##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the Quarterly Period Ended June 30,
    2004                                            
|          
|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: 000-25955

Waste Services, Inc.

(Successor registrant of Capital Environmental
Resource Inc. now known as Waste Services (CA) Inc.)


(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 01-0780204                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

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

(Address of principal executive offices and
zip code)


(905) 319-1237

(Registrants telephone number, including
area code)


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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

The number of shares of Common Stock, $0.01 par
value, of the registrant outstanding at August 2, 2004 was
96,886,711 (assuming conversion of all exchangeable shares).



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##### 



TABLE OF CONTENTS

|                                  |  |                                                                                                                                    |      |      |      | 
|--------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- | ---- | ---- | ---- | 
|                                  |  |                                                                                                                                    |      | Page
|                                  |  |                                                                                                                                    |      |     
|PART I. FINANCIAL
    INFORMATION
|Item 1.                           |  | Financial Statements                                                                                                               |      |      | 2    | 
|                                  |  | Condensed Consolidated
    Balance Sheets as of June 30, 2004 (unaudited) and
    December 31, 2003                                |      |      | 2    | 
|                                  |  | Unaudited Condensed
    Consolidated Statements of Operations for the three months and
    six months ended June 30, 2004 and 2003 |      |      | 3    | 
|                                  |  | Unaudited Condensed
    Consolidated Statement of Shareholders Equity for the six
    months ended June 30, 2004                  |      |      | 4    | 
|                                  |  | Unaudited Condensed
    Consolidated Statements of Cash Flows for the six months ended
    June 30, 2004 and 2003                  |      |      | 5    | 
|                                  |  | Notes to Unaudited Condensed
    Consolidated Financial Statements                                                                 |      |      | 6    | 
|Item 2.                           |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                          |      |      | 24   | 
|Item 3.                           |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                                     |      |      | 40   | 
|Item 4.                           |  | Controls and Procedures                                                                                                            |      |      | 40   | 
|                                 
|PART II. OTHER
    INFORMATION   
|Item 1.                           |  | Legal Proceedings                                                                                                                  |      |      | II-1 | 
|Item 2.                           |  | Changes in Securities, Use
    of Proceeds and Issuer Purchases of Equity Securities                                               |      |      | II-1 | 
|Item 3.                           |  | Defaults upon Senior
    Securities                                                                                                |      |      | II-1 | 
|Item 4.                           |  | Submission of Matters to a
    Vote of Security Holders                                                                            |      |      | II-1 | 
|Item 5.                           |  | Other Information                                                                                                                  |      |      | II-1 | 
|Item 6.                           |  | Exhibits and Reports on
    Form 8-K                                                                                               |      |      | II-1 | 
|Signatures                        |  |                                                                                                                                    | II-3 |     

1



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##### 






PART I. FINANCIAL INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

WASTE SERVICES, INC.

(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)




CONDENSED CONSOLIDATED BALANCE
SHEETS


(In thousands, except share amounts)


|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------- | ------------ | ------- |  | ------- | ------- | ------- | 
|                                                                                                                                                                |                                                                                                                                                                  | June 30,                                                            |         | December 31,
|                                                                                                                                                                |                                                                                                                                                                  | 2004                                                                |         | 2003        
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |             
|                                                                                                                                                                |                                                                                                                                                                  | (Unaudited)                                                         |         |             
|ASSETS                                                                                                                                                         
|Current assets:                                                                                                                                                 |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                | Cash and cash equivalents                                                                                                                                        |                                                                     | $       | 2,955        |         |  | $       | 21,062  |        
|                                                                                                                                                                | Restricted cash                                                                                                                                                  |                                                                     |         |             |         |  |         | 14,433  |        
|                                                                                                                                                                | Accounts receivable (net of allowance for
    doubtful accounts of $2,094 and $620 as of June 30, 2004
    and December 31, 2003, respectively)                  |                                                                     |         | 41,084       |         |  |         | 26,999  |        
|                                                                                                                                                                | Prepaid expenses and other current assets                                                                                                                        |                                                                     |         | 12,662       |         |  |         | 29,649  |        
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                |                                                                                                                                                                  | Total current assets                                                |         |              | 56,701  |  |         |         | 92,143  | 
|Property and equipment, net                                                                                                                                     |                                                                                                                                                                  |                                                                     | 116,767 |              |         |  | 74,521  |        
|Landfill sites, net                                                                                                                                             |                                                                                                                                                                  |                                                                     | 168,065 |              |         |  | 117,541 |        
|Deferred income taxes, net                                                                                                                                      |                                                                                                                                                                  |                                                                     | 2,596   |              |         |  | 1,135   |        
|Goodwill and other intangible assets,
    net                                                                                                                   |                                                                                                                                                                  |                                                                     | 322,914 |              |         |  | 163,380 |        
|Other assets                                                                                                                                                    |                                                                                                                                                                  |                                                                     | 21,786  |              |         |  | 22,278  |        
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                |                                                                                                                                                                  | Total assets                                                        |         | $            | 688,829 |  |         | $       | 470,998 | 
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                               
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                                       
|Current liabilities:                                                                                                                                            |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                | Accounts payable                                                                                                                                                 |                                                                     | $       | 27,232       |         |  | $       | 12,074  |        
|                                                                                                                                                                | Accrued expenses and other current liabilities                                                                                                                   |                                                                     |         | 32,922       |         |  |         | 25,401  |        
|                                                                                                                                                                | Short-term financing and current portion of
    long-term debt                                                                                                   |                                                                     |         | 265,457      |         |  |         | 172,280 |        
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                |                                                                                                                                                                  | Total current liabilities                                           |         |              | 325,611 |  |         |         | 209,755 | 
|Long-term debt                                                                                                                                                  |                                                                                                                                                                  |                                                                     |        |              |         |  | 3,130   |        
|Accrued closure, post-closure and other
    obligations                                                                                                         |                                                                                                                                                                  |                                                                     | 10,550  |              |         |  | 8,791   |        
|Cumulative mandatorily redeemable Preferred
    Shares (net of discount of $11,112 and $13,558 as of
    June 30, 2004 and December 31, 2003,
    respectively) |                                                                                                                                                                  |                                                                     | 56,132  |              |         |  | 48,205  |        
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                |                                                                                                                                                                  | Total liabilities                                                   |         |              | 392,293 |  |         |         | 269,881 | 
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|Commitments and contingencies                                                                                                                                   |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|Mezzanine financing (13,400,000 common shares
    pending registration)                                                                                         |                                                                                                                                                                  |                                                                     | 49,132  |              |         |  |        |        
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|Shareholders equity:                                                                                                                                           |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                | Common stock, no par value; unlimited shares
    authorized; 83,448,281 and 68,338,828 shares issued as of
    June 30, 2004 and December 31, 2003, respectively |                                                                     |         | 297,263      |         |  |         | 215,395 |        
|                                                                                                                                                                | Options, warrants and deferred stock-based
    compensation                                                                                                      |                                                                     |         | 25,011       |         |  |         | 25,828  |        
|                                                                                                                                                                | Accumulated other comprehensive income                                                                                                                           |                                                                     |         | 10,537       |         |  |         | 15,952  |        
|                                                                                                                                                                | Accumulated deficit                                                                                                                                              |                                                                     |         | (85,407      | )       |  |         | (56,058 | )      
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                |                                                                                                                                                                  | Total shareholders equity                                          |         |              | 247,404 |  |         |         | 201,117 | 
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        
|                                                                                                                                                                |                                                                                                                                                                  | Total liabilities, mezzanine financing and
    shareholders equity |         | $            | 688,829 |  |         | $       | 470,998 | 
|                                                                                                                                                                |                                                                                                                                                                  |                                                                     |         |              |         |  |         |        

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

2



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##### 



WASTE SERVICES, INC.

(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)




UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands, except per share
data)


|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ---------------- | - | ---- | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                 
|                                                                                                                                                                                  |                                                                                                                                         | Three Months Ended |         | Six Months Ended
|                                                                                                                                                                                  |                                                                                                                                         | June 30,           |         | June 30,        
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                 
|                                                                                                                                                                                  |                                                                                                                                         | 2004               |         | 2003             |   | 2004 |         | 2003  
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |       
|Revenue                                                                                                                                                                           |                                                                                                                                         | $                  | 72,626  |                  |   | $    | 31,282  |        |   | $ | 122,943 |        |   | $ | 56,562  |       
|Operating and other expenses:                                                                                                                                                     |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|                                                                                                                                                                                  | Cost of operations                                                                                                                      |                    |         | 49,913           |   |      |         | 20,430 |   |   |         | 84,084 |   |   |         | 37,024 |  
|                                                                                                                                                                                  | Selling, general and administrative expense
    exclusive of stock-based compensation                                                   |                    |         | 13,959           |   |      |         | 6,792  |   |   |         | 25,909 |   |   |         | 11,521 |  
|                                                                                                                                                                                  | Stock-based compensation expense (benefit)                                                                                              |                    |         | 357              |   |      |         | 120    |   |   |         | (1,034 | ) |   |         | (177   | )
|                                                                                                                                                                                  | Depreciation, depletion and amortization                                                                                                |                    |         | 7,809            |   |      |         | 3,566  |   |   |         | 13,281 |   |   |         | 6,791  |  
|                                                                                                                                                                                  | Foreign exchange gain and other                                                                                                         |                    |         | (283             | ) |      |         | 392    |   |   |         | (373   | ) |   |         | 357    |  
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|Income (loss) from operations                                                                                                                                                     |                                                                                                                                         |                    | 871     |                  |   |      | (18     | )      |   |   | 1,076   |        |   |   | 1,046   |       
|Interest expense                                                                                                                                                                  |                                                                                                                                         |                    | 12,266  |                  |   |      | 1,667   |        |   |   | 18,582  |        |   |   | 2,987   |       
|Changes in fair value of warrants pending
    registration                                                                                                                        |                                                                                                                                         |                    | 421     |                  |   |      |        |        |   |   | 421     |        |   |   |        |       
|Cumulative mandatorily redeemable preferred stock
    dividends and amortization of issue costs                                                                                   |                                                                                                                                         |                    | 4,290   |                  |   |      | 2,198   |        |   |   | 8,309   |        |   |   | 2,198   |       
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|Loss before income taxes                                                                                                                                                          |                                                                                                                                         |                    | (16,106 | )                |   |      | (3,883  | )      |   |   | (26,236 | )      |   |   | (4,139  | )     
|Income tax provision (benefit)                                                                                                                                                    |                                                                                                                                         |                    | 2,509   |                  |   |      | (377    | )      |   |   | 3,338   |        |   |   | (334    | )     
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|Loss before cumulative effect of change in
    accounting principle                                                                                                               |                                                                                                                                         |                    | (18,615 | )                |   |      | (3,506  | )      |   |   | (29,574 | )      |   |   | (3,805  | )     
|Cumulative effect of change in accounting
    principle, net of provision for income taxes of $134 and $256
    for the six months ended June 30, 2004 and 2003,
    respectively |                                                                                                                                         |                    |        |                  |   |      |        |        |   |   | 225     |        |   |   | 518     |       
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|Net loss                                                                                                                                                                          |                                                                                                                                         |                    | (18,615 | )                |   |      | (3,506  | )      |   |   | (29,349 | )      |   |   | (3,287  | )     
|Deemed dividend on Series 1 Preferred Shares                                                                                                                                      |                                                                                                                                         |                    |        |                  |   |      | (12,489 | )      |   |   |        |        |   |   | (21,021 | )     
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|Net loss attributable to Common
    Shareholders                                                                                                                                  |                                                                                                                                         | $                  | (18,615 | )                |   | $    | (15,995 | )      |   | $ | (29,349 | )      |   | $ | (24,308 | )     
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|Basic and diluted loss per share:                                                                                                                                                 |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|                                                                                                                                                                                  | Basic and diluted loss per share attributable to
    Common Shareholders before cumulative effect of change in
    accounting principle |                    | $       | (0.21            | ) |      | $       | (0.42  | ) |   | $       | (0.37  | ) |   | $       | (0.68  | )
|                                                                                                                                                                                  | Cumulative effect of change in accounting
    principle                                                                                 |                    |         |                 |   |      |         |       |   |   |         |       |   |   |         | 0.01   |  
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|                                                                                                                                                                                  | Loss per share  basic and diluted                                                                                                      |                    | $       | (0.21            | ) |      | $       | (0.42  | ) |   | $       | (0.37  | ) |   | $       | (0.67  | )
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       
|                                                                                                                                                                                  | Weighted average Common Shares
    outstanding  basic and diluted                                                                      |                    |         | 88,855           |   |      |         | 37,865 |   |   |         | 79,736 |   |   |         | 36,537 |  
|                                                                                                                                                                                  |                                                                                                                                         |                    |         |                  |   |      |         |        |   |   |         |        |   |   |         |       

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

3



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##### 



WASTE SERVICES, INC.

(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)




UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
SHAREHOLDERS EQUITY


For the Six Months Ended June 30,
2004


(In thousands)


|                                                           |  |              |        |              |  |               |         |             |  |               |        |        |  |   |        |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------------ | ------ | ------------ |  | ------------- | ------- | ----------- |  | ------------- | ------ | ------ |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                           |  |              |        |              |  | Options,      |         | Accumulated |  |               |        |       
|                                                           |  |              |        | Warrants and |  | Other         |         |             |  |              
|                                                           |  | Common Stock |        | Deferred     |  | Comprehensive |         |             |  | Total        
|                                                           |  |              |        | Stock-Based  |  | Income        |         | Accumulated |  | Shareholders
|                                                           |  | Shares       |        | Amount       |  | Compensation  |         | (Loss)      |  | Deficit       |        | Equity
|                                                           |  |              |        |              |  |               |         |             |  |               |        |       
|Balance, December 31, 2003                                 |  |              | 68,339 |              |  | $             | 215,395 |             |  | $             | 25,828 |        |  | $ | 15,952 |   |  | $ | (56,058 | ) |  | $ | 201,117 |  
|Common Shares issued in acquisitions                       |  |              | 14,798 |              |  |               | 80,615  |             |  |               |       |        |  |   |       |   |  |   |        |   |  |   | 80,615  |  
|Common Shares to be issued in acquisitions
    (38 shares) |  |              |       |              |  |               |        |             |  |               | 241    |        |  |   |       |   |  |   |        |   |  |   | 241     |  
|Exercise of options and warrants                           |  |              | 311    |              |  |               | 1,253   |             |  |               | (212   | )      |  |   |       |   |  |   |        |   |  |   | 1,041   |  
|Deferred stock-based compensation                          |  |              |       |              |  |               |        |             |  |               | (846   | )      |  |   |       |   |  |   |        |   |  |   | (846    | )
|Foreign currency translation adjustment                    |  |              |       |              |  |               |        |             |  |               |       |        |  |   | (5,415 | ) |  |   |        |   |  |   | (5,415  | )
|Net loss                                                   |  |              |       |              |  |               |        |             |  |               |       |        |  |   |       |   |  |   | (29,349 | ) |  |   | (29,349 | )
|                                                           |  |              |        |              |  |               |         |             |  |               |        |        |  |   |        |   |  |   |         |   |  |   |         |  
|Balance, June 30, 2004                                     |  |              | 83,448 |              |  | $             | 297,263 |             |  | $             | 25,011 |        |  | $ | 10,537 |   |  | $ | (85,407 | ) |  | $ | 247,404 |  
|                                                           |  |              |        |              |  |               |         |             |  |               |        |        |  |   |        |   |  |   |         |   |  |   |         |  

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

4



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##### 



WASTE SERVICES, INC.

(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)




UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS


(In thousands)


|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |         |       |        |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------- | ---------------------------------------------- | -------- | ------ | ------ | ------- | ------- | ----- | ------ | -
|                                                                 |                                                                                                                    |                                                                                                
|                                                                 |                                                                                                                    | Six Months Ended                                                                               
|                                                                 |                                                                                                                    | June 30,                                                                                       
|                                                                 |                                                                                                                    |                                                                                                
|                                                                 |                                                                                                                    | 2004                                                                                            |                                                | 2003    
|                                                                 |                                                                                                                    |                                                                                                 |                                                |         
|Cash flows from operating
    activities:                        |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|                                                                 | Net loss                                                                                                           |                                                                                                 | $                                              | (29,349  | )      |        | $       | (3,287  | )    
|                                                                 | Adjustments to reconcile net loss to net cash
    flows from operating activities  Depreciation and
    depletion |                                                                                                 |                                                | 11,028   |        |        |         | 6,444   |      
|                                                                 |                                                                                                                    | Amortization of intangible assets                                                               |                                                |          | 2,253  |        |         |         | 347   |       
|                                                                 |                                                                                                                    | Cumulative mandatorily redeemable preferred stock
    dividends and amortization of issue costs |                                                |          | 8,309  |        |         |         | 2,198 |       
|                                                                 |                                                                                                                    | Amortization of debt issue costs                                                                |                                                |          | 9,616  |        |         |         | 465   |       
|                                                                 |                                                                                                                    | Deferred income tax provision (benefit)                                                         |                                                |          | 3,338  |        |         |         | (334  | )     
|                                                                 |                                                                                                                    | Foreign exchange loss (gain)                                                                    |                                                |          | (84    | )      |         |         | 480   |       
|                                                                 |                                                                                                                    | Non-cash stock-based compensation                                                               |                                                |          | (1,034 | )      |         |         | (177  | )     
|                                                                 |                                                                                                                    | Cumulative effect of change in accounting
    principle, net of tax                             |                                                |          | (225   | )      |         |         | (518  | )     
|                                                                 |                                                                                                                    | Changes in fair value of warrants pending
    registration                                      |                                                |          | 421    |        |         |         |      |       
|                                                                 |                                                                                                                    | Other non-cash items                                                                            |                                                |          | (49    | )      |         |         | 14    |       
|                                                                 | Changes in operating assets and liabilities
    (excluding the effects of acquisitions)                           |                                                                                                 |                                                |          |        |        |         |         |      
|                                                                 |                                                                                                                    |                                                                                                 | Accounts receivable                            |          |        | (2,594 | )       |         |       | (2,145 | )
|                                                                 |                                                                                                                    |                                                                                                 | Prepaid expenses and other current assets      |          |        | (2,243 | )       |         |       | (607   | )
|                                                                 |                                                                                                                    |                                                                                                 | Accounts payable                               |          |        | 5,901  |         |         |       | 831    |  
|                                                                 |                                                                                                                    |                                                                                                 | Accrued expenses and other current liabilities |          |        | 2,793  |         |         |       | 1,680  |  
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|                                                                 |                                                                                                                    |                                                                                                 | 8,081                                          |          |        |        | 5,391   |        
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|Cash flows from investing
    activities:                        |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|                                                                 | Cash used in business combinations and
    significant asset acquisitions, net of cash acquired                    |                                                                                                 |                                                | (161,439 | )      |        |         | (69,300 | )    
|                                                                 | Capital expenditures                                                                                               |                                                                                                 |                                                | (22,606  | )      |        |         | (5,943  | )    
|                                                                 | Proceeds from business divestitures                                                                                |                                                                                                 |                                                | 9,983    |        |        |         |        |      
|                                                                 | Deposits for business acquisitions                                                                                 |                                                                                                 |                                                | (542     | )      |        |         | (6,917  | )    
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|                                                                 |                                                                                                                    |                                                                                                 | (174,604                                       | )        |        |        | (82,160 | )      
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|Cash flows from financing
    activities:                        |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|                                                                 | Proceeds from issuance of debt                                                                                     |                                                                                                 |                                                | 266,000  |        |        |         | 8,801   |      
|                                                                 | Principal repayments of debt                                                                                       |                                                                                                 |                                                | (181,639 | )      |        |         | (10,060 | )    
|                                                                 | Proceeds from the private placement of Common
    Shares and warrants                                              |                                                                                                 |                                                | 53,600   |        |        |         |        |      
|                                                                 | Proceeds from release of restricted cash and
    release of collateral supporting letters of credit                |                                                                                                 |                                                | 22,617   |        |        |         |        |      
|                                                                 | Proceeds from the issuance of Series 1
    Preferred Shares                                                        |                                                                                                 |                                                |         |        |        |         | 45,725  |      
|                                                                 | Proceeds from the issuance of mandatorily
    redeemable Preferred Shares                                          |                                                                                                 |                                                |         |        |        |         | 55,000  |      
|                                                                 | Proceeds from the exercise of options and warrants                                                                 |                                                                                                 |                                                | 1,041    |        |        |         |        |      
|                                                                 | Fees paid for financing transactions                                                                               |                                                                                                 |                                                | (12,999  | )      |        |         | (8,493  | )    
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|                                                                 |                                                                                                                    |                                                                                                 | 148,620                                        |          |        |        | 90,973  |        
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|Effect of exchange rate changes on cash and
    cash equivalents |                                                                                                                    |                                                                                                 | (204                                           | )        |        |        | 303     |        
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|Increase (decrease) in cash and cash
    equivalents             |                                                                                                                    |                                                                                                 | (18,107                                        | )        |        |        | 14,507  |        
|Cash and cash equivalents, beginning of
    period               |                                                                                                                    |                                                                                                 | 21,062                                         |          |        |        | 1,775   |        
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        
|Cash and cash equivalents, end of
    period                     |                                                                                                                    | $                                                                                               | 2,955                                          |          |        | $      | 16,282  |        
|                                                                 |                                                                                                                    |                                                                                                 |                                                |          |        |        |         |        

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

5



---



##### 



WASTE SERVICES, INC.

(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)




NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS




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

The accompanying unaudited condensed consolidated
financial statements include the accounts of Waste Services,
Inc. (Waste Services), successor to Capital
Environmental Resource Inc. now known as Waste Services (CA)
Inc. (Capital or the Canadian
operations) and its wholly owned subsidiaries
(collectively, we, us or
our). 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. In 2003,
we initiated a disposal-based growth strategy to enter the
United States 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. As part of our business strategy to expand
into the United States, we entered into a migration transaction,
which was completed effective July 31, 2004. Under the
migration transaction, our corporate structure was reorganized
so that Waste Services, a Delaware company, is the ultimate
parent company of our corporate group. Prior to the migration
transaction, Waste Services was a subsidiary of Capital. After
the migration transaction, Capital became Waste Services
subsidiary.

As further described in Note 8, we failed to
meet certain of the financial covenants contained in the Credit
Facilities. We are currently in discussion with lenders to
obtain a waiver of our failure to comply, as well as provide
access to capacity under our revolving credit facility. We
cannot provide any assurance that we will be able to maintain
existing capacity or obtain short-term liquidity on acceptable
terms or at all. If our lenders accelerate repayment of our
debt, it would cause substantial doubt about our ability to
continue as a going concern.

These condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. All significant intercompany
transactions and accounts have been eliminated. All figures are
presented in thousands of U.S. dollars, except share and
per share data, or except where expressly stated as being in
Canadian dollars (C$) or in millions. Certain
information related to our organization, significant accounting
policies and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States has been condensed or
omitted. Except as disclosed in Note 2, the accounting
policies followed in the preparation of these interim condensed
consolidated financial statements are consistent with those
followed in our annual consolidated financial statements for the
year ended December 31, 2003, as filed on Form 10-K.
In the opinion of management, these unaudited condensed
consolidated financial statements contain all material
adjustments, consisting only of normal recurring adjustments,
necessary to fairly state our financial position, results of
operations and cash flows for the periods presented and the
presentations and disclosures herein are adequate when read in
conjunction with our Form 10-K for the year ended
December 31, 2003. Income taxes during these interim
periods have been provided for based upon our anticipated annual
effective income tax rate. Certain reclassifications have been
made to the prior period financial statement amounts to conform
to the current presentation. Due to the seasonal nature of our
business, operating results for interim periods are not
necessarily indicative of the results for full years. These
interim financial statements should be read in conjunction with
our audited consolidated financial statements and notes thereto
appearing in our annual report on Form 10-K for the year
ended December 31, 2003.

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

6



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

development costs, liabilities for capping,
closure and post-closure obligations, insurance reserves,
liabilities for potential litigation and deferred taxes.

A portion of our operations are domiciled in
Canada; as such, for each reporting period, we translate the
results of operations and financial condition of our Canadian
operations into U.S. 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 U.S. dollar, revenue is favorably affected and
conversely 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 dates, 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 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). Currently, we do not hedge our exposure to
changes in foreign exchange rates.

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 period plus the dilutive effect of common stock purchase
warrants and stock options using the treasury stock method and
the dilutive effects of convertible instruments using the
if-converted method. Contingently issuable shares are included
in the computation of basic earnings (loss) per share when
issuance of the shares is no longer contingent. Due to the net
losses attributable to common shareholders for the three months
and six months ended June 30, 2004 and 2003, basic and
diluted loss per share were the same, as the effect of
potentially dilutive securities would have been anti-dilutive.
Dilutive securities not included in the diluted loss per share
calculation are as follows (unaudited):

|                                   |  |                |       |                |  |      |        |      |  |  |       |  |  |  |       | 
|---------------------------------- |  | -------------- | ----- | -------------- |  | ---- | ------ | ---- |  |  | ----- |  |  |  | ----- | 
|                                   |  |                |       |               
|                                   |  | Three Months   |       | Six Months    
|                                   |  | Ended June 30, |       | Ended June 30,
|                                   |  |                |       |               
|                                   |  | 2004           |       | 2003           |  | 2004 |        | 2003
|                                   |  |                |       |                |  |      |        |     
|Series 1 Preferred Shares          |  |                |      |                |  |      | 10,000 |      |  |  |      |  |  |  | 5,109 | 
|Options to purchase Common Shares  |  |                | 999   |                |  |      | 519    |      |  |  | 1,378 |  |  |  | 446   | 
|Warrants to purchase Common Shares |  |                | 5,285 |                |  |      | 1,835  |      |  |  | 6,064 |  |  |  | 1,294 | 
|                                   |  |                |       |                |  |      |        |      |  |  |       |  |  |  |       | 
|Dilutive securities                |  |                | 6,284 |                |  |      | 12,354 |      |  |  | 7,442 |  |  |  | 6,849 | 
|                                   |  |                |       |                |  |      |        |      |  |  |       |  |  |  |       | 



|   |                               
|-- | ------------------------------
|2. | Change in Accounting Principle

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 required us
to change our methodology used to record liabilities related to
capping, closure and post-closure of our landfill operations.
Under SFAS No. 143, we are required to recognize 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. Upon adoption, the liability we recognized
represented the present value of the total estimated future
asset retirement obligation. The methodology we used to define
the cost pool related to an obligating event included

7



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

total capping, closure and post-closure costs to
be incurred, on a discounted basis, over the remaining life of
the site.

In connection with the opening of our JED
Landfill in Florida in the first quarter of 2004, we
re-evaluated and changed the methodology used to define an
obligating event, and we segregated the cost pool for the
obligation into closure and post-closure obligations and
landfill capping obligations. Effective January 1, 2004, we
recognize the fair value of the liability for the closure and
post-closure obligation over the life of the landfill as waste
is placed in the site as opposed to the time at which the
landfill commences operations. Additionally, under our new
method, we view landfill capping events, which occur in phases
throughout the life of a landfill, as discrete activities that
are recognized as asset retirement obligations separately from
other closure and post-closure obligations. These capping events
occur generally during the operating life of a landfill and can
be associated with specific waste placed under an area to be
capped. As a result, we use a separate capping rate per ton to
recognize the principal amount of the retirement obligation and
related asset associated with each capping event. We deplete the
asset recorded pursuant to this approach as waste volume covered
by the capping event is placed into the landfill.

We believe this method is preferable as it
(i) provides a better measure of the fair value of the
asset retirement obligation by more precisely matching the
landfill obligating events with the recognition of the fair
value of the asset retirement obligation; (ii) is more
consistent with our policies for the allocation of purchase
price in landfill acquisitions and the related valuation of
assumed retirement obligations; (iii) reflects a more
accurate rate of accretion thereby creating a more accurate
value of our current and future retirement obligations and
(iv) is the predominant method used in our industry.

The effect of the change in methodology, had it
been adopted January 1, 2003, would have been to increase
net loss before cumulative effect of change in accounting
principle for the three and six months ended June 30, 2003
by approximately $0.1 million and $0.2 million,
respectively. The effect of this change on basic or diluted loss
per share for the three and six months ended June 30, 2003
would have been de minimus.

The following table summarizes the balance sheet
impact of adopting the accounting change on January 1, 2004:

|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  
|-------------------------------------------- |  | ----------------- | ------- | -------------- |  | --------------- | ------ | - |  | - | ------- | -
|                                             |  |                   |         | Adjustment for |  |                
|                                             |  |                   |         | Change in      |  |                
|                                             |  | December 31, 2003 |         | Accounting     |  | January 1, 2004
|                                             |  |                   |         |                |  |                
|Landfill sites                               |  | $                 | 128,044 |                |  | $               | (3,191 | ) |  | $ | 124,853 |  
|Accumulated depletion                        |  |                   | (10,503 | )              |  |                 | 717    |   |  |   | (9,786  | )
|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  
|Landfill sites, net                          |  | $                 | 117,541 |                |  | $               | (2,474 | ) |  | $ | 115,067 |  
|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  
|Accrued closure and post-closure obligations |  | $                 | 7,737   |                |  | $               | (2,831 | ) |  | $ | 4,906   |  
|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  
|Deferred income tax asset (liability)        |  | $                 | 3,727   |                |  | $               | (132   | ) |  | $ | 3,595   |  
|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  



|   |                                                             
|-- | ------------------------------------------------------------
|3. | Business Combinations and Significant Asset
    Acquisitions

In November 2003, we entered into an agreement to
acquire the assets of Allied Waste Industries, Inc.s
(Allied) northern and central Florida operations
(the Allied Assets) for a purchase price of
approximately $120.0 million subject to an adjustment for
working capital. The primary metropolitan areas served by the
Allied Assets are Tampa, Sarasota and Jacksonville, Florida. On
December 31, 2003, we completed the first phase of the
Allied Assets acquisition. During the first six months of 2004,
we completed the acquisition of the remaining Allied Assets.

8



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In April 2004, we completed an exchange of the
Nassau Landfill and related assets, which were acquired from
Allied in December 2003, for a collection operation in the
metropolitan Orlando area and cash proceeds of
$10.0 million. As part of this exchange, the new owner of
the Nassau Landfill assumed responsibility for the closure and
post closure obligations related to the landfill. Proceeds in
excess of net assets exchanged reduced goodwill from the
original Allied Assets acquisition by $8.6 million.

In April 2004, we completed the acquisition of
the issued and outstanding shares of Florida Recycling Services,
Inc. (Florida Recycling) for an aggregate purchase
price of approximately $99.0 million in cash, working
capital of approximately $2.2 million, subject to further
adjustment and the issuance of 9,250,000 Common Shares
valued at approximately $51.4 million. Florida
Recyclings operations are based in central Florida,
primarily serving the Orlando, Daytona, Fort Myers, and
Tampa markets.

In February 2004, we acquired a permitted
undeveloped municipal solid waste landfill in Fort Bend
County, Texas (the Fort Bend Regional
Landfill). We expect the landfill to begin operations
during the third quarter of 2004. The purchase price was
comprised of $5.1 million in cash, a seller financed
promissory note of $5.0 million and the issuance of
4,375,000 Common Shares valued at approximately
$25.0 million. The landfill site, which will serve the
metropolitan Houston area, is approximately 2,600 acres and
has an initial permitted capacity of 47.6 million cubic
yards. In addition to the landfill, we acquired a leasehold
interest in a fully permitted transfer station site near
Houston. In connection with the acquisition of the
Fort Bend Regional Landfill, we entered into a royalty
agreement, under which we will be required to pay a royalty of
$0.25 per ton of eligible waste, as defined in the
agreement, after we commence operations at the site and for the
first five years subsequent to the date of the royalty agreement
and $0.35 per ton of eligible waste thereafter.

During the first quarter of 2004, we acquired the
assets of three collection businesses in the metropolitan
Phoenix area for aggregate cash consideration of approximately
$8.4 million plus the current and future issuance of
949,800 Common Shares valued at approximately $5.5 million.
Separately, in January 2004, we acquired an industrial-permitted
waste landfill site in Saskatchewan, Canada. The purchase price
was comprised of $1.1 million in cash and the issuance of
12,000 Common Shares valued at approximately $0.1 million.

During July 2003, we purchased Cactus Waste
Systems, LLC for $0.6 million in cash and a
$1.2 million option that 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. During May
2004, we received the permits and authorizations necessary for
the operation of the landfill (the Southeast Regional Landfill)
and, as a condition of the purchase, we issued 1,250,000 Common
Shares valued at $5.5 million to the sellers during the
second quarter of 2004 which has been capitalized as a cost of
the landfill. The landfill began operations in July 2004. 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 Southeast
Regional Landfill after the earlier to occur of July 2006 or the
receipt of 1,250 tons of waste per day at the landfill.

The following unaudited condensed consolidated
pro forma statement of operations data shows the results of our
operations for the three and six months ended June 30, 2004
and 2003 as if recently completed business

9



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

combinations had occurred at the beginning of
each period presented (in thousands except per share amounts):

|                                                                                     |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                     |  |                    |         |                 
|                                                                                     |  | Three Months Ended |         | Six Months Ended
|                                                                                     |  | June 30,           |         | June 30,        
|                                                                                     |  |                    |         |                 
|                                                                                     |  | 2004               |         | 2003             |  | 2004 |         | 2003
|                                                                                     |  |                    |         |                  |  |      |         |     
|Revenue                                                                              |  | $                  | 86,076  |                  |  | $    | 79,439  |      |  | $ | 167,162 |   |  | $ | 152,851 |  
|                                                                                     |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Net loss attributable to Common Shareholders                                         |  | $                  | (21,577 | )                |  | $    | (17,894 | )    |  | $ | (34,327 | ) |  | $ | (25,165 | )
|                                                                                     |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per Common Share                                          |  | $                  | (0.23   | )                |  | $    | (0.33   | )    |  | $ | (0.39   | ) |  | $ | (0.46   | )
|                                                                                     |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Basic and diluted pro forma weighted average
    number of common shares outstanding |  |                    | 92,270  |                  |  |      | 54,860  |      |  |   | 87,643  |   |  |   | 54,860  |  
|                                                                                     |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         |  

These unaudited condensed consolidated pro forma
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 our future operations.
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.

The operating results of acquired businesses are
included in the consolidated statements of operations from the
dates of acquisition. The assets acquired and liabilities
assumed are recorded under the purchase

10



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

method of accounting. Details of the net assets
acquired and cash used in business and significant asset
acquisitions during the first six months of 2004 are as follows
(unaudited):

|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |         |        |  
|------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------- | ------ | --------- | ----- | ------ | ------- | ------- | ------ | - | ------ | ------ | ---- | - | ------- | ------- | ------ | -
|                                                              |                                                                  | Allied                                         |        | Florida   |       | All    |         |        
|                                                              |                                                                  | Assets                                         |        | Recycling |       | Others |         | Total  
|                                                              |                                                                  |                                                |        |           |       |        |         |        
|Purchase price:                                               |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|                                                              | Cash                                                             |                                                | $      | 45,793    |       |        | $       | 103,638 |        |   | $      | 16,050 |      |   | $       | 165,481 |       
|                                                              | Seller financed note payable                                     |                                                |        |          |       |        |         |        |        |   |        | 5,000  |      |   |         | 5,000   |       
|                                                              | Common stock issued and to be issued and warrants                |                                                |        |          |       |        |         | 51,357  |        |   |        | 36,267 |      |   |         | 87,624  |       
|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|Total purchase price                                          |                                                                  |                                                | 45,793 |           |       |        | 154,995 |         |        |   | 57,317 |        |      |   | 258,105 |        
|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|Allocated as follows:                                         |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|                                                              | Working capital assumed:                                         |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |         |       
|                                                              |                                                                  | Accounts receivable                            |        |           | 3,755 |        |         |         | 7,426  |   |        |        | 889  |   |         |         | 12,070 |  
|                                                              |                                                                  | Prepaid expenses and other current assets      |        |           | 258   |        |         |         | 1,114  |   |        |        | 56   |   |         |         | 1,428  |  
|                                                              |                                                                  | Accounts payable                               |        |           |      |        |         |         | (8,444 | ) |        |        | (835 | ) |         |         | (9,279 | )
|                                                              |                                                                  | Accrued expenses and other current liabilities |        |           | (804  | )      |         |         | (4,246 | ) |        |        | (20  | ) |         |         | (5,070 | )
|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|                                                              |                                                                  | Net working capital                            |        |           | 3,209 |        |         |         | (4,150 | ) |        |        | 90   |   |         |         | (851   | )
|                                                              | Property and equipment                                           |                                                |        | 10,312    |       |        |         | 23,911  |        |   |        | 4,016  |      |   |         | 38,239  |       
|                                                              | Landfill sites                                                   |                                                |        |          |       |        |         |        |        |   |        | 41,982 |      |   |         | 41,982  |       
|                                                              | Other assets                                                     |                                                |        |          |       |        |         | 278     |        |   |        |       |      |   |         | 278     |       
|                                                              | Deferred taxes                                                   |                                                |        |          |       |        |         |        |        |   |        | (334   | )    |   |         | (334    | )     
|                                                              | Accrued closures, post-closure and other
    obligations assumed |                                                |        |          |       |        |         |        |        |   |        | (52    | )    |   |         | (52     | )     
|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|Net book value of assets acquired and liabilities
    assumed |                                                                  |                                                | 13,521 |           |       |        | 20,039  |         |        |   | 45,702 |        |      |   | 79,262  |        
|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|Excess purchase price to be allocated                         |                                                                  | $                                              | 32,272 |           |       | $      | 134,956 |         |        | $ | 11,615 |        |      | $ | 178,843 |        
|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|Allocated as follows:                                         |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|                                                              | Goodwill                                                         |                                                | $      | 23,280    |       |        | $       | 107,800 |        |   | $      | 11,591 |      |   | $       | 142,671 |       
|                                                              | Other intangible assets                                          |                                                |        | 8,992     |       |        |         | 27,156  |        |   |        | 24     |      |   |         | 36,172  |       
|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        
|Total allocated                                               |                                                                  | $                                              | 32,272 |           |       | $      | 134,956 |         |        | $ | 11,615 |        |      | $ | 178,843 |        
|                                                              |                                                                  |                                                |        |           |       |        |         |         |        |   |        |        |      |   |         |        

The above table includes cash deposits and
acquisition related costs of $4.0 million and one million
shares and warrants valued at $5.7 million, which relate to
the Florida Recycling acquisition that were paid or deposited
during 2003 and have been capitalized to the cost of the
acquisition during 2004.

We allocate 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
we have obtained all required information to complete the
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 date of consummation of an acquisition. Adjustments to
the allocation of purchase price may decrease those amounts
allocated to goodwill and, as such, may

11



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##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

increase those amounts allocated to other
tangible or intangible assets, which may result in higher
depreciation or amortization expense in future periods.



|   |                       
|-- | ----------------------
|4. | Property and Equipment

Property and equipment consist of the following:

|                                                                           |                                |             |         |              |   |   |        |         |  
|-------------------------------------------------------------------------- | ------------------------------ | ----------- | ------- | ------------ | - | - | ------ | ------- | -
|                                                                           |                                | June 30,    |         | December 31,
|                                                                           |                                | 2004        |         | 2003        
|                                                                           |                                |             |         |             
|                                                                           |                                | (Unaudited) |         |             
|Land and buildings                                                         |                                | $           | 13,905  |              |   | $ | 6,132  |        
|Vehicles                                                                   |                                |             | 89,265  |              |   |   | 62,182 |        
|Containers, compactors, landfill and recycling
    equipment               |                                |             | 51,523  |              |   |   | 39,902 |        
|Furniture, fixtures, other office equipment and
    leasehold improvements |                                |             | 7,421   |              |   |   | 5,927  |        
|                                                                           |                                |             |         |              |   |   |        |        
|                                                                           | Total property and equipment   |             |         | 162,114      |   |   |        | 114,143 |  
|                                                                           | Less: Accumulated depreciation |             |         | (45,347      | ) |   |        | (39,622 | )
|                                                                           |                                |             |         |              |   |   |        |        
|Property and equipment, net                                                |                                | $           | 116,767 |              |   | $ | 74,521 |        
|                                                                           |                                |             |         |              |   |   |        |        



|   |                                                                        
|-- | -----------------------------------------------------------------------
|5. | Landfill Sites, Accrued Closure, Post-Closure
    and Other Obligations



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

Landfill sites consist of the following:

|                      |  |             |         |              |  |   |         |  
|--------------------- |  | ----------- | ------- | ------------ |  | - | ------- | -
|                      |  | June 30,    |         | December 31,
|                      |  | 2004        |         | 2003        
|                      |  |             |         |             
|                      |  | (Unaudited) |         |             
|Landfill sites        |  | $           | 180,331 |              |  | $ | 128,044 |  
|Accumulated depletion |  |             | (12,266 | )            |  |   | (10,503 | )
|                      |  |             |         |              |  |   |         |  
|Landfill sites, net   |  | $           | 168,065 |              |  | $ | 117,541 |  
|                      |  |             |         |              |  |   |         |  

The changes in landfill sites for the six months
ended June 30, 2004 and 2003 are as follows (unaudited):

|                             |                                                                  |                  |         |        |   |   |         |        |  
|---------------------------- | ---------------------------------------------------------------- | ---------------- | ------- | ------ | - | - | ------- | ------ | -
|                             |                                                                  |                 
|                             |                                                                  | Six Months Ended
|                             |                                                                  | June 30,        
|                             |                                                                  |                 
|                             |                                                                  | 2004             |         | 2003  
|                             |                                                                  |                  |         |       
|Balance, beginning of period |                                                                  | $                | 117,541 |        |   | $ | 13,084  |       
|                             | Acquisitions                                                     |                  |         | 41,982 |   |   |         | 88,589 |  
|                             | Additional landfill site costs                                   |                  |         | 7,938  |   |   |         | 782    |  
|                             | Additional asset retirement obligations                          |                  |         | 312    |   |   |         |       |  
|                             | Depletion                                                        |                  |         | (2,774 | ) |   |         | (2,152 | )
|                             | Divestitures                                                     |                  |         | (154   | ) |   |         |       |  
|                             | Capitalized interest                                             |                  |         | 178    |   |   |         |       |  
|                             | Purchase price allocation adjustments for prior
    acquisitions |                  |         | 5,905  |   |   |         |       |  
|                             | Effect of foreign exchange rate fluctuations                     |                  |         | (389   | ) |   |         | 2,670  |  
|                             | Change in accounting principle                                   |                  |         | (2,474 | ) |   |         | 3,657  |  
|                             |                                                                  |                  |         |        |   |   |         |       
|Balance, end of period       |                                                                  | $                | 168,065 |        |   | $ | 106,630 |       
|                             |                                                                  |                  |         |        |   |   |         |       

12



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##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Additional landfill site costs include
$2.8 million of capital expenditures incurred but not paid
as of June 30, 2004.



| |                                                        
| | -------------------------------------------------------
| | Accrued Closure, Post-Closure and Other
    Obligations

Accrued closure, post-closure and other
obligations consist of the following:

|                                             |  |             |        |              |  |   |       | 
|-------------------------------------------- |  | ----------- | ------ | ------------ |  | - | ----- | 
|                                             |  | June 30,    |        | December 31,
|                                             |  | 2004        |        | 2003        
|                                             |  |             |        |             
|                                             |  | (Unaudited) |        |             
|Accrued closure and post-closure obligations |  | $           | 5,162  |              |  | $ | 7,737 | 
|Warrants pending registration (See Note 11)  |  |             | 2,996  |              |  |   |      | 
|Deferred income tax liability                |  |             | 1,576  |              |  |   |      | 
|Capital lease obligations                    |  |             | 635    |              |  |   | 911   | 
|Other obligations                            |  |             | 181    |              |  |   | 143   | 
|                                             |  |             |        |              |  |   |       | 
|                                             |  | $           | 10,550 |              |  | $ | 8,791 | 
|                                             |  |             |        |              |  |   |       | 

Accrued closure and post-closure obligations
include costs associated with obligations for closure and
post-closure of our 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 for the six months ended June 30,
2004 and 2003 are as follows (unaudited):

|                             |                                                                  |                  |       |        |   |   |       |       | 
|---------------------------- | ---------------------------------------------------------------- | ---------------- | ----- | ------ | - | - | ----- | ----- | 
|                             |                                                                  |                 
|                             |                                                                  | Six Months Ended
|                             |                                                                  | June 30,        
|                             |                                                                  |                 
|                             |                                                                  | 2004             |       | 2003  
|                             |                                                                  |                  |       |       
|Balance, beginning of period |                                                                  | $                | 7,737 |        |   | $ | 1,925 |      
|                             | Acquisitions                                                     |                  |       | 52     |   |   |       |      | 
|                             | Accretion                                                        |                  |       | 224    |   |   |       | 236   | 
|                             | Additional asset retirement obligations                          |                  |       | 312    |   |   |       |      | 
|                             | Divestitures                                                     |                  |       | (146   | ) |   |       |      | 
|                             | Purchase price allocation adjustments for prior
    acquisitions |                  |       | (92    | ) |   |       |      | 
|                             | Effect of foreign exchange rate fluctuations                     |                  |       | (94    | ) |   |       | 738   | 
|                             | Change in accounting principle                                   |                  |       | (2,831 | ) |   |       | 2,883 | 
|                             |                                                                  |                  |       |        |   |   |       |      
|Balance, end of period       |                                                                  | $                | 5,162 |        |   | $ | 5,782 |      
|                             |                                                                  |                  |       |        |   |   |       |      

13



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                                     
|-- | ------------------------------------
|6. | Goodwill and Other Intangible Assets

Goodwill and other intangible assets consist of
the following:

|                                                         |                                      |             |         |              |   |   |         |        |  
|-------------------------------------------------------- | ------------------------------------ | ----------- | ------- | ------------ | - | - | ------- | ------ | -
|                                                         |                                      | June 30,    |         | December 31,
|                                                         |                                      | 2004        |         | 2003        
|                                                         |                                      |             |         |             
|                                                         |                                      | (Unaudited) |         |             
|Other intangible assets subject to amortization:         |                                      |             |         |              |   |   |         |       
|                                                         | Customer relationships and contracts |             | $       | 53,496       |   |   | $       | 17,909 |  
|                                                         | Non-competition agreements and other |             |         | 3,071        |   |   |         | 2,653  |  
|                                                         |                                      |             |         |              |   |   |         |       
|                                                         |                                      |             | 56,567  |              |   |   | 20,562  |       
|Less: Accumulated amortization:                          |                                      |             |         |              |   |   |         |       
|                                                         | Customer relationships and contracts |             |         | (2,727       | ) |   |         | (837   | )
|                                                         | Non-competition agreements and other |             |         | (1,181       | ) |   |         | (889   | )
|                                                         |                                      |             |         |              |   |   |         |       
|Other intangible assets subject to amortization,
    net |                                      |             | 52,659  |              |   |   | 18,836  |       
|Goodwill                                                 |                                      |             | 270,255 |              |   |   | 144,544 |       
|                                                         |                                      |             |         |              |   |   |         |       
|Goodwill and other intangible assets, net                |                                      | $           | 322,914 |              |   | $ | 163,380 |       
|                                                         |                                      |             |         |              |   |   |         |       

The changes in goodwill for the six months ended
June 30, 2004 and 2003 are as follows:

|                             |                                                                  |                           |         |         |   |       |        |        |   |   |         |         |   |   |        |        |  
|---------------------------- | ---------------------------------------------------------------- | ------------------------- | ------- | ------- | - | ----- | ------ | ------ | - | - | ------- | ------- | - | - | ------ | ------ | -
|                             |                                                                  |                          
|                             |                                                                  | Six Months Ended June 30,
|                             |                                                                  |                          
|                             |                                                                  |                           |         |        
|                             |                                                                  | 2004                      |         | 2003   
|                             |                                                                  |                           |         |        
|                             |                                                                  | U.S.                      |         | Canada  |   | Total |        | Total 
|                             |                                                                  |                           |         |         |   |       |        |       
|Balance, beginning of period |                                                                  | $                         | 65,822  |         |   | $     | 78,722 |        |   | $ | 144,544 |         |   | $ | 64,365 |       
|                             | Acquisitions                                                     |                           |         | 142,337 |   |       |        | 334    |   |   |         | 142,671 |   |   |        | 818    |  
|                             | Divestitures                                                     |                           |         | (8,645  | ) |       |        |       |   |   |         | (8,645  | ) |   |        |       |  
|                             | Effect of foreign exchange rate fluctuations                     |                           |         |        |   |       |        | (2,207 | ) |   |         | (2,207  | ) |   |        | 11,007 |  
|                             | Purchase price allocation adjustments for prior
    acquisitions |                           |         | (6,108  | ) |       |        |       |   |   |         | (6,108  | ) |   |        | (449   | )
|                             |                                                                  |                           |         |         |   |       |        |        |   |   |         |         |   |   |        |       
|Balance, end of period       |                                                                  | $                         | 193,406 |         |   | $     | 76,849 |        |   | $ | 270,255 |         |   | $ | 75,741 |       
|                             |                                                                  |                           |         |         |   |       |        |        |   |   |         |         |   |   |        |       



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

Other assets consist of the following:

|                                                                                                                                                                      |  |             |        |              |  |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | ------------ |  | - | ------ | 
|                                                                                                                                                                      |  | June 30,    |        | December 31,
|                                                                                                                                                                      |  | 2004        |        | 2003        
|                                                                                                                                                                      |  |             |        |             
|                                                                                                                                                                      |  | (Unaudited) |        |             
|Debt and redeemable Preferred Stock issue costs,
    net of accumulated amortization of $1,114 as of June 30,
    2004 and $496 as of December 31, 2003, respectively |  | $           | 11,003 |              |  | $ | 2,096  | 
|Acquisition deposits and deferred acquisition
    costs                                                                                                               |  |             | 10,101 |              |  |   | 20,182 | 
|Other assets                                                                                                                                                          |  |             | 682    |              |  |   |       | 
|                                                                                                                                                                      |  |             |        |              |  |   |        | 
|                                                                                                                                                                      |  | $           | 21,786 |              |  | $ | 22,278 | 
|                                                                                                                                                                      |  |             |        |              |  |   |        | 

14



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |     
|-- | ----
|8. | Debt

Debt consists of the following:

|                                                                                                  |  |             |          |              |  |   |          |  
|------------------------------------------------------------------------------------------------- |  | ----------- | -------- | ------------ |  | - | -------- | -
|                                                                                                  |  | June 30,    |          | December 31,
|                                                                                                  |  | 2004        |          | 2003        
|                                                                                                  |  |             |          |             
|                                                                                                  |  | (Unaudited) |          |             
|Senior Secured Credit Facilities floating rate
    (4.6% as of June 30, 2004), due 2011           |  | $           | 99,750   |              |  | $ |         |  
|Senior Subordinated Notes fixed rate at 9.5% due
    2014                                         |  |             | 160,000  |              |  |   |         |  
|Other subordinated promissory notes payable,
    interest at 2.1% and 6.7%, due through June 2017 |  |             | 5,707    |              |  |   | 3,285    |  
|364-day Senior Secured Credit Facility (repaid in
    full on April 30, 2004)                     |  |             |         |              |  |   | 172,125  |  
|                                                                                                  |  |             |          |              |  |   |          |  
|                                                                                                  |  |             | 265,457  |              |  |   | 175,410  |  
|Less: Current portion                                                                             |  |             | (265,457 | )            |  |   | (172,280 | )
|                                                                                                  |  |             |          |              |  |   |          |  
|Long-term portion                                                                                 |  | $           |         |              |  | $ | 3,130    |  
|                                                                                                  |  |             |          |              |  |   |          |  



| |                                     
| | ------------------------------------
| | Senior Secured Credit
    Facilities

On April 30, 2004, we entered into new
Senior Secured Credit Facilities (the Credit
Facilities) with a syndicate of lenders. The Credit
Facilities consist of a five-year revolving credit facility in
the amount of $60.0 million, up to $15.0 million of
which is available for our Canadian operations, and a seven-year
term loan facility in the amount of $100.0 million. The
Credit Facilities bear interest based upon a spread over base
rate or Eurodollar loans, as defined, at our option. The Credit
Facilities are secured by substantially all of the assets of our
U.S. restricted subsidiaries. Our Canadian operations
guarantee and pledge all of their assets only in support of the
portion of the revolving credit facility available to them.
Separately, 65% of the common shares of Waste Services
first tier foreign subsidiaries, including Capital, are pledged
to secure obligations under the Credit Facilities. As of
June 30, 2004, no amounts were drawn under the facility,
and $9.7 million was used to support outstanding letters of
credit.

Our 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 include (i) minimum consolidated interest
coverage; (ii) maximum total leverage and
(iii) maximum senior secured leverage.

As of June 30, 2004 we failed to meet
certain of the financial covenants contained in the Credit
Facilities which constitutes an event of default. As such, we
are not able to draw amounts under our revolving credit
facilities. We are currently in discussion with lenders to
obtain a waiver of our failure to comply, as well as provide
access to capacity under our revolving credit facility.
Additionally, we will seek to negotiate new financial covenants
for the remaining term of the Credit Facilities. We cannot
provide any assurance that we will be able to maintain existing
capacity or obtain short-term liquidity on acceptable terms or
at all, or at what interest rate or collateral requirements. As
our lenders continue to review their loans with us, there is no
assurance that all amounts outstanding under existing loans will
not be accelerated or adversely modified.

If our lenders do not grant a waiver or amend our
Credit Facilities, they have the right to seek remedies
including acceleration of all outstanding amounts under the
Credit Facilities. If the lenders seek acceleration of amounts
outstanding under the Credit Facilities this would cause a cross
default to occur under the senior subordinated notes and certain
other subordinated notes, thus giving each the right to demand
accelerated

15



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

repayment. We can provide no assurance that we
would be successful in obtaining alternative sources of funding
to repay these obligations should these events occur. If the
lenders accelerate repayment of our debt, it would cause
substantial doubt about our ability to continue as a going
concern. The accompanying financial statements have been
prepared on a basis assuming we are a going concern.

Although we believe we will be successful in
obtaining a waiver and/or an amendment, there can be no
assurance we will be successful in our efforts and accordingly,
as of June 30, 2004 we have reclassified all of our
outstanding debt as current.



| |                              
| | -----------------------------
| | New Senior Subordinated Notes

On April 30, 2004, we completed a private
offering of 9 1/2% Senior Subordinated Notes
(Subordinated Notes) due 2014 for gross proceeds of
$160.0 million. The Subordinated Notes mature on
April 15, 2014. Interest on the Subordinated Notes is
payable semi annually commencing October 15, 2004. The
Subordinated Notes are redeemable, in whole or in part, at our
option, on or after April 15, 2009, at a redemption price
of 104.75% of the principal amount, declining rateably in annual
increments to par on or after April 15, 2012, together with
accrued interest to the redemption date. In addition, prior to
April 15, 2007, we may redeem up to 35.0% of the aggregate
principal amount of the Subordinated Notes with the proceeds of
certain equity offerings, at a redemption price equal to 109.5%
of the principal amount. Upon a change of control, as such term
is defined in the Indenture, we are required to offer to
repurchase all the Subordinated Notes at 100.0% of the principal
amount, together with accrued interest and liquidated damages,
if any, and obtain the consent of our senior lenders to such
payment or repay our indebtedness under our Credit Facilities.

The Subordinated Notes are unsecured and are
subordinate to our existing and future senior secured
indebtedness, including our Credit Facilities, structurally
subordinated to existing and future indebtedness of our
non-guarantor subsidiaries, rank equally with any unsecured
senior subordinated indebtedness and senior to our existing and
future subordinated indebtedness. Our obligations with respect
to the Subordinated Notes, including principal, interest,
premium, if any, and liquidated damages, if any, are fully and
unconditionally guaranteed on an unsecured, senior subordinated
basis by all of our existing and future domestic restricted
subsidiaries. Our Canadian operations are not guarantors under
the Subordinated Notes.

The Subordinated Notes contain certain covenants
that, in certain circumstances and subject to certain
limitations and qualifications, restrict, among other things
(i) the incurrence of additional debt; (ii) the
payment of dividends and repurchases of stock; (iii) the
issuance of preferred stock and the issuance of stock of our
subsidiaries; (iv) certain investments; (v) the
repurchase of our Preferred Stock; (vi) transactions with
affiliates and (vii) certain sales of assets.

We also entered into a Registration Rights
Agreement with the initial purchasers of the Subordinated Notes
in which we agreed to (i) file a registration statement
with respect to the Subordinated Notes within 120 days of
the closing date of the issuance of the notes (August 28,
2004), pursuant to which we will exchange the Subordinated Notes
for registered notes of Waste Services with terms identical to
the Subordinated Notes; (ii) have such registration
statement declared effective within 210 days of the
issuance date; (iii) maintain the effectiveness of such
registration statement for minimum periods specified in the
agreement and (iv) file a shelf registration statement in
the circumstances and within the time periods specified in the
agreement. If we do not comply with these obligations, we will
be required to pay liquidated damages, in cash, in an amount
equal to $0.05 per week per $1,000 in principal amount, of
the unregistered Subordinated Notes, for each week that the
default continues for the first 90-days following default.
Thereafter, the amount of liquidated damages increases by an
additional $0.05 per week per $1,000 in principal amount of
unregistered Subordinated Notes for each subsequent 90-day
period until all defaults have been cured, to a maximum of
$0.50 per week per $1,000 in principal amount of
unregistered Subordinated

16



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Notes outstanding. Liquidated damages, if any,
are payable at the same time as interest payments due under the
Subordinated Notes.



| |                                                                              
| | -----------------------------------------------------------------------------
| | 364-day Senior Secured Credit Facility
    (Repaid in full on April 30, 2004)

On December 31, 2003, we entered into a
$220.0 million 364-day Senior Secured Credit Facility (the
364-day Facility) comprised of a $195.0 million
term loan and a $25.0 million revolving credit facility,
which was secured by substantially all of our current and future
acquired assets. Initial borrowings under the 364-day Facility
were used to finance the acquisition of certain of the Allied
Assets and to repay our prior senior credit facility in full.
The 364-day Facility bore interest at 9.0% per annum and
was repaid with the proceeds of the Credit Facilities,
Subordinated Notes and an equity private placement.



|   |                                                       
|-- | ------------------------------------------------------
|9. | Cumulative Mandatorily Redeemable Preferred
    Shares

In May 2003, Waste Services issued
55,000 shares of redeemable Preferred Stock (the
Waste Services Preferred Stock) to Kelso Investment
Associates VI, L.P. and KEP VI, LLC (collectively
Kelso), pursuant to the terms of an agreement dated
as of May 6, 2003, as amended in February 2004, (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 until May 6, 2010.
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 cash dividends of 17.75% per
annum compounding and accruing quarterly in arrears. The
liquidation preference approximated $67.2 million as of
June 30, 2004. The Waste Services Preferred Stock entitles
the holders to a liquidation preference of $1,000 per
share, adjusted for any stock dividend, stock split,
reclassification, recapitalization, consolidation or similar
event affecting the Waste Services Preferred Stock, plus the
amount of any accrued but unpaid dividends on such share as of
any date of determination.

As we are not permitted to declare and pay cash
dividends pursuant to the terms of our 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 our option to redeem
all of the Waste Services Preferred Stock by May 6, 2009,
Kelso may require us to initiate a sale of Waste Services or of
its assets on terms acceptable to our board consistent with the
exercise of their fiduciary duties. Pursuant to an amendment to
the Certificate of Designations of Waste Services dated
April 30, 2004, if Waste Services determines, after
conducting a sale process, that any such sale would not yield
sufficient proceeds to repay in full the indebtedness then
outstanding under our Credit Facilities and the redemption
amount of our Subordinated Notes issued on April 30, 2004,
or at least $320.0 million, then Waste Services may elect
to delay such sale. The sale date may be delayed until the
earliest to occur of (i) the final maturity date of the
Subordinated Notes (April 15, 2014); (ii) the date on
which our Credit Facilities and the Subordinated Notes are fully
repaid or otherwise satisfied or (iii) a sale of Waste
Services. We refer to this date as the delayed sale date. If we
do not initiate and complete a sale of Waste Services or its
assets within 20 months of initiation of the sale process
by the holders of Waste Services Preferred Stock, then on notice
from the holders of the Waste Services Preferred Stock, all
outstanding Waste Services Preferred Stock will become due and
payable on the first anniversary of the date on which the
holders of Waste Services Preferred Stock gave notice requiring
the initiation of a sale process, for a liquidation amount of
1.20 times the liquidation preference of $1,000 per

17



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##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

share. If the sale day has been delayed, then
Waste Services is not required to pay this increased liquidation
amount until the delayed sale date.

Also pursuant to the Amended Certificate of
Designations, if Waste Services becomes subject to a liquidation
or insolvency event (as such terms are defined in our Amended
and Restated Credit Agreement dated April 30, 2004) or in
the event of a change of control of Waste Services (as such term
is defined in the Amended Certificate of Designations), all
payments and other distributions to holders of Waste Services
Preferred Stock will be subordinate to the repayment in full of
our Credit Facilities. This provision does not prohibit any
accrual or increase in the dividend rate or in the liquidation
preference of the Waste Services Preferred Stock as provided for
in the Amended Certificate of Designations, or the distribution
of additional shares or other equity securities to the holders
of Waste Services Preferred Stock, so long as such additional
shares or other equity securities are subject to at least
equivalent subordination provisions. In addition, the Amended
Certificate of Designations prohibits us from making any payment
or distribution to the holders of Waste Services Preferred Stock
in the event of a sale of Waste Services or its assets, or the
exercise by the holders of Waste Services Preferred Stock of
their right to require payment of the liquidation amount of
their shares as a result of the failure to consummate a sale of
Waste Services as described in the preceding paragraph, unless
such payment or distribution is expressly permitted pursuant to
the terms of the agreement then governing our Credit Facilities.

Separately, we paid Kelso and Company, L.P., an
affiliate of Kelso, an advisory services fee of
$1.65 million in connection with the issuance of the Waste
Services Preferred Stock to Kelso. In February 2004, we also
paid Kelso and Company, L.P. a $0.5 million fee in
connection with services related to the arrangement of our
previous credit facilities that were entered into on
December 31, 2003. Two of our directors, George E. Matelich
and Michael B. Lazar, are Managing Directors of Kelso and
Company, L.P.



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies



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

We are subject to liability for environmental
damage that our 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 our acquisition of such facilities. Pollutants or hazardous
substances whose transportation, treatment, or disposal was
arranged by us or our predecessors, may also subject us to
liability for any off-site environmental contamination caused by
these pollutants or hazardous substances.

Any substantial liability for environmental
damage incurred by us could have a material adverse effect on
our financial condition, results of operations or cash flows. As
of the date of these condensed consolidated financial
statements, we estimate the range of reasonably possible losses
related to environmental matters to be insignificant and we are
not aware of any such environmental liabilities that would be
material to our operations or financial condition.



| |                  
| | -----------------
| | Legal Proceedings

In our normal course of 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 held by us. From time to time, we
may also be subject to actions brought by citizens groups,
adjacent landowners or residents in connection with the

18



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##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

permitting and licensing of transfer stations and
landfills or allegations related to environmental damage or
violations of the permits and licenses pursuant to which we
operate.

In addition, we may become party to various
claims and suits 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. We are currently involved in
pending litigation with Waste Management of Canada Corporation
(formerly Canadian Waste Services Inc.), one of our competitors,
which is more fully described in our financial statements for
the year ended December 31, 2003, as filed on
Form 10-K with the Securities and Exchange Commission. The
status of these actions, as well as the facts and circumstances
related to the suits, remain substantially unchanged from those
disclosed in our Form 10-K. To date, no statements of
defense have been filed, and documents have not been exchanged.
We intend to vigorously defend the actions with respect to both
liability and damages. As of the date of this report, we do not
believe that the reasonably possible losses in respect to all or
any of these matters would have a material adverse impact on our
business, financial condition, results of operations or cash
flows and accordingly, we have not established a provision in
the financial statements for these matters.

In July 2004, Waste Management, Inc. filed a suit
against our President and Chief Operating Officer, Charles A.
Wilcox, for breach of contract, including breach of a
non-competition agreement, and for a temporary and a permanent
injunction. Mr. Wilcox is presently subject to a temporary
order restraining him from engaging in certain activities
adverse to the interests of Waste Management, Inc.
Mr. Wilcox intends to vigorously defend this action.



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

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 June 30, 2004 and
December 31, 2003, we had provided customers and various
regulatory authorities with such bonds and letters of credit
amounting to approximately $63.5 million and
$19.6 million, respectively, to collateralize our
obligations.

Our U.S.-based automobile, general liability and
workers compensation insurance coverage is subject to
certain deductible limits. We retain up to $0.5 million and
$0.25 million of risk per claim, plus claims handling
expense under our workers compensation and our auto and
general liability insurance programs, respectively. Claims in
excess of such deductible levels are fully insured subject to
our policy limits. However, we have a limited claims history for
our U.S. operations and it is reasonably possible that
recorded reserves may not be adequate to cover future payment of
claims. Adjustments, if any, to our reserves will be reflected
in the period in which the adjustments are known. As of
June 30, 2004 we have posted a letter of credit with our
U.S. insurer of approximately $2.3 million to cover
the liability for losses within the deductible limit.



| |                                   
| | ----------------------------------
| | Other Contractual
    Arrangements

During December 2003, we issued 600,000 Common
Shares as part of the purchase price of an acquisition. In
connection with this acquisition, we entered into a
reimbursement agreement whereby for a period of one year after
the second anniversary of the closing date, we will reimburse
the seller for the loss on sale of shares below $4.75 per
share.

19



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |              
|--- | -------------
|11. | Capital Stock



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

During the first six months of 2004, we issued
14,798,370 Common Shares in connection with acquisitions and
311,083 Common Shares upon exercise of options and warrants for
proceeds of $1.0 million.

On April 30, 2004, we raised approximately
$50.7 million, after deducting expenses of approximately
$2.9 million, from the sale of 13,400,000 Common Shares and
warrants to purchase 1,340,000 Common Shares in private
placement transactions to certain investors. The net proceeds
were allocated to the Common Shares and warrants to purchase
Common Shares, based on the relative fair value of each security
at the time of issuance. Sanders Morris Harris Inc. acted as the
placement agent for the issuance and was paid a placement agent
fee of approximately $2.7 million. Don A. Sanders, a
director of ours at the time of issuance, is a principal of
Sanders Morris Harris Inc. We also entered into an agreement
with the investors in the private placement in which we agreed
to file a registration statement for the 13,400,000 Common
Shares and the 1,340,000 Common Shares issuable upon exercise of
the warrants and have that registration statement declared
effective within 120 days from April 30, 2004. Due to
the nature of certain financial penalties within the
registration rights agreement, the Common Shares, warrants and
related proceeds from the offering are classified outside of
shareholders equity at June 30, 2004, as the shares
were not registered at such date. However, such amounts will be
reclassified to permanent equity during the third quarter of
2004, as the shares became fully registered in August 2004. The
warrants, which had an initial carrying value of
$2.6 million and are classified as a liability, have been
remeasured to their fair value as of June 30, 2004,
resulting in a $0.4 million charge to earnings.



| |                                                               
| | --------------------------------------------------------------
| | Employee and Director Stock Option Plans
    and Option Grants

We have 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 unaudited pro forma information, determined as if we had
accounted for our employee stock options under the fair value
recognition provisions of SFAS No. 123, is illustrated
in the following table (unaudited):

|                                                                                   |             |                    |         |                  |   |      |         |       |   |   |         |       |   |   |         |       |  
|---------------------------------------------------------------------------------- | ----------- | ------------------ | ------- | ---------------- | - | ---- | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                   |             |                    |         |                 
|                                                                                   |             | Three Months Ended |         | Six Months Ended
|                                                                                   |             | June 30,           |         | June 30,        
|                                                                                   |             |                    |         |                 
|                                                                                   |             | 2004               |         | 2003             |   | 2004 |         | 2003 
|                                                                                   |             |                    |         |                  |   |      |         |      
|Net loss attributable to Common Shareholders as
    reported                       |             | $                  | (18,615 | )                |   | $    | (15,995 | )     |   | $ | (29,349 | )     |   | $ | (24,308 | )    
|Stock-based employee compensation expense
    pursuant to SFAS No. 123, net of tax |             |                    | (2,419  | )                |   |      | (858    | )     |   |   | (4,708  | )     |   |   | (1,286  | )    
|                                                                                   |             |                    |         |                  |   |      |         |       |   |   |         |       |   |   |         |      
|Pro forma net loss attributable to Common
    Shareholders                         |             | $                  | (21,034 | )                |   | $    | (16,853 | )     |   | $ | (34,057 | )     |   | $ | (25,594 | )    
|                                                                                   |             |                    |         |                  |   |      |         |       |   |   |         |       |   |   |         |      
|Basic and diluted loss per share:                                                  |             |                    |         |                  |   |      |         |       |   |   |         |       |   |   |         |      
|                                                                                   | As reported |                    | $       | (0.21            | ) |      | $       | (0.42 | ) |   | $       | (0.37 | ) |   | $       | (0.67 | )
|                                                                                   |             |                    |         |                  |   |      |         |       |   |   |         |       |   |   |         |      
|                                                                                   | Pro forma   |                    | $       | (0.24            | ) |      | $       | (0.45 | ) |   | $       | (0.43 | ) |   | $       | (0.70 | )
|                                                                                   |             |                    |         |                  |   |      |         |       |   |   |         |       |   |   |         |      

20



---



##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The fair value of options granted to
June 30, 2004, was estimated using the Black-Scholes option
pricing model using the following assumptions:

|                                       |  |                    |         |                  |  |      |         |      |  |  |          |   |  |  |          |  
|-------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  |  | -------- | - |  |  | -------- | -
|                                       |  |                    |         |                 
|                                       |  | Three Months Ended |         | Six Months Ended
|                                       |  | June 30,           |         | June 30,        
|                                       |  |                    |         |                 
|                                       |  | 2004               |         | 2003             |  | 2004 |         | 2003
|                                       |  |                    |         |                  |  |      |         |     
|Annual dividend yield                  |  |                    |        |                  |  |      |        |      |  |  |         |   |  |  |         |  
|Weighted-average expected life (years) |  |                    | 3 years |                  |  |      | 3 years |      |  |  | 3  years |   |  |  | 3  years |  
|Risk-free interest rate                |  |                    | 2.57    | %                |  |      | 3.46    | %    |  |  | 2.57     | % |  |  | 3.46     | %
|                                       |  |                    | to 4.62 | %                |  |      | to 4.92 | %    |  |  | to 4.62  | % |  |  | to 4.96  | %
|Volatility                             |  |                    | 53      | %                |  |      | 72      | %    |  |  | 53       | % |  |  | 72       | %

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, forfeited or expire.

Details of our 1997 and 1999 Stock Option Plans
are described in our consolidated financial statements for the
year ended December 31, 2003 filed on Form 10-K. There
are no options outstanding under the 1997 Stock Option Plan. Our
options are denominated in U.S. and Canadian dollars. During the
six months ended June 30, 2004, options to
purchase 5,259,000 Common Shares were granted. As of
June 30, 2004, the weighted average exercise price for
options outstanding was $4.62 and C$6.47 for U.S. and Canadian
dollar denominated options, respectively. During the six months
ended June 30, 2004, 215,000 options were exercised and
128,735 options expired or were terminated. As of June 30,
2004, the aggregate number of options outstanding entitled
holders to purchase 12,744,964 Common Shares at prices
ranging from $3.12 to $12.00 and C$4.05 to C$18.05 for U.S. and
Canadian dollar denominated options, respectively.



|    |                            
|--- | ---------------------------
|12. | Comprehensive Income (Loss)

Comprehensive income (loss) includes the effects
of foreign currency translation. Comprehensive income (loss) for
the three months and six months ended June 30, 2004 and
2003 are as follows (unaudited):

|                                        |  |                    |         |                  |  |      |        |      |  |   |         |   |  |   |        |  
|--------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                        |  |                    |         |                 
|                                        |  | Three Months Ended |         | Six Months Ended
|                                        |  | June 30,           |         | June 30,        
|                                        |  |                    |         |                 
|                                        |  | 2004               |         | 2003             |  | 2004 |        | 2003
|                                        |  |                    |         |                  |  |      |        |     
|Net loss                                |  | $                  | (18,615 | )                |  | $    | (3,506 | )    |  | $ | (29,349 | ) |  | $ | (3,287 | )
|Foreign currency translation adjustment |  |                    | (3,249  | )                |  |      | 7,760  |      |  |   | (5,415  | ) |  |   | 13,734 |  
|                                        |  |                    |         |                  |  |      |        |      |  |   |         |   |  |   |        |  
|Comprehensive income (loss)             |  | $                  | (21,864 | )                |  | $    | 4,254  |      |  | $ | (34,764 | ) |  | $ | 10,447 |  
|                                        |  |                    |         |                  |  |      |        |      |  |   |         |   |  |   |        |  



|    |                    
|--- | -------------------
|13. | Segment Information

We have determined our 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, we considered
our organization/reporting structure and the information used by
our chief operating decision makers to make decisions about
resource allocation and performance assessment. We are organized
along geographic locations or regions. The Canadian operations
are organized between two regions:

Eastern and Western Canada while the
U.S. operations are in Florida and the Southwest (primarily
Arizona and Texas). We believe our Canadian and United States
geographic segments meet the Aggregation Criteria
set forth in SFAS No. 131 for the following reasons:
(i) the nature of the service, waste collection


21



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##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 and the United States.

The tables below present certain segment
information on our geographic segments as of, and for the three
months and six months ended June 30, 2004 and 2003
(unaudited):

|                                                                                                |  |        |         |      |  |             |         |       |  |   |          |   |  |   |         | 
|----------------------------------------------------------------------------------------------- |  | ------ | ------- | ---- |  | ----------- | ------- | ----- |  | - | -------- | - |  | - | ------- | 
|Three Months Ended June 30, 2004                                                                |  | Canada |         | U.S. |  | Elimination |         | Total
|                                                                                                |  |        |         |      |  |             |         |      
|Revenue                                                                                         |  | $      | 34,395  |      |  | $           | 38,231  |       |  | $ |         |   |  | $ | 72,626  | 
|Operating and other expenses                                                                    |  |        | 32,119  |      |  |             | 39,636  |       |  |   |         |   |  |   | 71,755  | 
|Income (loss) from operations                                                                   |  |        | 2,276   |      |  |             | (1,405  | )     |  |   |         |   |  |   | 871     | 
|Depreciation, depletion and amortization                                                        |  |        | 3,676   |      |  |             | 4,133   |       |  |   |         |   |  |   | 7,809   | 
|Interest expense (income)                                                                       |  |        | 38      |      |  |             | 14,402  |       |  |   | (2,174   | ) |  |   | 12,266  | 
|Cumulative mandatorily redeemable preferred stock
    dividends and amortization of issue costs |  |        |        |      |  |             | 4,290   |       |  |   |         |   |  |   | 4,290   | 
|Total assets                                                                                    |  |        | 375,943 |      |  |             | 493,637 |       |  |   | (180,751 | ) |  |   | 688,829 | 
|Long-lived assets                                                                               |  |        | 345,261 |      |  |             | 465,022 |       |  |   | (180,751 | ) |  |   | 629,532 | 

|                                                                                                |  |        |        |      |  |             |       |       |  |   |      |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ------ | ------ | ---- |  | ----------- | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|Three Months Ended June 30, 2003                                                                |  | Canada |        | U.S. |  | Elimination |       | Total
|                                                                                                |  |        |        |      |  |             |       |      
|Revenue                                                                                         |  | $      | 31,282 |      |  | $           |      |       |  | $ |     |   |  | $ | 31,282 |  
|Operating and other expenses                                                                    |  |        | 31,038 |      |  |             | 262   |       |  |   |     |   |  |   | 31,300 |  
|Income (loss) from operations                                                                   |  |        | 244    |      |  |             | (262  | )     |  |   |     |   |  |   | (18    | )
|Depreciation, depletion and amortization                                                        |  |        | 3,566  |      |  |             |      |       |  |   |     |   |  |   | 3,566  |  
|Interest expense                                                                                |  |        | 1,621  |      |  |             | 418   |       |  |   | (372 | ) |  |   | 1,667  |  
|Cumulative mandatorily redeemable preferred stock
    dividends and amortization of issue costs |  |        |       |      |  |             | 2,198 |       |  |   |     |   |  |   | 2,198  |  

|                                                                                                |  |        |        |      |  |             |        |       |  |   |        |   |  |   |         | 
|----------------------------------------------------------------------------------------------- |  | ------ | ------ | ---- |  | ----------- | ------ | ----- |  | - | ------ | - |  | - | ------- | 
|Six Months Ended June 30, 2004                                                                  |  | Canada |        | U.S. |  | Elimination |        | Total
|                                                                                                |  |        |        |      |  |             |        |      
|Revenue                                                                                         |  | $      | 64,712 |      |  | $           | 58,231 |       |  | $ |       |   |  | $ | 122,943 | 
|Operating and other expenses                                                                    |  |        | 61,304 |      |  |             | 60,563 |       |  |   |       |   |  |   | 121,867 | 
|Income (loss) from operations                                                                   |  |        | 3,408  |      |  |             | (2,332 | )     |  |   |       |   |  |   | 1,076   | 
|Depreciation, depletion and amortization                                                        |  |        | 7,122  |      |  |             | 6,159  |       |  |   |       |   |  |   | 13,281  | 
|Interest expense (income)                                                                       |  |        | 117    |      |  |             | 21,174 |       |  |   | (2,709 | ) |  |   | 18,582  | 
|Cumulative mandatorily redeemable preferred stock
    dividends and amortization of issue costs |  |        |       |      |  |             | 8,309  |       |  |   |       |   |  |   | 8,309   | 

22



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##### 



WASTE SERVICES, INC.


(Successor of Capital Environmental Resource
Inc. now known as Waste Services (CA) Inc.)


NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                                                                                |  |        |        |      |  |             |       |       |  |   |      |   |  |   |        | 
|----------------------------------------------------------------------------------------------- |  | ------ | ------ | ---- |  | ----------- | ----- | ----- |  | - | ---- | - |  | - | ------ | 
|Six Months Ended June 30, 2003                                                                  |  | Canada |        | U.S. |  | Elimination |       | Total
|                                                                                                |  |        |        |      |  |             |       |      
|Revenue                                                                                         |  | $      | 56,562 |      |  | $           |      |       |  | $ |     |   |  | $ | 56,562 | 
|Operating and other expenses                                                                    |  |        | 55,254 |      |  |             | 262   |       |  |   |     |   |  |   | 55,516 | 
|Income from operations                                                                          |  |        | 1,308  |      |  |             | (262  | )     |  |   |     |   |  |   | 1,046  | 
|Depreciation, depletion and amortization                                                        |  |        | 6,791  |      |  |             |      |       |  |   |     |   |  |   | 6,791  | 
|Interest expense                                                                                |  |        | 2,928  |      |  |             | 418   |       |  |   | (359 | ) |  |   | 2,987  | 
|Cumulative mandatorily redeemable preferred stock
    dividends and amortization of issue costs |  |        |       |      |  |             | 2,198 |       |  |   |     |   |  |   | 2,198  | 

23



---



##### 








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the Unaudited Condensed Consolidated Financial
Statements and Notes thereto included elsewhere herein as well
as our annual report on Form 10-K, under the name of
Capital Environmental Resource Inc., (now known as Waste
Services (CA) Inc.) for the year ended December 31, 2003,
as filed with the Securities and Exchange Commission, including
the factors set forth in the section titled Forward
Looking Statements under the heading Risk
Factors as well as our other filings made with the
Securities and Exchange Commission.

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. In 2003,
we initiated a disposal-based growth strategy to enter the
United States 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. As part of our business strategy to expand
into the United States, we entered into a migration transaction.
Under the migration transaction, our corporate structure was
reorganized so that Waste Services, a Delaware company, is the
ultimate parent company of our corporate group. Prior to the
migration transaction, Waste Services was a subsidiary of
Capital. After the migration transaction, Capital became our
subsidiary.

In July 2004, we appointed Charles A. Wilcox as
President and Chief Operating Officer. Prior to joining us,
Mr. Wilcox held the positions of Senior Vice President,
Market Planning and Development, and prior to that, Senior Vice
President Eastern Group for Waste Management, Inc. In the third
quarter, we expect to recognize a severance charge of
approximately $1.7 million pursuant to the terms of our
former Chief Operating Officers employment agreement.

As further described in our discussion under the
heading Liquidity and Capital Resources, we failed
to meet certain of the financial covenants contained in the
Credit Facilities. We are currently in discussion with lenders
to obtain a waiver of our failure to comply, as well as provide
access to capacity under our revolving credit facility. We
cannot provide any assurance that we will be able to maintain
existing capacity or obtain short-term liquidity on acceptable
terms or at all. If our lenders accelerate repayment of our
debt, it would cause substantial doubt about our ability to
continue as a going concern.

Sources of Revenue

Our revenue consists primarily of fees charged to
customers for solid waste collection, landfill disposal,
transfer and recycling services.

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 generally 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 cost 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

24



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##### 



homeowners. Our contracts with municipalities are
typically for a term of up to five years and contain a formula,
generally based on a predetermined 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 capping, 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 provider in our markets.
Historically our internalization has been relatively low, but as
a result of the recent opening of our landfills in Florida and
Arizona, we expect our internalization will gradually increase
over time as we develop our network of transfer stations and
maximize delivery of our collection volumes to these landfill
sites.

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 for the year-to-date
period as a percentage of our revenue has increased over the
same period last year. We expect selling, general and
administrative expense to decline as a percentage of revenue as
we complete and integrate acquisitions and increase volume 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 capping, closure and post-closure
obligations using 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 life of the benefit to be
received by such intangibles. As further discussed in
Note 2 to the unaudited condensed consolidated financial
statements, effective January 1, 2004, we changed our
method of accounting for asset retirement obligations.

25



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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.

Recent Acquisitions

In November 2003, we entered into an agreement to
acquire the assets of Allied Waste Industries, Inc.s
(Allied) northern and central Florida operations
(the Allied Assets) for a purchase price of
approximately $120.0 million subject to an adjustment for
working capital. The primary metropolitan areas served by the
Allied Assets are Tampa, Sarasota and Jacksonville, Florida. On
December 31, 2003, we completed the first phase of the
Allied Assets acquisition. During the first six months of 2004,
we completed the acquisition of the remaining Allied Assets.

In April 2004, we completed an exchange of the
Nassau Landfill and related assets, which were acquired from
Allied in December 2003, for a collection operation in the
metropolitan Orlando area and cash proceeds of
$10.0 million. As part of this exchange, the new owner of
the Nassau Landfill assumed responsibility for the closure and
post closure obligations related to the landfill. Proceeds in
excess of net assets exchanged reduced goodwill from the
original Allied Assets acquisition by $8.6 million.

In April 2004, we completed the acquisition of
the issued and outstanding shares of Florida Recycling Services,
Inc. (Florida Recycling) for an aggregate purchase
price of approximately $99.0 million in cash, working
capital of approximately $2.2 million, subject to further
adjustment and the issuance of 9,250,000 Common Shares valued at
approximately $51.4 million. Florida Recyclings
operations are based in central Florida, primarily serving the
Orlando, Daytona, Fort Myers, and Tampa markets. The
performance of the operations of Florida Recycling has been
below our expectations and we are in the process of conducting a
thorough review of all aspects of Florida Recyclings
business in an effort to identify the factors contributing to
this level of performance.

In February 2004, we acquired a permitted
undeveloped municipal solid waste landfill in Fort Bend
County, Texas (the Fort Bend Regional
Landfill). We expect the landfill to being operations
during the third quarter of 2004. The purchase price was
comprised of $5.1 million in cash, a seller financed
promissory note of $5.0 million and the issuance of
4,375,000 Common Shares valued at approximately
$25.0 million. The landfill site, which will serve the
metropolitan Houston area, is approximately 2,600 acres and
has an initial permitted capacity of 47.6 million cubic
yards. In addition to the landfill, we acquired a leasehold
interest in a fully permitted transfer station site near
Houston. In connection with the acquisition of the
Fort Bend Regional Landfill, we entered into a royalty
agreement, under which we will be required to pay a royalty of
$0.25 per ton of eligible waste, as defined in the
agreement, after we commence operations at the site and for the
first five years subsequent to the date of the royalty agreement
and $0.35 per ton of eligible waste thereafter.

During the first quarter of 2004, we acquired the
assets of three collection businesses in the metropolitan
Phoenix area for aggregate cash consideration of approximately
$8.4 million plus the current and future issuance of
949,800 Common Shares valued at approximately $5.5 million.
Separately, in January 2004, we acquired an industrial-permitted
waste landfill site in Saskatchewan, Canada. The purchase price
was comprised of $1.1 million in cash and the issuance of
12,000 Common Shares valued at approximately $0.1 million.

During July 2003, we purchased Cactus Waste
Systems, LLC for $0.6 million in cash and a
$1.2 million option that 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. The landfill
began operations July 2004. During May 2004, we received the
permits and authorizations necessary for the operation of the
landfill (the Southeast Regional Landfill) and, as a condition
of the purchase, we issued 1,250,000 Common Shares valued at
$5.5 million to the sellers during the second quarter of
2004 which has been capitalized as a cost of the landfill. The
sellers are entitled to contingent payments based upon the
landfill achieving certain defined average tons of waste per

26



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##### 



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 Southeast
Regional Landfill after the earlier to occur of July 2006 or the
receipt of 1,250 tons of waste per day at the landfill.


We expect to continue to make strategic
acquisitions which we intend to finance through cash on hand,
our Senior Secured Credit Facilities, and/or the issuance of
other debt and equity financings.

Factors that Might Affect Future
Results

We have recently acquired and commenced
operations at three large municipal solid waste landfill sites
in the United States that we believe will materially affect our
revenue, profitability and cash flow going forward. These
landfills do not have historical operations, and accordingly,
our condensed consolidated operating results will not be
comparable to financial information for future periods.

The following summarizes our three recently
acquired landfills:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | JED Landfill  a municipal solid waste
    landfill with 24 million cubic yards of permitted capacity,
    located in Osceola County, Florida. The landfill is located
    approximately 20 miles south of metropolitan Orlando and is
    well positioned to serve the Orlando metropolitan area and the
    surrounding counties. The facility opened for operation in the
    first quarter of 2004. Part of our strategy is to maximize the
    internalization of waste volumes to our JED Landfill. The
    execution of this strategy is dependent partly upon the opening
    of three transfer stations in central Florida. Operations at
    these transfer station sites were all expected to be operational
    by the fourth quarter of 2004. However, due to construction
    delays we now expect them to begin operations in the second and
    third quarters of 2005.
|
| |  | Southeast Regional Landfill  a
    municipal solid waste landfill development with 224 million
    cubic yards of permitted capacity, located in Pinal County,
    Arizona. The landfill is located between Phoenix and Tucson,
    Arizona and is well-positioned to serve both markets. The
    facility opened for operation in the third quarter of 2004. In
    the third quarter of 2004, we began operations at two of our
    newly constructed transfer stations in the Phoenix market area.                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Fort Bend Regional Landfill  a
    municipal solid waste landfill development with 48 million
    cubic yards of permitted capacity, located in Fort Bend
    County, Texas. The landfill is located approximately
    15 miles southwest of metropolitan Houston and is
    well-positioned to serve the Houston metropolitan area,
    including Fort Bend County. We expect the landfill facility
    to open for operations in the third quarter of 2004. We are
    currently working though construction permitting issues which
    may delay the opening of our Houston transfer station. We
    previously expected the transfer station to begin operations in
    the fourth quarter of 2004.                                                                                                                                                                              

Results of Operations for the Three Months and
Six Months Ended June 30, 2004 and 2003

A portion of our operations are domiciled in
Canada; as such, we translate the results of operations and
financial condition of our Canadian operations into
U.S. 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
U.S. dollar, revenue is favorably affected and conversely
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 dates, 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 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). Currently, we do not hedge our exposure to
changes in foreign exchange rates.

27



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##### 



Our consolidated results of operations for the
three and six months ended June 30, 2004 and 2003 by
geographic segment is as follows (in thousands):

|                              |                                             |                                  |        |        |   |      |       |      |    |       |        |        |  |  |       |      |   |   |        |        |   |  |       |      |   
|----------------------------- | ------------------------------------------- | -------------------------------- | ------ | ------ | - | ---- | ----- | ---- | -- | ----- | ------ | ------ |  |  | ----- | ---- | - | - | ------ | ------ | - |  | ----- | ---- | --
|                              |                                             |                                 
|                              |                                             | Three Months Ended June 30, 2004
|                              |                                             |                                 
|                              |                                             | Canada                           |        |        |   | U.S. |       |      |    | Total |        |       
|                              |                                             |                                  |        |        |   |      |       |      |    |       |        |       
|Revenue                       |                                             | $                                | 34,395 |        |   |      | 100.0 | %    |    | $     | 38,231 |        |  |  | 100.0 | %    |   | $ | 72,626 |        |   |  | 100.0 | %   
|Operating expenses:           |                                             |                                  |        |        |   |      |       |      |    |       |        |        |  |  |       |      |   |   |        |        |   |  |       |     
|                              | Cost of operations                          |                                  |        | 23,210 |   |      |       | 67.5 | %  |       |        | 26,703 |  |  |       | 69.9 | % |   |        | 49,913 |   |  |       | 68.7 | % 
|                              | Selling, general and administrative expense |                                  |        | 5,185  |   |      |       | 15.1 | %  |       |        | 8,774  |  |  |       | 22.9 | % |   |        | 13,959 |   |  |       | 19.2 | % 
|                              | Stock-based compensation expense            |                                  |        | 331    |   |      |       | 1.0  | %  |       |        | 26     |  |  |       | 0.1  | % |   |        | 357    |   |  |       | 0.5  | % 
|                              | Depreciation, depletion and amortization    |                                  |        | 3,676  |   |      |       | 10.6 | %  |       |        | 4,133  |  |  |       | 10.8 | % |   |        | 7,809  |   |  |       | 10.8 | % 
|                              | Foreign exchange gain and other             |                                  |        | (283   | ) |      |       | (0.8 | )% |       |        |       |  |  |       |     |   |   |        | (283   | ) |  |       | (0.4 | )%
|                              |                                             |                                  |        |        |   |      |       |      |    |       |        |        |  |  |       |      |   |   |        |        |   |  |       |     
|Income (loss) from operations |                                             | $                                | 2,276  |        |   |      | 6.6   | %    |    | $     | (1,405 | )      |  |  | (3.7  | )%   |   | $ | 871    |        |   |  | 1.2   | %   
|                              |                                             |                                  |        |        |   |      |       |      |    |       |        |        |  |  |       |      |   |   |        |        |   |  |       |     

|                              |                                             |                                  |        |        |  |      |       |      |   |       |      |     |  |  |     |     |   |   |        |        |  |  |       |      |  
|----------------------------- | ------------------------------------------- | -------------------------------- | ------ | ------ |  | ---- | ----- | ---- | - | ----- | ---- | --- |  |  | --- | --- | - | - | ------ | ------ |  |  | ----- | ---- | -
|                              |                                             |                                 
|                              |                                             | Three Months Ended June 30, 2003
|                              |                                             |                                 
|                              |                                             | Canada                           |        |        |  | U.S. |       |      |   | Total |      |    
|                              |                                             |                                  |        |        |  |      |       |      |   |       |      |    
|Revenue                       |                                             | $                                | 31,282 |        |  |      | 100.0 | %    |   | $     |     |     |  |  |    |     |   | $ | 31,282 |        |  |  | 100.0 | %   
|Operating expenses:           |                                             |                                  |        |        |  |      |       |      |   |       |      |     |  |  |     |     |   |   |        |        |  |  |       |     
|                              | Cost of operations                          |                                  |        | 20,430 |  |      |       | 65.3 | % |       |      |    |  |  |     |    |   |   |        | 20,430 |  |  |       | 65.3 | %
|                              | Selling, general and administrative expense |                                  |        | 6,530  |  |      |       | 20.9 | % |       |      | 262 |  |  |     | 0.0 | % |   |        | 6,792  |  |  |       | 21.7 | %
|                              | Stock-based compensation expense            |                                  |        | 120    |  |      |       | 0.4  | % |       |      |    |  |  |     |    |   |   |        | 120    |  |  |       | 0.4  | %
|                              | Depreciation, depletion and amortization    |                                  |        | 3,566  |  |      |       | 11.3 | % |       |      |    |  |  |     |    |   |   |        | 3,566  |  |  |       | 11.4 | %
|                              | Foreign exchange loss and other             |                                  |        | 392    |  |      |       | 1.3  | % |       |      |    |  |  |     |    |   |   |        | 392    |  |  |       | 1.3  | %
|                              |                                             |                                  |        |        |  |      |       |      |   |       |      |     |  |  |     |     |   |   |        |        |  |  |       |     
|Income (loss) from operations |                                             | $                                | 244    |        |  |      | 0.8   | %    |   | $     | (262 | )   |  |  | 0.0 | %   |   | $ | (18    | )      |  |  | (0.1  | )%  
|                              |                                             |                                  |        |        |  |      |       |      |   |       |      |     |  |  |     |     |   |   |        |        |  |  |       |     

28



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##### 



|                              |                                             |                                |        |        |   |      |       |      |    |       |        |        |  |  |       |      |   |   |         |        |   |  |       |      |   
|----------------------------- | ------------------------------------------- | ------------------------------ | ------ | ------ | - | ---- | ----- | ---- | -- | ----- | ------ | ------ |  |  | ----- | ---- | - | - | ------- | ------ | - |  | ----- | ---- | --
|                              |                                             |                               
|                              |                                             | Six Months Ended June 30, 2004
|                              |                                             |                               
|                              |                                             | Canada                         |        |        |   | U.S. |       |      |    | Total |        |       
|                              |                                             |                                |        |        |   |      |       |      |    |       |        |       
|Revenue                       |                                             | $                              | 64,712 |        |   |      | 100.0 | %    |    | $     | 58,231 |        |  |  | 100.0 | %    |   | $ | 122,943 |        |   |  | 100.0 | %   
|Operating expenses:           |                                             |                                |        |        |   |      |       |      |    |       |        |        |  |  |       |      |   |   |         |        |   |  |       |     
|                              | Cost of operations                          |                                |        | 44,110 |   |      |       | 68.1 | %  |       |        | 39,974 |  |  |       | 68.7 | % |   |         | 84,084 |   |  |       | 68.4 | % 
|                              | Selling, general and administrative expense |                                |        | 11,505 |   |      |       | 17.8 | %  |       |        | 14,404 |  |  |       | 24.7 | % |   |         | 25,909 |   |  |       | 21.0 | % 
|                              | Stock-based compensation benefit            |                                |        | (1,060 | ) |      |       | (1.6 | )% |       |        | 26     |  |  |       | 0.0  | % |   |         | (1,034 | ) |  |       | (0.8 | )%
|                              | Depreciation, depletion and amortization    |                                |        | 7,122  |   |      |       | 11.0 | %  |       |        | 6,159  |  |  |       | 10.6 | % |   |         | 13,281 |   |  |       | 10.8 | % 
|                              | Foreign exchange gain and other             |                                |        | (373   | ) |      |       | (0.6 | )% |       |        |       |  |  |       |     |   |   |         | (373   | ) |  |       | (0.3 | )%
|                              |                                             |                                |        |        |   |      |       |      |    |       |        |        |  |  |       |      |   |   |         |        |   |  |       |     
|Income (loss) from operations |                                             | $                              | 3,408  |        |   |      | 5.3   | %    |    | $     | (2,332 | )      |  |  | (4.0  | )%   |   | $ | 1,076   |        |   |  | 0.9   | %   
|                              |                                             |                                |        |        |   |      |       |      |    |       |        |        |  |  |       |      |   |   |         |        |   |  |       |     

|                              |                                             |                                |        |        |   |      |       |      |    |       |      |     |  |  |     |     |   |   |        |        |   |  |       |      |   
|----------------------------- | ------------------------------------------- | ------------------------------ | ------ | ------ | - | ---- | ----- | ---- | -- | ----- | ---- | --- |  |  | --- | --- | - | - | ------ | ------ | - |  | ----- | ---- | --
|                              |                                             |                               
|                              |                                             | Six Months Ended June 30, 2003
|                              |                                             |                               
|                              |                                             | Canada                         |        |        |   | U.S. |       |      |    | Total |      |    
|                              |                                             |                                |        |        |   |      |       |      |    |       |      |    
|Revenue                       |                                             | $                              | 56,562 |        |   |      | 100.0 | %    |    | $     |     |     |  |  |    |     |   | $ | 56,562 |        |   |  | 100.0 | %   
|Operating expenses:           |                                             |                                |        |        |   |      |       |      |    |       |      |     |  |  |     |     |   |   |        |        |   |  |       |     
|                              | Cost of operations                          |                                |        | 37,024 |   |      |       | 65.5 | %  |       |      |    |  |  |     |    |   |   |        | 37,024 |   |  |       | 65.5 | % 
|                              | Selling, general and administrative expense |                                |        | 11,259 |   |      |       | 19.9 | %  |       |      | 262 |  |  |     | 0.0 | % |   |        | 11,521 |   |  |       | 20.4 | % 
|                              | Stock-based compensation benefit            |                                |        | (177   | ) |      |       | (0.3 | )% |       |      |    |  |  |     |     |   |   |        | (177   | ) |  |       | (0.3 | )%
|                              | Depreciation, depletion and amortization    |                                |        | 6,791  |   |      |       | 12.0 | %  |       |      |    |  |  |     |    |   |   |        | 6,791  |   |  |       | 12.0 | % 
|                              | Foreign exchange loss and other             |                                |        | 357    |   |      |       | 0.6  | %  |       |      |    |  |  |     |    |   |   |        | 357    |   |  |       | 0.6  | % 
|                              |                                             |                                |        |        |   |      |       |      |    |       |      |     |  |  |     |     |   |   |        |        |   |  |       |     
|Income (loss) from operations |                                             | $                              | 1,308  |        |   |      | 2.3   | %    |    | $     | (262 | )   |  |  | 0.0 | %   |   | $ | 1,046  |        |   |  | 1.8   | %   
|                              |                                             |                                |        |        |   |      |       |      |    |       |      |     |  |  |     |     |   |   |        |        |   |  |       |     



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

A summary of our revenue for the six months ended
June 30, 2004 and 2003 is as follows (in thousands):

|                             |  |                             |        |                           |  |      |       |      |  |   |        |   |  |  |       |   |  |  |         |   |  |  |       |   |  |   |        |   |  |  |       |  
|---------------------------- |  | --------------------------- | ------ | ------------------------- |  | ---- | ----- | ---- |  | - | ------ | - |  |  | ----- | - |  |  | ------- | - |  |  | ----- | - |  | - | ------ | - |  |  | ----- | -
|                             |  |                             |        |                          
|                             |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                             |  |                             |        |                          
|                             |  |                             |        |                           |  |      |       |     
|                             |  | 2004                        |        | 2003                      |  | 2004 |       | 2003
|                             |  |                             |        |                           |  |      |       |     
|                             |  |                             |        |                           |  |      |       |      |  |   |        |  
|Collection                   |  | $                           | 60,688 |                           |  |      | 78.7  | %    |  | $ | 26,013 |   |  |  | 75.2  | % |  |  | 101,079 |   |  |  | 77.4  | % |  | $ | 46,715 |   |  |  | 75.1  | %
|Landfill disposal            |  |                             | 5,290  |                           |  |      | 6.9   |      |  |   | 2,834  |   |  |  | 8.2   |   |  |  | 9,436   |   |  |  | 7.2   |   |  |   | 5,535  |   |  |  | 8.9   |  
|Transfer station             |  |                             | 6,266  |                           |  |      | 8.1   |      |  |   | 4,420  |   |  |  | 12.8  |   |  |  | 11,175  |   |  |  | 8.5   |   |  |   | 7,534  |   |  |  | 12.1  |  
|Material recovery facilities |  |                             | 2,510  |                           |  |      | 3.3   |      |  |   | 1,085  |   |  |  | 3.1   |   |  |  | 4,813   |   |  |  | 3.7   |   |  |   | 2,045  |   |  |  | 3.3   |  
|Other specialized services   |  |                             | 2,314  |                           |  |      | 3.0   |      |  |   | 245    |   |  |  | 0.7   |   |  |  | 4,241   |   |  |  | 3.2   |   |  |   | 386    |   |  |  | 0.6   |  
|                             |  |                             |        |                           |  |      |       |      |  |   |        |   |  |  |       |   |  |  |         |   |  |  |       |   |  |   |        |   |  |  |       |  
|                             |  |                             | 77,068 |                           |  |      | 100.0 | %    |  |   | 34,597 |   |  |  | 100.0 | % |  |  | 130,744 |   |  |  | 100.0 | % |  |   | 62,215 |   |  |  | 100.0 | %
|                             |  |                             |        |                           |  |      |       |      |  |   |        |   |  |  |       |   |  |  |         |   |  |  |       |   |  |   |        |   |  |  |       |  
|Intercompany elimination     |  |                             | (4,442 | )                         |  |      |       |      |  |   | (3,315 | ) |  |  |       |   |  |  | (7,801  | ) |  |  |       |   |  |   | (5,653 | ) |  |  |       |  
|                             |  |                             |        |                           |  |      |       |      |  |   |        |   |  |  |       |   |  |  |         |   |  |  |       |   |  |   |        |   |  |  |       |  
|                             |  | $                           | 72,626 |                           |  |      |       |      |  | $ | 31,282 |   |  |  |       |   |  |  | 122,943 |   |  |  |       |   |  |   | 56,562 |   |  |  |       |  
|                             |  |                             |        |                           |  |      |       |      |  |   |        |   |  |  |       |   |  |  |         |   |  |  |       |   |  |   |        |   |  |  |       |  

29



---



##### 



Revenue was $72.6 million and
$31.3 million for the three months ended June 30, 2004
and 2003, respectively, an increase of $41.3 million or in
excess of 100%. The increase in revenue for the three months
ended June 30, 2004, as compared to the same period in the
prior year, is due to the following (in thousands):

|                                                   |  |   |        |  |  |  |       |  
|-------------------------------------------------- |  | - | ------ |  |  |  | ----- | -
|Acquisitions in the United States                  |  | $ | 38,231 |  |  |  | 122.2 | %
|Internal revenue growth due to volume increases    |  |   | 1,273  |  |  |  | 4.1   |  
|Internal revenue growth due to price increases     |  |   | 575    |  |  |  | 1.8   |  
|Acquisitions in Canada                             |  |   | 118    |  |  |  | 0.4   |  
|Favorable effects of foreign exchange fluctuations |  |   | 1,147  |  |  |  | 3.7   |  
|                                                   |  |   |        |  |  |  |       |  
|Increase in revenue                                |  | $ | 41,344 |  |  |  | 132.2 | %
|                                                   |  |   |        |  |  |  |       |  

Revenue was $122.9 million and
$56.6 million for the six months ended June 30, 2004
and 2003, respectively, an increase of $66.3 million or in
excess of 100%. The increase in revenue for the six months ended
June 30, 2004, as compared to the same period in the prior
year, is due to the following (in thousands):

|                                                   |  |   |        |  |  |  |       |  
|-------------------------------------------------- |  | - | ------ |  |  |  | ----- | -
|Acquisitions in the United States                  |  | $ | 58,231 |  |  |  | 103.1 | %
|Internal revenue growth due to volume increases    |  |   | 1,545  |  |  |  | 2.7   |  
|Internal revenue growth due to price increases     |  |   | 1,137  |  |  |  | 2.0   |  
|Acquisitions in Canada                             |  |   | 480    |  |  |  | 0.8   |  
|Favorable effects of foreign exchange fluctuations |  |   | 4,988  |  |  |  | 8.8   |  
|                                                   |  |   |        |  |  |  |       |  
|Increase in revenue                                |  | $ | 66,381 |  |  |  | 117.4 | %
|                                                   |  |   |        |  |  |  |       |  



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

Cost of operations was $49.9 million and
$20.4 million for the three months ended June 30, 2004
and 2003, respectively, an increase of $29.5 million or in
excess of 100%. As a percentage of revenue, cost of operations
was 68.7% and 65.3% for the three months ended June 30,
2004 and 2003, respectively. The increase in cost of operations
as a percentage of revenue is due to lower margins on our newly
acquired U.S. operations as compared to our Canadian
operations. The increase in disposal, subcontractor, and labor
costs in aggregate dollars and as a percent of revenue is due to
increased disposal rates and volumes as well as higher
transportation costs at our Canadian operations. The increase in
cost of operations for the three months ended June 30,
2004, as compared to the same period in the prior year, is due
to the following (in thousands):

|                                                         |  |   |        |  |  |  |       |  
|-------------------------------------------------------- |  | - | ------ |  |  |  | ----- | -
|Acquisitions in the United States                        |  | $ | 26,703 |  |  |  | 130.7 | %
|Disposal and subcontractor cost increases                |  |   | 1,004  |  |  |  | 4.9   |  
|Labor cost increases                                     |  |   | 679    |  |  |  | 3.3   |  
|Acquisitions in Canada                                   |  |   | 48     |  |  |  | 0.2   |  
|Other increases                                          |  |   | 218    |  |  |  | 1.1   |  
|Unfavorable effects of foreign exchange
    fluctuations |  |   | 831    |  |  |  | 4.1   |  
|                                                         |  |   |        |  |  |  |       |  
|Increase in cost of operations                           |  | $ | 29,483 |  |  |  | 144.3 | %
|                                                         |  |   |        |  |  |  |       |  

Cost of operations was $84.1 million and
$37.0 million for the six months ended June 30, 2004
and 2003, respectively, an increase of $47.1 million or in
excess of 100%. As a percentage of revenue, cost of operations
was 68.4% and 65.5% for the six months ended June 30, 2004
and 2003, respectively. The increase in cost of operations as a
percentage of revenue is due to lower margins on our newly
acquired U.S. operations as compared to our Canadian
operations as well as higher costs of labor on certain
residential hauling contracts in our Canadian operations. The
increase in disposal, subcontractor, and labor costs in
aggregate dollars and as a percent of revenue is due to
increased disposal rates and volumes as well as higher
transportation costs at our

30



---



##### 



Canadian operations. The increase in cost of
operations for the six months ended June 30, 2004, as
compared to the same period in the prior year, is due to the
following (in thousands):


|                                                         |  |   |        |  |  |  |       |  
|-------------------------------------------------------- |  | - | ------ |  |  |  | ----- | -
|Acquisitions in the United States                        |  | $ | 39,974 |  |  |  | 108.0 | %
|Disposal and subcontractor cost increases                |  |   | 1,312  |  |  |  | 3.5   |  
|Labor cost increases                                     |  |   | 1,805  |  |  |  | 4.9   |  
|Acquisitions in Canada                                   |  |   | 286    |  |  |  | 0.8   |  
|Other increases                                          |  |   | 212    |  |  |  | 0.6   |  
|Unfavorable effects of foreign exchange
    fluctuations |  |   | 3,471  |  |  |  | 9.3   |  
|                                                         |  |   |        |  |  |  |       |  
|Increase in cost of operations                           |  | $ | 47,060 |  |  |  | 127.1 | %
|                                                         |  |   |        |  |  |  |       |  



| |                                                
| | -----------------------------------------------
| | Selling, general and administrative
    expense

Selling, general and administrative expense,
excluding stock-based compensation expense, was
$14.0 million and $6.8 million for the three months
ended June 30, 2004 and 2003, respectively, an increase of
$7.2 million or in excess of 100%. As a percentage of
revenue, selling, general and administrative expense was 19.2%
and 21.7% for the three months ended June 30, 2004 and
2003, respectively. Selling, general and administrative expense
was $25.9 million and $11.5 million for the six months
ended June 30, 2004 and 2003, respectively, an increase of
$14.4 million or in excess of 100%. As a percentage of
revenue, selling, general and administrative expense was 21.0%
and 20.4% for the six months ended June 30, 2004 and 2003,
respectively. The overall increase in selling, general and
administrative expense is primarily due to acquisitions in the
U.S., increased salaries, systems and other overhead costs
incurred in connection with our expansion into the
U.S. Overhead at our corporate offices was
$5.1 million and $4.0 million for the three months
ended June 30, 2004 and 2003, respectively and
$11.0 million and $5.8 million for the six months
ended June 30, 2004 and 2003, respectively. Due to the
failure to meet our internal expectations, we reversed
$1.4 million of excess bonus accrual, $0.7 million of
which was accrued in the first quarter of 2004. In connection
with our previously defined migration transaction we incurred
legal and professional fees of $0.6 million and
$0.7 million for the three and six months ended
June 30, 2004. The unfavorable effects of foreign exchange
movements increased selling, general and administrative expense
$0.1 million and $0.8 million for the three and six
months ended June 30, 2004, respectively. We expect
selling, general and administrative expense as a percentage of
revenue to decline in future periods in 2004, primarily due to
spreading our overhead costs over a larger revenue base
resulting from our recent acquisitions and landfill openings in
the U.S.



| |                                               
| | ----------------------------------------------
| | Stock-based compensation expense
    (benefit)

Stock-based compensation expense (benefit)
relates to warrants issued to an executive officer in 2001 for
which variable accounting applies and options or warrants issued
to non-employees for services to be rendered. Stock-based
compensation expense (benefit), which is partially based on
changes in our stock price, was $0.4 million and
$0.1 million for the three months ended June 30, 2004
and 2003, respectively, and $(1.0) million and
$(0.2) million for the six months ended June 30, 2004
and 2003, respectively.



| |                                             
| | --------------------------------------------
| | Depreciation, depletion and
    amortization

Depreciation, depletion and amortization was
$7.8 million and $3.6 million for the three months
ended June 30, 2004 and 2003, respectively, an increase of
$4.2 million or in excess of 100.0%. As a percentage of
revenue depreciation, depletion and amortization was 10.8% and
11.4% for the three months ended June 30, 2004 and 2003,
respectively. The overall increase in depreciation, depletion
and amortization for the three

31



---



##### 



months ended June 30, 2004, as compared to
the same period in the prior year, is due to the following (in
thousands):


|                                                              |  |   |       |   |  |  |       |  
|------------------------------------------------------------- |  | - | ----- | - |  |  | ----- | -
|Acquisitions in the United States                             |  | $ | 4,133 |   |  |  | 115.9 | %
|Increase in depreciation                                      |  |   | 388   |   |  |  | 10.8  |  
|Decrease in depletion at our Canadian landfill
    operations |  |   | (382  | ) |  |  | (10.7 | )
|Unfavorable effects of foreign exchange
    fluctuations      |  |   | 104   |   |  |  | 3.0   |  
|                                                              |  |   |       |   |  |  |       |  
|Increase in depreciation, depletion and
    amortization      |  | $ | 4,243 |   |  |  | 119.0 | %
|                                                              |  |   |       |   |  |  |       |  

Depreciation, depletion and amortization was
$13.3 million and $6.8 million for the six months
ended June 30, 2004 and 2003, respectively, an increase of
$6.5 million or 95.6%. As a percentage of revenue
depreciation, depletion and amortization was 10.8% and 12.0% for
the six months ended June 30, 2004 and 2003, respectively.
The overall increase in depreciation, depletion and amortization
for the six months ended June 30, 2004 as compared to the
same period in the prior year is due to the following (in
thousands):

|                                                              |  |   |       |   |  |  |       |  
|------------------------------------------------------------- |  | - | ----- | - |  |  | ----- | -
|Acquisitions in the United States                             |  | $ | 6,159 |   |  |  | 90.7  | %
|Increase in depreciation                                      |  |   | 666   |   |  |  | 9.8   |  
|Decrease in depletion at our Canadian landfill
    operations |  |   | (885  | ) |  |  | (13.0 | )
|Unfavorable effects of foreign exchange
    fluctuations      |  |   | 550   |   |  |  | 8.1   |  
|                                                              |  |   |       |   |  |  |       |  
|Increase in depreciation, depletion and
    amortization      |  | $ | 6,490 |   |  |  | 95.6  | %
|                                                              |  |   |       |   |  |  |       |  

The overall increase in depreciation, depletion
and amortization is primarily due to our U.S. acquisitions
and the opening of our JED Landfill. The decline in
depreciation, depletion, and amortization as a percentage of
revenue is primarily due to the relative mix of landfill
disposal revenue to total revenue. In addition, depletion
decreased primarily due to lower volumes at one of our Canadian
landfills that was part of our operations in both 2004 and 2003.
The weighted average landfill depletion rate for our operating
Canadian landfills during the six months ended June 30,
2004 and 2003 was C$10.18 and C$11.16 per tonne,
respectively. The weighted average landfill depletion rate for
our operating U.S. landfills during the six months ended
June 30, 2004 was $6.58 per ton.



| |                                           
| | ------------------------------------------
| | Foreign exchange loss (gain) and
    other

Foreign exchange loss (gain) and other was
$(0.3) million and $0.4 for the three months ended
June 30, 2004 and 2003, respectively and $(0.4) and
$0.4 million for the six months ended June 30, 2004
and 2003, respectively. The foreign exchange loss and other
relates primarily to the re-measuring of U.S. dollar
denominated cash balances into Canadian dollars.



| |                 
| | ----------------
| | Interest expense

The components of interest expense, including
cumulative mandatorily redeemable preferred stock dividends and
amortization of issue costs, for the six months ended
June 30, 2004 and 2003 are as follows:

|                                                                   |  |                             |        |                           |  |      |       |      |  |   |       |  |  |  |       |   |  |   |        |   |  |  |       |   |  |  |       |  |  |  |       |  
|------------------------------------------------------------------ |  | --------------------------- | ------ | ------------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  |  | ----- | - |  | - | ------ | - |  |  | ----- | - |  |  | ----- |  |  |  | ----- | -
|                                                                   |  |                             |        |                          
|                                                                   |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                                                   |  |                             |        |                          
|                                                                   |  |                             |        |                           |  |      |       |      |  |   |       |  |  | 
|                                                                   |  |                             |        |                           |  |      |       |     
|                                                                   |  | 2004                        |        | 2003                      |  | 2004 |       | 2003
|                                                                   |  |                             |        |                           |  |      |       |     
|Waste Services Preferred Stock and amortization
    of issue costs |  | $                           | 4,290  |                           |  |      | 25.9  | %    |  | $ | 2,198 |  |  |  | 56.9  | % |  |   | 8,309  |   |  |  | 30.9  | % |  |  | 2,198 |  |  |  | 42.4  | %
|Credit facility and Senior Subordinated Note
    interest          |  |                             | 4,863  |                           |  |      | 29.4  |      |  |   | 1,131 |  |  |  | 29.3  |   |  |   | 8,763  |   |  |  | 32.6  |   |  |  | 2,050 |  |  |  | 39.5  |  
|Amortization of debt issue costs                                   |  |                             | 7,406  |                           |  |      | 44.7  |      |  |   | 245   |  |  |  | 6.3   |   |  |   | 9,616  |   |  |  | 35.8  |   |  |  | 465   |  |  |  | 9.0   |  
|Capitalized interest                                               |  |                             | (178   | )                         |  |      | (1.1  | )    |  |   |      |  |  |  |      |   |  |   | (178   | ) |  |  | (0.7  | ) |  |  |      |  |  |  |      |  
|Other interest expense                                             |  |                             | 175    |                           |  |      | 1.1   |      |  |   | 291   |  |  |  | 7.5   |   |  |   | 381    |   |  |  | 1.4   |   |  |  | 472   |  |  |  | 9.1   |  
|                                                                   |  |                             |        |                           |  |      |       |      |  |   |       |  |  |  |       |   |  |   |        |   |  |  |       |   |  |  |       |  |  |  |       |  
|                                                                   |  | $                           | 16,556 |                           |  |      | 100.0 | %    |  | $ | 3,865 |  |  |  | 100.0 | % |  | $ | 26,891 |   |  |  | 100.0 | % |  |  | 5,185 |  |  |  | 100.0 | %
|                                                                   |  |                             |        |                           |  |      |       |      |  |   |       |  |  |  |       |   |  |   |        |   |  |  |       |   |  |  |       |  |  |  |       |  

32



---



##### 



Interest expense was $16.6 million and
$3.9 million for the three months ended June 30, 2004
and 2003, respectively, an increase of $12.7 million or in
excess of 100%. Interest expense was $26.9 million and
$5.2 million for the six months ended June 30, 2004
and 2003, respectively, an increase of $21.7 million or in
excess of 100%. The increase is due primarily to
(i) increased amortization of debt issue costs of
$7.2 million and $9.1 million for the three and six
months ended June 30, 2004, which includes a
$6.5 million charge for the remaining unamortized debt
issue costs associated with the repayment of our 364-day Credit
Facility in April 2004, (ii) increased interest expense
relative to our senior credit facilities and
9 1/2% Subordinated Notes of $3.7 million and
$6.7 million for the three and six months ended
June 30, 2004, respectively and (iii) increased
non-cash dividends and amortization of issue costs relative to
our cumulative mandatorily redeemable preferred shares of
$2.1 million and $6.1 million for the three and six
months ended June 30, 2004. The weighted average interest
rate on credit facility borrowings was 6.7% and 7.1%, for the
three months ended June 30, 2004 and 2003, respectively,
and 7.8% and 6.7% for the six months ended June 30, 2004
and 2003, respectively. We expect cash interest expense to
increase in future periods in 2004 due to increased debt
balances coupled with overall higher interest rates.



| |                                                           
| | ----------------------------------------------------------
| | Changes in fair value of warrants pending
    registration

Due to the nature of certain financial penalties
within the registration rights agreement in our April 2004
private placement, the Common Shares, warrants and related
proceeds from the offering are classified outside of
shareholders equity until the registration is declared
effective. However, such amounts will be reclassified to
permanent equity during the third quarter of 2004, as the shares
became fully registered in August 2004. The warrants, which are
classified as a liability, have been remeasured to their fair
value as of June 30, 2004, resulting in a $0.4 million
charge to earnings.



| |                                   
| | ----------------------------------
| | Income tax provision
    (benefit)

The provision (benefit) for income taxes was
$2.5 million and $(0.4) million for the three months
ended June 30, 2004 and 2003, respectively. The provision
(benefit) for income taxes was $3.3 million and
$(0.3) million for the six months ended June 30, 2004
and 2003, respectively. In 2004, we have recognized a provision
for income taxes despite our pre-tax loss due to the tax effect
of the non-deductible dividends on the cumulative mandatorily
redeemable preferred shares, including the corresponding
amortization of discounts and debt issue costs, and the Canadian
Large Corporations tax. Additionally, due to the lack of
operating history relative to our U.S. operations, we have
provided a valuation allowance for our net operating loss
carryforwards generated in the U.S.

Liquidity and Capital Resources

Our principal capital requirements are to fund
capital expenditures, fund business and asset acquisitions and
for debt service. Significant sources of liquidity are cash on
hand, working capital, borrowings from our Credit Facilities,
our ability to issue performance bonds and letters of credit and
proceeds from debt and equity issuances.



| |                                     
| | ------------------------------------
| | Senior Secured Credit
    Facilities

On April 30, 2004, we entered into new
Senior Secured Credit Facilities (the Credit
Facilities) with a syndicate of lenders. The Credit
Facilities consist of a five-year revolving credit facility in
the amount of $60.0 million, up to $15 million of
which is available to our Canadian operations, and a seven-year
term loan facility in the amount of $100.0 million. The
Credit Facilities bear interest based upon a spread over base
rate or Eurodollar loans, as defined, at our option. The Credit
Facilities are secured by substantially all of our assets and
the assets of our U.S. restricted subsidiaries as well as
the shares of capital stock of the U.S. restricted
subsidiaries held by us. Our Canadian operations guarantee and
pledge all of their assets only in support of the portion of the
revolving credit facility available to them. Separately, 65% of
the common shares of our first tier foreign subsidiaries are
pledged to secure obligations under the Credit Facilities. As of
June 30, 2004, no amounts were drawn under the facility and
$9.7 million was used to support outstanding letters of
credit. As of

33



---



##### 



August 16, 2004, $14.0 million was
drawn under the facility and $10.2 million was used to
support outstanding letters of credit.


As of June 30, 2004 we failed to meet
certain of the financial covenants contained in the Credit
Facilities, which constitutes an event of default. As such, we
are not able to draw amounts under our revolving credit
facilities. We are currently in discussion with lenders to
obtain a waiver of our failure to comply, as well as provide
access to capacity under our revolving credit facility.
Additionally, we will seek to negotiate new financial covenants
for the remaining term of the Credit Facilities. We cannot
provide any assurance that we will be able to maintain existing
capacity or obtain short-term liquidity on acceptable terms or
at all, or at what interest or collateral requirements. As our
lenders continue to review their loans with us, there is no
assurance that all amounts outstanding under existing loans will
not be accelerated or adversely modified.

If our lenders do not grant a waiver or amend our
Credit Facilities, they have the right to seek remedies
including acceleration of all outstanding amounts due under the
Credit Facilities. If the lenders seek acceleration of amounts
outstanding under the Credit Facilities, this would cause a
cross default to occur under the senior subordinated notes and
certain other subordinated notes, thus giving each the right to
demand accelerated repayment. We can provide no assurance that
we would be successful in obtaining alternative sources of
funding to repay these obligations should these events occur. If
the lenders accelerate repayment of our debt, it would cause
substantial doubt about our ability to continue as a going
concern.

Although we believe we will be successful in
obtaining a waiver and/or an amendment, there can be no
assurance we will be successful in our efforts and accordingly,
as of June 30, 2004 we have reclassified all of our
outstanding debt as current.

Our 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 include: (i) minimum consolidated interest
coverage, (ii) maximum total leverage and
(iii) maximum senior secured leverage. The covenants and
restrictions limit the manner in which we conduct our operations
and could adversely affect our ability to raise additional
capital.

The following table sets forth our financial
covenant levels for the current and each of the next four
quarters:

|               |  |                      |           |                             |  |                         |           |  |  |  |           | 
|-------------- |  | -------------------- | --------- | --------------------------- |  | ----------------------- | --------- |  |  |  | --------- | 
|               |  | Maximum Consolidated |           | Maximum Consolidated Senior |  | Minimum Consolidated   
|Fiscal Quarter |  | Leverage Ratio       |           | Secured Leverage Ratio      |  | Interest Coverage Ratio
|               |  |                      |           |                             |  |                        
|FQ2 2004       |  |                      | 5.50:1.00 |                             |  |                         | 2.50:1.00 |  |  |  | 2.50:1.00 | 
|FQ3 2004       |  |                      | 5.50:1.00 |                             |  |                         | 2.50:1.00 |  |  |  | 2.50:1.00 | 
|FQ4 2004       |  |                      | 5.25:1.00 |                             |  |                         | 2.25:1.00 |  |  |  | 2.75:1.00 | 
|FQ1 2005       |  |                      | 5.11:1.00 |                             |  |                         | 2.25:1.00 |  |  |  | 2.75:1.00 | 
|FQ2 2005       |  |                      | 4.75:1.00 |                             |  |                         | 2.25:1.00 |  |  |  | 3.00:1.00 | 



| |                          
| | -------------------------
| | Senior Subordinated Notes

On April 30, 2004, we completed a private
offering of 9 1/2% Senior Subordinated Notes
(Subordinated Notes) due 2014 for gross proceeds of
$160.0 million. The Subordinated Notes mature on
April 15, 2014. Interest on the Subordinated Notes is
payable semiannually commencing October 15, 2004. The
Subordinated Notes are redeemable, in whole or in part, at our
option, on or after April 15, 2009, at a redemption price
of 104.75% of the principal amount, declining ratably in annual
increments to par on or after April 15, 2012, together with
accrued interest to the redemption date. In addition, prior to
April 15, 2007, we may redeem up to 35.0% of the aggregate
principal amount of the Subordinated Notes with the proceeds of
certain equity offerings, at a redemption price equal to 109.5%
of the principal amount. Upon a change of control, as such term
is defined in the Indenture, we are is required to offer to
repurchase all the Subordinated Notes at 100.0% of the principal
amount, together with accrued interest and liquidated damages,
if any, and obtain the consent of our senior lenders to such
payment or repay our indebtedness under our Credit Facilities.

34



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##### 



The Subordinated Notes are unsecured and are
subordinate to our existing and future senior secured
indebtedness, including our Credit Facilities structurally
subordinated to existing and future indebtedness of our
non-guarantor subsidiaries, rank equally with any unsecured
senior subordinated indebtedness and senior to our existing and
future subordinated indebtedness. Our obligations with respect
to the Subordinated Notes, including principal, interest,
premium, if any, and liquidated damages, if any, are fully and
unconditionally guaranteed on an unsecured, senior subordinated
basis by all of our existing and future domestic restricted
subsidiaries. The Canadian operations are not guarantors under
the Subordinated Notes.

The Subordinated Notes contain certain covenants
that, in certain circumstances and subject to certain
limitations and qualifications, restrict, among other things
(i) the incurrence of additional debt; (ii) the
payment of dividends and repurchases of stock; (iii) the
issuance of preferred stock and the issuance of stock of our
subsidiaries; (iv) certain investments; (v) the
repurchase of our Preferred Stock; (vi) transactions with
affiliates and (vii) certain sales of assets.

We also entered into a Registration Rights
Agreement with the initial purchasers of the Subordinated Notes
in which we agreed to (i) file a registration statement
with respect to the Subordinated Notes within 120 days of
the closing date of the issuance of the notes (August 28,
2004), pursuant to which we will exchange the Subordinated Notes
for registered notes of Waste Services with terms identical to
the Subordinated Notes; (ii) have such registration
statement declared effective within 210 days of the
issuance date; (iii) maintain the effectiveness of such
registration statement for minimum periods specified in the
agreement and (iv) file a shelf registration statement in
the circumstances and within the time periods specified in the
agreement. If we do not comply with these obligations, we will
be required to pay liquidated damages, in cash, in an amount
equal to $0.05 per week per $1,000 in principal amount of
the unregistered Subordinated Notes, for each week that the
default continues for the first 90-days following default.
Thereafter, the amount of liquidated damages increases by an
additional $0.05 per week per $1,000 in principal amount of
unregistered Subordinated Notes for each subsequent 90-day
period until all defaults have been cured, to a maximum of
$0.50 per week per $1,000 in principal amount of
unregistered Subordinated Notes outstanding. Liquidated damages,
if any, are payable at the same time as interest payments due
under the Subordinated Notes.



| |                 
| | ----------------
| | Equity Placement

On April 30, 2004, we raised approximately
$50.7 million, after deducting expenses of approximately
$2.9 million, from the sale of 13,400,000 Common Shares and
warrants to purchase 1,340,000 Common Shares of Capital in
private placement transactions to certain investors. Sanders
Morris Harris Inc. acted as the placement agent for the issuance
and was paid a placement agent fee of approximately
$2.7 million. Don A. Sanders, a director of ours at the
time of such issuance, is a principal of Sanders Morris Harris
Inc. We also entered into an agreement with the investors in the
private placement in which we agreed to file a registration
statement for the 13,400,000 Common Shares and the 1,340,000
Common Shares issuable upon exercise of the warrants and have
that registration statement declared effective within
120 days from April 30, 2004, or incur certain
penalties. The registration statement was declared effective in
August 2004.



| |                                                       
| | ------------------------------------------------------
| | Cumulative Mandatorily Redeemable Preferred
    Shares

In May 2003, Waste Services issued
55,000 shares of redeemable Preferred Stock (the
Waste Services Preferred Stock) to Kelso Investment
Associates VI, L.P. and KEP VI, LLC (collectively
Kelso), pursuant to the terms of an agreement dated
as of May 6, 2003, as amended in February 2004, (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 until May 6, 2010.
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 cash dividends of 17.75% per
annum compounding and accruing quarterly in arrears. The
liquidation preference approximated $67.2 million as of
June 30, 2004. The Waste Services Preferred Stock entitles
the holders to a liquidation preference of $1,000 per
share, adjusted for any stock

35



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##### 



dividend, stock split, reclassification,
recapitalization, consolidation or similar event affecting the
Waste Services Preferred Stock, plus the amount of any accrued
but unpaid dividends on such share as of any date of
determination.


As we are not permitted to declare and pay cash
dividends pursuant to the terms of our 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 our option to redeem
all of the Waste Services Preferred Stock by May 6, 2009,
Kelso may require us to initiate a sale of Waste Services or of
its assets on terms acceptable to our board consistent with the
exercise of their fiduciary duties. Pursuant to an amendment to
the Certificate of Designations of Waste Services dated
April 30, 2004, if Waste Services determines, after
conducting a sale process, that any such sale would not yield
sufficient proceeds to repay in full the indebtedness then
outstanding under our Credit Facilities and the redemption
amount of our Subordinated Notes issued on April 30, 2004,
or at least $320.0 million, then Waste Services may elect
to delay such sale. The sale date may be delayed until the
earliest to occur of (i) the final maturity date of the
Subordinated Notes (April 15, 2014); (ii) the date on
which our Credit Facilities and the Subordinated Notes are fully
repaid or otherwise satisfied or (iii) a sale of Waste
Services. We refer to this date as the delayed sale date. If we
do not initiate and complete a sale of Waste Services or its
assets within 20 months of initiation of the sale process
by the holders of Waste Services Preferred Stock, then on notice
from the holders of the Waste Services Preferred Stock, all
outstanding Waste Services Preferred Stock will become due and
payable on the first anniversary of the date on which the
holders of Waste Services Preferred Stock gave notice requiring
the initiation of a sale process, for a liquidation amount of
1.20 times the liquidation preference of $1,000 per share.
If the sale day has been delayed, then Waste Services is not
required to pay this increased liquidation amount until the
delayed sale date.

Also pursuant to the Amended Certificate of
Designations, if Waste Services becomes subject to a liquidation
or insolvency event (as such terms are defined in our Amended
and Restated Credit Agreement dated April 30, 2004) or in
the event of a change of control of Waste Services (as such term
is defined in the Amended Certificate of Designations), all
payments and other distributions to holders of Waste Services
Preferred Stock will be subordinate to the repayment in full of
our Credit Facilities. This provision does not prohibit any
accrual or increase in the dividend rate or in the liquidation
preference of the Waste Services Preferred Stock as provided for
in the Amended Certificate of Designations, or the distribution
of additional shares or other equity securities to the holders
of Waste Services Preferred Stock, so long as such additional
shares or other equity securities are subject to at least
equivalent subordination provisions. In addition, the Amended
Certificate of Designations prohibits us from making any payment
or distribution to the holders of Waste Services Preferred Stock
in the event of a sale of Waste Services or its assets, or the
exercise by the holders of Waste Services Preferred Stock of
their right to require payment of the liquidation amount of
their shares as a result of the failure to consummate a sale of
Waste Services as described in the preceding paragraph, unless
such payment or distribution is expressly permitted pursuant to
the terms of the agreement then governing our Credit Facilities.

36



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##### 





| |                
| | ---------------
| | Equity Issuance

The following table summarizes common share
issuances during the six months ended June 30, 2004:

|                                                                                                 |                                                                                    |               |            |           | 
|------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ------------- | ---------- | --------- | 
|                                                                                                 |                                                                                    | Number of    
|                                                                                                 |                                                                                    | Common Shares
|                                                                                                 |                                                                                    |              
|Acquisitions:                                                                                    |                                                                                    |               |            |          
|                                                                                                 | Florida Recycling                                                                  |               |            | 8,250,000 | 
|                                                                                                 | Fort Bend Regional Landfill                                                        |               |            | 4,375,000 | 
|                                                                                                 | Southeast Regional Landfill (shares issued upon
    obtaining the landfill permit) |               |            | 1,250,000 | 
|                                                                                                 | Collection operations in Arizona                                                   |               |            | 911,370   | 
|                                                                                                 | Landfill acquisition in Saskatchewan                                               |               |            | 12,000    | 
|                                                                                                 |                                                                                    |               |            |          
|Total Common Shares issued in connection with
    acquisitions                                   |                                                                                    |               | 14,798,370 |          
|Private placement (classified as mezzanine
    financing pending the registration of the shares) |                                                                                    |               | 13,400,000 |          
|Common Shares issued upon exercise of options and
    warrants                                   |                                                                                    |               | 311,083    |          
|                                                                                                 |                                                                                    |               |            |          
|Common Shares issued during the six months ended
    June 30, 2004                               |                                                                                    |               | 28,509,453 |          
|                                                                                                 |                                                                                    |               |            |          



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

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 March, 31, 2004 and
December 31, 2003, we had provided customers and various
regulatory authorities with such bonds and letters of credit
amounting to approximately $63.5 million and
$19.6 million, respectively, to collateralize our
obligations.

Our U.S.-based automobile, general liability and
workers compensation insurance coverage is subject to
certain deductible limits. We retain up to $0.5 million and
$0.25 million of risk per claim, plus claims handling
expense under our workers compensation and our auto and
general liability insurance programs, respectively. Claims in
excess of such deductible levels are fully insured subject to
our policy limits. However, we have a limited claims history for
our U.S. operations and it is reasonably possible that
recorded reserves may not be adequate to cover future payment of
claims. Adjustments, if any, to our reserves will be reflected
in the period in which the adjustments are known. As of
June 30, 2004 we have posted a letter of credit with our
U.S. insurer of approximately $2.3 million to cover
the liability for losses within the deductible limit.



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

The following discussion relates to the major
components of the changes in cash flows for the six months ended
June 30, 2004 and 2003.



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

Cash flows provided by operating activities was
$8.1 million and $5.4 million for the six months ended
June 30, 2004 and 2003, respectively. The increase in cash
provided by operating activities is primarily due to cash
generated from our domestic acquisitions as well as improvements
in working capital.



| |                                            
| | -------------------------------------------
| | Cash Flows used in Investing
    Activities

Cash flows used in investing activities was
$174.6 million and $82.2 million for the six months
ended June 30, 2004 and 2003, respectively. The increase in
cash used in investing activities is primarily due to the
various business acquisitions we completed during the first six
months of 2004 and increased capital expenditures. We intend to
finance capital expenditures and business acquisitions through
operating cash flow, borrowings under our Credit Facilities,
subject to the limitations on our investing activities set out
in the Credit Facilities Agreement, and the issuance of
additional debt and/or equity securities.

37



---



##### 





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

Cash flows provided by financing activities was
$148.6 million and $91.0 million for the six months
ended June 30, 2004 and 2003, respectively. The increase in
cash flows from financing activities is due to our debt offering
and private placement financing transaction previously discussed.



| |                            
| | ---------------------------
| | Off-Balance Sheet Financing

We have no off-balance sheet debt or similar
obligations, other than our letters of credit and 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. Capital has entered into a put
or pay disposal agreement with RCI Environment Inc., Centres de
Transbordement et de Valorisation Nord Sud Inc., RCM
Environnement Inc. (collectively the RCI Companies)
and Intersan Inc. pursuant to which we have posted a letter of
credit for C$4.0 million to secure our obligations and
those of the RCI Companies to Intersan Inc. Concurrently with
the put or pay disposal agreement with the RCI Companies,
Capital entered into a three year agreement with Waste
Management of Canada Corporation (formerly Canadian Waste
Services Inc.) to allow us to deliver non-hazardous solid waste
to their landfill in Michigan. Details of these agreement are
further described in our annual financial statements for the
year ended December 31, 2003, as filed on Form 10-K
with the Securities and Exchange Commission.

Landfill Sites

The following table summarizes the changes in our
operating landfill capacity for the six months ended
June 30, 2004 (in thousands of cubic yards):

|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |        | 
|---------------- | --------------------------- | --------- |  | --------- |  | --------- |  | -------- |  | -------- |  | --- | - |  |  | ---- | - |  |  | ------ | 
|                 |                             | Balance,  |  |           |  |           |  |          |  | Balance,
|                 |                             | Beginning |  | Landfills |  | Landfills |  | Airspace |  | End of  
|                 |                             | of Period |  | Acquired  |  | Divested  |  | Consumed |  | Period  
|                 |                             |           |  |           |  |           |  |          |  |         
|Canada           |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Permitted capacity          |           |  | 10,871    |  |           |  | 1,430    |  |          |  |    |   |  |  | (223 | ) |  |  | 12,078 | 
|                 | Probable expansion capacity |           |  |          |  |           |  |         |  |          |  |    |   |  |  |     |   |  |  |       | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Total available airspace    |           |  | 10,871    |  |           |  | 1,430    |  |          |  |    |   |  |  | (223 | ) |  |  | 12,078 | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Number of sites             |           |  | 2         |  |           |  | 1        |  |          |  |    |   |  |  |      |   |  |  | 3      | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|United States(1) |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Permitted capacity          |           |  | 26,084    |  |           |  |         |  |          |  | (83 | ) |  |  | (249 | ) |  |  | 25,752 | 
|                 | Probable expansion capacity |           |  | 18,300    |  |           |  |         |  |          |  |    |   |  |  |     |   |  |  | 18,300 | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Total available airspace    |           |  | 44,384    |  |           |  |         |  |          |  | (83 | ) |  |  | (249 | ) |  |  | 44,052 | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Number of sites             |           |  | 3         |  |           |  |         |  |          |  | (1  | ) |  |  |      |   |  |  | 2      | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|Total            |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Permitted capacity          |           |  | 36,955    |  |           |  | 1,430    |  |          |  | (83 | ) |  |  | (472 | ) |  |  | 37,830 | 
|                 | Probable expansion capacity |           |  | 18,300    |  |           |  |         |  |          |  |    |   |  |  |     |   |  |  | 18,300 | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Total available airspace    |           |  | 55,255    |  |           |  | 1,430    |  |          |  | (83 | ) |  |  | (472 | ) |  |  | 56,130 | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       
|                 | Number of sites             |           |  | 5         |  |           |  | 1        |  |          |  | (1  | ) |  |  |      |   |  |  | 5      | 
|                 |                             |           |  |           |  |           |  |          |  |          |  |     |   |  |  |      |   |  |  |       



---



|    |                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes our Southeast Regional Landfill in
    Arizona (opened during July 2004) and Fort Bend Regional
    Landfill in Texas (expected to open during the third quarter of
    2004) which have initial permitted capacities of
    224 million and 48 million cubic yards, respectively.

38



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##### 



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.

Disclosure Regarding Forward-Looking
Statements

This Form 10-Q 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;                                                                                                      
|
| |  | 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 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 our annual report on Form 10-K, as filed with the
Securities and Exchange Commission for the year ended
December 31, 2003, included under Item 1. of the
annual report, Business  Risk Factors as
well as set forth in our Form S-3/A as filed on August 3,
2004. 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 Form 10-Q and

39



---



##### 



our 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.


You should also carefully consider the following
factor and other information in this Form 10-Q when considering
our company and its common stock:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of June 30, 2004, we failed to meet
    certain of the financial covenants contained in the Credit
    Facilities. We are currently in discussion with lenders to
    obtain a waiver of our failure to comply, as well as provide
    access to capacity under our revolving credit facility. We
    cannot provide any assurance that we will be able to maintain
    existing capacity or obtain short-term liquidity on acceptable
    terms or at all. If our lenders accelerate repayment of our
    debt, it would cause substantial doubt about our ability to
    continue as a going concern. Additionally, if our ongoing
    viability is seriously threatened, we may be forced to evaluate
    a number of strategic alternatives, including a debt
    restructuring or other reorganization, the closure of certain
    operating locations or the sale of certain of our assets in
    order to continue to fund our operations. If we attempted to
    sell assets in order to continue to fund our operations, there
    can be no assurance that the proceeds of any such sales would be
    sufficient to satisfy our liabilities.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

A portion of our operations are domiciled in
Canada; as such, we translate the results of our operations and
financial condition of our Canadian operations 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 our 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 three and six months ended June 30,
2004 and 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.

As of June 30, 2004, we were exposed to
variable interest rates under our new Credit Facilities. The
interest rates payable on our revolving and term facilities are
based on a spread over base rate and Eurodollar loans as defined
at our option. A 25 basis point increase in base interest
rates would increase cash interest expense by approximately
$0.3 million.






|        |                        
|------- | -----------------------
|Item 4. | 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.

40



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##### 





| |                             
| | ----------------------------
| | Changes in Internal Controls

During the period covered by this filing, 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.

41



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##### 






PART II. OTHER INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

Information regarding our legal proceedings may
be found under the Legal Proceedings section of
Note 10, Commitments and Contingencies to our
unaudited condensed consolidated financial statements contained
herein.






|        |                                                                                     
|------- | ------------------------------------------------------------------------------------
|Item 2. | Changes in Securities, Use of Proceeds and
    Issuer Purchases of Equity Securities

On April 29, 2004, we issued a total of
8,250,000 Common Shares in partial consideration for the
acquisition of the shares of Florida Recycling Services, Inc.
The exemption from registration was pursuant to Section 4
(2) of the Securities Act and the rules and regulations
promulgated under the Securities Act on the basis that the
transaction did not involve a public offering.

On April 30, 2004, we issued a total of
13,400,000 Common Shares and warrants to purchase 1,340,000
Common Shares for aggregate consideration of $53,600,000 in a
private placement transaction to accredited investors pursuant
to Rule 506 of Regulation D under the Securities Act.
The warrants have an exercise price of $4.00 per share and
expire on April 30, 2009.

On June 16, 2004, we issued a total of
1,250,000 Common Shares in a private placement transaction as
consideration for the deferred purchase price for Cactus Waste
Systems LLC. The exemption from registration was pursuant to
Section 4 (2) of the Securities Act and the rules and
regulations promulgated under the Securities Act on the basis
that the transaction did not involve a public offering.






|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults upon Senior
    Securities

Information regarding our Default of the Credit
Facilities may be found under Senior Secured Credit
Facilities section of Note 8, Debt to our
unaudited condensed consolidated financial statements contained
herein.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.






|        |                  
|------- | -----------------
|Item 5. | Other Information

None.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits 

Exhibit 31.1  Section 302
Certification of David Sutherland  Yoest, Chairman
and Chief Executive Officer

Exhibit 31.2  Section 302
Certification of Ronald L. Rubin, Executive Vice President and
Chief Financial Officer

Exhibit 32.1  Section 1350
Certification of David Sutherland  Yoest, Chairman
and Chief Executive Officer

Exhibit 32.2  Section 1350
Certification of Ronald L. Rubin, Executive Vice President and
Chief Financial Officer

(b) Reports on Form 8-K during the
quarter ended June 30, 2004:

On April 2, 2004, we filed a current report
on Form 8-K to furnish a copy of a press release issued on
March 31, 2004 announcing our results of operations for the
year ended December 31, 2004 and the filing of our Annual
Report on Form 20-F.

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---



##### 



On April 15, 2004, we filed a current report
on Form 8-K to furnish a copy of a press release issued on
April 14, 2004 announcing commencement of the private
placement of $160.0 million aggregate principal amount of
Senior Subordinated Notes due 2014 and to file information
included in the confidential preliminary offering memorandum
dated April 14, 2004, relating to the offering of the
Senior Subordinated Notes.

On April 15, 2004, we filed a current report
on Form 8-K disclosing information included in the
confidential preliminary offering memorandum dated
April 14, 2004, relating to the offering of the Senior
Subordinated Notes as well as other information.

On May 3, 2004, we filed a current report on
Form 8-K to furnish a copy of a press release issued on
May 3, 2004 announcing the completion of a new
$160 million Credit Facility, an offering of
$160 million of Senior Subordinated Notes, a private
placement of 13,400,000 Common Shares with 1,340,000 warrants to
purchase Common Shares and the closing of the previously
announced acquisition of Florida Recycling Services, Inc.

On May 10, 2004, we filed a current report
on Form 8-K to announce the acquisition of Florida
Recycling, to announce the completion of certain phases of an
asset acquisition from Allied Waste Industries, Inc., to discuss
our recently completed financing transactions and to file the
relevant pro forma financial information relative to these
transactions.

On May 13, 2004, we filed a current report
on Form 8-K to furnish a copy of a press release issued on
May 13, 2004 announcing our results of operations for the
quarter ended March 31, 2004.

On June 9, 2004, we filed a current report
on Form 8-K to announce the acquisition of Florida
Recycling, to announce the completion of the acquisition of
certain assets from Allied Waste Industries, Inc., to discuss
our recently completed financing transactions and to bring
current the relevant pro forma information relative to these
transactions.

II-2



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##### 






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, Waste Services, Inc. has duly caused this
Report to be signed on its behalf by the undersigned, thereunto
duly authorized.

Date: August 16, 2004



| |     |                           
| | --- | --------------------------
| | By: | /s/ DAVID SUTHERLAND-YOEST

| |                                          
| | -----------------------------------------
| |                                          
| | David Sutherland-Yoest                   
| | Chairman of the Board,                   
| | Chief Executive Officer, and
    Director



| |     |                    
| | --- | -------------------
| | By: | /s/ RONALD L. RUBIN

| |                             
| | ----------------------------
| |                             
| | Ronald L. Rubin             
| | Executive Vice President and
| | Chief Financial Officer     

II-3



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##### 



EXHIBIT INDEX

|            |               |  |  |             |  |                                                                                                        
|----------- | ------------- |  |  | ----------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit No. |               |  |  | Description
|            |               |  |  |            
|            | Exhibit  31.1 |  |  |            |  | Section 302 Certification of David
    Sutherland-Yoest, Chairman and Chief Executive Officer          
|            | Exhibit  31.2 |  |  |            |  | Section 302 Certification of Ronald L.
    Rubin, Executive Vice President and Chief Financial Officer 
|            | Exhibit  32.1 |  |  |            |  | Section 1350 Certification of David
    Sutherland-Yoest, Chairman and Chief Executive Officer         
|            | Exhibit  32.2 |  |  |            |  | Section 1350 Certification of Ronald L.
    Rubin, Executive Vice President and Chief Financial Officer