
|Land and buildings                                                         |  | $    | 6,132   |      |  | $ | 2,768   |  
|Vehicles                                                                   |  |      | 62,182  |      |  |   | 39,735  |  
|Containers, compactors, landfill and recycling
    equipment               |  |      | 39,902  |      |  |   | 25,520  |  
|Furniture, fixtures, other office equipment and
    leasehold improvements |  |      | 5,927   |      |  |   | 3,725   |  
|                                                                           |  |      |         |      |  |   |         |  
|Total property and equipment                                               |  |      | 114,143 |      |  |   | 71,748  |  
|Less: Accumulated depreciation                                             |  |      | (39,622 | )    |  |   | (25,838 | )
|                                                                           |  |      |         |      |  |   |         |  
|Property and equipment, net                                                |  | $    | 74,521  |      |  | $ | 45,910  |  
|                                                                           |  |      |         |      |  |   |         |  

Included in property and equipment at
December 31, 2003, are vehicles held under capital leases
with a cost of $5.7 million (2002 
$5.9 million) and accumulated depreciation of
$1.9 million (2002  $1.8 million). In 2001,
the Company recognized as a component of depreciation, depletion
and amortization an impairment charge of approximately
$2.0 million.

6.                Landfill
Sites, Accrued Closure, Post-Closure and Other
Obligations



| |               
| | --------------
| | Landfill Sites

Landfill sites consist of the following as of
December 31, 2003 and 2002:

|                      |  |      |         |      |  |   |        |  
|--------------------- |  | ---- | ------- | ---- |  | - | ------ | -
|                      |  | 2003 |         | 2002
|                      |  |      |         |     
|Landfill sites        |  | $    | 128,044 |      |  | $ | 16,788 |  
|Accumulated depletion |  |      | (10,503 | )    |  |   | (3,704 | )
|                      |  |      |         |      |  |   |        |  
|Landfill sites, net   |  | $    | 117,541 |      |  | $ | 13,084 |  
|                      |  |      |         |      |  |   |        |  

On an annual basis, the Company updates the
development cost estimates, closure and post-closure and future
capacity estimates for its landfills. Future capacity estimates
are updated using surveys to estimate utilized disposal capacity
and remaining disposal capacity. These cost and capacity
estimates are reviewed and approved by senior management on an
annual basis.

The change in landfill sites for the years ended
December 31, 2003, 2002 and 2001 is as follows:

|                                 |                                        |      |         |        |   |      |        |        |   |   |       |      |  
|-------------------------------- | -------------------------------------- | ---- | ------- | ------ | - | ---- | ------ | ------ | - | - | ----- | ---- | -
|                                 |                                        | 2003 |         | 2002   |   | 2001
|                                 |                                        |      |         |        |   |     
|Balance at beginning of the year |                                        | $    | 13,084  |        |   | $    | 3,768  |        |   | $ | 4,239 |     
|                                 | Acquisitions                           |      |         | 90,094 |   |      |        | 11,936 |   |   |       |     |  
|                                 | Additional site costs                  |      |         | 12,268 |   |      |        | 368    |   |   |       | 11   |  
|                                 | Depletion                              |      |         | (4,789 | ) |      |        | (3,124 | ) |   |       | (238 | )
|                                 | Effect of foreign exchange translation |      |         | 3,227  |   |      |        | 136    |   |   |       | (244 | )
|                                 | SFAS No. 143 adjustment                |      |         | 3,657  |   |      |        |       |   |   |       |     |  
|                                 |                                        |      |         |        |   |      |        |        |   |   |       |     
|Balance at end of the year       |                                        | $    | 117,541 |        |   | $    | 13,084 |        |   | $ | 3,768 |     
|                                 |                                        |      |         |        |   |      |        |        |   |   |       |     

F-19



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)




| |                                                        
| | -------------------------------------------------------
| | Accrued closure, post-closure and other
    obligations

Accrued closure, post-closure and other
obligations consist of the following as of December 31,
2003 and 2002:

|                                             |  |      |       |      |  |   |       | 
|-------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                             |  | 2003 |       | 2002
|                                             |  |      |       |     
|Accrued closure and post-closure obligations |  | $    | 7,737 |      |  | $ | 1,925 | 
|Capital lease obligations                    |  |      | 911   |      |  |   | 1,610 | 
|Other obligations                            |  |      | 143   |      |  |   |      | 
|                                             |  |      |       |      |  |   |       | 
|                                             |  | $    | 8,791 |      |  | $ | 3,535 | 
|                                             |  |      |       |      |  |   |       | 

Accrued closure and post-closure obligations
include the costs associated with obligations for closure and
post-closure of the Companys landfills. The anticipated
timeframe for paying these costs varies based on the remaining
useful life of each landfill as well as the duration of the
post-closure monitoring period. The changes to accrued closure
and post-closure obligations are as follows:

|                                 |                                         |      |       |       |  |      |       |     |  |   |     |    |  
|-------------------------------- | --------------------------------------- | ---- | ----- | ----- |  | ---- | ----- | --- |  | - | --- | -- | -
|                                 |                                         | 2003 |       | 2002  |  | 2001
|                                 |                                         |      |       |       |  |     
|Balance at beginning of the year |                                         | $    | 1,925 |       |  | $    | 170   |     |  | $ | 121 |   
|                                 | Acquisitions                            |      |       | 1,483 |  |      |       | 896 |  |   |     |   |  
|                                 | Expense                                 |      |       | 455   |  |      |       | 856 |  |   |     | 57 |  
|                                 | Impact of foreign exchange fluctuations |      |       | 991   |  |      |       | 3   |  |   |     | (8 | )
|                                 | SFAS No. 143 adjustment                 |      |       | 2,883 |  |      |       |    |  |   |     |   |  
|                                 |                                         |      |       |       |  |      |       |     |  |   |     |   
|Balance at end of the year       |                                         | $    | 7,737 |       |  | $    | 1,925 |     |  | $ | 170 |   
|                                 |                                         |      |       |       |  |      |       |     |  |   |     |   

The aggregate non-discounted annual payments
required in respect of accrued closure and post-closure
obligations for the Companys permitted sites as of
December 31, 2003 are as follows:

|           |  |        |        | 
|---------- |  | ------ | ------ | 
|           |  | Amount
|           |  |       
|2004       |  | $      | 371    | 
|2005       |  |        | 40     | 
|2006       |  |        | 192    | 
|2007       |  |        | 622    | 
|2008       |  |        | 705    | 
|Thereafter |  |        | 16,944 | 
|           |  |        |        | 
|Total      |  | $      | 18,874 | 
|           |  |        |        | 

The above future expenditures for closure and
post-closure obligations assume full utilization of permitted
and probable expansion airspace.

F-20



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)




|   |             
|-- | ------------
|7. | Other Assets

Other assets consisted of the following as of
December 31, 2003 and 2002:

|                                                                                                           |  |      |        |      |  |   |       | 
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ----- | 
|                                                                                                           |  | 2003 |        | 2002
|                                                                                                           |  |      |        |     
|Debt and redeemable Preferred Stock issue costs,
    net of accumulated amortization of $496 ($400  2002) |  | $    | 2,096  |      |  | $ | 2,108 | 
|Acquisition deposits and deferred acquisition
    costs                                                    |  |      | 20,182 |      |  |   | 1,575 | 
|                                                                                                           |  |      |        |      |  |   |       | 
|Total other assets                                                                                         |  | $    | 22,278 |      |  | $ | 3,683 | 
|                                                                                                           |  |      |        |      |  |   |       | 



|   |                                     
|-- | ------------------------------------
|8. | Goodwill and Other Intangible Assets

Goodwill and other intangible assets consist of
the following as of December 31, 2003 and 2002:

|                                                         |                                      |      |         |        |   |   |        |       |  
|-------------------------------------------------------- | ------------------------------------ | ---- | ------- | ------ | - | - | ------ | ----- | -
|                                                         |                                      | 2003 |         | 2002  
|                                                         |                                      |      |         |       
|Other intangible assets subject to amortization:         |                                      |      |         |        |   |   |        |      
|                                                         | Customer relationships and contracts |      | $       | 17,909 |   |   | $      | 1,928 |  
|                                                         | Non-competition agreements and other |      |         | 2,653  |   |   |        | 1,031 |  
|                                                         |                                      |      |         |        |   |   |        |      
|                                                         |                                      |      | 20,562  |        |   |   | 2,959  |      
|Less: Accumulated amortization                           |                                      |      |         |        |   |   |        |      
|                                                         | Customer relationships and contracts |      |         | (837   | ) |   |        | (266  | )
|                                                         | Non-competition agreements and other |      |         | (889   | ) |   |        | (462  | )
|                                                         |                                      |      |         |        |   |   |        |      
|Other intangible assets subject to amortization,
    net |                                      |      | 18,836  |        |   |   | 2,231  |      
|Goodwill                                                 |                                      |      | 144,544 |        |   |   | 64,365 |      
|                                                         |                                      |      |         |        |   |   |        |      
|Total goodwill and other intangible assets               |                                      | $    | 163,380 |        |   | $ | 66,596 |      
|                                                         |                                      |      |         |        |   |   |        |      

The changes in goodwill for the years ended
December 31, 2003 and 2002 are as follows:

|                                 |                                                          |        |        |        |   |       |        |        |  |   |         |        |   |   |        |       | 
|-------------------------------- | -------------------------------------------------------- | ------ | ------ | ------ | - | ----- | ------ | ------ |  | - | ------- | ------ | - | - | ------ | ----- | 
|                                 |                                                          |        |        |       
|                                 |                                                          | 2003   |        |       
|                                 |                                                          |        |        |       
|                                 |                                                          | Canada |        | US     |   | Total |        | 2002  
|                                 |                                                          |        |        |        |   |       |        |       
|Balance at beginning of the year |                                                          | $      | 64,365 |        |   | $     |       |        |  | $ | 64,365  |        |   | $ | 54,489 |      
|                                 | Acquisitions                                             |        |        | 817    |   |       |        | 65,822 |  |   |         | 66,639 |   |   |        | 9,348 | 
|                                 | Effect of foreign exchange translation                   |        |        | 13,989 |   |       |        |       |  |   |         | 13,989 |   |   |        | 528   | 
|                                 | Other adjustments related to prior year
    acquisitions |        |        | (449   | ) |       |        |       |  |   |         | (449   | ) |   |        |      | 
|                                 |                                                          |        |        |        |   |       |        |        |  |   |         |        |   |   |        |      
|Balance at end of the year       |                                                          | $      | 78,722 |        |   | $     | 65,822 |        |  | $ | 144,544 |        |   | $ | 64,365 |      
|                                 |                                                          |        |        |        |   |       |        |        |  |   |         |        |   |   |        |      

F-21



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


Amortization expense of other intangible assets
for the year ended December 31, 2003, was $0.8 million
(2002  $0.6 million; 2001 
$0.7 million). Estimated future amortization of other
intangible assets based on balances existing at
December 31, 2003, is as follows:

|           |  |        |        | 
|---------- |  | ------ | ------ | 
|           |  | Amount
|           |  |       
|2004       |  | $      | 2,923  | 
|2005       |  |        | 2,649  | 
|2006       |  |        | 2,450  | 
|2007       |  |        | 1,841  | 
|2008       |  |        | 1,405  | 
|Thereafter |  |        | 7,568  | 
|           |  |        |        | 
|Total      |  | $      | 18,836 | 
|           |  |        |        | 

As of December 31, 2003, the weighted
average amortization period for other intangible assets is as
follows:

|                                     |  |           
|------------------------------------ |  | ----------
|Customer relationships and contracts |  | 13.6 years
|Non-competition agreements and other |  | 4.2 years 



|   |                                                   
|-- | --------------------------------------------------
|9. | Accrued Expenses and Other Current
    Liabilities

Accrued expenses and other current liabilities
consist of the following as of December 31, 2003 and 2002:

|                                                           |  |      |        |      |  |   |        | 
|---------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                           |  | 2003 |        | 2002
|                                                           |  |      |        |     
|Accrued compensation, benefits and subcontractor
    costs |  | $    | 5,665  |      |  | $ | 1,992  | 
|Accrued waste disposal costs                               |  |      | 2,631  |      |  |   | 2,243  | 
|Accrued acquisition costs                                  |  |      | 1,804  |      |  |   | 1,064  | 
|Accrued insurance                                          |  |      | 3,383  |      |  |   |       | 
|Current portion of capital lease obligations               |  |      | 1,128  |      |  |   | 1,262  | 
|Deferred revenue                                           |  |      | 5,834  |      |  |   | 1,304  | 
|Other accrued expenses and liabilities                     |  |      | 4,956  |      |  |   | 5,211  | 
|                                                           |  |      |        |      |  |   |        | 
|Total accrued expenses and other current
    liabilities   |  | $    | 25,401 |      |  | $ | 13,076 | 
|                                                           |  |      |        |      |  |   |        | 

F-22



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)




|    |     
|--- | ----
|10. | Debt

Debt consists of the following as of
December 31, 2003 and 2002:

|                                                                                                          |  |      |          |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- |  | - | ------ | -
|                                                                                                          |  | 2003 |          | 2002
|                                                                                                          |  |      |          |     
|364-day senior secured credit facility, interest
    at 9.0% per annum, due December 29, 2004             |  | $    | 172,125  |      |  | $ |       |  
|Senior Credit Facility (repaid in full on
    December 31, 2003)                                          |  |      |         |      |  |   | 50,710 |  
|Other subordinated promissory notes payable,
    interest at 6.67%, due June 2018 as of December 31, 2003 |  |      | 3,285    |      |  |   | 63     |  
|                                                                                                          |  |      |          |      |  |   |        |  
|                                                                                                          |  |      | 175,410  |      |  |   | 50,773 |  
|Less: current portion                                                                                     |  |      | (172,280 | )    |  |   | (63    | )
|                                                                                                          |  |      |          |      |  |   |        |  
|Total long-term portion                                                                                   |  | $    | 3,130    |      |  | $ | 50,710 |  
|                                                                                                          |  |      |          |      |  |   |        |  

364-day
senior secured credit facility

On December 31, 2003, the Companys US
subsidiary, WSI, entered into a $220.0 million 364-day
senior secured credit facility comprised of a
$195.0 million term loan and a $25.0 million revolving
credit facility, which is secured by substantially all of the
current and future acquired assets of the Company. Initial
borrowings under the 364-day facility were used to finance the
acquisition of certain assets of Allied and to repay the
Companys prior senior credit facility in full. The 364-day
facility bears interest at 9.0% per annum and has an
initial term of 364 days with an extension option. If the
option is exercised, the term of the 364-day facility would
extend to July 2005 at a rate of 11.0% per annum. The
364-day facility contains certain financial and other covenants
that restrict the Companys ability to, among other things,
make capital expenditures, incur indebtedness, incur liens,
dispose of property, repay debt, pay dividends, repurchase
shares and make certain acquisitions. The financial covenants
primarily relate to: (i) a maximum leverage ratio;
(ii) a minimum interest coverage ratio; and (iii) a
minimum EBITDA, as defined in the agreement governing the
364-day facility. The Company incurred $8.8 million of
issue costs directly related to the facility, which were
capitalized and will be amortized over the 364-day term of the
facility. As of December 31, 2003, the $25.0 million
revolving credit facility was undrawn.

The aggregate annual principal repayments
required in respect to debt as of December 31, 2003 are as
follows:

|           |  |        |         | 
|---------- |  | ------ | ------- | 
|           |  | Amount
|           |  |       
|2003       |  | $      | 172,280 | 
|2004       |  |        | 166     | 
|2005       |  |        | 177     | 
|2006       |  |        | 189     | 
|2007       |  |        | 203     | 
|Thereafter |  |        | 2,395   | 
|           |  |        |         | 
|Total      |  | $      | 175,410 | 
|           |  |        |         | 



| |                                                                 
| | ----------------------------------------------------------------
| | Senior Credit Facility (repaid in full on
    December 31, 2003)

In June 2002, the Company completed a refinancing
of its former senior debt facility and entered into a new Senior
Secured Credit Facility, or Senior Credit Facility, with a
syndicate of financial institutions. The Senior Credit Facility
was a revolving credit facility denominated in Canadian dollars
and provided for

F-23



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


borrowings of up to the lesser of
$76.5 million or C$116.0 million. The Senior Credit
Facility was collateralized by a first priority security
interest in substantially all of the current and future acquired
assets of the Company. The Senior Credit Facility contained
certain financial and other covenants that restricted the
Companys ability to, among other things, make capital
expenditures, pay dividends, repurchase shares and make certain
acquisitions. Interest rates were based on current market rates
plus a fixed margin based on the form of borrowing (Canadian
Eurodollar or Prime). The fixed margins ranged from 2.75% to
3.75% per annum for Canadian Eurodollar rate loans and
1.25% to 2.25% per annum for prime rate loans. Within the
ranges, the fixed margin was determined based on the
Companys leverage ratio. The interest rate on the Senior
Credit Facility, prior to its repayment, was 5.75% per
annum compared to 6.06% per annum as of December 31,
2002. The weighted average rate of interest on all Senior debt
for the year ended December 31, 2002 was 6.8%
(2001  9.5%).

In May 2003, the Company amended its Senior
Credit Facility to authorize the completion of the acquisition
of the JED Landfill, to increase the Companys authorized
capital expenditures in connection with certain new municipal
service contracts awarded to the Company and to exclude up to
$12.0 million in capital expenditures incurred in
connection with the acquisition of the JED Landfill or the
development of the JED Landfill site from the capital
expenditure cap imposed by the Senior Credit Facility. In
November 2003, the Company amended its Senior Credit Facility to
allow for: (i) the acquisition of certain assets of Allied;
(ii) subordinated debt of up to $110.0 million to
complete the Allied acquisitions; and (iii) increased
lending commitments of up to the lesser of $88.0 million or
C$131.0 million.



|    |                                                       
|--- | ------------------------------------------------------
|11. | Cumulative Mandatorily Redeemable Preferred
    Shares

In May 2003, WSI issued 55,000 shares of
redeemable Preferred Stock, or the WSI Preferred Stock to Kelso
Investment Associates VI, L.P. and KEP VI, LLC, or collectively,
Kelso, pursuant to the terms of an agreement dated as of
May 6, 2003, as amended in February 2004, or the WSI
Subscription Agreement, at a price of $1,000 per share. WSI
also issued to Kelso 7,150,000 warrants to purchase shares of
Common Stock (on a one-for-one basis) of WSI for $3.00 per
share. The warrants are exercisable at any time following the
completion of a reorganization pursuant to the Ontario Business
Corporations Act by which Capital Environmental
Resource, Inc. will become an indirect wholly owned
subsidiary of WSI, which the Company refers to as the Migration.
The issuance of the WSI Preferred Stock resulted in proceeds of
approximately $49.5 million, net of fees of approximately
$5.5 million. The shares of WSI Preferred stock are
non-voting. The WSI Preferred Stock entitles the holders to a
liquidation preference of $1,000 per share and a cumulative
cash dividend of 17.75% per annum (compounding and accruing
quarterly in arrears). The liquidation preference approximated
$61.8 million as of December 31, 2003. As the Company
is not permitted to declare and pay cash dividends pursuant to
the terms of the 364-day facility, the dividend payments will
accrue. The WSI Preferred Stock, including all accrued and
unpaid dividends, must be redeemed in full by no later than
May 6, 2015. Until May 6, 2006, the Company may redeem
all or any part of the WSI Preferred Stock on payment of the sum
of $1,000 per share plus accrued and unpaid dividends
calculated as if the WSI Preferred Stock were redeemed on
May 6, 2006, or approximately $92.7 million. If the
Company does not exercise the option to redeem all of the WSI
Preferred Stock by May 6, 2009, Kelso may require WSI to
initiate a sale of WSI or its assets on terms acceptable to its
board of directors consistent with the exercise by the board
members of their fiduciary obligations.

Additionally, Kelso, as the holder of the WSI
Preferred Stock, has the exclusive right to elect two directors
of WSI so long as 25,000 or more WSI Preferred Stock are
outstanding or one director so long as there are 5,000 or more
WSI Preferred Stock outstanding. Certain actions of WSI and its
affiliates, including incurring certain indebtedness, also
require the prior approval of the holders of a majority of the
WSI Preferred Stock. All of these covenants and restrictions
could limit the manner in which the

F-24



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


Company conducts its operations and could
adversely affect its ability to raise additional capital. Any
failure by the Company to comply with these covenants and
restrictions will, unless waived by Kelso, result in an
immediate obligation to redeem all of the then outstanding WSI
Preferred Stock. If such events occurred, the Company would be
required to refinance WSI or obtain capital from other sources,
including sales of additional debt or equity or the sale of
assets, in order to meet its redemption obligations.

Under the terms of the WSI Subscription
Agreement, as amended, if the Company does not complete the
Migration by June 30, 2004, the dividend payable on the WSI
Preferred Stock issued to Kelso will increase by 1% per
annum, from 17.75%, for every month that the Migration is
delayed, up to a maximum increase of an additional 12% per
annum. The Company may also be required to issue to Kelso an
additional 250,000 warrants per month for each month that the
Migration is delayed after June 30, 2004, up to an
additional 6,000,000 warrants to purchase WSI common stock, at
an exercise price of $0.01 per share. The increase in the
dividend payable on the WSI Preferred Stock issued to Kelso
would increase the amount to be paid to Kelso on the redemption
of the WSI Preferred Stock and would have a material adverse
effect on the Companys financial condition. By the terms
of the agreement, as amended, if the Migration is not completed
at all, Kelso may also require the Company to exchange the
existing 7,150,000 warrants to purchase common stock of WSI, and
any of the additional warrants for common stock of WSI issued as
a result of our completing the Migration after June 30,
2004, for warrants to purchase the Companys Common Shares.

The Company adopted SFAS No. 150 and
accordingly classified the WSI Preferred Stock as a liability.
The Company also allocated the relative fair value of the
proceeds to the WSI Preferred Stock and warrants. The 7,150,000
warrants have an allocated value on the date of issue of
approximately $14.8 million. The value allocated to the
warrants was treated as a component of equity, with an
offsetting amount treated as a discount which will accrete to
interest expense using the effective interest method over the
life of the WSI Preferred Stock to the earliest redemption date
of May 6, 2006.



|    |                              
|--- | -----------------------------
|12. | Commitments and Contingencies



| |       
| | ------
| | Leases

The following is a schedule of future minimum
lease payments as of December 31, 2003:

|                                                   |  |           |        |         |  |       |        |   |  |   |        | 
|-------------------------------------------------- |  | --------- | ------ | ------- |  | ----- | ------ | - |  | - | ------ | 
|                                                   |  | Operating |        | Capital |  |      
|                                                   |  | Leases    |        | Leases  |  | Total
|                                                   |  |           |        |         |  |      
|2004                                               |  | $         | 2,564  |         |  | $     | 1,243  |   |  | $ | 3,807  | 
|2005                                               |  |           | 1,882  |         |  |       | 585    |   |  |   | 2,467  | 
|2006                                               |  |           | 1,392  |         |  |       | 431    |   |  |   | 1,823  | 
|2007                                               |  |           | 1,306  |         |  |       |       |   |  |   | 1,306  | 
|2008                                               |  |           | 1,107  |         |  |       |       |   |  |   | 1,107  | 
|Thereafter                                         |  |           | 5,867  |         |  |       |       |   |  |   | 5,867  | 
|                                                   |  |           |        |         |  |       |        |   |  |   |        | 
|                                                   |  | $         | 14,118 |         |  |       | 2,259  |   |  | $ | 16,377 | 
|                                                   |  |           |        |         |  |       |        |   |  |   |        | 
|Less: amount representing interest                 |  |           |        |         |  |       | (220   | ) |  |   |        | 
|                                                   |  |           |        |         |  |       |        |   |  |   |        | 
|                                                   |  |           |        |         |  |       | 2,039  |   |  |   |        | 
|Less: current portion of capital lease obligations |  |           |        |         |  |       | (1,128 | ) |  |   |        | 
|                                                   |  |           |        |         |  |       |        |   |  |   |        | 
|Long-term capital lease obligations                |  |           |        |         |  | $     | 911    |   |  |   |        | 
|                                                   |  |           |        |         |  |       |        |   |  |   |        | 

F-25



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


The Company has entered into operating lease
agreements, primarily consisting of leases for the
Companys various facilities. Total rent expense, under
operating leases charged to operations, was approximately
$2.2 million for the year ended December 31, 2003
(2002  $1.8 million; 2001 
$1.9 million). The Company leases certain heavy equipment
and hauling vehicles under capital lease agreements. The assets
related to these leases have been capitalized and are included
in property and equipment.

Separately, as of December 31, 2003 the
Company had commitments for certain construction projects of
approximately $4.4 million.



| |                                       
| | --------------------------------------
| | Surety Bonds and Letters of
    Credit

Municipal solid waste services contracts, permits
and licenses to operate transfer stations, landfills and
recycling facilities may require performance or surety bonds,
letters of credit or other means of financial assurance to
secure contractual performance. As of December 31, 2003,
the Company had provided customers and various regulatory
authorities with such bonds and letters of credit amounting to
approximately $19.6 million (2002 
$17.1 million) to collateralize its obligations. The
Company expects that as a result of acquiring the northern and
central Florida assets of Allied, we will need to obtain
additional performance or surety bonds of approximately
$9.4 million.



| |                    
| | -------------------
| | Environmental Risks

The Company is subject to liability for
environmental damage that its solid waste facilities may cause,
including damage to neighboring landowners or residents,
particularly as a result of the contamination of soil,
groundwater or surface water, including damage resulting from
conditions existing prior to the acquisition of such facilities
by the Company. Pollutants or hazardous substances whose
transportation, treatment or disposal was arranged by the
Company or its predecessors, may also subject the Company to
liability for any off-site environmental contamination caused by
these pollutants or hazardous substances.

Any substantial liability for environmental
damage incurred by the Company could have a material adverse
effect on the Companys financial condition, results of
operations or cash flows. As of the date of these consolidated
financial statements, the Company estimates the range of
reasonably possible loss related to environmental matters to be
insignificant and is not aware of any such environmental
liabilities that would be material to the Companys
operations or financial condition.



| |                   
| | ------------------
| | Disposal Agreement

On November 22, 2002, the Company entered
into a Put or Pay Disposal Agreement, or the Disposal Agreement,
with RCI Environnement Inc., Centres de Transbordement et de
Valorisation Nord Sud Inc., RCM Environnement Inc., collectively
the RCI Companies, and Intersan Inc., or Intersan, a subsidiary
of Canadian Waste Services Inc., pursuant to which the Company,
together with the RCI Companies, agreed to deliver to certain of
Intersans landfill sites and transfer stations in Quebec,
Canada, over the next 5 years, 850,000 metric tonnes of
waste per year, and for the next 2 years after the
expiration of the first 5 year term, 710,000 metric tonnes
of waste per year at a fixed disposal rate set out in the
Disposal Agreement. If the Company and the RCI Companies fail to
deliver the required tonnage, they are jointly and severally
required to pay to Intersan, C$23.67 per metric tonne for
every tonne below the required tonnage. If a portion of the
annual tonnage commitment is not delivered to a specific site
the Company is also required to pay C$8.00 per metric tonne
for every tonne below the site specific allocation. The
Companys obligations to Intersan are secured by a letter
of credit for C$4.0 million. The Company does not
anticipate material future payments under the Disposal Agreement
and accordingly, has not provided

F-26



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


for a liability pursuant to this agreement as of
December 31, 2003, or 2002. The companies within the RCI
Group are controlled by a director of the Company and/or
individuals related to that director.

Concurrently with the Disposal Agreement, the
Company entered into a three-year agreement with Canadian Waste
Services, Inc. to allow the Company to deliver up to 75,000 tons
in year one and up to 100,000 tons in years two and three of
non-hazardous solid waste to their landfill in Michigan at
negotiated fixed rates per ton.



| |                                     
| | ------------------------------------
| | Collective Bargaining
    Agreements

As of December 31, 2003, approximately 37%
of the Companys employees were subject to various
collective bargaining agreements. Currently, there are no
significant grievances with regards to these agreements.

Legal
Proceedings

In the normal course of the Companys
business and as a result of the extensive governmental
regulation of the solid waste industry, the Company may
periodically become subject to various judicial and
administrative proceedings involving federal, provincial, state
or local agencies. In these proceedings, an agency may seek to
impose fines on the Company or to revoke or deny renewal of an
operating permit or license held by it. From time to time, the
Company may also be subject to actions brought by citizens
groups or adjacent landowners or residents in connection with
the permitting and licensing of transfer stations and landfills
or alleging environmental damage or violations of the permits
and licenses pursuant to which it operates.

In addition, the Company may become party to
various claims and suits pending for alleged damages to persons
and property, alleged violations of certain laws and alleged
liabilities arising out of matters occurring during the normal
operation of a waste management business.

On December 18, 2002, Canadian Waste
Services Inc., or Canadian Waste, a competitor of the Company,
commenced an action against the Company and one of the
Companys employees who was previously employed by Canadian
Waste. The action alleges breach of the employment contract
between the employee and Canadian Waste, and breach of fiduciary
duties. The action also alleges that the Company participated in
those alleged breaches. The action seeks damages from the
Company and its employee for the alleged breach of contract and
fiduciary duties in the amount of approximately
C$14.5 million, as amended in December 2003, and an
injunction enjoining the employee from acting contrary to the
alleged terms of his employment contract and fiduciary duties.

On February 7, 2003, Canadian Waste
commenced an action against the Company alleging breach of a
landfill tipping agreement entered into by the Company and
Canadian Waste. The action alleges that the Company breached the
Agreement by not paying certain amounts invoiced to the Company
by Canadian Waste, relating to increased costs of Canadian Waste
in operating the Ryley Landfill. Canadian Waste seeks damages in
the amount of approximately C$1.3 million. The landfill
tipping agreement contains an arbitration clause that forecloses
court action and requires arbitration with respect to certain
disputes.

The Company intends to vigorously defend these
actions both with respect to liability and damages. No provision
has been made in these financial statements for the above
matters. The Company does not believe that the reasonably
possible losses in respect of all or any of these matters would
have a material adverse impact on the Companys business,
financial condition, results of operations or cash flows.

F-27



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)




|    |              
|--- | -------------
|13. | Capital Stock

Series I
Preferred Shares

During 2003 and 2002, the Company completed
several private offerings of its Series 1 Preferred Shares,
which were converted to Common Shares. The Series 1
Preferred Shares were non-voting and were not entitled to
receive any dividends declared by the Company. The following
table sets forth the varied tranches of Series 1 Preferred
Shares issued during 2003 (amounts in thousands except share and
per share amounts):

|             |  |                  |            |           |  |          |      |          |  |          |        |                  |  |   |        |     |  |  |           |  |  |   |      | 
|------------ |  | ---------------- | ---------- | --------- |  | -------- | ---- | -------- |  | -------- | ------ | ---------------- |  | - | ------ | --- |  |  | --------- |  |  | - | ---- | 
|             |  | Series 1         |            | Price Per |  | Gross    |      | Net      |  | Warrants |        | Warrant Exercise
|Period       |  | Preferred Shares |            | Share     |  | Proceeds |      | Proceeds |  | Issued   |        | Price Per Share 
|             |  |                  |            |           |  |          |      |          |  |          |        |                 
|March  June |  |                  | 10,241,666 |           |  | $        | 3.00 |          |  | $        | 30,725 |                  |  | $ | 28,925 |     |  |  | 2,048,333 |  |  | $ | 3.00 | 
|June(a)      |  |                  | 5,000,000  |           |  | $        | 3.00 |          |  |          | 15,000 |                  |  |   | 14,100 |     |  |  | 1,000,000 |  |  | $ | 3.00 | 
|July(b)      |  |                  | 4,154,667  |           |  | $        | 3.00 |          |  |          | 12,464 |                  |  |   | 11,600 |     |  |  | 830,933   |  |  | $ | 3.00 | 
|September(b) |  |                  | 8,750,000  |           |  | $        | 3.20 |          |  |          | 28,000 |                  |  |   | 27,877 |     |  |  | 1,575,000 |  |  | $ | 3.20 | 
|             |  |                  |            |           |  |          |      |          |  |          |        |                  |  |   |        |     |  |  |           |  |  |   |      | 
|             |  |                  | 28,146,333 |           |  |          |      |          |  | $        | 86,189 |                  |  | $ | 82,502 | (c) |  |  | 5,454,266 |  |  |   |      | 
|             |  |                  |            |           |  |          |      |          |  |          |        |                  |  |   |        |     |  |  |           |  |  |   |      | 



---



|    |  |                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The proceeds from this issue were received and
    recorded as of June 25, 2003; the shares were issued
    July 8, 2003.                                                                    
|   
|(b) |  | A shareholder and certain of the Companys
    officers and directors and/or their affiliates, purchased
    1,762,500 Series 1 Preferred Shares in these private
    placement transactions.
|   
|(c) |  | Separately, the Company recorded a tax asset of
    $1.3 million for the deductible portion of the fees paid.                                                                                

The Company accounted for the issuance of the
Series 1 Preferred Shares as the issuance of three
differing securities: (i) Series 1 Preferred Shares
convertible into Common Shares; (ii) warrants exercisable
for Common Shares; and (iii) a beneficial conversion
feature embedded in the Series 1 Preferred Shares. The
gross proceeds from the offerings were allocated based upon the
relative fair value of the Series 1 Preferred Shares on the
commitment date (date of issue), and the warrants. The fair
value of the Common Shares at the commitment date was compared
to the gross proceeds allocated to the Series 1 Preferred
Shares based upon their relative fair value. The excess of fair
value of the Common Shares over the gross proceeds allocated to
the Series 1 Preferred Shares was deemed to be the value
associated with the beneficial conversion feature of the
Series 1 Preferred Shares and was recorded as a non-cash
dividend on the Series 1 Preferred Shares. Value ascribed
to the beneficial conversion feature of the Series 1
Preferred Shares and the allocated fair value of the warrants
approximated $54.6 million for the year ended
December 31, 2003, which was recognized as a deemed
dividend to the Series 1 Preferred Shareholders.

At the Companys annual meeting held in
December 2003, the shareholders approved the conversion of the
Series 1 Preferred Shares to Common Shares, thereby
effecting the exchange on the basis of one Common Share for each
one Series 1 Preferred Share and the exercisability of the
warrants that were issued with the Series 1 Preferred
Shares.

On February 6, 2002, the Company completed a
private placement sale to certain investors, including some of
the Companys shareholders, directors and officers, of
11,320,754 Series 1 Preferred Shares at a price of
$2.65 per share, resulting in net proceeds to the Company
of approximately $28.1 million. There were no warrants
issued relative to the 2002 Series 1 Preferred Shares. The
closing market price of the Companys common stock, as
reported by NASDAQ, on February 6, 2002 was $3.95 per
share resulting in a beneficial conversion feature of
$1.30 per share or approximately $14.7 million, which
was recognized as

F-28



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


a deemed dividend to the Series 1 Preferred
Shareholders. Under the terms of the Preferred Shares, the
holders had agreed to hold a stockholders meeting to approve the
conversion and were required under contract to vote their Common
Shares in favor of the conversion. As the holders of the
Preferred Shares represented the majority of the outstanding
Common Shares of the Company, the conversion of Preferred Shares
was assumed at the time of their issuance. On March 27,
2002, the stockholders approved the conversion and all
outstanding Series 1 Preferred Shares were converted into
Common Shares.

Class
B Special Stock

On November 1, 1997, the Company issued
400,000 redeemable convertible Class B Special
shares valued at $7.5 million in exchange for the remaining
outstanding common stock of Western Waste. The Class
B Special Stock was automatically convertible into
Common Stock on completion of a qualifying public
offering. The holders could otherwise require the Company
to redeem such shares at a specified price of C$21.67 per
share. On June 8, 1999, the Class B Special
Stock was converted into 484,645 Common Shares on completion of
the initial public offering, or IPO. In satisfaction of the
shortfall of the price of the initial public offering, the
Company paid the holder an additional $0.5 million. In
addition, the Company agreed to pay the holder an additional
payment if the holder elected to sell up to 112,323 shares
in the future, based on the shortfall if the selling price is
less than C$21.67 per share. No Class B Special
Stock was authorized or outstanding during 2003, 2002, or 2001.
During 2001, the Company paid the former holder an additional
$1.0 million in full satisfaction of its shortfall
obligation. This amount has been accounted for as a reduction of
the value initially ascribed to the Common Shares. As of
December 31, 2003, the Company had no further obligations
related to the Class B Special Stock.

Stock
Purchase Options and Warrants

In September 2001, the Company issued 1,000,000
warrants to purchase Common Stock to the Companys Chairman
and CEO at an exercise price of $2.70 per share expiring
September 7, 2011. The market price at the date of grant
was $3.82 per share resulting in a compensation cost of
$1.12 million, which has been recorded in the consolidated
statement of operations over the three-year vesting period in
accordance with APB No. 25. Based on the terms and
conditions of the warrants, variable accounting for the
compensation expense is required to be recognized. During 2003,
an additional $1.0 million was attributed to the value of
the warrants based on the increased market value of the stock.
During the year ended December 31, 2003, total compensation
expense recognized was $2.7 million (2002 
$1.0 million; 2001  $0.2 million).

On November 1, 2001, the Company issued
100,000 options to purchase Common Stock to a non-employee in
conjunction with the settlement of a legal matter. The options
were issued at the market price of $3.75 on the date of grant
resulting in an expense recorded by the Company in the amount of
$0.2 million. The options were valued using the
Black-Scholes option pricing model applying the following
assumptions: risk free interest rate of 3.21%, annual dividend
yield of nil and expected volatility of 79%. The options fully
vested and were exercisable on November 1, 2003, and expire
on November 1, 2005. During 2003, 77,500 of these options
were exercised for proceeds of $0.3 million. As of
December 31, 2003, 22,500 options were outstanding.

On December 7, 2001, the Company issued
200,000 warrants to purchase Common Stock to a non-employee in
connection with the settlement of a legal matter. The warrants
were issued at the market price of $3.94 on the date of grant
resulting in an expense recorded by the Company in the amount of
$0.5 million. The warrants were valued using the
Black-Scholes option pricing model applying the following
assumptions: risk free interest rate of 4.69%, annual dividend
yield of nil and expected volatility of 79%. The warrants vest
over a period of four years and expire on December 8, 2005.
During 2003,

F-29



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


50,000 of these warrants were exercised for
proceeds of $197. As of December 31, 2003, 150,000 warrants
were outstanding.

In 1997, the Company issued 123,084 warrants to
certain founding stockholders at an exercise price of
C$0.007 per share expiring July 15, 2002. During the
year ended December 31, 1999, 30,772 Common Shares had been
issued on exercise of these warrants. During the year ended
December 31, 2002, 86 warrants were cancelled and the
remaining 92,226 warrants were exercised.

Employee and
Director Stock Option Plans and Option Grants

Under the 1997 Stock Option Plan, the Company may
grant options to acquire Common Shares up to a maximum of 10% of
the then issued and outstanding Common Shares on an as converted
basis. All of the options issued under the 1997 plan vested on
completion of the initial public offering of the Companys
securities. No options will remain exercisable later than five
years after the grant date, unless the Board of Directors
determines otherwise.

Under the 1999 Stock Option Plan, the Company may
grant options to acquire Common Shares up to a maximum of 19% of
the then issued and outstanding shares of Common Stock and
Common Stock equivalents, including stock options issued under
the 1997 Stock Option Plan. Options granted to non-employee
directors will generally vest one year from the date of grant.
Options granted to employees become exercisable only after the
second anniversary of the grant date, unless otherwise
determined by the Compensation Committee. No option will remain
exercisable later than five years after the grant date, unless
the Compensation Committee determines otherwise. Upon a change
of control event, options become immediately exercisable.

All options granted under the 1997 and 1999 Stock
Option Plans have been granted at or above market price. The
weighted average exercise price of the aggregate outstanding
options at December 31, 2003, was $4.71 (2002 
$4.18; 2001  $5.09). The weighted average contractual
life of the options outstanding as at December 31, 2003,
was 4.24 years (2002  3.75 years). As of
December 31, 2003, the weighted average exercise price of
options that were exercisable was $5.07 (2002  $9.12;
2001  $8.65). Certain of the Companys options
are priced in Canadian dollars and certain options are priced in
US

F-30



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


dollars. Stock option activity, for employee
options covered by the 1997 and 1999 Stock Option Plans for the
years ended December 31, 2003, 2002 and 2001 is as follows:

|                                                        |                                        |      |           |            |   |      |           |            |   |  |           |            |  
|------------------------------------------------------- | -------------------------------------- | ---- | --------- | ---------- | - | ---- | --------- | ---------- | - |  | --------- | ---------- | -
|                                                        |                                        | 2003 |           | 2002       |   | 2001
|                                                        |                                        |      |           |            |   |     
|Options outstanding at beginning of the year            |                                        |      | 2,435,816 |            |   |      | 1,871,713 |            |   |  | 1,018,334 |           
|                                                        | Options granted during the year        |      |           | 5,493,000  |   |      |           | 1,065,500  |   |  |           | 1,152,694  |  
|                                                        | Options exercised during the year      |      |           | (20,000    | ) |      |           | (85,388    | ) |  |           |           |  
|                                                        | Options forfeited during the year      |      |           | (102,117   | ) |      |           | (416,009   | ) |  |           | (299,315   | )
|                                                        |                                        |      |           |            |   |      |           |            |   |  |           |           
|Options outstanding at end of the year                  |                                        |      | 7,806,699 |            |   |      | 2,435,816 |            |   |  | 1,871,713 |           
|                                                        |                                        |      |           |            |   |      |           |            |   |  |           |           
|Options exercisable at end of the year                  |                                        |      | 1,790,699 |            |   |      | 284,500   |            |   |  | 616,713   |           
|                                                        |                                        |      |           |            |   |      |           |            |   |  |           |           
|Weighted average exercise price: (C$ Options In
    C$) |                                        |      |           |            |   |      |           |            |   |  |           |           
|                                                        | Options granted                        |      | $         | 6.49       |   |      | $         | 5.87       |   |  | $         |           |  
|                                                        | Options exercised                      |      | $         | 4.05       |   |      | $         | 7.22       |   |  | $         |           |  
|                                                        | Options forfeited                      |      | $         | 9.47       |   |      | $         | 10.94      |   |  | $         | 9.64       |  
|                                                        | Options outstanding at end of the year |      | $         | 6.15       |   |      | $         | 5.70       |   |  | $         | 13.25      |  
|Option price ranges: (C$ Options In C$)                 |                                        |      |           |            |   |      |           |            |   |  |           |           
|                                                        | Options granted                        |      | $         | 5.257.28  |   |      | $         | 4.95-9.20  |   |  | $         |           |  
|                                                        | Options exercised                      |      | $         | 4.05       |   |      | $         | 7.22       |   |  | $         |           |  
|                                                        | Options forfeited                      |      | $         | 5.8914.44 |   |      | $         | 7.22-14.44 |   |  | $         | 7.22-18.05 |  
|                                                        | Options outstanding at end of the year |      | $         | 4.0518.05 |   |      | $         | 4.05-18.05 |   |  | $         | 7.22-18.05 |  
|Weighted average exercise price: (US$ Options)          |                                        |      |           |            |   |      |           |            |   |  |           |           
|                                                        | Options granted                        |      | $         | 4.49       |   |      | $         | 3.37       |   |  | $         | 3.16       |  
|                                                        | Options exercised                      |      | $         |           |   |      | $         | 3.39       |   |  | $         |           |  
|                                                        | Options forfeited                      |      | $         | 6.34       |   |      | $         | 7.50       |   |  | $         | 5.83       |  
|                                                        | Options outstanding at end of the year |      | $         | 4.55       |   |      | $         | 5.97       |   |  | $         | 4.61       |  
|Option price ranges: (US$ Options)                      |                                        |      |           |            |   |      |           |            |   |  |           |           
|                                                        | Options granted                        |      | $         | 3.895.52  |   |      | $         | 3.12-4.15  |   |  | $         | 2.23-4.05  |  
|                                                        | Options exercised                      |      | $         |           |   |      | $         | 2.43-4.00  |   |  | $         |           |  
|                                                        | Options forfeited                      |      | $         | 4.0012.00 |   |      | $         | 4.00-14.50 |   |  | $         | 2.23-12.00 |  
|                                                        | Options outstanding at end of the year |      | $         | 3.1212.00 |   |      | $         | 3.1214.44 |   |  | $         | 2.44-14.50 |  



| |                        
| | -----------------------
| | Shareholder Rights Plan

On September 2, 1999, the Company adopted a
Shareholder Rights Plan, or the Plan. Under the terms of the
Plan, Common Share purchase rights, or the Rights, were
distributed at the rate of one Right for each Common Share held.
Each Right will entitle the holder to buy 1/100th of a Common
Share of the Company at an exercise price of $60.00 per
share. The Rights will be exercisable and will trade separately
from the Common Shares only if a person or group acquires
beneficial ownership of 20% or more of the Companys Common
Shares or commences a tender or exchange offer that would result
in owning 20% or more of the Common Shares (unless the Board of
Directors determines that the acquisition is fair to all
shareholders and amends the Plan to permit the acquisition). If
either of these events occurs, the Rights will entitle each
holder to receive, upon exercise, a number of Common Shares (or,
in certain circumstances, a number of Common Shares in the
acquiring company) having a Current

F-31



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


Market Price (as defined in the Plan) equal to
approximately two times the exercise price of the Right. The
Rights are not exercisable with respect to the share ownership
of certain existing shareholders as long as these persons, along
with their affiliates and associates, do not acquire beneficial
ownership of 30% or more. The plan was amended in July 2001 and
January 2002 to prevent the September 2001 and February 2002
private placement transactions, respectively, from triggering
the Shareholder Rights Plan. The number of Rights outstanding is
subject to adjustment under certain circumstances, and all
Rights expire on September 30, 2009.



|    |             
|--- | ------------
|14. | Income Taxes

The income tax provision (benefit) for the years
ended December 31, 2003, 2002 and 2001 consists of the
following:

|                                        |               |      |      |      |   |      |       |       |   |   |     |     |  
|--------------------------------------- | ------------- | ---- | ---- | ---- | - | ---- | ----- | ----- | - | - | --- | --- | -
|                                        |               | 2003 |      | 2002 |   | 2001
|                                        |               |      |      |      |   |     
|Current                                 |               |      |      |      |   |      |       |       |   |   |     |    
|                                        | Canada        |      | $    | 403  |   |      | $     | 2,177 |   |   | $   | 299 |  
|                                        | United States |      |      |     |   |      |       |      |   |   |     | (18 | )
|                                        |               |      |      |      |   |      |       |       |   |   |     |    
|Current income tax provision            |               |      | 403  |      |   |      | 2,177 |       |   |   | 281 |    
|                                        |               |      |      |      |   |      |       |       |   |   |     |    
|Deferred                                |               |      |      |      |   |      |       |       |   |   |     |    
|                                        | Canada        |      |      | (990 | ) |      |       | (464  | ) |   |     |    |  
|                                        | United States |      |      |     |   |      |       |      |   |   |     | 687 |  
|                                        |               |      |      |      |   |      |       |       |   |   |     |    
|Deferred income tax provision (benefit) |               |      | (990 | )    |   |      | (464  | )     |   |   | 687 |    
|                                        |               |      |      |      |   |      |       |       |   |   |     |    
|Income tax provision (benefit)          |               | $    | (587 | )    |   | $    | 1,713 |       |   | $ | 968 |    
|                                        |               |      |      |      |   |      |       |       |   |   |     |    

The reconciliation of the difference between
income taxes at the statutory rate and the income tax provision
(benefit) before cumulative effect of change in accounting
principle for the years ended December 31, 2003, 2002 and
2001 is as follows:

|                                                                   |  |      |        |      |  |      |       |   |  |   |        |  
|------------------------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                                                   |  | 2003 |        | 2002 |  | 2001
|                                                                   |  |      |        |      |  |     
|Taxes at combined federal and provincial/state
    statutory rates |  | $    | (8,675 | )    |  | $    | 1,482 |   |  | $ | (7,916 | )
|Effect of lower tax rates applicable to US income                  |  |      |       |      |  |      |      |   |  |   | 133    |  
|Effect of change in enacted rates on deferred
    taxes            |  |      | (478   | )    |  |      | 96    |   |  |   | 1,655  |  
|Non-deductible warrant expense                                     |  |      | 903    |      |  |      | 404   |   |  |   |       |  
|Non-deductible interest expense and preferred
    stock dividends  |  |      | 3,790  |      |  |      | 59    |   |  |   | (260   | )
|Non-deductible foreign exchange (gains) and
    losses             |  |      | 366    |      |  |      | (558  | ) |  |   | 65     |  
|Other non-deductible expense                                       |  |      | 509    |      |  |      | 13    |   |  |   | 2,377  |  
|Valuation allowance                                                |  |      | 2,641  |      |  |      |      |   |  |   | 4,663  |  
|Large corporations tax                                             |  |      | 357    |      |  |      | 217   |   |  |   | 251    |  
|                                                                   |  |      |        |      |  |      |       |   |  |   |        |  
|Income tax provision (benefit)                                     |  | $    | (587   | )    |  | $    | 1,713 |   |  | $ | 968    |  
|                                                                   |  |      |        |      |  |      |       |   |  |   |        |  

F-32



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


The income tax provision of $0.3 million
relative to the cumulative effect of change in accounting
principle was provided at statutory rates. Significant
components of the Companys deferred income tax assets and
liabilities as of December 31, 2003 and 2002 are as follows:

|                                                              |                                                                    |      |        |        |   |   |       |        |  
|------------------------------------------------------------- | ------------------------------------------------------------------ | ---- | ------ | ------ | - | - | ----- | ------ | -
|                                                              |                                                                    | 2003 |        | 2002  
|                                                              |                                                                    |      |        |       
|Deferred income tax assets:                                   |                                                                    |      |        |        |   |   |       |       
|                                                              | Tax benefit related to net operating loss
    carry-forwards       |      | $      | 14,033 |   |   | $     | 5,810  |  
|Deferred income tax liabilities:                              |                                                                    |      |        |        |   |   |       |       
|                                                              | Property, equipment, deductible goodwill and
    other intangibles |      |        | (7,665 | ) |   |       | (4,761 | )
|                                                              |                                                                    |      |        |        |   |   |       |       
|Net deferred income tax assets before valuation
    allowance |                                                                    |      | 6,368  |        |   |   | 1,049 |       
|Less: valuation allowance                                     |                                                                    |      | (2,641 | )      |   |   |      |       
|                                                              |                                                                    |      |        |        |   |   |       |       
|Net deferred income tax assets                                |                                                                    |      | 3,727  |        |   |   | 1,049 |       
|                                                              |                                                                    |      |        |        |   |   |       |       
|Less: current portion of deferred income taxes                |                                                                    |      | (2,592 | )      |   |   |      |       
|                                                              |                                                                    |      |        |        |   |   |       |       
|Long-term portion of deferred income taxes                    |                                                                    | $    | 1,135  |        |   | $ | 1,049 |       
|                                                              |                                                                    |      |        |        |   |   |       |       

Due to the lack of operating history relative to
the Companys US operations, management has provided a
valuation allowance for net operating loss carryforwards
generated in the US. The valuation allowance recorded for the
year ended December 31, 2003 was $2.6 million.

Gross net operating loss carry-forwards expire as
follows:

|                                        |  |        |        |    |  |       |       |  |  |   |        | 
|--------------------------------------- |  | ------ | ------ | -- |  | ----- | ----- |  |  | - | ------ | 
|                                        |  | Canada |        | US |  | Total
|                                        |  |        |        |    |  |      
|2004                                    |  | $      | 2,562  |    |  | $     |      |  |  | $ | 2,562  | 
|2005                                    |  |        | 2,950  |    |  |       |      |  |  |   | 2,950  | 
|2006                                    |  |        | 4,535  |    |  |       |      |  |  |   | 4,535  | 
|2007                                    |  |        | 9,623  |    |  |       |      |  |  |   | 9,623  | 
|2008                                    |  |        | 11,061 |    |  |       |      |  |  |   | 11,061 | 
|Thereafter                              |  |        | 8,747  |    |  |       | 7,747 |  |  |   | 16,494 | 
|                                        |  |        |        |    |  |       |       |  |  |   |        | 
|Total net operating loss carry-forwards |  | $      | 39,478 |    |  | $     | 7,747 |  |  | $ | 47,225 | 
|                                        |  |        |        |    |  |       |       |  |  |   |        | 

For tax purposes, generally goodwill acquired as
a result an asset-based United States acquisition is deducted
over a 15-year period and 75% of goodwill acquired in an
asset-based Canadian acquisition is deducted based on a
seven-percent declining balance.

The changes to the deferred tax valuation
allowance for the years ended December 31, 2003, 2002 and
2001 are as follows:

|                                 |                                    |      |       |       |  |      |       |        |   |   |       |       | 
|-------------------------------- | ---------------------------------- | ---- | ----- | ----- |  | ---- | ----- | ------ | - | - | ----- | ----- | 
|                                 |                                    | 2003 |       | 2002  |  | 2001
|                                 |                                    |      |       |       |  |     
|Balance at beginning of the year |                                    | $    |      |       |  | $    | 6,981 |        |   | $ | 2,318 |      
|                                 | Additions to valuation allowance   |      |       | 2,641 |  |      |       | 593    |   |   |       | 4,663 | 
|                                 | Reversal related to acquisitions   |      |       |      |  |      |       | (5,074 | ) |   |       |      | 
|                                 | Adjustments to valuation allowance |      |       |      |  |      |       | (2,500 | ) |   |       |      | 
|                                 |                                    |      |       |       |  |      |       |        |   |   |       |      
|Balance at end of the year       |                                    | $    | 2,641 |       |  | $    |      |        |   | $ | 6,981 |      
|                                 |                                    |      |       |       |  |      |       |        |   |   |       |      

F-33



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)




|    |                               
|--- | ------------------------------
|15. | Net Loss Per Share Information

The following table sets forth the calculation of
the numerator and denominator used in the computation of basic
and diluted net loss per share for the years ended
December 31, 2003, 2002 and 2001 (in thousands except per
share amounts):

|                                                                                        |                                                                    |      |       |         |   |      |       |         |   |   |       |         |  
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ---- | ----- | ------- | - | ---- | ----- | ------- | - | - | ----- | ------- | -
|                                                                                        |                                                                    | 2003 |       | 2002    |   | 2001
|                                                                                        |                                                                    |      |       |         |   |     
|Numerator:                                                                              |                                                                    |      |       |         |   |      |       |         |   |   |       |        
|                                                                                        | Net loss attributable to Common Shareholders                       |      | $     | (76,952 | ) |      | $     | (12,590 | ) |   | $     | (19,668 | )
|                                                                                        |                                                                    |      |       |         |   |      |       |         |   |   |       |        
|Denominator:                                                                            |                                                                    |      |       |         |   |      |       |         |   |   |       |        
|                                                                                        | Weighted average Common Shares
    outstanding  basic and diluted |      |       | 38,782  |   |      |       | 32,414  |   |   |       | 12,260  |  
|                                                                                        |                                                                    |      |       |         |   |      |       |         |   |   |       |        
|Basic and diluted net loss per share                                                    |                                                                    | $    | (1.98 | )       |   | $    | (0.39 | )       |   | $ | (1.60 | )      
|                                                                                        |                                                                    |      |       |         |   |      |       |         |   |   |       |        
|Antidilutive securities not included in the
    diluted earnings per share calculation: |                                                                    |      |       |         |   |      |       |         |   |   |       |        
|                                                                                        | Series 1 Preferred Shares                                          |      |       | 13,582  |   |      |       | 1,520   |   |   |       |        |  
|                                                                                        | Options to purchase Common Shares                                  |      |       | 707     |   |      |       | 450     |   |   |       | 1,038   |  
|                                                                                        | Warrants to purchase Common Shares                                 |      |       | 3,189   |   |      |       | 437     |   |   |       | 172     |  

The diluted loss per share calculation for 2003,
2002, and 2001 excludes the conversion of the Series 1
Preferred Shares and exercise of stock options and warrants
issued because the impact would have been anti-dilutive.



|    |                
|--- | ---------------
|16. | Retirement Plan

The Company sponsors a defined contribution
Registered Retirement Savings Plan, or RSP, for its Canadian
domiciled employees. Eligible employees may contribute pre-tax
compensation to the RSP, subject to certain Revenue Canada
limits and restrictions. The Company matches 100% of the
employee contributions, up to the first 3% of the
employees compensation which is deferred. Participant
contributions vest immediately and employer contributions vest
after two years of employment. During 2003, the Company matched
contributions totaling approximately $0.3 million
(2002  $0.2 million; 2001 
$0.2 million), which is included in operating expenses. As
of December 31, 2003, the Company had not established a
Company sponsored retirement savings plan for employees located
in the United States.



|    |                    
|--- | -------------------
|17. | Segment Information

The Company has determined its operating and
reporting segments pursuant to the requirements of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. In making this
determination, the Company considered its organization/reporting
structure and the information used by its chief operating
decision makers to make decisions about resource allocation and
performance assessment. The Company is organized along
geographic locations or regions. The Canadian operations are
organized between two regions: Eastern and Western Canada. The
Company believes its Canadian geographic segments meet the
Aggregation Criteria set forth in SFAS 131 for
the following reasons: (i) the nature of the service, waste
collection and disposal, is economically the same and
transferable across locations; (ii) the type and class of
customer is consistent among regions/districts; (iii) the
methods used to deliver services are essentially the same (e.g.
containers collect waste at market locations and trucks collect
and transfer waste to landfills); and (iv) the regulatory
environment is consistent within Canada.

F-34



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


Prior to fiscal 2002, the Company operated in two
reporting segments, the United States and Canada. As a result of
the sale of its US business during 2001, the Company operated
exclusively in Canada during 2002. The Company re-entered the
United States in May 2003 with the acquisition of the JED
Landfill in Osceola County, Florida. The Company does not have
significant (in volume or dollars) inter-segment
operation-related transactions.

The tables below present certain segment
information on the Companys geographic segments as of, and
for the years ended, December 31, 2003, 2002 and 2001:

|                                                                                   |  |        |         |               |  |       |       |   |  |   |         |   |  |  |      |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------ | ------- | ------------- |  | ----- | ----- | - |  | - | ------- | - |  |  | ---- | - |  | - | ------- | -
|                                                                                   |  |        |         |               |  |      
|                                                                                   |  | Canada |         | United States |  |      
|                                                                                   |  |        |         |               |  | Total
|                                                                                   |  | $      |         | %             |  | $     |       | % |  | $
|                                                                                   |  |        |         |               |  |       |       |   |  |  
|2003                                                                               |  |        |         |               |  |       |       |   |  |   |         |   |  |  |      |   |  |   |         |  
|Revenue                                                                            |  | $      | 124,985 |               |  |       | 98.6  | % |  | $ | 1,765   |   |  |  | 1.4  | % |  | $ | 126,750 |  
|Operating and other expenses                                                       |  |        | 125,679 |               |  |       | 95.4  |   |  |   | 6,117   |   |  |  | 4.6  |   |  |   | 131,796 |  
|Loss from operations                                                               |  |        | (694    | )             |  |       | 13.8  |   |  |   | (4,352  | ) |  |  | 86.2 |   |  |   | (5,046  | )
|Depreciation, depletion and amortization                                           |  |        | 14,726  |               |  |       | 98.7  |   |  |   | 201     |   |  |  | 1.3  |   |  |   | 14,927  |  
|Interest expense                                                                   |  |        | 5,446   |               |  |       | 29.5  |   |  |   | 12,993  |   |  |  | 70.5 |   |  |   | 18,439  |  
|Income (loss) before income taxes                                                  |  |        | (6,140  | )             |  |       | 26.1  |   |  |   | (17,345 | ) |  |  | 73.9 |   |  |   | (23,485 | )
|Income tax provision (benefit)                                                     |  |        | (587    | )             |  |       | 100.0 |   |  |   |        |   |  |  |     |   |  |   | (587    | )
|Cumulative effect of change in accounting
    principle                            |  |        | 518     |               |  |       | 100.0 |   |  |   |        |   |  |  |     |   |  |   | 518     |  
|Total assets                                                                       |  |        | 231,631 |               |  |       | 49.2  |   |  |   | 239,367 |   |  |  | 50.8 |   |  |   | 470,998 |  
|Long-lived assets                                                                  |  |        | 178,200 |               |  |       | 47.2  |   |  |   | 199,520 |   |  |  | 52.8 |   |  |   | 377,720 |  
|Expenditures for additions to property and
    equipment, including capital leases |  |        | 14,179  |               |  |       | 58.0  |   |  |   | 10,259  |   |  |  | 42.0 |   |  |   | 24,438  |  

|                                                                                   |  |        |         |               |  |       |       |   |  |   |   |  |  |  |   |   |  |   |         | 
|---------------------------------------------------------------------------------- |  | ------ | ------- | ------------- |  | ----- | ----- | - |  | - | - |  |  |  | - | - |  | - | ------- | 
|                                                                                   |  |        |         |               |  |      
|                                                                                   |  | Canada |         | United States |  |      
|                                                                                   |  |        |         |               |  | Total
|                                                                                   |  | $      |         | %             |  | $     |       | % |  | $
|                                                                                   |  |        |         |               |  |       |       |   |  |  
|2002                                                                               |  |        |         |               |  |       |       |   |  |   |   |  |  |  |   |   |  |   |         | 
|Revenue                                                                            |  | $      | 98,846  |               |  |       | 100.0 | % |  |   |  |  |  |  |  | % |  | $ | 98,846  | 
|Operating expenses                                                                 |  |        | 89,279  |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 89,279  | 
|Income from operations                                                             |  |        | 9,567   |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 9,567   | 
|Depreciation, depletion and amortization                                           |  |        | 10,718  |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 10,718  | 
|Interest expense                                                                   |  |        | 5,727   |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 5,727   | 
|Income (loss) before income taxes                                                  |  |        | 3,840   |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 3,840   | 
|Income tax provision                                                               |  |        | 1,713   |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 1,713   | 
|Total assets                                                                       |  |        | 149,022 |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 149,022 | 
|Long-lived assets                                                                  |  |        | 129,273 |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 129,273 | 
|Expenditures for additions to property and
    equipment, including capital leases |  |        | 13,943  |               |  |       | 100.0 |   |  |   |  |  |  |  |  |   |  |   | 13,943  | 

F-35



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


|                                                                                   |  |        |         |               |  |       |       |   |  |   |        |   |  |  |      |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------ | ------- | ------------- |  | ----- | ----- | - |  | - | ------ | - |  |  | ---- | - |  | - | ------- | -
|                                                                                   |  |        |         |               |  |      
|                                                                                   |  | Canada |         | United States |  |      
|                                                                                   |  |        |         |               |  | Total
|                                                                                   |  | $      |         | %             |  | $     |       | % |  | $
|                                                                                   |  |        |         |               |  |       |       |   |  |  
|2001                                                                               |  |        |         |               |  |       |       |   |  |   |        |   |  |  |      |   |  |   |         |  
|Revenue                                                                            |  | $      | 85,496  |               |  |       | 91.7  | % |  | $ | 7,745  |   |  |  | 8.3  | % |  | $ | 93,241  |  
|Operating expenses                                                                 |  |        | 89,331  |               |  |       | 87.7  |   |  |   | 12,581 |   |  |  | 12.3 |   |  |   | 101,912 |  
|Loss from operations                                                               |  |        | (3,835  | )             |  |       | 44.2  |   |  |   | (4,836 | ) |  |  | 55.8 |   |  |   | (8,671  | )
|Depreciation, depletion and amortization                                           |  |        | 10,648  |               |  |       | 94.4  |   |  |   | 628    |   |  |  | 5.6  |   |  |   | 11,276  |  
|Interest expense                                                                   |  |        | 9,311   |               |  |       | 92.8  |   |  |   | 718    |   |  |  | 7.2  |   |  |   | 10,029  |  
|Income (loss) before income taxes                                                  |  |        | (13,146 | )             |  |       | 70.3  |   |  |   | (5,554 | ) |  |  | 29.7 |   |  |   | (18,700 | )
|Income tax provision                                                               |  |        | 281     |               |  |       | 29.0  |   |  |   | 687    |   |  |  | 71.0 |   |  |   | 968     |  
|Total assets                                                                       |  |        | 109,948 |               |  |       | 99.4  |   |  |   | 704    |   |  |  | 0.6  |   |  |   | 110,652 |  
|Long-lived assets                                                                  |  |        | 93,223  |               |  |       | 100.0 |   |  |   |       |   |  |  |     |   |  |   | 93,223  |  
|Expenditures for additions to property and
    equipment, including capital leases |  |        | 3,939   |               |  |       | 98.6  |   |  |   | 56     |   |  |  | 1.4  |   |  |   | 3,995   |  



|    |                           
|--- | --------------------------
|18. | Related Party Transactions

The Company paid Kelso and Company, L.P., an
affiliate of Kelso, an advisory services fee of
$1.65 million in connection with the issuance of
55,000 shares of WSI Preferred Stock to Kelso in May 2003.
In February 2004, the Company also paid Kelso and Company, L.P.,
a $0.5 million fee in connection with services related to
the arrangement of the existing credit facilities that was
entered into on December 31, 2003. One of the
Companys directors, George E. Matelich, is a Managing
Director of Kelso & Company.

Effective March 31, 2003, the Company
entered into a placement agent agreement with Sanders Morris
Harris Inc., or SMH, pursuant to which the Company agreed to pay
SMH a fee for Series 1 preferred shares sold through SMH.
To date, the Company has paid SMH fees of $1.9 million
pursuant to the agreement. SMH is a beneficial owner of the
Companys Common Shares and Don Sanders, one of the
Companys directors is a principal of SMH.

During 2003, the Company purchased legal services
for less than $0.1 million from Durkin and Durkin. An
executive officer, Thomas E. Durkin III, is an inactive
partner in Durkin and Durkin.

In 2003, the Company purchased furnishings and
leasehold improvements from H2O Technologies, Ltd.
for $0.3 million and assumed a lease of premises from David
Sutherland-Yoest. David Sutherland-Yoest, the Companys
Chairman and Chief Executive Officer was, until October of 2003,
Chairman and Chief Executive Officer of H2O
Technologies, Ltd. and until January 2004, was a director
of H20 Technologies, Ltd. The lease expires on
March 31, 2005 with annual rent and operating costs of less
than $0.1 million.

Certain affiliates of the Companys officers
and directors were purchasers of Series 1 Preferred Shares
in September 2003. An independent committee consisting of David
Sutherland-Yoest and George E. Matelich reviewed and approved
the terms of issuance of the Series 1 Preferred Shares in
which the shareholder, officers and directors or their
affiliates were purchasers.

In November of 2002, the Company entered into a
Put or Pay Disposal agreement with the RCI Companies which are
controlled by one of the Companys directors,
Mr. Lucien Rémillard. Concurrently with the Put or Pay
Disposal Agreement, the Company entered into a disposal
agreement with Canadian

F-36



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)


Waste Services Inc. which provides the Company
with access to Canadian Wastes Michigan landfill at
negotiated fixed rates per ton.

During the years ended December 31, 2002,
and 2001, the Company paid fees for financial advisory services
to SMH of approximately $1.3 million and
$0.75 million, respectively. During the years ended
December 31, 2002 and 2001, the Company also purchased
legal services for approximately $125 and $185, respectively
from a law firm of which an executive officer of the Company is
an inactive partner. During the year ended December 31,
2002, the Company paid a director $30 for certain services
rendered.

During the year ended December 31, 2001, the
Company acquired a solid waste collection business from a
relative of an officer, director and shareholder of the Company
for cash of $363.

These transactions are in the normal course of
operations and are recorded at the exchange amount, which is the
consideration agreed to between the respective parties.



|    |                                    
|--- | -----------------------------------
|19. | Supplementary Cash Flow Information

Supplemental non-cash operating and financing
activities during the years ended December 31, 2003, 2002
and 2001 are as follows:

|                             |                                                                |      |   |        |  |      |   |        |  |  |   |     | 
|---------------------------- | -------------------------------------------------------------- | ---- | - | ------ |  | ---- | - | ------ |  |  | - | --- | 
|                             |                                                                | 2003 |   | 2002   |  | 2001
|                             |                                                                |      |   |        |  |     
|Financing activities:        |                                                                |      |   |        |  |      |   |        |  |  |   |    
|                             | Beneficial conversion feature of Series 1
    Preferred Shares |      | $ | 54,572 |  |      | $ | 14,717 |  |  | $ |    | 
|                             | Common shares issued on acquisition                            |      |   | 18,382 |  |      |   |       |  |  |   |    | 
|                             | Common shares issued on deposit for acquisition                |      |   | 6,430  |  |      |   |       |  |  |   |    | 
|                             | Assets acquired under capital leases                           |      |   |       |  |      |   | 1,786  |  |  |   | 217 | 
|Other cash flow information: |                                                                |      |   |        |  |      |   |        |  |  |   |    

|                           |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                           |  | 2003 |       | 2002 |  | 2001
|                           |  |      |       |      |  |     
|Cash paid for interest     |  | $    | 5,147 |      |  | $    | 3,766 |  |  | $ | 8,517 | 
|Cash paid for income taxes |  |      | 1,220 |      |  |      | 2,085 |  |  |   | 574   | 

F-37



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)




|    |                                                  
|--- | -------------------------------------------------
|20. | Selected Quarterly Financial Data
    (unaudited)

The following table summarizes the unaudited
quarterly results of operations as reported for 2003 and 2002
(in thousands of US dollars, except per share amounts):

|                                                                                                |  |         |        |         |  |         |         |         |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                                                                |  |        
|                                                                                                |  | 2003   
|                                                                                                |  |        
|                                                                                                |  | First   |        | Second  |  | Third   |         | Fourth 
|                                                                                                |  | Quarter |        | Quarter |  | Quarter |         | Quarter
|                                                                                                |  |         |        |         |  |         |         |        
|Revenue                                                                                         |  | $       | 25,280 |         |  | $       | 31,282  |         |  | $ | 34,748  |   |  | $ | 35,440  |  
|Income (loss) from operations                                                                   |  |         | 1,064  |         |  |         | (18     | )       |  |   | (841    | ) |  |   | (5,251  | )
|Net loss before cumulative effect of change in
    accounting principal                         |  |         | (299   | )       |  |         | (3,506  | )       |  |   | (7,121  | ) |  |   | (11,972 | )
|Cumulative effect of change in accounting
    principle                                         |  |         | 518    |         |  |         |        |         |  |   |        |   |  |   |        |  
|Net income (loss)                                                                               |  |         | 219    |         |  |         | (3,506  | )       |  |   | (7,121  | ) |  |   | (11,972 | )
|Net loss attributable to Common Shareholders                                                    |  |         | (8,313 | )       |  |         | (15,995 | )       |  |   | (40,672 | ) |  |   | (11,972 | )
|Basic and diluted loss per share before
    cumulative effect of change in accounting principle |  | $       | (0.25  | )       |  | $       | (0.42   | )       |  | $ | (1.06   | ) |  | $ | (0.28   | )
|Cumulative effect of change in accounting
    principle                                         |  |         | 0.01   |         |  |         |        |         |  |   |        |   |  |   |        |  
|                                                                                                |  |         |        |         |  |         |         |         |  |   |         |   |  |   |         |  
|Basic and diluted loss per share                                                                |  | $       | (0.24  | )       |  | $       | (0.42   | )       |  | $ | (1.06   | ) |  | $ | (0.28   | )
|                                                                                                |  |         |        |         |  |         |         |         |  |   |         |   |  |   |         |  
|Shares used in computing per share amounts                                                      |  |         | 35,195 |         |  |         | 37,865  |         |  |   | 38,447  |   |  |   | 43,531  |  

|                                                          |         |         |         |         |  |         |        |         |  |   |        |        |  |   |        |        | 
|--------------------------------------------------------- | ------- | ------- | ------- | ------- |  | ------- | ------ | ------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                          |         |        
|                                                          |         | 2002   
|                                                          |         |        
|                                                          |         | First   |         | Second  |  | Third   |        | Fourth 
|                                                          |         | Quarter |         | Quarter |  | Quarter |        | Quarter
|                                                          |         |         |         |         |  |         |        |        
|Revenue                                                   |         | $       | 19,855  |         |  | $       | 25,412 |         |  | $ | 27,961 |        |  | $ | 25,618 |       
|Income from operations                                    |         |         | 1,963   |         |  |         | 4,299  |         |  |   | 3,200  |        |  |   | 105    |       
|Net income (loss)                                         |         |         | 333     |         |  |         | 1,843  |         |  |   | 1,531  |        |  |   | (1,580 | )     
|Net income (loss) attributable to Common
    Shareholders |         |         | (14,384 | )       |  |         | 1,843  |         |  |   | 1,531  |        |  |   | (1,580 | )     
|Basic income (loss) per share                             |         | $       | (0.60   | )       |  | $       | 0.05   |         |  | $ | 0.04   |        |  | $ | (0.04  | )     
|Diluted income (loss) per share                           |         | $       | (0.60   | )       |  | $       | 0.05   |         |  | $ | 0.04   |        |  | $ | (0.04  | )     
|Shares used in computing per share amounts:               |         |         |         |         |  |         |        |         |  |   |        |        |  |   |        |       
|                                                          | Basic   |         |         | 24,074  |  |         |        | 35,045  |  |   |        | 35,188 |  |   |        | 35,195 | 
|                                                          | Diluted |         |         | 24,074  |  |         |        | 36,372  |  |   |        | 35,748 |  |   |        | 35,195 | 



|    |                                                            
|--- | -----------------------------------------------------------
|21. | Reconciliation From United States GAAP To
    Canadian GAAP

These financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States, which conform, in all material respects for the
Company, with accounting principles generally accepted in
Canada, except:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) The concept of comprehensive income
    (loss) is not recognized under Canadian GAAP. Accordingly, under
    Canadian GAAP, the Consolidated Statements of Comprehensive
    Income (Loss) would not be presented, and the accumulated other
    comprehensive loss, as presented in the Consolidated Statement
    of Stockholders Equity, would be referred to as cumulative
    foreign currency translation adjustments.
|
| | (ii) Under Canadian GAAP, the issue of the
    Series 1 Preferred Shares and subsequent conversion into
    Common Shares described in Note 13 would be accounted for
    at the subscribed price of $2.65 per share and the value of
    the beneficial conversion feature and related deemed dividend                                                                                                                          

F-38



---



##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(In thousands of US dollars unless otherwise
stated)




| |                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | would not have been recognized. The Series 1
    Preferred Shares would have been treated as common stock
    equivalents and considered outstanding from the date of grant.
    Accordingly, the basic and diluted earnings (loss) per share
    would have been determined as follows (in thousands):

|                                                         |                                                               |      |        |         |   |      |        |        |  |   |        |         |  
|-------------------------------------------------------- | ------------------------------------------------------------- | ---- | ------ | ------- | - | ---- | ------ | ------ |  | - | ------ | ------- | -
|                                                         |                                                               | 2003 |        | 2002    |   | 2001
|                                                         |                                                               |      |        |         |   |     
|Numerator:                                               |                                                               |      |        |         |   |      |        |        |  |   |        |        
|                                                         | Net income (loss)                                             |      | $      | (22,380 | ) |      | $      | 2,127  |  |   | $      | (19,668 | )
|                                                         |                                                               |      |        |         |   |      |        |        |  |   |        |        
|Denominator:                                             |                                                               |      |        |         |   |      |        |        |  |   |        |        
|                                                         | Weighted average shares outstanding 
    basic               |      |        | 52,364  |   |      |        | 33,965 |  |   |        | 12,260  |  
|                                                         | Dilutive effect of stock options and warrants
    outstanding |      |        |        |   |      |        | 887    |  |   |        |        |  
|                                                         |                                                               |      |        |         |   |      |        |        |  |   |        |        
|Weighted average shares outstanding 
    diluted        |                                                               |      | 52,364 |         |   |      | 34,852 |        |  |   | 12,260 |        
|                                                         |                                                               |      |        |         |   |      |        |        |  |   |        |        
|Basic and diluted net income (loss) per common
    share |                                                               | $    | (0.43  | )       |   | $    | 0.06   |        |  | $ | (1.60  | )      
|                                                         |                                                               |      |        |         |   |      |        |        |  |   |        |        



|    |                  
|--- | -----------------
|22. | Subsequent Events



| |             
| | ------------
| | Acquisitions

In January 2004, the Company acquired all
outstanding shares of Gap Disposal (2001), Ltd, an
industrial-permitted waste landfill site in Saskatchewan. The
purchase price was comprised of a cash payment of approximately
$1.1 million plus the issuance of 12,000 Common Shares
valued at approximately $0.1 million.

In February 2004, the Company acquired a new,
fully permitted, municipal solid waste landfill currently under
development in Fort Bend County, Texas. The purchase price
was comprised of a cash payment of $5.0 million, a seller
financed promissory note of $5.0 million and the issuance
of 4,375,000 Common Shares valued at approximately
$25.0 million. This approximately 2,600-acre site, which
will serve the greater Houston area, has a permitted capacity of
48 million cubic yards. In addition to the landfill, the
Company acquired a leasehold interest in a fully permitted
transfer station site near Houston.

During the first quarter of 2004, the Company
also acquired the assets of three collection businesses for
aggregate cash consideration of approximately $7.9 million
plus the issuance of 911,370 Common Shares valued at
approximately $5.3 million.



| |                     
| | --------------------
| | Pending Acquisitions

In November 2003, the Company entered into an
agreement, which was amended in March 2004, to acquire all of
the issued and outstanding shares of Florida Recycling Services,
Inc., or FRS, for a purchase price of $98.5 million in
cash, subject to certain changes in working capital, and the
issuance of 9,250,000 Common Shares. The transaction is subject
to customary closing conditions, including financing conditions.
As a part of this transaction, the Company has advanced deposits
of $3.75 million in cash and 1,000,000 in Common Shares. If
the closing is not completed on or before May 1, 2004, the
Company is required to make an additional advance of
$1.0 million, and the sellers may terminate the agreement,
at which point the Company would forfeit all cash and Common
Share advances. FRSs operations are based in central
Florida, primarily servicing the Orlando, Daytona,
Fort Myers, and Tampa markets. Separately, the
Companys President and Chief Operating Officer,
Larry D. Henk, holds a 3% equity interest in FRS which was
acquired prior to his employment with the Company. In addition,
under an agreement with the sellers entered into prior to his
employment with the Company, this officer will receive a fee of
approximately $2.5 million from the sellers upon closing of
the transaction.

F-39