<PAGE>
 
                                                                  Exhibit 10.1

            STOCK OPTION AGREEMENT, dated as of the 10th day of August, 1998
(this "Agreement"), between American Disposal Services, Inc., a Delaware
corporation ("Issuer"), and Allied Waste Industries, Inc., a Delaware
corporation ("Grantee").

            WHEREAS, contemporaneously with the execution of this Agreement,
the Grantee, a wholly-owned subsidiary of Grantee ("Merger Sub"), and Issuer
are entering into an Agreement and Plan of Merger, dated as of the date hereof
(the "Merger Agreement"), pursuant to which Grantee and Issuer intend to
effect a merger of Merger Sub with and into Issuer (the "Merger"); and

            WHEREAS, as an inducement and condition to Grantee's willingness
to enter into the Merger Agreement, and in consideration thereof, the Board of
Directors of Issuer has approved the grant to Grantee of the option pursuant
to this Agreement; provided, that such grant was expressly conditioned upon,
and made of no effect until after, execution and delivery of the Merger
Agreement by Issuer, Grantee and Merger Sub.

            NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth in this Agreement and in the Merger
Agreement, the parties agree as follows:

            1.    The Option. (a) Issuer hereby grants to Grantee an
unconditional, irrevocable option (the "Option") to purchase, subject to the
terms hereof, up to 4,000,000 fully paid and nonassessable shares of common
stock, having a par value of .01 per share ("Common Stock"), of Issuer at a
price per share in cash equal to $40.00 (the "Option Price"); provided,
however, that in no event shall the number of shares for which the Option is
exercisable exceed 19.9% of the shares of Common Stock issued and outstanding
at the time of exercise (without giving effect to the shares of Common Stock
issued or issuable under the Option) (the "Maximum Applicable Percentage").
The number of shares of Common Stock purchasable upon exercise of the Option
and the Option Price are subject to adjustment as set forth in this Agreement.

            (b)   In the event that any additional shares of Common Stock are
issued or otherwise become outstanding after the date of this Agreement (other
than pursuant to this Agreement), the aggregate number of shares of Common
Stock purchasable upon exercise of the Option (inclusive of shares, if any,
previously purchased upon exercise of the Option) shall automatically be
increased (without any further action on the part of Issuer or Grantee being
necessary) so that, after such issuance, it equals the Maximum Applicable
Percentage. Any such increase shall not affect the Option Price.
<PAGE>
 
            2.    Exercise; Closing.

            (a)   Conditions to Exercise; Termination. Grantee or any other
person that shall become a holder of all or a part of the Option in accordance
with the terms of this Agreement (each such person, including Grantee, being
referred to as the "Holder") may exercise the Option, in whole or in part,
after the occurrence of a Triggering Event by delivering a written notice as
provided in Section 2(d) within 180 days of the occurrence of a Triggering
Event (as defined in Section 2(b)). The Option shall terminate upon either (i)
the occurrence of the Effective Time (as defined in the Merger Agreement) or
(ii) (A) if the Notice Date (as hereinafter defined) has not previously
occurred, the close of business on the earlier of (x) the day 180 days after
the date that Grantee becomes entitled to receive the Termination Fee (as
defined in the Merger Agreement) and (y) the date that Grantee is no longer
potentially entitled to receive the Termination Fee, in each case under
Section 7.6(b) of the Merger Agreement, and (B) if the Notice Date has
previously occurred, one year after the Notice Date (the events in (i) or (ii)
being referred to as "Exercise Termination Events".)

            (b)   Triggering Event.  A "Triggering Event" shall have occurred
if the Merger Agreement is terminated and Grantee then or thereafter becomes
entitled to receive the Termination Fee pursuant to Section 7.6(b) of the
Merger Agreement.


            (c)   Notice of Trigger Event by Issuer.  Issuer shall notify
Grantee promptly in writing of the occurrence of any Triggering Event, it
being understood that the giving of the notice by Issuer shall not be a
condition to the right of the Holder to exercise the Option.


            (d)   Notice of Exercise by Grantee. If a Holder shall be entitled
to and wishes to exercise the Option, it shall send to Issuer a written notice
(the date on which it is given, as defined in Section 16, is referred to as
the "Notice Date") specifying (i) the total number of shares that the Holder
will purchase pursuant to the exercise and (ii) a place and date (a "Closing
Date") not earlier than three business days nor later than 60 business days
from the Notice Date for the closing of the purchase (a "Closing"); provided,
that if a filing is required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") or prior notification to
or approval of any other authority is required in connection with this
purchase, the Holder or Issuer, as required, promptly after the giving of the
notice shall file the notice or application for approval and shall
expeditiously process the same and the period of time referred to in clause
(ii) shall commence on the date on which the Holder furnishes to Issuer a
supplemental written notice setting forth the Closing Date, which notice shall
be furnished as promptly as practicable after all required notification
periods shall have expired or been terminated and all required approvals shall
have been obtained and all requisite waiting periods shall have passed. Each
of the Holder and the Issuer agrees to use all reasonable efforts to cooperate
with and provide information to Issuer or Holder, as the case may be, for the
purpose of any required notice or application for approval.

                                     -2-
<PAGE>
 
            (e)   Payment of Purchase Price.  At each Closing, the Holder
shall pay to Issuer the aggregate purchase price for the shares of Common
Stock purchased pursuant to the exercise of the Option in immediately
available funds by a wire transfer to a bank account designated by Issuer;
provided, that failure or refusal of Issuer to designate a bank account shall
not preclude the Holder from exercising the option, in whole or in part.


            (f)   Delivery of Common Stock.  At such Closing, simultaneously
with the payment of the purchase price by the Holder, Issuer shall deliver to
the Holder a certificate or certificates representing the number of shares of
Common Stock purchased by the Holder and, if the Option shall be exercised in
part only, a new option evidencing the rights of the Holder to purchase the
balance (as adjusted pursuant to Section l(b)) of the shares then purchasable
hereunder.


            (g)   Restrictive Legend. Certificates for Common Stock delivered
at a Closing may be endorsed with a restrictive legend that shall read
substantially as follows:

            "The transfer of the shares represented by this certificate
     is subject to certain provisions of an agreement between the
     registered holder and Issuer, a copy of which agreement is on file
     at the principal office of Issuer, and to resale restrictions
     arising under the Securities Act of 1933, as amended. A copy of the
     aforementioned agreement will be mailed to the holder without
     charge promptly after receipt by Issuer of a written request."

It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "Securities Act"), in the above
legend shall be removed by delivery of substitute certificate(s) without this
reference if the Holder shall have delivered to Issuer a copy of a letter from
the staff of the Securities and Exchange Commission, or a written opinion of
counsel, in form and substance reasonably satisfactory to Issuer, to the
effect that this legend is not required for purposes of the Securities Act;
(ii) the reference to the provisions of this Agreement in the above legend
shall be removed by delivery of substitute certificate(s) without this
reference if the shares have been sold or transferred in compliance with the
provisions of this Agreement and under circumstances that do not require the
retention of such reference; and (iii) the legend shall be removed in its
entirety if the conditions in the preceding clauses (i) and (ii) both are
satisfied. In addition, the certificates shall bear any other legend as may be
required by applicable law.

            (h)   Ownership of Record; Tender of Purchase Price; Expenses.
Upon the giving by the Holder to Issuer of a written notice of exercise
referred to in Section 2(e) and the tender of the applicable purchase price in
immediately available funds, the Holder shall be deemed to be the holder of
record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be closed
or that certificates representing such shares of Common Stock shall

                                     -3-
<PAGE>
 
not have been delivered to the Holder. Issuer shall pay all expenses, and any
and all United States federal, state and local taxes (other than income taxes
payable by Holder) and other charges that may be payable in connection with
the preparation, issue and delivery of stock certificates under this Section 2
in the name of the Holder or its assignee, transferee or designee.

            3.    Covenants of Issuer. In addition to its other agreements and
covenants herein, Issuer agrees:

            (a)   Shares Reserved for Issuance.  To maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be fully exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights of third parties to purchase
shares of Common Stock from Issuer, or to issue the appropriate number of
shares of Common Stock pursuant to the terms of this Agreement;

            (b)   No Avoidance.  Not to avoid or seek to avoid (whether by
charter amendment or through reorganization, consolidation, merger, issuance
of rights, dissolution or sale of assets, or by any other voluntary act) the
observance or performance of any of the covenants, agreements or conditions to
be observed or performed hereunder by Issuer and not to take any action which
would cause any of its representations or warranties not to be true; and


            (c)   Further Assurances. Promptly after the date hereof to take
all actions as may from time to time be required (including (i) complying with
all applicable premerger notification, reporting and waiting period
requirements under the HSR Act and (ii) in the event that prior approval of or
notice to any other regulatory authority is necessary under any applicable
federal, state or local law before the Option may be exercised, cooperating
fully with the Holder in preparing and processing the required applications or
notices) in order to permit each Holder to exercise the Option and purchase
shares of Common Stock pursuant to such exercise and to take all action
necessary to protect the rights of the Holder against dilution.

            4.    Representations and Warranties of Issuer. Issuer hereby
represents and warrants to Grantee that Issuer has all requisite corporate
power and authority and has taken all corporate action necessary to authorize,
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby; this Agreement has been duly
and validly authorized, executed and delivered by Issuer and constitutes a
valid and binding agreement of Issuer enforceable against Issuer in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles. Issuer
hereby further represents and warrants to Grantee that it has taken all
necessary corporate action to authorize and reserve for issuance upon exercise
of the Option the shares of Common

                                     -4-
<PAGE>
 
Stock issuable upon exercise of the Option and that all shares of Common
Stock, upon issuance pursuant to the Option, will be delivered free and clear
of all claims, liens, encumbrances, and security interests (other than those
created by this Agreement) and not subject to any preemptive rights. There are
no agreements, instruments, securities, arrangements, or plans which would
create any additional cost or burden on any exercise of the Option. Issuer has
taken all action necessary to make inapplicable to Grantee any state takeover,
business combination, control share or other similar statute and any charter
provisions which would otherwise be applicable to Grantee or any transaction
involving Issuer and Grantee by reason of the grant of the Option, the
acquisition of beneficial ownership of shares of Common Stock as a result of
the grant of the Option, or the acquisition of shares of Common Stock upon
exercise of the Option, except for statutes or provisions which by their terms
cannot be waived or rendered inapplicable by any action of the Board of
Directors of the Issuer.

            5.    Representations and Warranties of Grantee. Grantee hereby
represents and warrants to Issuer that Grantee has all requisite corporate
power and authority and has taken all corporate action necessary in order to
authorize, execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby; this Agreement has
been duly and validly authorized, executed and delivered by Grantee and
constitutes a valid and binding agreement of Grantee enforceable against
Grantee in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.

            6.    Exchange; Replacement. This Agreement and the Option granted
hereby are exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office of
Issuer, for other Agreements providing for Options of different denominations
entitling the holder thereof to purchase in the aggregate the same number of
shares of Common Stock purchasable at such time hereunder, subject to
corresponding adjustments in the number of shares of Common Stock purchasable
upon exercise so that the aggregate number of such shares under all Stock
Option Agreements issued in respect of this Agreement shall not exceed the
Maximum Applicable Percentage. Unless the context shall require otherwise, the
terms "Agreement" and "Option" as used in this Agreement include any Stock
Option Agreements and related options for which this Agreement (and the option
granted hereby) may be exchanged. Upon (i) receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction, or mutilation
of this Agreement, (ii) receipt by Issuer of reasonably satisfactory
indemnification in the case of loss, theft or destruction and (iii) surrender
and cancellation of this Agreement in the case of mutilation, Issuer will
execute and deliver a new Agreement of like tenor and date. Any new Agreement
executed and delivered shall constitute an additional contractual obligation
on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed
or mutilated shall at any time be enforceable by any person other than the
holder of the new Agreement.

                                     -5-
<PAGE>
 
            7.    Adjustments.  In addition to the adjustment to the total
number of shares of Common Stock purchasable upon exercise of the Option
pursuant to Section l(b), the total number of shares of Common Stock
purchasable upon the exercise and the Option Price shall be subject to
adjustment from time to time as follows:


            (a)   In the event of any change in the outstanding shares of
Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares or the like, the type and number of shares of Common Stock purchasable
upon exercise of the Option shall be appropriately adjusted, and proper
provision shall be made in the agreements governing any such transaction, so
that (i) any Holder shall receive upon exercise of the Option the number and
class of shares, other securities, property or cash that such Holder would
have received in respect of the shares of Common Stock purchasable upon
exercise of the option if the Option had been exercised and such shares of
Common Stock had been issued to such Holder immediately prior to such event or
the record date therefor, as applicable; and (ii) in the event any additional
shares of Common Stock are to be issued or otherwise become outstanding as a
result of any such change (other than pursuant to an exercise of the Option),
the number of shares of Common Stock purchasable upon exercise of the Option
shall be increased so that, after such issuance and together with shares of
Common Stock previously issued pursuant to the exercise of the Option (as
adjusted on account of any of the foregoing changes in the Common Stock), the
number of shares so purchasable equals the Maximum Applicable Percentage of
the number of shares of Common Stock issued and outstanding immediately after
the consummation of such change; and

            (b)   Whenever the number of shares of Common Stock purchasable
upon exercise hereof is adjusted as provided in this Section 7, the Option
Price shall be adjusted by multiplying the Option Price by a fraction, the
numerator of which is equal to the number of shares of Common Stock
purchasable prior to the adjustment and the denominator of which is equal to
the number of shares of Common Stock purchasable after the adjustment.

            8.    Registration. (a) At any time after the occurrence of a
Triggering Event prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee delivered in the written notice of exercise of the option
provided for in Section 2(e), as promptly as practicable prepare, file and
keep current a shelf registration statement under the Securities Act covering
any or all shares issued and issuable pursuant to the Option and shall use its
best efforts to cause such registration statement to become effective and
remain current in order to permit the sale or other disposition of any shares
of Common Stock issued upon total or partial exercise of the Option ("Option
Shares") in accordance with any plan of disposition requested by Grantee;
provided, however, that Issuer may postpone filing a registration statement
relating to a registration request by Grantee under this Section 8 for a
period of time (not in excess of 90 days) if in its judgment such filing would
require the disclosure of material information that Issuer has a bona fide
business

                                     -6-
<PAGE>
 
purpose for preserving as confidential. Issuer will use its best efforts to
cause such registration statement first to become effective and then to remain
effective for 365 days after the later of the (i) day the registration
statement first becomes effective or until such earlier date as all shares
registered shall have been sold by Grantee or the Holders and (ii) the Closing
Date. In connection with any such registration, Issuer and Grantee shall
provide each other with representations, warranties, indemnities and other
agreements customarily given in connection with such registrations. If
requested by Grantee in connection with such registration, Issuer shall become
a party to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating Issuer in respect of representations,
warranties, indemnities, contribution and other agreements customarily made by
issuers in such underwriting agreements.

            (b)   In the event that Grantee so requests, the closing of the
sale or other disposition of the Common Stock or other securities pursuant to
a registration statement filed pursuant to Section 8(a) shall occur
substantially simultaneously with the exercise of the Option.

            9.    Repurchase of Option and/or Shares.

            (a)   Repurchase; Repurchase Price. Upon the occurrence of a
Triggering Event prior to an Exercise Termination Event, (i) at the request of
a Holder, delivered in writing within 180 days of this occurrence (or such
later period as provided in Section 2(d) with respect to any required notice
or application or in Section 10), Issuer shall repurchase the Option from the
Holder, in whole or in part, at a price (the "Option Repurchase Price") equal
to the number of shares of Common Stock then purchasable upon exercise of the
Option (or such lesser number of shares as may be designated in the Repurchase
Notice (as defined below)) multiplied by the amount by which the market/offer
price (as defined below) exceeds the Option Price and (ii) at the request of a
Holder or any person who has been a Holder (for purposes of this Section 9
only, each such person being referred to as a "Holder"), delivered in writing
within 180 days of this occurrence (or such later period as provided in
Section 2(d) with respect to any required notice or application or in Section
10), Issuer shall repurchase such number of Option Shares from such Holder as
the Holder shall designate in the Repurchase Notice at a price (the "Option
Share Repurchase Price") equal to the number of shares designated multiplied
by the market/offer price. The term "market/offer price" shall mean the
highest of (w) the Option Price plus $2.00, (x) the price per share of Common
Stock at which a tender or exchange offer for Common Stock has been made after
the date of this Agreement and prior to the delivery of the Repurchase Notice
and which offer has either been consummated or has not been withdrawn or
terminated as of the date payment of the Repurchase Price is made, (y) the
price per share of Common Stock to be paid by any third party pursuant to an
agreement with Issuer for a merger, share exchange, consolidation or
reorganization entered into after the date hereof and on or prior to the
delivery of the Repurchase Notice and (z) the average closing price for shares
of Common Stock on the NYSE (or, if the Common Stock is not then listed on the
NYSE,

                                     -7-
<PAGE>
 
any other national securities exchange or automated quotation system on which
the Common Stock is then listed or quoted) for the twenty consecutive trading
days immediately preceding the delivery of the Repurchase Notice. In the event
that a tender or exchange offer is made for the Common Stock or an agreement
is entered into for a merger, share exchange, consolidation or reorganization
involving consideration other than cash, the value of the securities or other
property issuable or deliverable in exchange for the Common Stock shall be
determined in good faith by a nationally recognized investment banking firm
selected by Issuer and reasonably acceptable to Grantee.

            (b)   Method of Repurchase. A Holder may exercise its right to
require Issuer to repurchase the Option, in whole or in part, and/or any
Option Shares then owned by such Holder pursuant to this Section 9 by
surrendering for this purpose to Issuer, at its principal office, this
Agreement or certificates for Option Shares, as applicable, accompanied by a
written notice or notices stating that the Holder elects to require Issuer to
repurchase the Option and/or such Option Shares in accordance with the
provisions of this Section 9 (each such notice, a "Repurchase Notice"). Within
two business days after the surrender of the Option and/or certificates
representing Option Shares and the receipt of the Repurchase Notice, Issuer
shall deliver or cause to be delivered to the Holder the applicable Option
Repurchase Price and/or the Option Share Repurchase Price or, in either case,
the portion that Issuer is not then prohibited under applicable law and
regulation from so delivering. In the event that the Repurchase Notice shall
request the repurchase of the Option in part, Issuer shall deliver with the
Option Repurchase Price a new Stock Option Agreement evidencing the right of
the Holder to purchase that number of shares of Common Stock purchasable
pursuant to the Option at the time of delivery of the Repurchase Notice minus
the number of shares of Common Stock represented by that portion of the Option
then being repurchased.

            (c)   Effect of Statutory or Regulatory Restraints on Repurchase.
To the extent that, upon or following the delivery of a Repurchase Notice,
Issuer is prohibited under applicable law or regulation from repurchasing the
Option (or a portion) and/or any Option Shares subject to such Repurchase
Notice (and Issuer hereby undertakes to use its reasonable best efforts to
obtain all required regulatory and legal approvals and to file any required
notices as promptly as practicable in order to accomplish this repurchase),
Issuer shall immediately so notify the Holder in writing and thereafter
deliver or cause to be delivered, from time to time, to the Holder the portion
of the option Repurchase Price and the Option Share Repurchase Price that
Issuer is no longer prohibited from delivering, within 2 business days after
the date on which it is no longer so prohibited; provided, however, that upon
notification by Issuer in writing of this prohibition, the Holder may, within
5 days of receipt of this notification from Issuer, revoke in writing its
Repurchase Notice, whether in whole or to the extent of the prohibition,
whereupon, in the latter case, Issuer shall promptly (i) deliver to the Holder
that portion of the option Repurchase Price and/or the Option Share Repurchase
Price that Issuer is not prohibited from delivering; and (ii) deliver to the
Holder, as appropriate, (a) with respect to the Option, a new Stock

                                     -8-
<PAGE>
 
Option Agreement evidencing the right of the Holder to purchase that number of
shares of Common Stock for which the surrendered Stock Option Agreement was
exercisable at the time of delivery of the Repurchase Notice less the number
of shares as to which the Option Repurchase Price has theretofore been
delivered to the Holder, and/or (b) with respect to Option Shares, a
certificate for the option Shares as to which the Option Share Repurchase
Price has not theretofore been delivered to the Holder. Notwithstanding
anything to the contrary in this Agreement, including, without limitation, the
time limitations on the exercise of the Option, the Holder may exercise the
Option for 180 days after a notice of revocation has been issued pursuant to
this Section 9(c).

            (d)   Acquisition Transactions. In addition to any other
restrictions covenants, Issuer hereby agrees that, in the event that a Holder
delivers a Repurchase Notice, it shall not enter or agree to enter into any
Acquisition Transaction unless the other party or parties thereto agree to
assume in writing Issuer's obligations under Section 9(a) and, notwithstanding
any notice of revocation delivered pursuant to the proviso to Section 9(c), a
Holder may require such other party or parties to perform Issuer's obligations
under Section 9(a) unless such party or parties are prohibited by law or
regulation from such performance, in which case such party or parties shall be
subject to the obligations of the Issuer under Section 9(c).

            10.   Extension of Exercise Periods.  The 180-day periods for
exercise of certain rights under Sections 2 and 9 shall be extended in each
such case at the request of the Holder to the extent necessary to avoid
liability by the Holder under Section 16(b) of the Exchange Act by reason of
this exercise.

            11.   Standstill.  Upon an exercise of the Option which results in
Grantee or any Holder owning in excess of 9.9% of the then outstanding shares
of Common Stock, the person who would own in excess of 9.9% of such shares
shall be subject to the following restrictions:

            (a)   it and its affiliates will not (and will not assist, provide
or arrange financing to or for others or encourage other to), directly or
indirectly, acting alone or as part of a group, (i) propose to Issuer or to
any of Issuer's security holders or any other person any merger, consolidation
or similar transaction, acquisition of a substantial portion of Issuer's
business or assets, an acquisition of any of Issuer's securities or any other
transaction involving any of Issuer's securities, in any such case involving
it and the Issuer or the Issuer and any third party, (ii) acquire by purchase
or otherwise, or agree, propose or offer to acquire any of the securities of
Issuer or any interest therein (other than pursuant to exercises of the
Option, stock dividends or other distributions by the Issuer or offerings by
Issuer made available to holder of shares of Common Stock generally), (iii)
otherwise seek to influence or control, in any manner whatsoever, (including
proxy solicitation, becoming a "participant" in any "election contest," or
otherwise), the management or policies of the Issuer or (iv) enter into
discussions, negotiations, arrangements or understandings with, or solicit or
encourage, any third party

                                     -9-
<PAGE>
 
with respect to any of the foregoing or make public disclosure in respect of
any of the foregoing or request permission to do any of the foregoing. (As
used in this Agreement, the term "affiliate" shall have the meaning set forth
in Rule 12b-2 of the Securities Exchange Act of 1934.) (Notwithstanding the
foregoing, any employee benefit, pension or similar plan of such person or the
Company, as the case may be, may own, acquire or transfer up to 1% of any
class of securities of an Issuer in the ordinary course of business, solely
for investment.); and

            (b)   it shall not sell, transfer or dispose of the Option Shares
(a "Transfer") except:

                  (i)     to affiliated or associated persons who agree to
                          become subject to this Agreement on the same terms
                          as such person;

                  (ii)    in connection with a bona fide pledge, after default
                          in the obligation secured by the pledge;

                  (iii)   an offering or distribution of the Shares in
                          compliance with the Securities Act in which
                          reasonable efforts are made not to knowingly sell 5%
                          or more of the then outstanding shares of Common
                          Stock to any one person (including its affiliates
                          and other members of a "group" within the meaning of
                          Rule 13(d)(3) of the Securities Exchange Act of
                          1934);

                  (iv)    in compliance with the requirements of Rule 144
                          under the Securities Act;

                  (v)     in privately negotiated transactions which would
                          not, to the reasonable knowledge of such person
                          after reasonable inquiry, after giving effect to the
                          Transfer result in the acquiror's ownership of 5% or
                          more of the outstanding shares of Common Stock;

                  (vi)    pursuant to a tender or exchange offer (as such
                          terms are used in the Securities Exchange Act of
                          1934 and the rules and regulations promulgated
                          thereunder) made by a party not affiliated or
                          associated with such person for all outstanding
                          Shares as to which offer a majority of the directors
                          of the Issuer then in office have not recommended
                          that stockholders not tender or exchange their
                          Shares; or

                  (vii)   pursuant to a tender or exchange offer by the Issuer
                          or in a merger or other transaction pursuant to an
                          agreement with the Issuer.

                                     -10-
<PAGE>
 
            These restrictions shall expire upon the earlier of (i) five years
from the date of this Agreement and (ii) the date upon which such person owns
less than 5% of the outstanding shares of Common Stock so long as this person
continues to own less than 5% of the outstanding shares of Common Stock for
the next twelve consecutive months and, if its ownership is 5% or more of the
outstanding shares during this twelve month period, then these restrictions
shall once again apply to that person.

            12.   Assignment. Neither party hereto may assign any of its
rights or obligations under this Agreement or the Option to any other person
without the express written consent of the other party except that Grantee may
assign its rights in whole or in part to any of its affiliates and, in the
event that a Triggering Event shall have occurred, Grantee may assign the
Option, in whole or in part to one or more third parties, provided that the
affiliate and any third party shall execute this Agreement and become subject
to its terms. Any attempted assignment in contravention of the preceding
sentence shall be null and void.

            13.   Filings; Other Actions.  Each of Grantee and Issuer will use
its best efforts to make all filings with, and to obtain consents of, all
third parties and govern mental authorities necessary for the consummation of
the transactions contemplated by this Agreement.

            14.   Specific Performance.  The parties acknowledge that damages
would be an inadequate remedy for a breach of this Agreement by either party
and that the obligations of the parties shall be specifically enforceable
through injunctive or other equitable relief.

            15.   Severability; Etc. If any term, provision, covenant, or
restriction contained in this Agreement is held by a court or a federal or
state regulatory agency of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the terms, provisions, covenants, and
restrictions contained in this Agreement shall remain in full force and
effect, and shall in no way be affected, impaired, or invalidated. If for any
reason a court or regulatory agency determines that the Holder is not
permitted to acquire, or Issuer is not permitted to repurchase pursuant to
Section 9, the full number of shares of Common Stock provided in Section l(a)
hereof (as adjusted pursuant (b) and 7 hereof), it is the express intention of
Issuer to allow Holder to acquire or to require Issuer to repurchase such
lesser number of shares as may be permissible, without any amendment or
modification of this Agreement.

            16.   Notices. All notices, requests, instructions, or other
documents to be given hereunder shall be in writing and shall be deemed given
(i) three business days following sending by registered or certified mail,
return receipt requested, postage prepaid, (ii) when sent if sent by
facsimile, provided that the fax is promptly confirmed by telephone
confirmation, (iii) when delivered, if delivered personally to the intended
recipient, and (iv) one business day later, if sent by overnight delivery via
a national

                                     -11-
<PAGE>
 
courier service, in each case at the respective addresses of the parties set
forth in the Merger Agreement.

            17.   Governing Law.  This Agreement shall be deemed to be made in
and in all respects shall be interpreted, construed and governed by and in
accordance with the law of the State of Delaware, without regard to the
conflict of law principles thereof.

            18.   Expenses.  Except as otherwise expressly provided in this
Agreement or in the Merger Agreement, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring the expense, including fees and
expenses of its own financial consultants, investment bankers, accountants,
and counsel.

            19.   Entire Agreement, Etc.  This Agreement and the Merger
Agreement constitute the entire agreement, and supersede all other prior
agreements, understandings, representations and warranties, both written and
oral, between the parties, with respect to the subject matter of this
Agreement.  The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, expressed or
implied, is intended to confer upon any party, other than the parties, and
their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.

            20.   Limitation on Profit. (a) Notwithstanding any other
provision of this Agreement, in no event shall the Grantee's Total Profit (as
hereinafter defined) plus any Termination Fee paid to Grantee pursuant to
Section 7.6(b) of the Merger Agreement exceed in the aggregate $40 million
and, if it otherwise would exceed this amount, the Grantee, at its sole
election, shall either (i) reduce the number of shares of Common Stock subject
to this Option, (ii) deliver to the Issuer for cancellation Option Shares
previously purchased by Grantee, (iii) pay cash to the Issuer, or (iv) any
combination thereof, so that Grantee's realized Total Profit, when aggregated
with the Termination Fee so paid to Grantee shall not exceed $40 million after
taking into account the foregoing actions.

            (b)   Notwithstanding any other provision of this Agreement, this
Option may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below) which, together
with any Termination Fee theretofore paid to Grantee would exceed $40 million;
provided, that nothing in this sentence shall restrict any exercise of the
Option permitted hereby on any subsequent date.

            (c)   As used in this Agreement, the term "Total Profit" shall
mean the aggregate amount (before taxes) of the following: (i) (x) the amount
received by Grantee and any other Holder pursuant to Issuer's repurchase of
the Option (or any portion thereof) or any Option Shares pursuant to Section
9, less, in the case of any repurchase of

                                     -12-
<PAGE>
 
Option Shares, (y) the Grantee's and any other Holder's purchase price for
such Option Shares, as the case may be, (ii) (x) the net cash amounts (and the
fair market value of any other consideration) received by Grantee and any
other Holder pursuant to the sale of Option Shares (or any other securities
into which such Option Shares are converted or exchanged) to any unaffiliated
party, less (y) the Grantee's (or any other Holder's) purchase price of the
Option Shares, and (iii) the net cash amounts (and the fair market value of
any other consideration) received by Grantee (or any other Holder) on the
transfer of the Option (or any portion thereof) to any unaffiliated party. In
the case of clauses (ii)(x) and (iii) above, the Grantee and any Holder agrees
to furnish as promptly as reasonably practicable after any disposition of all
or a portion of the Option or Option Shares a complete and correct statement,
certified by a responsible executive officer or partner of the Grantee or
Holder, of the net cash amounts (and the fair market value of any other
consideration) received in connection with any sale or transfer of the Option
or Option Shares.

            (d)   As used in this Agreement, the term "Notional Total Profit"
with respect to any number of shares as to which Grantee and any other Holder
may propose to exercise this Option shall be the Total Profit determined as of
the date of this proposal assuming that this Option were exercised on such
date for this number of shares and assuming that such shares, together with
all other Option Shares held by Grantee and any other Holders and their
respective affiliates as of such date, were sold for cash at the closing
market price for the Common Stock as of the close of business on the preceding
trading day (less customary brokerage commissions).

            21.   Captions. The Article, Section and paragraph captions in
this Agreement are for convenience of reference only, do not constitute part
of this Agreement and shall not be deemed to limit or otherwise affect any of
the provisions of this Agreement.

                                     -13-
<PAGE>
 
            IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the date
first written above.

                                      AMERICAN DISPOSAL SERVICES, INC.


                                      By: ____________________________________
                                               Name:
                                               Title:


                                      ALLIED WASTE INDUSTRIES, INC.



                                      By: ____________________________________
                                               Name:
                                               Title:



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