e10vq

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, 2006


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 1-14705

ALLIED WASTE INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		88-0228636
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

15880 North Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (480) 627-2700

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o

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

Indicate the number of shares outstanding of the issuer’s class of common stock, as of the latest practicable date.


Class		Outstanding as of July 27, 2006


Common Stock		367,583,054

ALLIED WASTE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)


	June 30,			December 31,
	2006			2005
	(unaudited)
ASSETS
Current Assets —
Cash and cash equivalents	$	47.6		$	56.1
Accounts receivable, net of allowance of $17.8 and $17.8		728.0			690.5
Prepaid and other current assets		90.7			80.5
Deferred income taxes		128.6			93.3

Total current assets		994.9			920.4
Property and equipment, net		4,393.7			4,273.5
Goodwill		8,179.8			8,184.2
Other assets, net		242.5			247.5

Total assets	$	13,810.9		$	13,625.6


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities —
Current portion of long-term debt	$	223.0		$	238.5
Accounts payable		481.1			564.8
Current portion of accrued capping, closure, post-closure and environmental costs		89.7			95.8
Accrued interest		117.7			116.5
Other accrued liabilities		343.7			330.5
Unearned revenue		241.1			229.4

Total current liabilities		1,496.3			1,575.5
Long-term debt, less current portion		6,959.1			6,853.2
Deferred income taxes		395.1			305.5
Accrued capping, closure, post-closure and environmental costs, less current portion		809.0			796.8
Other long-term obligations		643.1			655.2
Commitments and Contingencies
Stockholders’ Equity —
Series C senior mandatory convertible preferred stock, $0.10 par value, 6.9 million shares authorized, issued and outstanding, liquidation preference of $50.00 per share, net of $11.9 million of issuance costs		—			333.1
Series D senior mandatory convertible preferred stock, $0.10 par value, 2.4 million shares authorized, issued and outstanding, liquidation preference of $250.00 per share, net of $19.2 million of issuance costs		580.8			580.8
Common stock, $0.01 par value, 525 million authorized shares, 366.6 million and 331.2 million shares issued and outstanding		3.7			3.3
Additional paid-in capital		2,787.6			2,440.7
Accumulated other comprehensive loss		(70.3	)		(70.3	)
Retained earnings		206.5			151.8

Total stockholders’ equity		3,508.3			3,439.4

Total liabilities and stockholders’ equity	$	13,810.9		$	13,625.6

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

ALLIED WASTE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts, unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Revenues	$	1,540.6		$	1,448.6		$	2,979.3		$	2,789.9
Cost of operations (exclusive of depreciation and amortization shown below)		991.9			942.7			1,935.2			1,817.6
Selling, general and administrative expenses		148.4			117.0			293.8			246.9
Depreciation and amortization		147.5			141.0			288.9			274.3

Operating income		252.8			247.9			461.4			451.1
Interest expense and other		173.8			126.6			306.5			330.2

Income before income taxes		79.0			121.3			154.9			120.9
Income tax expense		41.2			69.3			76.3			43.9
Minority interest		0.2			(1.0	)		(0.2	)		(0.7	)

Income from continuing operations		37.6			53.0			78.8			77.7
Income from discontinued operations, net of tax		—			1.0			—			1.0

Net income		37.6			54.0			78.8			78.7
Dividends on preferred stock		(9.4	)		(14.7	)		(24.1	)		(22.4	)

Net income available to common shareholders	$	28.2		$	39.3		$	54.7		$	56.3


Basic EPS:
Continuing operations	$	0.08		$	0.12		$	0.16		$	0.17
Discontinued operations		—			—			—			—

Net income available to common shareholders	$	0.08		$	0.12		$	0.16		$	0.17


Weighted average common shares		364.1			329.1			347.2			324.2


Diluted EPS:
Continuing operations	$	0.08		$	0.12		$	0.16		$	0.17
Discontinued operations		—			—			—			—

Net income available to common shareholders	$	0.08		$	0.12		$	0.16		$	0.17


Weighted average common and common equivalent shares		367.3			332.2			349.9			327.6

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

ALLIED WASTE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)


	Six Months Ended June 30,
	2006			2005
Operating activities —
Net income	$	78.8		$	78.7
Discontinued operations, net of tax		—			(1.0	)
Adjustments to reconcile net income to cash provided by operating activities from continuing operations —
Provisions for:
Depreciation and amortization		288.9			274.3
Stock-based compensation expense		7.3			2.8
Doubtful accounts		7.5			6.3
Accretion of debt and amortization of debt issuance costs		10.9			11.9
Deferred income taxes		63.9			31.3
Gain on sale of fixed assets		(2.5	)		(1.6	)
Non-cash reduction in acquisition and environmental accruals		(13.5	)		(17.5	)
Write-off of deferred debt issuance costs		3.6			13.5
Change in operating assets and liabilities, excluding the effects of purchase acquisitions—
Accounts receivable, prepaid expenses, inventories and other assets		(52.5	)		(45.9	)
Accounts payable, accrued liabilities, unearned income and other		(26.0	)		(29.9	)
Capping, closure and post-closure accretion		25.2			25.3
Capping, closure, post-closure and environmental expenditures		(23.8	)		(30.7	)

Cash provided by operating activities from continuing operations		367.8			317.5


Investing activities —
Cost of acquisitions, net of cash acquired		(10.6	)		(1.9	)
Proceeds from divestitures, net of cash divested		13.4			3.5
Proceeds from sale of fixed assets		7.3			7.2
Capital expenditures, excluding acquisitions		(371.8	)		(283.5	)
Capitalized interest		(8.2	)		(7.1	)
Change in deferred acquisition costs, notes receivable and other		1.5			1.1

Cash used for investing activities from continuing operations		(368.4	)		(280.7	)


Financing activities —
Net proceeds from sale of Series D preferred stock		—			580.6
Proceeds from long-term debt, net of issuance costs		1,223.1			2,614.9
Payments of long-term debt		(1,147.0	)		(3,213.3	)
Payments of preferred stock dividends		(29.4	)		(19.3	)
Net change in disbursement account		(63.3	)		(94.4	)
Net proceeds from sale of common stock, exercise of stock options and other		8.7			96.0

Cash used for financing activities from continuing operations		(7.9	)		(35.5	)


Discontinued operations:
Provided by operating activities		—			0.7

Cash provided by discontinued operations		—			0.7


(Decrease) increase in cash and cash equivalents		(8.5	)		2.0
Cash and cash equivalents, beginning of period		56.1			68.0

Cash and cash equivalents, end of period	$	47.6		$	70.0

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

ALLIED WASTE INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Allied Waste Industries, Inc. (Allied, we, us, our or the Company), a Delaware corporation, is the second largest, non-hazardous solid waste management company in the United States, as measured by revenues. We provide non-hazardous waste collection, transfer, recycling and disposal services in 37 states and Puerto Rico, geographically identified as the Midwestern, Northeastern, Southeastern, Southwestern and Western regions.

The consolidated financial statements include the accounts of Allied and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. The December 31, 2005 balance sheet data included herein is derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States (GAAP). The consolidated balance sheet as of December 31, 2005 and the unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). As applicable under such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. We believe that the presentations and disclosures herein are adequate when read in conjunction with our Annual Report on Form 10-K, for the year ended December 31, 2005. The consolidated financial statements as of June 30, 2006, and for the three and six months ended June 30, 2006 and 2005 reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments (except as otherwise disclosed in the notes) necessary to fairly state the financial position and results of operations for such periods. Certain reclassifications have been made to the prior period financial statements to conform to the current presentation.

Operating results for interim periods are not necessarily indicative of the results for full years. These consolidated financial statements should be read in conjunction with our consolidated financial statements for the year ended December 31, 2005 and the related notes thereto included in our Annual Report on Form 10-K.

For the description of our significant accounting policies, see Note 1 of Notes to Consolidated Financial Statements for the year ended December 31, 2005 in our Annual Report on Form 10-K.

Assets held for sale –

Certain operations were classified as assets held for sale in 2005, which did not qualify as discontinued operations. In the first quarter of 2005, we recorded a $3.7 million pre-tax loss in cost of operations and a benefit of approximately $27.0 million in our provision for income taxes, of which $25.5 million related to the stock basis of these assets held for sale. Since certain of these operations were sold pursuant to a stock sale agreement, we were able to recognize as a deferred tax asset the tax basis in the stock of these operations in the first quarter of 2005, which previously could not be recognized under Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS 109). The sale of these assets was completed in the first quarter of 2006.

Discontinued operations –

Discontinued operations for the three and six months ended June 30, 2005 include $1.7 million of income before tax ($1.0 million, net of tax), primarily the result of adjustments to our insurance liabilities related to Florida operations classified as discontinued operations and sold in 2004.

Interest expense capitalized –

We capitalize interest in connection with the construction of our landfill assets. Actual acquisition, permitting and construction costs incurred which relate to landfill assets under active development qualify for interest capitalization. Interest capitalization ceases when the construction of a landfill asset is complete and available for use.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended June 30, 2006 and 2005, we incurred gross interest expense of $132.4 million and $126.5 million, respectively, of which $4.1 million and $3.7 million, respectively, was capitalized. We incurred gross interest expense of $264.4 million and $264.9 million for the six months ended June 30, 2006 and 2005, respectively, of which $8.2 million and $7.1 million, respectively, was capitalized.

Statements of cash flows –

The supplemental cash flow disclosures are as follows (in millions):


	Six Months Ended June 30,
	2006		2005
Supplemental Disclosures -
Interest paid (net of amounts capitalized)	$	254.5	$	278.8
Income taxes paid (net of refunds)		17.1		28.4

Non-Cash Transactions -
Liabilities incurred or assumed in acquisitions	$	1.7	$	0.1
Dividends accrued on preferred stock		3.1		8.5

Use of estimates –

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available and assumptions about the future. Actual results may differ significantly from the estimates.

Recently issued accounting pronouncements –

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which revises SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be measured at fair value and expensed in the consolidated statement of operations over the service period (generally the vesting period).

Effective January 1, 2006, we adopted SFAS 123(R) using the modified prospective transition method, whereby compensation expense is only recognized in the consolidated statements of operations in the period beginning in January 1, 2006. Accordingly, compensation cost amounts for prior periods are contained in the Company’s footnotes but the consolidated financial statements have not been restated to reflect, and do not include, the impact of SFAS 123(R). See Note 8, Stock Plans, for additional disclosures.

We have elected to adopt the alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon the adoption of SFAS 123(R).

In October 2005, the FASB issued FASB Staff Position (FSP) No. 13-1 (FSP FAS 13-1), Accounting for Rental Costs Incurred during a Construction Period. This FSP requires rental costs associated with ground or building operating leases that are incurred during the construction period to be recognized as rental expense over the lease term, which includes the construction period. The adoption of FSP FAS 13-1 as of January 1, 2006 did not have a material impact on our financial position or results of operations.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and provides guidance on the recognition, de-recognition and measurement of benefits related to an entity’s uncertain tax positions. FIN 48 is effective for us beginning January 1, 2007. We are currently evaluating the impact of its adoption on our financial position and results of operations.

2. Property and Equipment

Maintenance and repair expenses charged to cost of operations for the three and six months ended June 30, 2006 were $123.9 million and $249.2 million and $123.5 million and $239.3 million for the same periods in 2005, respectively. We recognized net pre-tax gains on the disposal of fixed assets for the three and six months ended June 30, 2006 of $1.7 million and $2.5 million, and $1.0 million and $1.6 million for same periods in 2005, respectively.

The following tables show the activity and balances related to property and equipment from December 31, 2005 through June 30, 2006 (in millions):


	Property and Equipment
	Balance at							Acquisitions,			Transfers			Balance at
	December 31,		Capital		Sales and			net of			and			June 30,
	2005		Additions		Retirements			Divestitures			Other⁽¹⁾			2006
Land and improvements	$	472.0	$	8.6	$	(1.5	)	$	(0.1	)	$	3.5		$	482.5
Land held for permitting as landfills		114.0		2.6		—			(7.1	)		(12.6	)		96.9
Landfills		3,978.5		107.9		—			12.2			20.7			4,119.3
Buildings and improvements		506.6		13.8		(1.7	)		(3.3	)		27.9			543.3
Vehicles and equipment		2,039.6		200.7		(34.2	)		(1.2	)		0.5			2,205.4
Containers and compactors		920.7		37.4		(8.8	)		(1.2	)		0.1			948.2
Furniture and office equipment		52.7		0.8		(1.4	)		—			—			52.1

Total	$	8,084.1	$	371.8	$	(47.6	)	$	(0.7	)	$	40.1		$	8,447.7


	Accumulated Depreciation and Amortization
				Depreciation
	Balance at			and						Acquisitions,		Transfers			Balance at
	December 31,			Amortization			Sales and			net of		and			June 30,
	2005			Expense			Retirements			Divestitures		Other⁽¹⁾			2006
Land and improvements	$	(31.7	)	$	(3.0	)	$	—		$	—	$	—		$	(34.7	)
Landfills		(1,839.9	)		(129.6	)		—			—		—			(1,969.5	)
Buildings and improvements		(150.2	)		(13.8	)		0.8			0.3		—			(162.9	)
Vehicles and equipment		(1,159.4	)		(98.5	)		32.4			1.7		(1.2	)		(1,225.0	)
Containers and compactors		(590.0	)		(41.1	)		8.2			1.3		—			(621.6	)
Furniture and office equipment		(39.4	)		(2.3	)		1.4			—		—			(40.3	)

Total	$	(3,810.6	)	$	(288.3	)	$	42.8		$	3.3	$	(1.2	)	$	(4,054.0	)


Property and equipment, net	$	4,273.5		$	83.5		$	(4.8	)	$	2.6	$	38.9		$	4,393.7


⁽¹⁾		Includes construction-in-process related to the lease of a new Operations Support Center, for which we are considered the owner during the construction period (for accounting purposes) under the provisions of EITF 97-10, The Effect of Lessee Involvement in Asset Construction. Also includes capitalized interest, reclass of landfill cover from land held for landfills and changes in our landfill retirement obligation asset for recognition of and adjustments to capping, closure and post-closure costs (see Note 6).

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Goodwill and Intangible Assets

At least annually, we perform an assessment of goodwill impairment by applying a fair value based test to each of our reporting units, which we define as each of our geographic operating segments. We completed our annual assessment of goodwill in the fourth quarter of 2005 and no impairment was recorded. The calculation of fair value is subject to judgments and estimates about future events. We estimated fair value based on projected net cash flows discounted using a weighted-average cost of capital of approximately 7.4% in 2005. In addition, consideration is also given to an earnings multiple approach as an indicator of the reasonableness of our discounted cash flows. The estimated fair value could change if there were future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted or changes to the market capitalization of our company. As a result of evaluating goodwill for impairment, we may recognize an impairment in one or more reporting units even though our fair value test indicates no impairment in other reporting units or no impairment if a test were to be performed on the Company as a whole.

We may conduct an impairment test of goodwill more frequently than annually under certain conditions. For example, a significant adverse change in liquidity or the business environment, unanticipated competition, a significant adverse action by a regulator or a disposal of a significant portion of a reporting unit could prompt an impairment test between annual assessments.

Our reporting units are comprised of several vertically integrated businesses. A divestiture of any individual asset below the reporting unit level could result in a loss. At the time of a divestiture of an individual business within a reporting unit, goodwill is allocated to that business based on its relative fair value to its reporting unit and a gain or loss on disposal is derived. Subsequently, the remaining goodwill in the reporting unit from which the assets were divested would be re-evaluated for realizability. This could result in an additional recognized loss.

We have incurred non-cash losses on sales of assets when we believed that re-deployment of the proceeds from the sale of such assets could reduce debt or improve operations and was economically beneficial. If we decide to sell additional assets in the future, we could incur additional non-cash losses on asset sales.

The following table shows the activity and balances related to goodwill by reporting unit from December 31, 2005 through June 30, 2006 (in millions):


	Balance as of										Balance as of
	December 31, 2005		Acquisitions		Divestitures			Adjustments⁽¹⁾			June 30, 2006
Midwestern	$	2,169.1	$	—	$	(0.5	)	$	(0.6	)	$	2,168.0
Northeastern		1,796.5		—		—			(3.0	)		1,793.5
Southeastern		1,584.0		—		—			(0.5	)		1,583.5
Southwestern		1,316.9		0.8		—			58.9			1,376.6
Western		1,317.7		—		—			(59.5	)		1,258.2

Total	$	8,184.2	$	0.8	$	(0.5	)	$	(4.7	)	$	8,179.8


⁽¹⁾		Primarily due to a reallocation related to refinements to the regional organization structure.

In addition, we have other amortizable intangible assets included in other assets that consist primarily of the following at June 30, 2006 (in millions):


	Gross Carrying		Accumulated
	Value		Amortization		Net Carrying Value
Non-compete agreements	$	6.8	$	5.8	$	1.0
Other		2.8		0.6		2.2

Total	$	9.6	$	6.4	$	3.2

Amortization expense for the three and six months ended June 30, 2006 was $0.2 million and $0.5 million and $0.3 million and $0.7 million for the same periods in 2005, respectively. Based upon the amortizable assets recorded in the balance sheet at June 30, 2006, amortization expense for each of the next five years is estimated to decline from $0.9 million to $0.4 million.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Long-term Debt

Long-term debt at June 30, 2006 and December 31, 2005 consists of the amounts listed in the following table. The effective interest rate includes our interest cost incurred, amortization of deferred debt issuance cost and the amortization or accretion of discounts or premiums (in millions, except percentages).


	Debt Balance at				Effective Interest Rate
	June 30,		December 31,		June 30,			December 31,
	2006		2005		2006			2005
Revolving credit facility ABR borrowings*	$	1.8	$	3.7		10.00	%		9.00	%
Revolving credit facility Adjusted LIBOR borrowings*		115.0		—		8.16			7.29
2005 Term loan B		1,275.0		1,275.0		6.93			6.33
Receivables secured loan		215.1		230.0		6.17			4.90
6.375% senior notes due 2008		156.3		154.7		8.34			8.34
8.875% senior notes due 2008		—		600.0		—			9.15
8.50% senior notes due 2008		750.0		750.0		8.78			8.78
6.50% senior notes due 2010		350.0		350.0		6.76			6.76
5.75% senior notes due 2011		400.0		400.0		6.00			6.00
6.375% senior notes due 2011		275.0		275.0		6.63			6.63
9.25% senior notes due 2012		251.0		251.1		9.40			9.40
7.875% senior notes due 2013		450.0		450.0		8.09			8.09
6.125% senior notes due 2014		425.0		425.0		6.30			6.30
7.25% senior notes due 2015		600.0		600.0		7.43			7.43
7.125% senior notes due 2016		594.8		—		7.38			—
9.25% debentures due 2021		96.2		96.1		9.47			9.47
7.40% debentures due 2035		293.3		292.2		8.03			8.03
4.25% senior subordinated convertible debentures due 2034		230.0		230.0		4.34			4.34
7.375% senior unsecured notes due 2014		400.0		400.0		7.55			7.55
Solid waste revenue bond obligations, principal payable through 2031		280.4		283.9		6.92			6.81
Notes payable to banks, finance companies, and individuals, interest rates of 0.7% to 11.25%, and principal payable through 2014, secured by vehicles, equipment, real estate or accounts receivable **		4.6		5.1		4.18			4.32
Obligations under capital leases of vehicles and equipment **		12.7		13.2		9.03			9.08
Notes payable to individuals and a commercial company, interest rates of 5.99% to 9.50%, principal payable through 2010, unsecured **		5.9		6.7		8.07			7.93

Total debt **		7,182.1		7,091.7		7.31			7.29
Less: Current portion		223.0		238.5

Long-term portion	$	6,959.1	$	6,853.2


*		Excludes fees

**		Reflects weighted average interest rate

2005 Credit facility —

We have a senior secured credit facility (2005 Credit Facility) that includes at June 30, 2006: (i) a $1.575 billion Revolving Credit Facility due January 2010 (the 2005 Revolver), (ii) a $1.275 billion Term Loan due January 2012 (the 2005 Term Loan), and (iii) a $495.0 million Institutional Letter of Credit Facility due January 2012. The proceeds of the 2005 Term Loan were used to repay previously outstanding Term Loans B, C, and D under our 2003 Credit Facility. Of the $1.575 billion available under the 2005 Revolver, the entire amount may be used to support the issuance of letters of credit. At June 30, 2006, we had $116.8 million of borrowings outstanding and $411.1 million in letters of credit outstanding under the 2005 Revolver, leaving approximately $1.047 billion capacity available under the 2005 Revolver.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The 2005 Credit Facility bears interest at (a) an Alternative Base Rate (ABR), or (b) an Adjusted LIBOR, both terms defined in the 2005 Credit Facility agreement, plus, in either case, an applicable margin based on our leverage ratio. Proceeds from the 2005 Credit Facility may be used for working capital and other general corporate purposes, including acquisitions.

We are required to make prepayments on the 2005 Credit Facility upon completion of certain transactions as defined in the 2005 Credit Facility, including asset sales and issuances of debt securities. Proceeds from these transactions are required to be applied to amounts due under the 2005 Credit Facility pursuant to the 2005 Credit Facility agreement. We are also required to make prepayments on the 2005 Credit Facility for 50% of any excess cash flows from operations, as defined in the 2005 Credit Facility agreement. There is also scheduled amortization on the 2005 Term Loan and Institutional Letter of Credit Facility, as required in the 2005 Credit Facility agreement.

Senior notes —

In May 2006, we issued $600 million of 7.125% senior notes due 2016 at a discounted price equal to 99.123% of the aggregate principal amount. The net proceeds were used to fund a portion of the tender offer for our 8.875% senior notes due 2008. Interest is payable semi-annually on May 15^th and November 15^th, beginning on November 15,2006. These senior notes have a make-whole call provision that is exercisable any time prior to May 15, 2011 at the stated redemption price. These notes may also be redeemed on or after May 15, 2011 at the stated redemption price.

Receivables secured loan —

We have an accounts receivable securitization program with two financial institutions that allows us to borrow up to $230 million on a revolving basis under a loan agreement secured by receivables. The agreements include a 364-day liquidity facility and a three-year purchase commitment. If we are unable to renew the liquidity facility when it matures on May 29, 2007, we will refinance any amounts outstanding with a portion of our senior credit facility or with other long-term borrowings. Although we intend to renew the liquidity facility on May 29, 2007, and do not expect to repay the amounts within the next twelve months, the loan is classified as a current liability because it has a contractual maturity of less than one year.

Debt covenants —

Under the 2005 Credit Facility, we are subject to the following financial covenants:

Minimum Interest Coverage:


From the Quarter Ending	Through the Quarter Ending	EBITDA⁽¹⁾/Interest
January 1, 2006	June 30, 2006		1.95x
July 1, 2006	December 31, 2006		2.00x
January 1, 2007	March 31, 2007		2.10x
April 1, 2007	June 30, 2007		2.15x
July 1, 2007	March 31, 2008		2.20x
April 1, 2008	September 30, 2008		2.25x
October 1, 2008	December 31, 2008		2.30x
January 1, 2009	June 30, 2009		2.40x
July 1, 2009	December 31, 2009		2.55x
January 1, 2010	Thereafter		2.75x

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maximum Leverage:


From the Quarter Ending	Through the Quarter Ending	Total Debt/EBITDA⁽¹⁾
January 1, 2006	June 30, 2006		6.25x
July 1, 2006	December 31, 2006		6.00x
January 1, 2007	June 30, 2007		5.75x
July 1, 2007	December 31, 2008		5.50x
January 1, 2009	June 30, 2009		5.25x
July 1, 2009	December 31, 2009		5.00x
January 1, 2010	Thereafter		4.50x

At June 30, 2006, we were in compliance with all financial and other covenants under our 2005 Credit Facility. We are not subject to any minimum net worth covenants. At June 30, 2006, Total Debt/EBITDA⁽¹⁾ ratio, as defined by the 2005 Credit Facility, was 4.83:1 and our EBITDA⁽¹⁾/Interest ratio was 2.42:1.


⁽¹⁾		EBITDA, which is a non-GAAP measure used for covenants, is calculated in accordance with the definition in the 2005 Credit Facility agreement. In this context, EBITDA is used solely to provide information on the extent to which we are in compliance with debt covenants and is not comparable to EBITDA used by other companies.

In addition, the 2005 Credit Facility restricts us from making certain types of payments, including dividend payments on our common and preferred stock. However, we are able to pay cash dividends on our outstanding 6.25% Series D senior mandatory convertible preferred stock (Series D preferred).

All of our notes contain certain financial covenants and restrictions, which may, in certain circumstances, limit our ability to complete acquisitions, pay dividends, incur indebtedness, make investments and take certain other corporate actions. At June 30, 2006, we were in compliance with all applicable covenants.

2006 Refinancing –

On April 12, 2006, we completed the re-pricing of the 2005 Term Loan and Institutional Letter of Credit portions of our 2005 Credit Facility. The 2005 Term Loan and Institutional Letter of Credit Facility re-priced at LIBOR plus 175 basis points (or ABR plus 75 basis points), a reduction of 25 basis points. The pricing will further decrease to LIBOR plus 150 basis points (or ABR plus 50 basis points) when our leverage ratio is equal to or less than 4.25x. In May 2006, we issued $600 million of 7.125% senior notes due 2016 and used the net proceeds to fund a portion of our tender offer for our 8.875% senior notes due 2008. In connection with these transactions, during the second quarter of 2006, we expensed approximately $40.8 million of premiums paid, deferred financing and other costs.

2005 Refinancing –

During the first quarter of 2005, we executed a multifaceted refinancing plan for which the costs incurred to early extinguish debt during the six months ended June 30, 2005 were $62.4 million. These expenses were recorded in interest expense and other.

Collateral —

Our 2005 Credit Facility is secured by the stock of substantially all of our subsidiaries and a security interest in substantially all of our assets. A portion of the collateral that collateralizes the 2005 Credit Facility is shared as collateral with the holders of certain of our senior secured notes and debentures.

The senior secured notes and debentures are collateralized by the stock of substantially all of Browning-Ferris Industries, LLC (BFI) subsidiaries along with certain other Allied subsidiaries and a security interest in the assets of BFI, its domestic subsidiaries and certain other Allied subsidiaries. As of June 30, 2006, the book value of the assets of the subsidiaries that serve as collateral for these notes and debentures was approximately $8.8 billion, which represents approximately 64% of our consolidated total assets.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative instruments and hedging activities —

Our risk management policy requires that no less than 70% of our total debt is fixed, either directly or effectively through interest rate swap contracts. From time to time, in order to adhere to the policy, we have entered into interest rate swap agreements for the purpose of hedging variability of interest expense and interest payments on our long-term variable rate bank debt and maintaining a mix of fixed and floating rate debt. Our strategy is to use interest rate swap contracts when such transactions will serve to reduce our aggregate exposure and meet the objectives of our risk management policy. These contracts are not entered into for trading purposes.

We believe it is important to have a mix of fixed and floating rate debt to provide financing flexibility. At June 30, 2006, approximately 77% of our debt was fixed and 23% had variable interest rates. We had no interest rate swap contracts outstanding at June 30, 2006 or 2005.

5. Stockholders’ Equity

Accumulated other comprehensive loss —

The components of the ending balances of accumulated other comprehensive loss, as reflected in stockholders’ equity are as follows (in millions):


	June 30,			December 31,
	2006			2005
Minimum pension liability adjustment, net of taxes of $46.8	$	(70.3	)	$	(70.3	)

Accumulated other comprehensive loss	$	(70.3	)	$	(70.3	)

Comprehensive income —

The components of total comprehensive income are shown as follows (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net income	$	37.6	$	54.0	$	78.8	$	78.7
Other comprehensive income:
Designated interest rate swap contracts gain, net of tax effect of $0.0, $0.0, $0.0 and $0.7		—		—		—		1.3

Total comprehensive income	$	37.6	$	54.0	$	78.8	$	80.0

Series C senior mandatory convertible preferred stock –

In April 2006, each of the outstanding shares of our 6.25% Series C senior mandatory convertible preferred stock (Series C preferred stock) automatically converted into 4.9358 shares of our common stock pursuant to the terms of the certificate of designations governing the Series C preferred stock. This increased our common shares outstanding by approximately 34.1 million shares and eliminated annual cash dividends of $21.6 million.

The conversion rate, pursuant to the terms set forth in the certificate of designations, is equal to $50.00 divided by $10.13 (the threshold appreciation price), as the average of the closing prices per share of our common stock on each of the 20 consecutive trading days ending on March 29, 2006 (the third trading day preceding the conversion date) was greater than the threshold appreciation price. Each holder of Series C preferred stock on the applicable record date received a cash payment equal to the amount of accrued and unpaid dividends. As a result of the automatic conversion, we will no longer pay any future quarterly dividends in cash or stock in respect of the Series C preferred stock. Each holder of Series C preferred stock on the conversion date received cash in lieu of any fractional shares of common stock issued upon conversion of the Series C preferred stock.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Landfill Accounting

Landfill accounting —

We have a network of 169 owned or operated active landfills with a net book value of approximately $2.1 billion at June 30, 2006. In addition, we own or have responsibility for 107 closed landfills.

We use a life-cycle accounting method for landfills and the related capping, closure and post-closure liabilities. This method applies the costs to be capitalized associated with acquiring, developing, closing and monitoring the landfills over the associated consumption of landfill capacity.

Specifically, we record landfill retirement obligations at fair value as a liability with a corresponding increase to the landfill asset as waste is disposed. The amortizable landfill asset includes landfill development costs incurred, landfill development costs expected to be incurred over the life of the landfill, the recorded capping, closure and post-closure asset retirement obligation and the present value of cost estimates for future capping, closure and post-closure costs. We amortize the landfill asset over the remaining capacity of the landfill as volume is consumed during the life of the landfill with one exception. The exception applies to capping costs for which both the recognition of the liability and the amortization of these costs is based instead on the costs and capacity of the specific capping event.

On an annual basis, we update the development cost estimates (which include the costs to develop the site as well as the individual cell construction costs) and capping, closure and post-closure cost estimates for each landfill. Additionally, future capacity estimates (sometimes referred to as airspace) are updated annually using aerial surveys of each landfill to estimate utilized disposal capacity and remaining disposal capacity. The overall cost and capacity estimates are reviewed and approved by senior operations management annually.

Landfill assets —

The following is a rollforward of our investment in our landfill assets excluding land held for future permitting as landfills (in millions):

Net Book

Net Book Value

Capping,

Net Book

Value at

of Landfills

Landfill

Closure and

Value at

December 31,

Acquired, net of

Development

Post Closure

Landfill

June 30,

2005

Divestitures

Costs

Accruals

Amortization

Other

2006

$2,138.6

$12.2

$116.2

$11.2

($129.6)

$1.2

$2,149.8

We expensed approximately $67.9 million and $65.4 million, or an average of $3.28 and $3.14 per ton consumed, related to landfill amortization during the three months ended June 30, 2006 and 2005, respectively. During the six months ended June 30, 2006 and 2005, we expensed approximately $129.6 million and $122.7 million, respectively, or an average of $3.30 and $3.12 per ton consumed, respectively, related to landfill amortization.

Capping, closure and post-closure and environmental costs—

Accretion expense is necessary to increase the accrued capping, closure and post-closure accrual balance to its future undiscounted value. To accomplish this, we accrete our capping, closure and post-closure accrual balance using the applicable credit-adjusted, risk-free rate and charge this accretion as an operating expense in that period. Accretion expense on recorded landfill liabilities is recorded to cost of operations from the time the liability is recognized until the costs are paid.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accretion expense for capping, closure and post-closure for the three months ended June 30, 2006 and 2005 was $12.4 million and $12.6 million, respectively, or an average of $0.60 and $0.60 per ton consumed, respectively. During the six months ended June 30, 2006 and 2005, we recorded accretion expense of $25.2 million and $25.3 million, respectively, or an average of $0.64 and $0.64 per ton consumed, respectively. Changes in estimates of costs or disposal capacity are treated on a prospective basis for operating landfills and are recorded immediately in results of operations for fully incurred capping events and closed landfills. There were no changes in estimates that had a material impact on our results of operations during the three and six months ended June 30, 2006.

Environmental liabilities arise from contamination at sites that we own or operate or third-party sites where we deliver or transport waste. These liabilities primarily include costs associated with remediating groundwater, surface water and soil contamination as well as controlling and containing methane gas migration. In connection with evaluating liabilities for environmental matters, we estimate a range of potential impacts and the most likely outcome. The recorded liabilities represent our estimate of the most likely outcome of the matters for which we have determined liability is probable. For these matters, we periodically evaluate the recorded liabilities and as additional information becomes available to ascertain whether the accrued liabilities are adequate. We do not expect near-term adjustments to estimates will have a material effect on our consolidated liquidity, financial position or results of operations.

These estimates, however, require assumptions about future events due to a number of uncertainties including the extent of the contamination, the appropriate remedy, the financial viability of other potentially responsible parties and the final apportionment of responsibility among the potentially responsible parties. As noted above, because of these uncertainties, we estimate a range of exposure for environmental liabilities. Using the high end of our estimate of the reasonably possible range, the outcome of these matters, which exclude capping, closure and post-closure costs, could result in approximately $22 million of additional liability.

The following table shows the activities and balances related to environmental accruals and for capping, closure and post-closure accruals related to open and closed landfills from December 31, 2005 through June 30, 2006 (in millions):


	Balance at										Balance at
	December 31,		Charges to								June 30,
	2005		Expense		Other^{(1) (2)}			Payments			2006
Environmental accruals	$	272.8	$	—	$	(7.9	)	$	(7.0	)	$	257.9
Open landfills capping, closure, and post-closure accruals		419.8		17.4		12.7			(6.4	)		443.5
Closed landfills capping, closure, and post-closure accruals		200.0		7.8		(0.1	)		(10.4	)		197.3

Total	$	892.6	$	25.2	$	4.7		$	(23.8	)	$	898.7


⁽¹⁾		Environmental adjustment recorded in the second quarter was due to the selection by a regulatory agency of a lower cost remediation plan related to a Superfund site.

⁽²⁾		Amounts for open and closed landfills consist primarily of amounts accrued for capping, closure and post-closure liability to landfill assets during the period.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Employee Benefit Plans

Components of net periodic benefit cost —

The following tables provide the components of net periodic benefit cost for the BFI Pension Plan and the supplemental executive retirement plan (SERP) (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
BFI Pension Plan:	2006			2005			2006			2005
Service cost	$	—		$	0.2		$	0.1		$	0.3
Interest cost		5.3			5.2			10.6			10.4
Expected return on plan assets		(7.5	)		(7.1	)		(15.0	)		(14.1	)
Recognized net actuarial loss		1.8			1.7			3.5			3.4
Amortization of prior service cost		—			—			—			—
Curtailment		0.1			—			0.1			—

Net periodic benefit (income) cost	$	(0.3	)	$	—		$	(0.7	)	$	—


	Three Months Ended June 30,						Six Months Ended June 30,
SERP:	2006			2005			2006			2005
Service cost	$	0.2		$	0.6		$	0.4		$	0.8
Interest cost		0.1			—			0.3			0.2
Recognized net actuarial gain		—			—			(0.0	)		—
Curtailment		(0.0	)		(0.4	)		(0.0	)		(0.4	)
Amortization of prior service cost		0.2			0.4			0.4			0.8

Net periodic benefit cost	$	0.5		$	0.6		$	1.1		$	1.4

8. Stock Plans

Effective January 1, 2006, we adopted the provisions of SFAS 123(R), Share-Based Payment, which establishes the accounting for stock-based awards exchanged for employee services. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be measured at fair value and expensed in the consolidated statement of operations over the service period (generally the vesting period). We previously accounted for share-based compensation plans under APB 25 and the related interpretations and provided the required SFAS 123 pro forma disclosures for employee stock options.

Periods prior to the adoption of SFAS 123(R) –

Prior to the adoption of SFAS 123(R), we provided the disclosures required under SFAS 123. We did not recognize stock option-based compensation cost in our statement of operations for the periods prior to the adoption of SFAS 123(R), as all options granted had an exercise price equal to the fair value of our common stock on the date of grant. The following table presents the effect on net income available to common shareholders and earnings per share as if we had applied the fair value recognition provisions of SFAS 123 (in millions, except per share data):


	Three Months			Six Months
	Ended June 30,			Ended June 30,
	2005			2005
Net income available to common shareholders, as reported	$	39.3		$	56.3
Add: Stock-based compensation expense included in reported net income available to common shareholders, net of tax		1.4			2.8
Less: Total stock-based employee compensation expense determined under fair value based method, net of tax		(2.5	)		(5.1	)

Net income available to common shareholders, pro forma	$	38.2		$	54.0


Basic earnings per share: As reported	$	0.12		$	0.17
Pro forma		0.12			0.17

Diluted earnings per share: As reported	$	0.12		$	0.17
Pro forma		0.11			0.16

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with SFAS 123, the fair value of each option grant was estimated as of the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:


	Three Months			Six Months
	Ended June 30,			Ended June 30,
	2005			2005
Risk free interest rate		3.2	%		3.2	%
Expected life (in years)		6.0			6.0
Dividend rate		0.0	%		0.0	%
Expected volatility		53.3	%		53.6	%

Adoption of SFAS 123(R) –

We elected to adopt the modified prospective transition method as provided by SFAS 123(R). Under this method, we are required to recognize compensation expense for all awards granted after the date of adoption and for all the unvested portion of previously granted awards that remained outstanding at the date of adoption. Accordingly, financial statement amounts for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). The effect of recording stock-based compensation expense for the three and six months ended June 30, 2006 was as follows (in millions, except per share data):


	Three Months		Six Months
	Ended June 30,		Ended June 30,
	2006		2006
Stock-based compensation expense by type of award⁽¹⁾:
Stock options	$	2.1	$	3.7
Restricted stock awards ⁽²⁾		1.8		3.6

Total stock-based compensation expense	$	3.9	$	7.3
Tax effect on stock-based compensation expense		1.3		2.6

Net effect on net income available to common shareholders	$	2.6	$	4.7

Effect on earnings per share:
Basic	$	0.01	$	0.01
Diluted		0.01		0.01


⁽¹⁾		Included in selling, general and administrative expenses.

⁽²⁾		Stock-based compensation expense related to restricted stock awards was recorded under the provisions of APB 25.

Employee stock options –

In February 2006, the Board amended and restated the 1991 Employee Stock Plan to create the 2006 Incentive Stock Plan (2006 Plan). Our stockholders approved the 2006 Plan in May 2006. The 2006 Plan, the Amended and Restated 1993 Incentive Stock Plan (1993 Plan) and the Amended and Restated 1994 Incentive Stock Plan (1994 Plan) (collectively the Employee Plans), provide for the grant of non-qualified stock options, incentive stock options, shares of restricted stock, shares of phantom stock and stock bonuses. The 2006 Plan also provides for the grant of restricted stock units, stock appreciation rights, performance awards, dividend equivalents, cash awards, or other stock-based awards. Options granted under the Employee Plans typically vest over three to five years and expire ten years from their grant date. No further awards may be granted under the 1993 Plan and 1994 Plan. At June 30, 2006, there were approximately 35.0 million shares of common stock available for award under the 2006 Plan.

During the six months ended June 30, 2006, Allied granted 0.6 million stock options, all in the first quarter, with an estimated total grant-date fair value of $2.5 million. Of this amount, we estimated that the stock-based compensation for the awards granted during the six months ended June 30, 2006 not expected to vest was $0.1 million. All options have no intrinsic value at date of grant. The weighted average fair value of options granted during the six months ended June 30, 2006 was $4.35 per share.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the three and six months ended June 30, 2006, we recorded stock-based compensation related to stock options of $2.1 million and $3.7 million or $1.2 million and $2.2 million, net of tax, respectively, for all unvested options granted prior to and after the adoption of SFAS 123(R). At June 30, 2006, the deferred stock-based compensation balance, net of estimated forfeitures, related to stock options was $16.4 million and is expected to be recognized over an estimated weighted average amortization period of 3.6 years.

The total intrinsic value of stock options exercised during the three and six months ended June 30, 2006 was $1.5 million and $1.9 million, respectively. The weighted average grant date fair value of stock options vested during the three months and six months ended June 30, 2006 was $2.3 million and $4.4 million, respectively. Total cash received from employee stock option exercises during the three and six months ended June 30, 2006 was $7.7 million and $8.8 million, respectively. The income tax benefits from stock option exercises totaled approximately $0.6 million and $0.7 million, respectively, for the three and six months ended June 30, 2006.

Non-employee director stock awards –

We provide restricted stock awards (or, at the discretion of the Management Development/ Compensation Committee of the Board of Directors, restricted stock units or stock options) to non-employee members of the Board of Directors under our 2005 Non-Employee Director Equity Compensation Plan (the Director Plan). The maximum number of shares to be granted under the Director Plan is 2.75 million common shares, of which approximately 1.3 million was available for issuance at June 30, 2006. Stock awards granted under the Director Plan generally vest over a period of one to three years and expire ten years from the grant date. Restricted stock awards cannot be sold or transferred and are subject to forfeiture until they are fully vested.

During the three and six months ended June 30, 2006, Allied granted non-employee directors approximately 46,000 shares of restricted stock with an estimated total grant-date fair value of $0.6 million and weighted average fair value of $12.04 per share for both the three and six months ended June 30, 2006.

During the three and six months ended June 30, 2006, stock-based compensation related to non-employee directors’ awards was $0.1 million and $0.2 million, net of tax, respectively. During the six months ended June 30, 2006, approximately 14,000 shares were forfeited, all in the first quarter. Approximately 49,000 shares vested during the six months ended June 30, 2006, all in the second quarter. At June 30, 2006, the deferred stock-based compensation balance related to these awards was $0.5 million and is expected to be recognized over an estimated weighted average amortization period of one year.

A summary of our stock option awards, including those granted to non-employee directors, for the three months ended June 30, 2006, is as follows:


	Number			Weighted		Weighted Average		Aggregate
	of			Average		Remaining		Intrinsic
	Shares			Exercise		Contractual Term		Value
	(in millions)			Price		(years)		(in millions)⁽¹⁾
Outstanding, March 31, 2006		19.8		$	11.50		5.8	$	23.7
Granted		—			—				—
Exercised		(0.8	)		9.63				(1.5	)
Forfeited or expired		(0.0	)		10.85				(0.1	)

Outstanding, June 30, 2006		19.0			11.59		5.7	$	22.1

Exercisable, June 30, 2006		14.1			12.46		4.6	$	10.2


⁽¹⁾		Based on our closing common stock price of $11.36 at June 30, 2006.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of our non-vested options at June 30, 2006 and changes during the three months ended June 30, 2006 is as follows:


	Number
	of			Weighted
	Shares			Average Grant
	(in millions)			Date Fair Value
Non-vested balance at March 31, 2006		5.5		$	4.62
Granted		—			—
Vested		(0.5	)		4.51
Forfeited		(0.1	)		4.94

Non-vested balance at June 30, 2006		4.9			4.63

Valuation assumptions –

In connection with the adoption of SFAS 123(R), we assessed our valuation technique and related assumptions. Consistent with the provisions of SFAS 123(R), Staff Accounting Bulletin No. 107 (SAB 107) and our prior period pro forma disclosures, we estimated the fair value of stock options on the date of grant using a Black-Scholes option valuation model that uses the assumptions in the following table. The fair value of each option grant is recognized using the straight-line attribution approach.


	Three Months Ended			Six Months Ended
	June 30, 2006			June 30, 2006
Risk free interest rate		3.8	%		3.8	%
Expected life (in years)		6.7			6.7
Dividend rate		0.0	%		0.0	%
Expected volatility		45.7	%		45.9	%

The risk-free interest rate is based on a zero-coupon U.S. Treasury bill rate on the date of grant with the maturity date approximately equal to the expected life at the grant date. The expected life of the options is determined using the simplified method as provided by SAB 107 for “plain vanilla” options. Allied has not issued any dividends on common stock and is currently restricted from paying common stock dividends under our 2005 Credit Facility. Based on this, the dividend rate is assumed to be zero. The Company derives its expected volatility based on a combination of the implied volatility of its traded options and daily historical volatility of its stock price. Prior to the adoption of SFAS 123(R), the Company used historical volatility of its stock price for its pro forma disclosures.

Restricted stock awards –

During 2000, our Management Development/Compensation Committee approved grants of approximately 7.0 million shares of restricted stock, with a weighted average grant-date fair value of $6.05, to key members of management under the Performance Accelerated Restricted Stock Agreement (PARSAP). Under the terms of the PARSAP, an award becomes partially vested after 4 years (1/7^th at year 4 and 1/7^th each year thereafter until fully vested at year 10). Generally, if the individual’s employment is terminated prior to vesting, the unvested shares are forfeited.

During 2005 and 2004, the Management Development/Compensation Committee approved grants of approximately 1.1 million and 0.2 million restricted stock units with a weighted average grant-date fair value of $8.83 and $13.38, respectively. These restricted stock units cannot be sold or transferred and are subject to forfeiture until they are fully vested. The restricted stock units vest over a period of three to five years, after which time they are automatically converted into shares of Allied’s common stock unless a participant has elected to defer the settlement of shares. Also during 2005, Allied granted 100,000 shares of restricted stock to its Chief Executive Officer. On May 27, 2006, 10,000 of those shares vested. Beginning in June 2006, another 40,000 began vesting at a rate of 833 per month. The remaining 50,000 will vest solely based on achieving certain performance targets over a period of not more than seven years beginning on January 1, 2006.

During six months ended June 30, 2006, Allied granted approximately 0.2 million restricted stock units with an estimated total grant-date fair value of $1.5 million, all in the first quarter. Of these amounts,

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

we estimated the stock-based compensation for the awards granted during the six months ended June 30, 2006 not expected to vest was immaterial. The weighted average fair value of restricted stock units granted during the six months ended June 30, 2006 was $8.94 per share.

During the three and six months ended June 30, 2006, we recorded stock-based compensation related to restricted stock awards to employees of $1.7 million and $3.4 million, or $1.3 million and $2.3 million net of tax, respectively. During the three and six months ended June 30, 2006, approximately 0.2 million shares and 0.2 million shares, respectively, were forfeited and approximately 0.8 million shares and 1.0 million shares, respectively, vested. At June 30, 2006, the deferred stock-based compensation balance related to non-vested restricted stock awards was $14.7 million and is expected to be recognized over an estimated weighted average amortization period of 3.7 years.

The weighted average grant date fair value of restricted stock awards vested during the three and six months ended June 30, 2006 was $5.0 million and $6.7 million, respectively. The income tax benefits from restricted stock awards were approximately $1.5 million for both the three and six months ended June 30, 2006.

A summary of our restricted stock awards, including those granted to non-employee directors, for the three months ended June 30, 2006, is as follows:


	Number			Weighted		Weighted Average		Aggregate
	of			Average		Remaining		Intrinsic
	Shares			Grant Date		Contractual Term		Value
	(in millions)			Fair Value		(years)		(in millions) ⁽¹⁾
Outstanding, March 31, 2006		4.9		$	7.06		3.9	$	55.0
Granted		0.0			12.04				0.5
Vested		(0.8	)		6.02				(9.5	)
Forfeited		(0.2	)		6.63				(2.1	)

Outstanding, June 30, 2006		3.9			7.37		3.7	$	43.9


⁽¹⁾		Based on our closing common stock price of $11.36 at June 30, 2006.

9. Net Income Per Common Share

Net income per common share is calculated by dividing net income less dividend requirements on preferred stock, by the weighted average number of common shares and common share equivalents outstanding during each period. The computation of basic earnings per share and diluted earnings per share is as follows (in millions, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Basic earnings per share computation:
Income from continuing operations	$	37.6		$	53.0		$	78.8		$	77.7
Less: Dividends on preferred stock		(9.4	)		(14.7	)		(24.1	)		(22.4	)

Income from continuing operations available to common shareholders	$	28.2		$	38.3		$	54.7		$	55.3


Weighted average common shares outstanding		364.1			329.1			347.2			324.2

Basic earnings per share from continuing operations	$	0.08		$	0.12		$	0.16		$	0.17


Diluted earnings per share computation:
Income from continuing operations	$	37.6		$	53.0		$	78.8		$	77.7
Less: Dividends on preferred stock		(9.4	)		(14.7	)		(24.1	)		(22.4	)

Income from continuing operations available to common shareholders	$	28.2		$	38.3		$	54.7		$	55.3


Weighted average common shares outstanding		364.1			329.1			347.2			324.2
Dilutive effect of stock, stock options and contingently issuable shares		3.2			3.1			2.7			3.4

Weighted average common and common equivalent shares outstanding		367.3			332.2			349.9			327.6

Diluted earnings per share from continuing operations	$	0.08		$	0.12		$	0.16		$	0.17

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In calculating earnings per share, we have not assumed conversion of the following securities into common shares since the effects of those conversions would not be dilutive to earnings per share (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Stock options		7.0		17.6		8.7		17.6
Series C preferred stock		—		41.6		34.1		41.6
Series D preferred stock		60.8		74.5		60.8		46.5
Senior subordinated convertible debentures		11.3		11.3		11.3		11.3

10. Commitments and Contingencies

Litigation –

We are subject to extensive and evolving laws and regulations and have implemented our own environmental safeguards to respond to regulatory requirements. In the normal course of conducting our operations, we may become involved in certain legal and administrative proceedings. Some of these actions may result in fines, penalties or judgments against us, which may have an impact on earnings for a particular period. We accrue for legal matters and regulatory compliance contingencies when such costs are probable and can be reasonably estimated. Our selling, general and administrative expenses in the second quarter of 2005 included a reversal of $16.3 million related to accruals for legal matters, primarily established at the time of the BFI acquisition. We do not believe that matters in process at June 30, 2006 will have a material adverse effect on our consolidated liquidity, financial position or results of operations. See Tax contingencies below for a discussion of our outstanding tax dispute with the Internal Revenue Service (IRS).

A consolidated amended class action complaint was filed against us and five of our current and former officers on March 31, 2005 in the U.S. District Court for the District of Arizona, consolidating three lawsuits previously filed on August 9, 2004, August 27, 2004 and September 30, 2004. The amended complaint asserted claims against all defendants under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and claims against the officers under Section 20(a) of the Securities Exchange Act. The complaint alleged that from February 10, 2004 to September 13, 2004, the defendants caused false and misleading statements to be issued in our public filings and public statements regarding our anticipated results for fiscal year 2004. The lawsuit sought an unspecified amount of damages. We filed a motion to dismiss the complaint on May 2, 2005. On December 15, 2005, the U.S. District Court for the District of Arizona granted our motion and dismissed the lawsuit with prejudice. Plaintiffs have appealed the dismissal to the 9^th Circuit Court of Appeals. We do not believe the outcome of this matter will have a material adverse effect on our consolidated results of operations.

In the normal course of conducting our landfill operations, we are involved in legal and administrative proceedings relating to the process of obtaining and defending the permits that allow us to operate our landfills.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

lawsuit effectively revoked the expansion permit that was granted by the TCEQ in 2001, which would require us to operate the landfill according to a prior permit granted in 1988. On appeal, the Texas Court of Appeals stayed the trial court’s order, allowing us to continue to place waste in the landfill in accordance with the expansion permit granted in 2001. In the administrative expansion proceeding on October 28, 2005, the Texas Supreme Court denied review of the neighboring parties’ appeal of the expansion permit, thereby confirming that the TCEQ properly granted our expansion permit.

In April 2006, the Texas Court of Appeals ruled on the civil litigation. The court dissolved the permanent injunction which would have effectively prevented us from operating the landfill under the expansion permit, but also required us to pay a damage award of approximately $2 million plus attorney fees and interest. On April 27, 2006, all parties filed motions for rehearing, which were denied by the Texas Court of Appeals. We are evaluating our options regarding the April 2006 opinion, including whether to file an appeal to the Texas Supreme Court.

Employment agreements –

We have entered into employment agreements with certain of our executive officers for periods up to two years. Under these agreements, in some circumstances, including a change in control as defined in the employment agreements, we may be obligated to pay an amount up to three times the sum of the executive’s base salary and targeted bonus. Also, in the event of a change in control, our executive officers may be entitled to a gross-up of certain excise taxes incurred, provided that the fair market value of our shares is at or greater than a specified price as of the date of the change in control. If an executive officer’s employment is terminated under certain circumstances, the executive may be entitled to continued medical, dental and/or vision coverage, continued vesting in outstanding awards of restricted stock and restricted stock units, continued vesting and exercisability of the executive’s stock options, and continued coverage under our directors’ and officers’ liability insurance, among other matters. In addition, our executive officers may be entitled to retirement payments equal to up to 60% of their base salary, paid over a period of 10 years under our supplemental executive retirement plan.

We expect that certain modifications may be required to be made to the employment agreements, as well as to related compensation plans, programs, and arrangements, to comply with the provisions of Section 409A of the Internal Revenue Code of 1986, as amended. The IRS has not released final guidance on Section 409A, and it is not certain when such guidance will be released or what modifications will be required. Under proposed regulations released by the IRS in September 2005, however, our company is required to operate its employment and compensation agreements, plans, programs and arrangements in reasonable good faith compliance with Section 409A and the guidance issued thereunder during 2005 and 2006. Under the proposed regulations, we generally will have until December 31, 2006 to amend documents to comply with Section 409A.

Financial assurances —

We are required to provide financial assurances to governmental agencies and a variety of other entities under applicable environmental regulations relating to our landfill operations for capping, closure and post-closure costs and/or related to performance under certain collection, landfill and transfer station contracts. We satisfy the financial assurance requirements by providing performance bonds, letters of credit, insurance policies or trust deposits. Additionally, we are required to provide financial assurances for our insurance program and collateral required for certain performance obligations.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At June 30, 2006, we had the following financial assurance instruments and collateral in place (in millions):


	Landfill
	Closure/		Contract		Risk/Casualty		Collateral for
	Post-Closure		Performance		Insurance		Obligations		Total
Insurance policies	$	646.0	$	—	$	—	$	—	$	646.0
Surety bonds		557.6		503.7		—		—		1,061.3
Trust deposits		81.9		—		—		—		81.9
Letters of credit ⁽¹⁾		469.4		46.2		282.0		108.5		906.1


Total	$	1,754.9	$	549.9	$	282.0	$	108.5	$	2,695.3


⁽¹⁾		At June 30, 2006, these amounts were issued under the 2005 Revolver and the Institutional Letter of Credit Facility under our 2005 Credit Facility.

These financial instruments are issued in the normal course of business and are not debt of the Company. Since we currently have no liability for these financial assurance instruments, they are not reflected in the accompanying consolidated balance sheets. However, we have recorded capping, closure and post-closure liabilities and self-insurance as the liabilities are incurred under GAAP. The underlying obligations of the financial assurance instruments would be valued and recorded in the consolidated balance sheets if it is probable that we would be unable to perform our obligations under the financial assurance contracts. We do not expect this to occur.

Off-balance sheet arrangements —

We have no off-balance sheet debt or similar obligations, other than operating leases and financial assurance instruments discussed above, which are not classified as 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.

Guarantees —

We enter into contracts in the normal course of business that include indemnification clauses. Indemnifications relating to known liabilities are recorded in the consolidated financial statements based on our best estimate of required future payments. Certain of these indemnifications relate to contingent events or occurrences, such as the imposition of additional taxes due to a change in the tax law or adverse interpretation of the tax law, and indemnifications made in divestiture agreements where we indemnify the buyer for liabilities that relate to our activities prior to the divestiture and that may become known in the future. As of June 30, 2006, we estimated the contingent obligations associated with these indemnifications to be insignificant.

We have entered into agreements to guarantee property owners the value of certain property that is adjacent to certain landfills. These agreements have varying terms over varying periods. Prior to December 31, 2002, liabilities associated with these guarantees have been accounted for in accordance with SFAS No. 5, Accounting for Contingencies, in the consolidated financial statements. Agreements modified or entered into subsequent to December 31, 2002 are accounted for in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others and were not significant as of June 30, 2006 and 2005.

Tax contingencies –

We are subject to various federal, state and local tax rules and regulations. Although these rules are extensive and often complex, we are required to interpret and apply them to our transactions. Positions taken in tax filings are subject to challenge by taxing authorities. Accordingly, we may have exposure for additional tax liabilities if, upon audit, any positions taken are disallowed by the taxing authorities.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We are currently under examination or administrative review by various state and federal taxing authorities for certain tax years, including federal income tax audits for calendar years 1998 through 2003. A federal income tax audit for BFI’s tax years ended September 30, 1996 through July 30, 1999 is complete with the exception of the matter discussed below.

Prior to our acquisition of BFI on July 30, 1999, BFI operating companies, as part of a risk management initiative to effectively manage and reduce costs associated with certain liabilities, contributed assets and existing environmental and self-insurance liabilities to six fully consolidated BFI risk management companies (RMCs) in exchange for stock representing a minority ownership interest in the RMCs. Subsequently, the BFI operating companies sold that stock in the RMCs to third parties at fair market value which resulted in a capital loss of approximately $900 million for tax purposes, calculated as the excess of the tax basis of the stock over the cash proceeds received.

On January 18, 2001, the IRS designated this type of transaction and other similar transactions as a “potentially abusive tax shelter” under IRS regulations. During 2002, the IRS proposed the disallowance of all of this capital loss. The primary argument advanced by the IRS for disallowing the capital loss was that the tax basis of the stock of the RMCs received by the BFI operating companies was required to be reduced by the amount of liabilities assumed by the RMCs even though such liabilities were contingent and, therefore, not liabilities recognized for tax purposes. Under the IRS view, there was no capital loss on the sale of the stock since the tax basis of the stock should have approximately equaled the proceeds received. We protested the disallowance to the Appeals Office of the IRS in August 2002.

In April 2005, the Appeals Office of the IRS upheld the disallowance of the capital loss deduction. As a result, in late April 2005 we paid a deficiency to the IRS of $23 million for BFI tax years prior to the acquisition. In July 2005, we filed a suit for refund in the United States Court of Federal Claims. Based on the complexity of the case, we estimate it will likely take a number of years to fully try the case and obtain a decision. Furthermore, depending on the circumstances at that time, the losing party may appeal the decision to the Court of Appeals for the Federal Circuit. A settlement, however, could occur at any time during the litigation process.

We also received a notification from the IRS assessing a penalty of $5.4 million and interest of $12.8 million relating to the asserted $23 million deficiency. In December 2005, the IRS agreed to suspend the collection of this penalty and interest until a decision is rendered on our suit for refund.

The remaining tax years affected by the capital loss issue are currently being audited or reviewed by the IRS. A decision by the United States Court of Federal Claims on the litigation should resolve the issue in these years as well. If we were to win the case, the initial payments would be refunded to us, subject to an appeal. If we were to lose the case, the deficiency associated with the remaining tax years would be due, subject to an appeal. If we were to settle the case, the settlement would likely cover all affected tax years and any resulting deficiency would become due in the ordinary course of the audits. A deficiency payment would adversely impact our cash flow in the period the payment was made.

On July 12, 2006, the United States Court of Appeals for the Federal Circuit reversed a decision by the United States Court of Federal Claims favorable to the taxpayer in Coltec v. United States, — F.3d — (Fed. Cir. 2006), in a case involving a similar transaction. The Federal Circuit affirmed the taxpayer’s position regarding the technical interpretation of the relevant tax code provisions. However, although we continue to believe that our suit for refund in the Court of Federal Claims is factually distinguishable from Coltec, the legal bases upon which the decision was reached by the Federal Circuit may impact our litigation.

If capital loss deduction is fully disallowed, we estimate it could have a potential federal and state cash tax impact (excluding penalties) of up to $310 million, of which approximately $33 million has been paid, plus accrued interest through June 30, 2006 of approximately $117 million ($70 million net of tax benefit). We are evaluating any potential impact of the Coltec decision on the possibility of penalties ultimately being paid. If the capital loss deduction is disallowed, the IRS could ultimately impose penalties and interest on those penalties for any amount up to approximately $130 million, after tax.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The potential tax and interest (but not penalties or penalty-related interest) impact of a full disallowance has been fully reserved on our consolidated balance sheet. With regard to tax and accrued interest through June 30, 2006, a disallowance would not materially adversely affect our consolidated results of operations. The periodic accrual of additional interest charged through the time at which this matter is resolved will continue to affect our consolidated results of operations. In addition, the successful assertion by the IRS of penalties could have a material adverse impact on our consolidated liquidity, financial position and results of operations.

11. Segment Reporting

Our revenues are derived from one industry segment, which includes the collection, transfer, recycling and disposal of non-hazardous solid waste. We evaluate performance based on several factors, of which the primary financial measure is operating income before depreciation and amortization. Operating income before depreciation and amortization is not a measure of operating income, operating performance or liquidity under GAAP and may not be comparable to similarly titled measures reported by other companies. Our management uses operating income before depreciation and amortization in the evaluation of field operating performance as it represents operational cash flows and is a profit measure of components that are within the control of the operating units. The accounting policies of the business segments are the same as those described in the Organization and Summary of Significant Accounting Policies (See Note 1).

We manage our operations through five geographic operating segments: Midwestern, Northeastern, Southeastern, Southwestern and Western. Each region is responsible for managing several vertically integrated operations, which are comprised of districts. Results by segment have been restated for previous periods to reflect the changes in organizational structure in the fourth quarter of 2005 and refinements to that organizational structure completed during the second quarter ended June 30, 2006.

The tables below reflect information relating to our geographic operating segments (in millions):

Revenues:


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Midwestern	$	319.6	$	308.9	$	608.7	$	586.1
Northeastern		322.3		324.4		618.6		613.2
Southeastern		270.0		248.5		528.2		484.7
Southwestern		252.6		233.8		493.6		452.5
Western		338.0		313.1		660.8		617.3

Total reportable segments		1,502.5		1,428.7		2,909.9		2,753.8
Other ⁽¹⁾		38.1		19.9		69.4		36.1

Total per financial statements	$	1,540.6	$	1,448.6	$	2,979.3	$	2,789.9


⁽¹⁾		Amounts relate primarily to our subsidiaries that provide services throughout the organization and not on a regional basis.

Operating income before depreciation and amortization: ⁽¹⁾


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Midwestern	$	96.2	$	89.1	$	174.3	$	169.2
Northeastern		84.3		85.9		156.6		157.1
Southeastern		80.5		70.0		153.2		139.9
Southwestern		73.5		65.7		143.8		129.9
Western		109.7		103.4		209.0		201.4


⁽¹⁾		See the following table for the reconciliation to income before income taxes and minority interest per the consolidated statements of operations.

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The reconciliation of reportable segment primary measure of profitability to income before income taxes and minority interest is as follows (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Total operating income before depreciation and amortization for reportable segments	$	444.2		$	414.1		$	836.9		$	797.5
Other⁽¹⁾		(43.9	)		(25.2	)		(86.6	)		(72.1	)
Depreciation and amortization		(147.5	)		(141.0	)		(288.9	)		(274.3	)
Interest expense and other		(173.8	)		(126.6	)		(306.5	)		(330.2	)

Income before taxes and minority interest	$	79.0		$	121.3		$	154.9		$	120.9


⁽¹⁾		Amounts relate primarily to our subsidiaries that provide services throughout the organization and not on a regional basis, including national accounts where work has been subcontracted.

Amounts of our total revenue attributable to services provided are as follows (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005⁽¹⁾		2006		2005⁽¹⁾
Collection
Residential	$	301.8	$	300.2	$	597.7	$	589.4
Commercial		373.4		345.6		737.6		682.2
Roll-off⁽²⁾		345.9		317.8		662.8		601.2
Recycling		52.9		50.8		99.8		99.6

Total Collection		1,074.0		1,014.4		2,097.9		1,972.4

Disposal
Landfill		223.2		209.1		421.6		389.3
Transfer		111.3		109.7		207.8		206.7

Total Disposal		334.5		318.8		629.4		596.0

Recycling — Commodity		55.4		59.5		105.8		116.2

Other⁽³⁾		76.7		55.9		146.2		105.3


Total Revenues	$	1,540.6	$	1,448.6	$	2,979.3	$	2,789.9


⁽¹⁾		The revenue mix for 2005 reflects the reclassification of transportation revenue out of collection, disposal and recycling-commodity revenue to other revenue.

⁽²⁾		Consists of revenue generated from commercial, industrial and residential customers from waste collected in roll-off containers that are loaded onto collection vehicles.

⁽³⁾		Consists primarily of revenue from national accounts where the work has been subcontracted, revenue generated from waste transported via railway and revenue from liquid waste.

There were no revenues or operating income before depreciation and amortization reported for discontinued operations for the three and six months ended June 30, 2006. For the three and six months ended June 30, 2005, there were no revenues reported for discontinued operations and the operating income before depreciation and amortization reported as discontinued operations by geographic region was as follows (in millions):

Operating income before depreciation and amortization:


	Three Months			Six Months
	Ended			Ended
	June 30, 2005			June 30, 2005
Northeastern	$	(0.1	)	$	(0.1	)
Southeastern		(1.6	)		(1.6	)

Total reportable segments	$	(1.7	)	$	(1.7	)

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Condensed Consolidating Financial Statements

Most of our outstanding debt is issued by Allied NA, our wholly-owned subsidiary, or BFI. The 8.50% senior notes due 2008, the 8.875% senior notes due 2008, the 6.50% senior notes due 2010, the 5.75% senior notes due 2011, the 6.375% senior notes due 2011, the 9.25% senior notes due 2012, the 7.875% senior notes due 2013, the 6.125% senior notes due 2014, the 7.25% senior notes due 2015, the 7.125% senior notes due 2016 and the 7.375% senior unsecured notes due 2014 issued by Allied NA, and certain other debt issued by BFI and the 2005 Credit Facility are guaranteed by us. The 6.375% senior notes due 2008, the 9.25% debentures due 2021 and the 7.40% debentures due 2035 issued by BFI are guaranteed by Allied NA and Allied. All guarantees (including those of the guarantor subsidiaries) are full, unconditional and joint and several of Allied NA’s and BFI’s debt. Presented below are Condensed Consolidating Balance Sheets as of June 30, 2006 and December 31, 2005 and the related Condensed Consolidating Statements of Operations and Cash Flows for the three and six months ended June 30, 2006 and 2005 of Allied Waste Industries, Inc. (Parent), Allied NA (Issuer), the guarantor subsidiaries (Guarantors) and the subsidiaries that are not guarantors (Non-Guarantors).

CONDENSED CONSOLIDATING BALANCE SHEETS
(in millions)


	June 30, 2006
									Non-
	Parent			Issuer		Guarantors			Guarantors			Eliminations			Consolidated
ASSETS
Current Assets —
Cash and cash equivalents	$	—		$	—	$	44.1		$	3.5		$	—		$	47.6
Accounts receivable, net		—			—		361.0			367.0			—			728.0
Prepaid and other current assets		—			0.4		41.2			126.0			(76.9	)		90.7
Deferred income taxes		—			—		119.1			9.5			—			128.6

Total current assets		—			0.4		565.4			506.0			(76.9	)		994.9
Property and equipment, net		—			0.1		4,367.5			26.1			—			4,393.7
Goodwill		—			—		8,107.4			72.4			—			8,179.8
Investment in subsidiaries		2,294.2			14,684.2		420.1			—			(17,398.5	)		—
Other assets, net		5.7			88.8		7.8			1,186.2			(1,046.0	)		242.5

Total assets	$	2,299.9		$	14,773.5	$	13,468.2		$	1,790.7		$	(18,521.4	)	$	13,810.9


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities —
Current portion of long-term debt	$	—		$	—	$	7.9		$	215.1		$	—		$	223.0
Accounts payable		—			—		476.7			4.4			—			481.1
Accrued closure, post-closure and environmental costs		—			—		14.6			75.1			—			89.7
Accrued interest		2.1			94.8		96.4			1.3			(76.9	)		117.7
Other accrued liabilities		63.2			0.8		62.7			217.0			—			343.7
Unearned revenue		—			—		234.4			6.7			—			241.1

Total current liabilities		65.3			95.6		892.7			519.6			(76.9	)		1,496.3
Long-term debt, less current portion		230.0			5,887.6		841.5			—			—			6,959.1
Deferred income taxes		—			—		404.8			(9.7	)		—			395.1
Accrued closure, post-closure and environmental costs		—			—		366.7			442.3			—			809.0
Due to (from) parent		(1,522.8	)		6,531.6		(5,004.4	)		(4.4	)		—			—
Other long-term obligations		19.1			—		1,608.1			62.9			(1,047.0	)		643.1
Stockholders’ equity		3,508.3			2,258.7		14,358.8			780.0			(17,397.5	)		3,508.3

Total liabilities and stockholders’ equity	$	2,299.9		$	14,773.5	$	13,468.2		$	1,790.7		$	(18,521.4	)	$	13,810.9

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEETS
(in millions)


	December 31, 2005
									Non-
	Parent			Issuer		Guarantors			Guarantors			Eliminations			Consolidated
ASSETS
Current Assets —
Cash and cash equivalents	$	—		$	—	$	53.1		$	3.0		$	—		$	56.1
Accounts receivable, net		—			—		302.6			387.9			—			690.5
Prepaid and other current assets		—			0.1		52.2			67.4			(39.2	)		80.5
Deferred income taxes		—			—		87.4			5.9			—			93.3

Total current assets		—			0.1		495.3			464.2			(39.2	)		920.4
Property and equipment, net		—			1.4		4,244.8			27.3			—			4,273.5
Goodwill		—			—		8,111.8			72.4			—			8,184.2
Investment in subsidiaries		2,242.9			14,469.2		396.5			—			(17,108.6	)		—
Other assets, net		5.8			89.0		9.5			1,202.0			(1,058.8	)		247.5

Total assets	$	2,248.7		$	14,559.7	$	13,257.9		$	1,765.9		$	(18,206.6	)	$	13,625.6


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities —
Current portion of long-term debt	$	—		$	—	$	8.5		$	230.0		$	—		$	238.5
Accounts payable		—			0.1		559.3			5.4			—			564.8
Accrued closure, post-closure and environmental costs		—			—		20.7			75.1			—			95.8
Accrued interest		2.1			93.6		58.8			1.2			(39.2	)		116.5
Other accrued liabilities		90.2			9.3		7.6			223.4			—			330.5
Unearned revenue		—			—		222.9			6.5			—			229.4

Total current liabilities		92.3			103.0		877.8			541.6			(39.2	)		1,575.5
Long-term debt, less current portion		230.0			5,779.8		843.4			—			—			6,853.2
Deferred income taxes		—			—		315.5			(10.0	)		—			305.5
Accrued closure, post-closure and environmental costs		—			—		348.1			448.7			—			796.8
Due to (from) parent		(1,531.6	)		6,457.5		(4,893.6	)		(32.3	)		—			—
Other long-term obligations		18.6			—		1,624.1			72.3			(1,059.8	)		655.2
Stockholders’ equity		3,439.4			2,219.4		14,142.6			745.6			(17,107.6	)		3,439.4

Total liabilities and stockholders’ equity	$	2,248.7		$	14,559.7	$	13,257.9		$	1,765.9		$	(18,206.6	)	$	13,625.6

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(in millions)


	Three Months Ended June 30, 2006
										Non-
	Parent			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	—		$	1,482.8		$	57.8		$	—		$	1,540.6
Cost of operations		—			0.2			957.2			34.5			—			991.9
Selling, general and administrative expenses		6.9			—			138.8			2.7			—			148.4
Depreciation and amortization		—			0.2			145.0			2.3			—			147.5

Operating (loss) income		(6.9	)		(0.4	)		241.8			18.3			—			252.8
Equity in earnings of subsidiaries		(21.3	)		(119.4	)		(10.9	)		—			151.6			—
Interest expense (income) and other		2.7			150.6			21.0			(0.5	)		—			173.8
Intercompany interest (income) expense		(35.1	)		21.7			32.6			(19.2	)		—			—
Management fees		(2.0	)		—			1.6			0.4			—			—

Income (loss) before income taxes		48.8			(53.3	)		197.5			37.6			(151.6	)		79.0
Income tax expense (benefit)		11.2			(69.0	)		84.3			14.7			—			41.2
Minority interest		—			—			—			0.2			—			0.2

Net income		37.6			15.7			113.2			22.7			(151.6	)		37.6
Dividends on preferred stock		(9.4	)		—			—			—			—			(9.4	)

Net income available to common shareholders	$	28.2		$	15.7		$	113.2		$	22.7		$	(151.6	)	$	28.2


	Six Months Ended June 30, 2006
										Non-
	Parent			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	—		$	2,866.5		$	112.8		$	—		$	2,979.3
Cost of operations		—			—			1,850.7			84.5			—			1,935.2
Selling, general and administrative expenses		12.9			—			273.9			7.0			—			293.8
Depreciation and amortization		—			0.7			283.8			4.4			—			288.9

Operating (loss) income		(12.9	)		(0.7	)		458.1			16.9			—			461.4
Equity in earnings of subsidiaries		(46.3	)		(226.3	)		(17.2	)		—			289.8			—
Interest expense (income) and other		5.5			259.6			43.0			(1.6	)		—			306.5
Intercompany interest (income) expense		(69.3	)		51.3			56.6			(38.6	)		—			—
Management fees		(4.1	)		—			3.3			0.8			—			—

Income (loss) before income taxes		101.3			(85.3	)		372.4			56.3			(289.8	)		154.9
Income tax expense (benefit)		22.5			(124.6	)		156.3			22.1			—			76.3
Minority interest		—			—			—			(0.2	)		—			(0.2	)

Net income		78.8			39.3			216.1			34.4			(289.8	)		78.8
Dividends on preferred stock		(24.1	)		—			—			—			—			(24.1	)

Net income available to common shareholders	$	54.7		$	39.3		$	216.1		$	34.4		$	(289.8	)	$	54.7

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(in millions)


	Three Months Ended June 30, 2005
										Non-
	Parent			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	—		$	1,409.6		$	39.0		$	—		$	1,448.6
Cost of operations		—			—			886.9			55.8			—			942.7
Selling, general and administrative expenses		5.2			—			108.1			3.7			—			117.0
Depreciation and amortization		—			—			139.2			1.8			—			141.0

Operating (loss) income		(5.2	)		—			275.4			(22.3	)		—			247.9
Equity in earnings of subsidiaries		(38.2	)		(127.2	)		(6.1	)		—			171.5			—
Interest expense (income) and other		2.7			104.4			20.9			(1.4	)		—			126.6
Intercompany interest (income) expense		(32.9	)		27.4			23.4			(17.9	)		—			—
Management fees		(1.3	)		—			0.9			0.4			—			—

Income (loss) before income taxes		64.5			(4.6	)		236.3			(3.4	)		(171.5	)		121.3
Income tax expense (benefit)		10.5			(52.7	)		112.3			(0.8	)		—			69.3
Minority interest		—			—			—			(1.0	)		—			(1.0	)

Net income (loss) from continuing operations		54.0			48.1			124.0			(1.6	)		(171.5	)		53.0
Discontinued operations, net of tax		—			—			1.0			—			—			1.0

Net income (loss)		54.0			48.1			125.0			(1.6	)		(171.5	)		54.0
Dividends on preferred stock		(14.7	)		—			—			—			—			(14.7	)

Net income (loss) available to common shareholders	$	39.3		$	48.1		$	125.0		$	(1.6	)	$	(171.5	)	$	39.3


	Six Months Ended June 30, 2005
										Non-
	Parent			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
Revenues	$	—		$	—		$	2,694.4		$	95.5		$	—		$	2,789.9
Cost of operations		—			(0.4	)		1,714.6			103.4			—			1,817.6
Selling, general and administrative expenses		10.6			—			229.6			6.7			—			246.9
Depreciation and amortization		—			—			271.0			3.3			—			274.3

Operating (loss) income		(10.6	)		0.4			479.2			(17.9	)		—			451.1
Equity in earnings of subsidiaries		(54.1	)		(268.2	)		(12.4	)		—			334.7			—
Interest expense (income) and other		5.5			284.1			43.6			(3.0	)		—			330.2
Intercompany interest (income) expense		(55.6	)		47.6			45.0			(37.0	)		—			—
Management fees		(2.5	)		—			1.7			0.8			—			—

Income (loss) before income taxes		96.1			(63.1	)		401.3			21.3			(334.7	)		120.9
Income tax expense (benefit)		17.4			(132.5	)		150.1			8.9			—			43.9
Minority interest		—			—			—			(0.7	)		—			(0.7	)

Net income from continuing operations		78.7			69.4			251.2			13.1			(334.7	)		77.7
Discontinued operations, net of tax		—			—			1.0			—			—			1.0

Net income		78.7			69.4			252.2			13.1			(334.7	)		78.7
Dividends on preferred stock		(22.4	)		—			—			—			—			(22.4	)

Net income available to common shareholders	$	56.3		$	69.4		$	252.2		$	13.1		$	(334.7	)	$	56.3

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions)


	Six Months Ended June 30, 2006
										Non-
	Parent			Issuer			Guarantors			Guarantors			Eliminations		Consolidated
Cash (used for) provided by operating activities	$	(8.7	)	$	(258.6	)	$	610.2		$	24.9		$	—	$	367.8

Investing activities —
Proceeds from divestitures (cost of acquisitions), net of cash divested/acquired		—			—			2.8			—			—		2.8
Proceeds from sale of fixed assets		—			—			7.3			—			—		7.3
Capital expenditures, excluding acquisitions		—			—			(368.1	)		(3.7	)		—		(371.8	)
Capitalized interest		—			—			(8.2	)		—			—		(8.2	)
Change in deferred acquisition costs, notes receivable and other		—			—			1.5			—			—		1.5

Cash used for investing activities		—			—			(364.7	)		(3.7	)		—		(368.4	)


Financing activities —
Proceeds from long-term debt, net of issuance costs		—			1,200.7			—			22.4			—		1,223.1
Payments of long-term debt		—			(1,104.1	)		(5.7	)		(37.2	)		—		(1,147.0	)
Payments of preferred stock dividend		(29.4	)		—			—			—			—		(29.4	)
Net change in disbursement account		—			—			(63.3	)		—			—		(63.3	)
Net proceeds from sale of common stock, exercise of stock options and other		8.7			—			—			—			—		8.7
Intercompany between issuer and subsidiary		29.4			162.0			(185.5	)		(5.9	)		—		—

Cash provided by (used for) financing activities		8.7			258.6			(254.5	)		(20.7	)		—		(7.9	)


(Decrease) increase in cash and cash equivalents		—			—			(9.0	)		0.5			—		(8.5	)
Cash and cash equivalents, beginning of period		—			—			53.1			3.0			—		56.1

Cash and cash equivalents, end of period	$	—		$	—		$	44.1		$	3.5		$	—	$	47.6

ALLIED WASTE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions)


	Six Months Ended June 30, 2005
										Non-
	Parent			Issuer			Guarantors			Guarantors			Eliminations		Consolidated
Cash (used for) provided by operating activities from continuing operations	$	(100.9	)	$	(180.0	)	$	564.3		$	34.1		$	—	$	317.5

Investing activities —
Proceeds from divestitures (cost of acquisitions), net of cash divested/acquired		—			—			1.6			—			—		1.6
Proceeds from sale of fixed assets		—			—			7.2			—			—		7.2
Capital expenditures, excluding acquisitions		—			—			(277.1	)		(6.4	)		—		(283.5	)
Capitalized interest		—			—			(7.1	)		—			—		(7.1	)
Change in deferred acquisitions costs, notes receivable and other		—			—			1.1			—			—		1.1

Cash used for investing activities from continuing operations		—			—			(274.3	)		(6.4	)		—		(280.7	)


Financing activities —
Net proceeds from sale of Series D preferred stock		580.6			—			—			—			—		580.6
Proceeds from long-term debt, net of issuance costs		—			2,560.6			—			54.3			—		2,614.9
Payments of long-term debt		—			(3,074.8	)		(84.5	)		(54.0	)		—		(3,213.3	)
Payments of preferred stock dividend		(19.3	)		—			—			—			—		(19.3	)
Net change in disbursement account		—			—			(94.4	)		—			—		(94.4	)
Net proceeds from sale of common stock, exercise of stock options and other, net		96.0			—			—			—			—		96.0
Intercompany between issuer and subsidiary		(556.3	)		698.9			(119.5	)		(23.1	)		—		—

Cash provided by (used for) financing activities from continuing operations		101.0			184.7			(298.4	)		(22.8	)		—		(35.5	)


Cash provided by discontinued operations		—			—			0.7			—			—		0.7


Increase (decrease) in cash and cash equivalents		0.1			4.7			(7.7	)		4.9			—		2.0
Cash and cash equivalents, beginning of period		—			(0.3	)		66.7			1.6			—		68.0

Cash and cash equivalents, end of period	$	0.1		$	4.4		$	59.0		$	6.5		$	—	$	70.0

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Financial Statements and the notes thereto, included elsewhere herein. Please note that unless otherwise specifically indicated, discussion of our results relate to our continuing operations. This discussion may contain forward-looking statements that anticipate results based upon assumptions as to future events that may not prove to be accurate.

Executive Summary

We are the second largest non-hazardous solid waste management company in the United States, as measured by revenues. We provide non-hazardous solid waste collection, transfer, recycling and disposal services in 37 states and Puerto Rico, geographically identified as the Midwestern, Northeastern, Southeastern, Southwestern and Western regions.

Our business is characterized by a relatively stable customer base. Competition is driven by domestic economic and local demographic factors, as well as fluctuations in capacity utilization, in both the collection and landfill business. Customer service satisfaction levels industry-wide are very high since the collection customer has a very low tolerance for poor service.

Our revenues result primarily from fees charged to customers for waste collection, transfer, recycling and disposal services. We generally provide collection services under direct agreements with our customers or pursuant to contracts with municipalities. Commercial and municipal contract terms generally range from one to five years and commonly have renewal options. Our landfill operations include both company-owned landfills and landfills that we operate on behalf of municipalities and others.

We invest a significant amount of capital to support the ongoing operations of our landfill and collection business. Landfills are highly engineered, sophisticated facilities similar to civil works. Each year we invest capital at our 169 active landfills to ensure sufficient capacity to receive the waste volume we handle. In addition, we have approximately 13,200 collection vehicles and over 1.5 million containers to serve our collection customers. They endure rough conditions each day and must be routinely maintained and replaced. During the six months ended June 30, 2006, we invested $371.8 million of capital into the business (see Note 2, Property and Equipment, for detail by fixed asset category). In 2006, total capital expenditures are expected to be approximately $700 million.

Cash flows in our business are for the most part fairly predictable as a result of the nature of our customer base. This predictability helps us to determine our ability to service debt. Knowing this, we have incurred debt to acquire the assets we own and we have paid cash to acquire existing cash flow streams. This financial model should allow us over time to transfer the enterprise value of the company from debt holders to shareholders as we use our cash flow to repay debt. We continue to use cash flow from operations after capital expenditures to reduce our debt balance.

Results of Operations.

Net income for the three months ended June 30, 2006 decreased to $37.6 million from $54.0 million for the three months ended June 30, 2005. This decrease was the result of increased revenues, offset by higher operating costs and higher interest expenses. Net income for the six months ended June 30, 2006 remained flat compared to the same period in the prior year, driven by increased revenues, higher operating costs and higher income tax expenses. Income tax expenses for the six months ended June 30, 2005 included a tax benefit of approximately $25.5 million, recorded in the first quarter of 2005, related to additional stock basis associated with a pending divestiture.

Our organic revenue growth was 7.8% for both the three and six months ended June 30, 2006. Revenues increased across all service lines except for a slight decrease in our recycling business.

Operating income for the three and six months ended June 30, 2006 increased by $4.9 million and $10.3 million, respectively, over the same periods in the prior year. However, increases in subcontractor and fuel recovery fee revenues were offset by increases in their related costs. In addition, operating costs increased from volume increases, normal inflation and investments in supply chain, sales, pricing and customer service programs. The increase in interest expense for the three months ended June 30, 2006 was driven by costs incurred in connection with the refinancing transactions during the second quarter of 2006 while the decrease in interest expense for the six months ended June 30, 2006 related to higher costs incurred to early extinguish and refinance debt during the first quarter of 2005.

Beginning in 2004 and continuing through the first six months of 2006, we implemented a best practices program to focus on improving sales productivity and pricing effectiveness, driver productivity through improved routing and maintenance efficiency through standardized operating practices, as well as reducing our procurement costs through more effective purchasing. In addition, we are focused on improving the effectiveness of our safety and our health and welfare programs.

Beginning in 2005, we increased the level of annual capital expenditures to approximately $700 million primarily to accelerate replacement of vehicles; we plan to maintain this level of annual spending for the next few years. We expect this investment, along with improved maintenance practices, to have a favorable impact on maintenance costs.

Financing activities. We remain committed to our long-term strategy of reducing our debt balance. As this occurs, we believe the relative cost of debt and interest expense should decline. Upon achieving optimal credit ratios, we should have the opportunity to choose the best use of any excess cash flow: further repay debt, pay a dividend to the extent permitted by our debt agreements, repurchase stock or reinvest in our company. We may take advantage of opportunities that arise to accelerate the de-leveraging process as long as the opportunities meet our need to maintain our competitive strength.

In May 2006, we issued $600 million of 7.125% senior notes due 2016 at a discounted price equal to 99.123% of the aggregate principal amount. The net proceeds were used to fund a portion of the tender offer for our 8.875% senior notes due 2008. The refinancing of the senior notes is expected to generate approximately $6 million in annual interests savings. In conjunction with the re-pricing and refinancing transactions during the second quarter of 2006, we expensed approximately $40.8 million of costs related to premiums paid, deferred financing and other costs.

We continue to focus on maximizing cash flow to repay debt and to seek opportunities to create additional cash flow through reductions in interest cost. During the six months ended June 30, 2006, our debt balance increased by approximately $90 million to $7.2 billion primarily due to a higher level of capital reinvestment in the fourth quarter of 2005 and throughout 2006. We continue to improve our debt to total capitalization ratio, which decreased to 67.2% at June 30, 2006 from 67.3% at December 31, 2005.

Results of Operations

Three and Six Months Ended June 30, 2006 and 2005

The following table sets forth our results of operations and percentage relationship that the various items bear to revenues for the periods indicated (in millions, except percentages).

Statement of Operations Data:


	Three Months Ended June 30,
	2006					2005
Revenues	$	1,540.6		100.0	%	$	1,448.6		100.0	%
Cost of operations		991.9		64.4			942.7		65.1
Selling, general and administrative expenses		148.4		9.6			117.0		8.1
Depreciation and amortization		147.5		9.6			141.0		9.7

Operating income		252.8		16.4			247.9		17.1
Interest expense and other		173.8		11.3			126.6		8.7

Income before income taxes		79.0		5.1			121.3		8.4
Income tax expense		41.2		2.7			69.3		4.8
Minority interest		0.2		0.0			(1.0	)	(0.1	)

Income from continuing operations		37.6		2.4			53.0		3.7
Discontinued operations, net of tax		—		—			1.0		0.0

Net income		37.6		2.4			54.0		3.7
Dividends on preferred stock		(9.4	)	(0.6	)		(14.7	)	(1.0	)

Net income available to common shareholders	$	28.2		1.8	%	$	39.3		2.7	%


	Six Months Ended June 30,
	2006					2005
Revenues	$	2,979.3		100.0	%	$	2,789.9		100.0	%
Cost of operations		1,935.2		64.9			1,817.6		65.1
Selling, general and administrative expenses		293.8		9.9			246.9		8.9
Depreciation and amortization		288.9		9.7			274.3		9.8

Operating income		461.4		15.5			451.1		16.2
Interest expense and other		306.5		10.3			330.2		11.8

Income before income taxes		154.9		5.2			120.9		4.4
Income tax expense		76.3		2.6			43.9		1.6
Minority interest		(0.2	)	(0.0	)		(0.7	)	(0.0	)

Income from continuing operations		78.8		2.6			77.7		2.8
Discontinued operations, net of tax		—		—			1.0		0.0

Net income		78.8		2.6			78.7		2.8
Dividends on preferred stock		(24.1	)	(0.8	)		(22.4	)	(0.8	)

Net income available to common shareholders	$	54.7		1.8	%	$	56.3		2.0	%

Revenues. We generate revenues primarily from fees charged to customers for waste collection, transfer, recycling and disposal services. We consider our core business to be our collection and disposal operations. We also generate revenue from the sale of recycled commodities. We record revenue as the services are provided, with revenue deferred in instances where services are billed in advance of the service being provided.

The following table shows our total reported revenues by service line. Inter-company revenues have been eliminated.

Revenues by service line (in millions, except percentages):


	Three Months Ended June 30,								Six Months Ended June 30,
	2006				2005⁽¹⁾				2006				2005⁽¹⁾
Collection
Residential	$	301.8	19.6	%	$	300.2	20.7	%	$	597.7	20.1	%	$	589.4	21.1	%
Commercial		373.4	24.2			345.6	23.9			737.6	24.8			682.2	24.4
Roll-off ⁽²⁾		345.9	22.5			317.8	21.9			662.8	22.2			601.2	21.6
Recycling		52.9	3.4			50.8	3.5			99.8	3.3			99.6	3.6

Total Collection		1,074.0	69.7			1,014.4	70.0			2,097.9	70.4			1,972.4	70.7

Disposal
Landfill		223.2	14.5			209.1	14.4			421.6	14.1			389.3	14.0
Transfer		111.3	7.2			109.7	7.6			207.8	7.0			206.7	7.4

Total Disposal		334.5	21.7			318.8	22.0			629.4	21.1			596.0	21.4

Recycling – Commodity		55.4	3.6			59.5	4.1			105.8	3.6			116.2	4.2

Other⁽³⁾		76.7	5.0			55.9	3.9			146.2	4.9			105.3	3.7

Total Revenues	$	1,540.6	100.0	%	$	1,448.6	100.0	%	$	2,979.3	100.0	%	$	2,789.9	100.0	%


⁽¹⁾		The revenue mix for 2005 reflects the reclassification of transportation revenue out of collection, disposal and recycling-commodity revenue to other revenue.

⁽²⁾		Consists of revenue generated from commercial, industrial and residential customers from waste collected in roll-off containers that are loaded onto collection vehicles.

⁽³⁾		Consists primarily of revenue from national accounts where the work has been subcontracted, revenue generated from waste transported via railway and revenue from liquid waste.

Revenues increased 6.3% and 6.8%, respectively, during the three and six months ended June 30, 2006 over the comparative periods in 2005. All lines of business increased with the exception of recycling — commodity. The revenue increase within the collection business was attributable to increases in each of the residential, commercial, roll-off and recycling lines of business. The revenue increase within the disposal business is driven primarily by landfill revenue increases while transfer revenue increased slightly year over year. Recycling revenue decreased primarily due to cardboard and newspaper commodity price declines while other revenue increased as a result of waste volume increases associated with our national accounts. National account-related revenue included in other revenue represents the portion of revenue generated from nationwide contracts in markets outside our standard operating areas, and as such, the associated waste handling services are subcontracted to local operators. Consequently, substantially all of this revenue is offset by the corresponding subcontract costs.

Following is a summary of the change in revenues (in millions):


	Three Months			Six Months
	Ended June 30,			Ended June 30,
Reported revenues in 2005	$	1,448.6		$	2,789.9
Core business organic growth
Increase from average base per unit price change		51.6			92.6
Increase from fuel recovery fees		30.1			61.1
Increase from net volume change		24.1			48.0
Net divested revenues and adjustments		(10.2	)		(7.0	)
Decrease in recycling and other		(3.6	)		(5.3	)

Reported revenues in 2006	$	1,540.6		$	2,979.3

During the three and six months ended June 30, 2006, we generated organic revenue growth of 7.8% and 7.8%, of which $81.7 million or 6.0% and $153.7 million or 5.9% were attributable to revenue growth relating to our average price per unit on core business. Our continued price growth reflected the results of pricing increases implemented throughout the year. Within the collection business, average per unit pricing increased 7.0%, 8.3%, 3.4% and 10.4%, respectively, in the commercial, roll-off, residential and recycling collection lines of business for the quarter ended June 30, 2006. For the six months ended June 30, 2006, average per unit pricing increased by 6.6%, 7.6%, 4.1% and 11.2% in the commercial, roll-off, residential and recycling collection lines of business. Within the disposal line of business, landfill average per unit pricing increased 5.1% and 4.9%, respectively, and transfer average per unit pricing increased 5.2% and 5.0%, respectively, for the three and six months ended June 30, 2006. The fuel recovery fee program, implemented in 2005 to mitigate our exposure to increases in fuel price, generated $30.1 million or 36.8% and $61.1 million or 39.8%, respectively, of the total price growth in the three and six months ended June 30, 2006. This fee fluctuates with the price of fuel.

Core business volume growth was 1.8% and 1.9% for the three and six months ended June 30, 2006 compared to the same periods in the prior year. Approximately 1.6% and 1.4% of the total volume increases during the three and six months ended June 30, 2006 related to subcontracted and transportation revenues which generally generate low margin. Within the collection business, the commercial and roll-off lines of business experienced volume increases of 1.1% and 1.7%, respectively, and 1.6% and 3.1%, respectively, for the three and six months ended June 30, 2006. The residential line of business experienced slight volume decreases during both the three and six month periods ended June 30, 2006 and recycling collection volume declined by 9.0% and 10.5%,

respectively. Within the disposal business, landfill and transfer volume decreased slightly during the quarter ended June 30, 2006. For the six months ended June 30, 2006, landfill volume increased slightly while transfer volume declined by 2.5%.

Our operations are not concentrated in any one geographic region. At June 30, 2006, we operated in 129 major markets in 37 states and Puerto Rico. Our regional teams focus on developing local markets in which we can operate a vertically integrated operation and maximize operating efficiency. As a result, we may choose to not operate in a market where our business objective cannot be met.

The following table shows our revenues by geographic region in total and as a percentage of total revenues.

Revenues by region⁽¹⁾(in millions, except percentages):


	Three Months Ended June 30,								Six Months Ended June 30,
	2006				2005				2006				2005
Midwestern	$	319.6	20.8	%	$	308.9	21.3	%	$	608.7	20.4	%	$	586.1	21.0	%
Northeastern		322.3	20.9			324.4	22.4			618.6	20.8			613.2	22.0
Southeastern		270.0	17.5			248.5	17.1			528.2	17.7			484.7	17.4
Southwestern		252.6	16.4			233.8	16.2			493.6	16.6			452.5	16.2
Western		338.0	21.9			313.1	21.6			660.8	22.2			617.3	22.1
Other⁽²⁾		38.1	2.5			19.9	1.4			69.4	2.3			36.1	1.3

Total Revenues	$	1,540.6	100.0	%	$	1,448.6	100.0	%	$	2,979.3	100.0	%	$	2,789.9	100.0	%


⁽¹⁾		See discussion in Note 11 to our Consolidated Financial Statements.

⁽²⁾		Amounts relate primarily to our subsidiaries that provide services throughout the organization and not on a regional basis, including national accounts where the work has been subcontracted.

Cost of operations. Cost of operations includes labor and related benefits, which consists of salaries and wages, health and welfare benefits, incentive compensation and payroll taxes. It also includes transfer and disposal costs representing tipping fees paid to third-party disposal facilities and transfer stations; maintenance and repairs relating to our vehicles, equipment, and containers, including related labor and benefit costs; transportation and subcontractor costs which include costs for independent haulers who transport our waste to disposal facilities and costs for local operators who provide waste handling services associated with our national accounts in markets outside our standard operating areas; fuel which includes the direct cost of fuel used by our vehicles, net of fuel credits; disposal and franchise fees and taxes consisting of landfill taxes, municipal franchise fees, host community fees and royalties; landfill operating costs which includes landfill accretion, financial assurance, leachate disposal and other landfill maintenance costs; risk management which includes casualty insurance premiums and claims; cost of goods sold which includes material costs paid to suppliers associated with recycling commodities; and other which includes expenses such as facility operating costs, equipment rent, and gains or losses on sale of assets used in our operations.

The following tables provide the components of our operating costs and as a percentage of revenues (in millions, except percentages):


	Three Months Ended June 30,								Six Months Ended June 30,
	2006				2005				2006				2005
Labor and related benefits	$	284.5	18.5	%	$	279.2	19.3	%	$	566.9	19.0	%	$	549.2	19.7	%
Transfer and disposal costs		132.4	8.6			131.0	9.0			248.7	8.3			243.4	8.7
Maintenance and repairs		123.9	8.0			123.5	8.5			249.2	8.4			239.3	8.6
Transportation and subcontractor costs		138.5	9.0			111.8	7.7			258.3	8.7			211.1	7.6
Fuel		82.6	5.4			59.8	4.1			147.5	4.9			106.9	3.8
Disposal and franchise fees and taxes		92.3	6.0			90.3	6.2			181.8	6.1			171.6	6.1
Landfill operating costs		38.4	2.5			37.6	2.6			76.4	2.6			75.0	2.7
Risk management		37.7	2.5			49.0	3.4			79.9	2.7			88.9	3.2
Costs of good sold		16.2	1.0			11.7	0.8			25.9	0.9			23.6	0.8
Other		45.4	2.9			48.8	3.5			100.6	3.3			108.6	3.9

Total operating expenses	$	991.9	64.4	%	$	942.7	65.1	%	$	1,935.2	64.9	%	$	1,817.6	65.1	%

Cost of operations increased 5.2% and 6.5% in the three and six months ended June 30, 2006 compared to the same periods in the prior year primarily due to increases in labor, fuel, and transportation and subcontract costs, partially offset by decreases in risk management and other expenses. Labor costs increased for the six months ended June 30, 2006, primarily as a function of inflation and volume increases. The increase in transportation and subcontractor costs reflected our year-to-date price and volume growth, particularly volume growth in our national accounts, and pass-through fuel cost increases. Risk management costs were reduced by $7 million in the second quarter of 2006 as a result of changes in estimates due to claims experience. Other expense decreased approximately $8 million as a result of a favorable adjustment to our environmental reserves in the second quarter of 2006, primarily due to the selection by the U.S. Environmental Protection Agency of a lower cost remediation plan related to a Superfund site at which the Company is a potentially responsible party.

Fuel costs increased because of higher fuel prices and the expiration of certain fixed price purchase contracts. A significant portion of these contracts expired in early 2005. All fixed price purchase contracts expired as of March 31, 2006, and, unless new contracts are executed, all future fuel purchases will be at market rates. In the three and six months ended June 30, 2006, the contracts in place reduced fuel costs by $5.9 million when compared to then current market prices. We expect that our fuel recovery fee will offset a portion of the volatility in fuel costs arising from future market price fluctuations. At June 30, 2006, approximately 56% of our customers participated in the fuel recovery fee program.

Selling, general and administrative expenses include salaries, health and welfare benefits and incentive compensation for corporate and field general management, field support functions, sales force, accounting and finance, legal, management information systems and clerical and administrative departments. It also includes rent and office costs, fees for professional services provided by third parties, such as accountants, lawyers and consultants, provisions for estimated uncollectible accounts receivable and other expenses such as marketing, investor and community relations, directors’ and officers’ insurance, employee relocation, travel, entertainment and bank charges.

The following tables provide the components of our selling, general and administrative costs and as a percentage of revenues (in millions, except percentages):


	Three Months Ended June 30,								Six Months Ended June 30,
	2006				2005				2006				2005
Salaries	$	89.7	5.8	%	$	78.9	5.5	%	$	176.6	5.9	%	$	161.4	5.8	%
Rent and office costs		10.8	0.7			9.8	0.7			21.3	0.7			20.0	0.7
Professional fees		15.2	1.0			12.6	0.9			29.8	1.0			25.0	0.9
Provision for doubtful accounts		2.8	0.2			5.5	0.4			7.5	0.3			6.3	0.2
Other		29.9	1.9			10.2	0.6			58.6	2.0			34.2	1.3

Total selling, general and administrative expenses	$	148.4	9.6	%	$	117.0	8.1	%	$	293.8	9.9	%	$	246.9	8.9	%

Selling, general and administrative expenses increased 26.8% and 19.0% for the three and six months ended June 30, 2006 compared to the same periods in 2005 primarily relating to salaries, professional fees and other expenses. The increase in salaries reflected the impact of inflation and benefits costs as well as stock option expense recognized due to the adoption of SFAS 123(R) as of January 1, 2006. The professional fees increase was driven by consulting fees related to initiatives to standardize sales programs and implement procurement programs. The increase in other expense was primarily attributable to a $16.3 million non-cash reversal of litigation reserves during the quarter ended June 30, 2005 and accruals and settlements for certain legal matters in the second quarter of 2006.

Depreciation and amortization includes depreciation of fixed assets and amortization costs associated with the acquisition, development and retirement of landfill airspace and intangible assets. Depreciation is provided on the straight-line method over the estimated useful lives of buildings and improvements (30-40 years), vehicles and equipment (3-15 years), containers and compactors (5-10

years) and furniture and office equipment (4-8 years). Landfill assets are amortized at a rate per ton of waste disposed. (See Note 6, Landfill Accounting for a discussion of landfill accounting.) Depreciation of vehicles increases as fully-depreciated trucks are replaced by new vehicles. Amortization of landfill assets is impacted by several factors including rates of inflation, granted landfill expansions and compaction rates.

The following tables provide the components of our depreciation and amortization and as a percentage of revenues (in millions, except percentages):


	Three Months Ended June 30,								Six Months Ended June 30,
	2006				2005				2006				2005
Depreciation of fixed assets	$	79.4	5.2	%	$	75.3	5.2	%	$	158.7	5.3	%	$	150.8	5.4	%
Landfill and other amortization		68.1	4.4			65.7	4.5			130.2	4.4			123.5	4.4

Total depreciation and amortization	$	147.5	9.6	%	$	141.0	9.7	%	$	288.9	9.7	%	$	274.3	9.8	%

Depreciation and amortization increased 4.6% in the second quarter of 2006 and 5.3% for the six months ended June 30, 2006 compared to the same periods in 2005. The increase in amortization expense is primarily related to an increase in the landfill amortization rate. Depreciation expense related to vehicles and equipment increased primarily due to increases in capital expenditures in recent periods.

Interest expense and other. Interest expense and other increased by 37.2% in the quarter ended June 30, 2006 and decreased by 7.2% in the six months ended June 30, 2006 compared to the same periods in 2005. Following are the components of interest expense and other (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Interest expense, gross	$	132.4		$	126.5		$	264.4		$	264.9
Interest income		(0.7	)		(1.5	)		(1.4	)		(1.9	)
Interest capitalized for development projects		(4.1	)		(3.7	)		(8.2	)		(7.1	)
Accretion of debt and amortization of debt issuance costs		5.4			5.7			10.9			11.9
Costs incurred to early extinguish debt		40.8			(0.4	)		40.8			62.4

Total Interest expense and other	$	173.8		$	126.6		$	306.5		$	330.2

The increase in interest expense and other for the three months ended June 30, 2006 was attributable primarily to the premiums paid and the write-off of deferred financing and other costs in connection with the refinancing transactions in the second quarter of 2006. In connection with these refinancing transactions, we incurred costs to early extinguish and refinance debt of $40.8 million during the three and six months ended June 30, 2006. Gross interest expense increased during the three months ended June 30, 2006 due to the impact of rising interest rates on the variable rate portion of our debt. Gross interest expense for the six months ended June 30, 2006 decreased due to the repayment of debt in prior quarters from our continued de-leveraging strategy and the refinancing of debt at lower interest rates in the first quarter of 2005 (2005 Refinancing plan). In connection with the 2005 refinancing transactions, costs incurred to early extinguish and refinance debt were $62.4 million for six months ended June 30, 2005.

Income tax expense. The effective tax rate for the three and six months ended June 30, 2006 was 52.3% and 49.2%, respectively, compared to 56.7% and 36.1% for the same periods in the prior year. The increase in the effective tax rate for the six months ended June 30, 2006 is primarily attributable to a $25.5 million tax benefit, recorded in the first quarter of 2005, related to the stock basis associated with a pending divestiture.

Dividends on preferred stock. Dividends on preferred stock were $9.4 million and $14.7 million for the three months ended June 30, 2006 and 2005, respectively, and $24.1 million and $22.4 million for the six months ended June 30, 2006 and 2005, respectively. The decrease of $5.3 million for the three months ended June 30, 2006 was a result of the conversion of the Series C mandatory convertible preferred stock (Series C preferred stock) issued in April 2003. The Series C preferred stock was converted into approximately 34.1 million shares of common stock on April 1, 2006, eliminating

approximately $21.6 million of annual cash dividends. The increase of $1.7 million for the six months ended June 30, 2006 was a result of an increase of $7.1 million of 6.25% dividends payable in cash for the Series D mandatory convertible preferred stock (Series D preferred stock) issued in March 2005 offset by the decrease of $5.4 million due to the conversion of the Series C preferred stock.

Liquidity and Capital Resources

We are a highly leveraged company with $7.2 billion of outstanding debt at June 30, 2006. The majority of our debt was incurred to acquire solid waste companies between 1990 and 2000. We incurred and assumed over $11 billion of debt to acquire BFI in 1999. Since the acquisition of BFI, we have repaid debt with cash flow from operations, asset sales and the issuances of equity. We intend to continue to reduce our debt balance until we reach credit ratios that we believe will allow us to benefit from an investment grade-like cost of capital. We believe that as we move towards these ratios, when compared to today, we will have additional opportunities to reduce our cost of debt below our current level on a basis relative to interest rates at the time. We expect these opportunities will increase liquidity, and provide more flexibility in deciding the most appropriate use of our cash flow. Additionally, we believe that as we reduce our financial leverage, shareholder value should be created through cash flow due to reduced interest payments.

Until then, we will continue to manage operating cash flows after capital expenditures to ensure repayment of our scheduled debt maturities and opportunistically reduce interest costs through refinancing transactions to the extent economically beneficial. In both 2004 and 2005, we completed multifaceted refinancing transactions that reduced our overall debt, refinanced our credit facility and reduced our higher cost debt. In addition, we expect to continue to evaluate the performance of and opportunities to divest operations that do not maximize operating efficiencies or provide an adequate return on invested capital.

We may refinance or repay portions of our debt to ensure a capital structure that supports our operating plan, as well as continue to seek opportunities to extend our maturities in the future with actions that are economically beneficial. The potential alternatives include continued application of cash flow from operations, asset sales and capital markets transactions. Capital markets transactions could include issuance of debt with longer-term maturities, issuance of equity, or a combination of both. There is no assurance that in the future we will be able to generate annual cash flows to repay debt, consummate transactions in the capital markets on commercially reasonable terms, or at all, or sell assets on terms that decrease leverage.

We generally meet operational liquidity needs with operating cash flows. Our liquidity needs are primarily for working capital, capital expenditures for vehicles, containers and landfill development, capping, closure, post-closure and environmental expenditures, debt service costs and scheduled debt maturities.

When we cannot meet our liquidity needs with operating cash flow, we meet those needs with borrowings under our 2005 Credit Facility. We have a $1.575 billion commitment until 2010 under our 2005 Credit Facility, which we believe is adequate to meet our liquidity needs based on current conditions. At June 30, 2006, we had $116.8 million of loans outstanding and $411.1 million in letters of credit drawn on the 2005 Revolver, leaving approximately $1.047 billion of availability for borrowings and letters under our Institutional Letter of Credit Facility, all of which was used at June 30, 2006. During the second half of 2006, we expect to repay the $116.8 million outstanding on our revolving credit facility with cash flow from operations after capital expenditures plus the proceeds from the sale of assets and surplus properties.

Cash provided by operations increased 16% in the first six months of 2006 when compared to the same period in 2005, primarily due to an increase in net income after adjusting for non-cash items related to deferred taxes of approximately $33 million and depreciation and amortization of approximately $15 million. Consistent with our 2006 capital plan, we reinvested $371.8 million of capital into the business during the first six months of 2006, an increase of more than $88 million over

the first six months of 2005. The year over year reduction in cash used for financing activities is primarily reflective of the change in disbursement account. The disbursement account represents outstanding checks that were issued but are in transit at the end of a reporting period.

Following is a summary of the primary sources and uses of cash during the six months ended June 30, (in millions):

Sources of cash


	2006		2005
Cash provided by operations	$	367.8	$	317.5
Net proceeds from issuance of common and preferred stock		8.7		676.6
Decrease in cash balance		8.5		—
Net proceeds from divestitures, net of acquisitions		2.8		1.6
Debt proceeds, net of debt repayments		87.4		—
Proceeds from the sale of fixed assets		7.3		7.2

Total	$	482.5	$	1,002.9

Uses of cash


	2006		2005
Capital expenditures	$	371.8	$	283.5
Debt repayments, net of debt proceeds		—		569.9
Debt issuance costs		11.3		28.5
Increase in cash balance		—		2.0
Payment of preferred stock cash dividends		29.4		19.3
Decrease in disbursement account		63.3		94.4
Other non-operating net cash outflows		6.7		5.3

Total	$	482.5	$	1,002.9

We continuously seek opportunities to increase our cash flow through improvements in operations and reduction of our interest cost. Historically, we have used bank financings and capital markets transactions to meet our refinancing and liquidity requirements. Under our 2005 Credit Facility, we are required to meet certain financial covenants. Our objective is to maintain sufficient surplus between the required covenant ratios and the actual ratios calculated according to the 2005 Credit Agreement. We monitor the surplus carefully and will seek to take action if the surplus becomes too small. We have not historically experienced difficulty in obtaining financing or refinancing existing debt. We expect to continue to seek such opportunities in the future to the extent such opportunities are available to us. (See also Debt covenants in Contractual Obligations and Commitments.)

Significant financing events in 2006. On April 1, 2006, each of the outstanding shares of the 6.25% Series C preferred stock automatically converted into 4.9358 shares of our common stock pursuant to the terms of the certificate of designations governing the Series C preferred stock. This increased our common shares outstanding by approximately 34.1 million shares as of April 1, 2006 and eliminated annual cash dividends of $21.6 million.

In May 2006, we issued $600 million of 7.125% senior notes due 2016 at a discounted price equal to 99.123% of the aggregate principal amount. The net proceeds were used to fund a portion of the tender offer for our 8.875% senior notes due 2008. The refinancing of the senior notes is expected to generate approximately $6 million in annual interest savings. In conjunction with the re-pricing and refinancing transactions during the second quarter of 2006, we expensed approximately $40.8 million of costs related to premiums paid, deferred financing and other costs.

In June 2006, we filed an automatic shelf registration statement with the SEC. It allows us to issue, from time to time, an unrestricted amount of debt securities, preferred stock, common stock, debt and equity warrants, depositary shares (including an indeterminate amount of debt securities, preferred stock and common stock as may be issued upon conversion or exchange for any of our other securities). The registration statement was effective immediately upon filing.

Contractual Obligations and Commitments

The following table provides additional maturity detail of our long-term debt at June 30, 2006 (in millions):


Debt	2006		2007		2008		2009		2010		Thereafter		Total
Revolving 2005 Credit Facility⁽¹⁾	$	—	$	—	$	—	$	—	$	116.8	$	—	$	116.8
Term loan B		—		—		—		—		6.0		1,269.0		1,275.0
Receivables secured loan⁽²⁾		—		215.1		—		—		—		—		215.1
6.375% BFI Senior notes		—		—		161.2		—		—		—		161.2
8.50% Senior notes		—		—		750.0		—		—		—		750.0
6.50% Senior notes		—		—		—		—		350.0		—		350.0
5.75% Senior notes due 2011		—		—		—		—		—		400.0		400.0
6.375% Senior notes due 2011		—		—		—		—		—		275.0		275.0
9.25% Senior notes due 2012		—		—		—		—		—		250.0		250.0
7.875% Senior notes due 2013		—		—		—		—		—		450.0		450.0
6.125% Senior notes due 2014		—		—		—		—		—		425.0		425.0
7.25% Senior notes due 2015		—		—		—		—		—		600.0		600.0
7.125% Senior notes due 2016		—		—		—		—		—		600.0		600.0
9.25% BFI debentures due 2021		—		—		—		—		—		99.5		99.5
7.40% BFI debentures due 2035		—		—		—		—		—		360.0		360.0
4.25% Senior subordinated convertible debentures due 2034		—		—		—		—		—		230.0		230.0
7.375% Senior unsecured notes due 2014		—		—		—		—		—		400.0		400.0
Other debt		2.9		6.5		1.8		2.0		25.4		268.0		306.6

Total principal due	$	2.9	$	221.6	$	913.0	$	2.0	$	498.2	$	5,626.5	$	7,264.2
Discount, net														(82.1	)

Total debt balance													$	7,182.1


⁽¹⁾		At June 30, 2006, under our 2005 Credit Facility, we had revolving commitments totaling $1.575 billion with $116.8 million in loans outstanding and $411.1 million of letters of credit outstanding, providing us remaining availability of approximately $1.047 billion. In addition, we had an Institutional Letter of Credit Facility of $495.0 million available under the 2005 Credit Facility, all of which was used for letters of credit outstanding.

⁽²⁾		The receivables secured loan is a 364-day liquidity facility with a maturity date on May 29, 2007. At that time, we intend to renew the liquidity facility. If we are unable to renew the liquidity facility, we will refinance any amounts outstanding with our 2005 Credit Facility, which matures in 2010, or with other long-term borrowings. Although we intend to renew the liquidity facility on May 29, 2007 and do not expect to repay the amounts within the next twelve months, the loan is classified as a current liability because it has a contractual maturity of less than one year.

Debt covenants. Our 2005 Credit Facility and the indentures relating to our senior subordinated notes and our senior notes contain financial covenants and restrictions on our ability to complete acquisitions, pay dividends, incur indebtedness, make investments and take certain other corporate actions. See Note 4 to our Consolidated Financial Statements for additional information regarding our primary financial covenants.

At June 30, 2006, we were in compliance with all financial and other covenants under our 2005 Credit Facility. We are not subject to any minimum net worth covenants.

Failure to comply with the financial and other covenants under our 2005 Credit Facility, as well as the occurrence of certain material adverse events, would constitute default under the credit agreement and would allow the lenders under the 2005 Credit Facility to accelerate the maturity of all indebtedness under the credit agreement. This could also have an adverse impact on availability of financial assurances. In addition, maturity acceleration on the 2005 Credit Facility constitutes an event of default under our other debt instruments, including our senior notes and our senior subordinated notes and, therefore, these would also be subject to acceleration of maturity. If such acceleration of maturities of indebtedness were to occur, we would not have sufficient liquidity available to repay the indebtedness. We would likely have to seek an amendment under the 2005 Credit Facility for relief from the financial covenants or repay the debt with proceeds from the issuance of new debt or equity, and/or assets sales, if necessary. We may be unable to amend the 2005 Credit Facility or raise sufficient capital to repay such obligations in the event the maturities are accelerated.

Prepayments. Under our 2005 Credit Facility, if we generate cash flow in excess of specified levels, we must prepay a portion of our Term Loan borrowings annually (prior to the stated maturity). To make these payments, if required, we may have to use the 2005 Revolver to accommodate cash timing differences. Factors primarily increasing Excess Cash Flow, as defined in the 2005 Credit Agreement, could include increases in operating cash flow, lower capital expenditures and working capital requirements, net divestitures or other favorable cash generating activities. In addition, we are required to make prepayments on the 2005 Credit Facility upon completion of certain transactions as defined in the 2005 Credit Agreement, including asset sales and issuances of debt or equity securities.

Financial Assurances. We are required to provide financial assurances to governmental agencies and a variety of other entities under applicable environmental regulations relating to our landfill operations for capping, closure and post-closure costs, and/or related to our performance under certain collection, landfill and transfer station contracts. We satisfy the financial assurance requirements by providing performance bonds, letters of credit, insurance policies or trust deposits. The amount of the financial assurance requirements for capping, closure and post-closure costs are determined by the applicable state environmental regulations, which vary by state. The financial assurance requirements for capping, closure and post-closure costs can either be for costs associated with a portion of the landfill or the entire landfill. Generally, states will require a third-party engineering specialist to determine the estimated capping, closure and post-closure costs that are used to determine the required amount of financial assurance for a landfill. The amount of financial assurances required can, and generally will, differ from the obligation determined and recorded under generally accepted accounting principles in the United States (GAAP). The amount of the financial assurance requirements related to contract performance varies by contract.

Additionally, we are required to provide financial assurance for our insurance program and collateral required for certain performance obligations. We do not expect a material increase in financial assurances during 2006, although the mix of financial assurance instruments may change.

At June 30, 2006, we had the following financial assurance instruments and collateral in place (in millions):


	Landfill
	Closure/		Contract		Risk/Casualty		Collateral for
	Post-Closure		Performance		Insurance		Obligations		Total
Insurance policies	$	646.0	$	—	$	—	$	—	$	646.0
Surety bonds		557.6		503.7		—		—		1,061.3
Trust deposits		81.9		—		—		—		81.9
Letters of credit ⁽¹⁾		469.4		46.2		282.0		108.5		906.1


Total	$	1,754.9	$	549.9	$	282.0	$	108.5	$	2,695.3


⁽¹⁾		These amounts are issued under the 2005 Revolver and the Institutional Letter of Credit Facility under our 2005 Credit Facility.

These financial instruments are issued in the normal course of business and are not debt of the company. Since we currently have no liability for these financial assurance instruments, they are not reflected in the accompanying consolidated balance sheets. However, we have recorded capping, closure and post-closure liabilities and self-insurance as the liabilities are incurred under GAAP. The underlying obligations of the financial assurance instruments would be valued and recorded in the consolidated balance sheets if it is probable that we would be unable to perform our obligations under the financial assurance contracts. We do not expect this to occur.

Off-Balance Sheet Financing

We have no off-balance sheet debt or similar obligations, other than financial assurance instruments and operating leases, which are not classified as 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.

Interest Rate Risk Management

We believe it is important to have a mix of fixed and floating rate debt to provide financing flexibility. Our policy and procedures require that no less than 70% of our total debt is fixed, either directly or effectively through interest rate swap agreements. At June 30, 2006, approximately 77% of our debt was fixed, all directly.

From time to time, we have entered into interest rate swap agreements for the purpose of hedging variability of interest expense and interest payments on our long-term variable rate bank debt and maintaining a mix of fixed and floating rate debt. Our strategy is to use interest rate swap contracts when such transactions will serve to reduce our aggregate exposure and meet the objectives of our interest rate policy. These contracts are not entered into for trading purposes. At June 30, 2006, we had no interest rate swap agreements outstanding.

Contingencies

For a description of our commitments and contingencies, see Note 10 to our consolidated financial statements included under Item 1 of this Form 10-Q.

Accounting for Stock Options Granted to Employees

Our stock-based compensation program is a long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. We offer our employees a variety of stock-based awards including stock options, restricted stock and restricted stock units. Stock options are granted with an exercise price equal to the fair value of our common stock on the date of grant. All stock-based awards generally vest over a period of three to five years and expire ten years from the date of grant.

Effective January 1, 2006, we adopted the provisions of SFAS 123(R), Share-Based Payment, which establishes the accounting for stock-based awards exchanged for employee services. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be measured at fair value and expensed in the consolidated statement of operations over the service period (generally the vesting period). We previously accounted for share-based compensation plans under APB 25, Accounting for Stock Issued to Employees, and the related interpretations and provided the required pro forma disclosures of SFAS 123, Accounting for Stock-Based Compensation.

During the three and six months ended June 30, 2006, we recorded stock-based compensation related to stock options of $2.1 million and $3.7 million or $1.2 million and $2.2 million net of tax, respectively, for all unvested options granted prior to and after the adoption of SFAS 123(R). At June 30, 2006, the deferred stock-based compensation balance, net of estimated forfeitures, related to stock options was $16.4 million and is expected to be recognized over an estimated weighted average amortization period of 3.6 years.


	Three Months			Six Months
	Ended June 30,			Ended June 30,
	2006			2006
Risk free interest rate		3.8	%		3.8	%
Expected life (in years)		6.7			6.7
Dividend rate		0.0	%		0.0	%
Expected volatility		45.7	%		45.9	%

The risk-free interest rate is based on a zero-coupon U.S. Treasury bill rate on the date of grant with the maturity date approximately equal to the expected life at the grant date. The expected life of the options is determined using the simplified method as provided by SAB 107 for “plain vanilla” options. We have not issued any dividends on common stock and are currently restricted from paying common stock dividends under our 2005 Credit Facility. Based on this, the dividend rate is assumed to be zero. The Company derives its expected volatility based on a combination of the implied volatility of its traded options and daily historical volatility of its stock price. Prior to the adoption of SFAS 123(R), the Company utilized historical volatility of its stock price for its pro forma disclosures.

As stock-based compensation expense recognized in our consolidated statement of operations for the three and six months ended June 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. In our pro forma disclosures prior to the adoption of SFAS 123(R), we accounted for forfeitures upon occurrence.

If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the stock-based compensation expense that we record under SFAS 123(R) may differ from what we have recorded in the current period.

Critical Accounting Judgments and Estimates

We identified and discussed our critical accounting judgments and estimates in our Annual Report on Form 10-K for the year ended December 31, 2005. Although we believe that our estimates and assumptions are reasonable, they are based upon information available at the time the judgment or estimate is made. Actual results may differ significantly from estimates under different assumptions or conditions.

New Accounting Standards

For a description of the new accounting standards that affect us, see Note 1 to our consolidated financial statements included under Item 1 of this Form 10-Q.

Disclosure Regarding Forward Looking Statements

This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Forward Looking Statements). All statements, other than statements of historical fact included in this report, are Forward Looking Statements. Although we believe that the expectations reflected in such Forward Looking Statements are reasonable, we can give no assurance that such expectations will prove to be correct. Examples of these Forward Looking Statements include, among others, statements regarding:

	•		our business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies;

	•		our ability to obtain financing, refinance existing debt, increase liquidity, reduce interest cost, extend debt maturities and provide adequate financial liquidity;

	•		the adequacy of our operating cash flow and revolving credit facility to make payments on our indebtedness, support our capital reinvestment needs and fund other liquidity needs;

	•		our ability to repay during 2006 the outstanding balance on our revolving credit facility with cash flow from operations after capital expenditures plus the proceeds from the sale of assets and surplus properties;

	•		our expected interest savings in connection with the refinancing of portions of our 2005 Credit Facility and the tender offer of a portion of our 8.875% senior notes;

	•		our ability to generate cash flows from operations after funding capital expenditures;

	•		our ability to achieve credit ratios that would allow us to receive benefits of a cross-over investment grade company and/or investment grade-like cost of capital;

	•		our ability to achieve price and volume increases and cost reductions in the future;

	•		our estimates of future annual interest costs reductions;

	•		our ability to perform our obligations under financial assurance contracts and our expectation that our need for financial assurance contracts will not materially increase;

	•		underlying assumptions related to general economic and financial market condition;

	•		our expectation that our casualty, property or environmental claims or other contingencies will not have a material effect on our operations;

	•		our belief that the costs of settlements or judgments arising from litigation and the effects of settlements or judgments on our consolidated liquidity, financial position or results of operation will not be material;

	•		our ability to implement environmental safeguards to comply with governmental requirements;

	•		the impact of fuel costs and fuel recovery fees on our operations;

	•		our ability to meet our projected capital expenditures spending;

	•		our ability to achieve benefits, including the timing and amount of any benefits, resulting from the implementation of standards and best practices program;

	•		our ability to renew our receivables liquidity facility;

	•		the expected benefits of our refinancing plan;

	•		our ability to maintain sufficient surplus between our covenant ratios;

	•		our expectations of lower vehicle and equipment ownership costs in the future;

	•		the amount, timing and sources of additional cash payments to the IRS and other taxing authorities;

	•		our ability to avoid a penalty by the IRS; and

	•		the ability to anticipate the impact of changes in federal, state, or local laws or regulations.

Other factors that could materially affect the Forward Looking Statements in this Form 10-Q can be found in our periodic reports filed with the SEC, including risk factors detailed in Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2005 and in our Form 10-Q dated March 31, 2006. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the Forward Looking Statements and are cautioned not to place undue reliance on such Forward Looking Statements. The Forward Looking Statements made herein are only made as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to publicly update such Forward Looking Statements to reflect subsequent events or circumstances.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk. We are subject to interest rate risk on our variable rate long-term debt. From time to time, to reduce the risk from interest rate fluctuations, we have entered into hedging transactions that have been authorized pursuant to our policies and procedures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. We currently have no outstanding interest rate swap arrangements at June 30, 2006.

At June 30, 2006, with 77% of our debt fixed, we have $1.692 billion of floating rate debt. If interest rates increased by 100 basis points, annualized interest expense and cash payments for interest would increase by approximately $16.9 million ($10.2 million after tax). This analysis does not reflect the effect that interest rates would have on other items, such as new borrowings nor the favorable impact declining rates would have on interest expense and cash payments for interest.

Fuel prices. Fuel costs represent a significant operating expense. Historically, we have mitigated fuel cost exposure with fixed price purchase contracts. A significant portion of these contracts expired in the first quarter of 2005 and the remainder in the first quarter of 2006.

When economically practical, we may enter into new or renewed contracts, or engage in other strategies to mitigate market risk. Where appropriate, we have implemented a fuel recovery fee that is designed to recover our fuel costs.

At our current consumption levels, a one-cent change in the price of diesel would affect annual net income by approximately $0.7 million, before considering the impact of fuel recovery fees. Accordingly, a substantial rise or drop in fuel costs could result in a material impact to our revenues and cost of operations.

Commodities prices. We market recycled products such as cardboard and newspaper from our material recycling facilities. As a result, changes in the market prices of these items will impact our results of operations. Revenues from sales of recycled cardboard and newspaper in the second quarter of 2006 were approximately $22.9 million compared to $28.5 million in the second quarter of 2005.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective. The conclusions of the CEO and CFO from this evaluation were communicated to the Audit Committee.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

On June 27, 2006, our wholly-owned subsidiary, American Disposal Services of West Virginia, Inc., received a proposed Settlement Agreement and Consent Order from the West Virginia Department of Environmental Protection seeking to assess a civil penalty of $150,000 and seeking to require the facility to perform a Supplemental Environmental Project with a value of not less than $100,000 to resolve several alleged environmental violations under the West Virginia Solid Waste Management Act that occurred over the past three (3) years at its Short Creek Landfill in Ohio County, West Virginia.

In September 1999, neighboring parties and the county drainage district filed a civil lawsuit seeking to prevent BFI from obtaining a vertical elevation expansion permit at our 131-acre landfill in Donna, Texas. They claimed BFI had agreed not to expand the landfill based on a pre-existing Settlement Agreement from an unrelated dispute years ago related to drainage discharge rights. In 2001, the Texas Commission on Environmental Quality (TCEQ) granted BFI an expansion permit (the administrative expansion permit proceeding), and, based on this expansion permit, the landfill has an estimated remaining capacity of approximately 2.3 million tons at June 30, 2006. Nonetheless, the parties opposing the expansion continued to litigate the civil lawsuit and pursue their efforts in preventing the expansion. In November 2003, a judgment issued by a Texas state trial court in the civil lawsuit effectively revoked the expansion permit that was granted by the TCEQ in 2001, which would require us to operate the landfill according to a prior permit granted in 1988. On appeal, the Texas Court of Appeals stayed the trial court’s order, allowing us to continue to place waste in the landfill in accordance with the expansion permit granted in 2001. In the administrative expansion proceeding on October 28, 2005, the Texas Supreme Court denied review of the neighboring parties’ appeal of the expansion permit, thereby confirming that the TCEQ properly granted our expansion permit.

In April 2006, the Texas Court of Appeals ruled on the civil litigation. The court dissolved the permanent injunction which would have effectively prevented us from operating the landfill under the expansion permit, but also required us to pay a damage award of approximately $2 million, plus attorney fees and interest. On April 27, 2006, all parties filed a motion for rehearing, which was denied by the Texas Court of Appeals. We are evaluating our options regarding the April 2006 opinion, including whether to file an appeal to the Texas Supreme Court.

Item 1A. Risk Factors

For a listing of our risk factors, see Item 1A, “Risk Factors”, in our Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

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

On May 25, 2006, our annual meeting of stockholders was held at which we submitted to a vote of our stockholders the following proposals:

(1) Election of directors as follows :


	Number of Votes		Number of Votes
Nominee	For		Withheld
John J. Zillmer		311,688,950		16,416,051
Robert M. Agate		316,587,132		11,517,869
Charles H. Cotros		315,600,282		12,504,719
James W. Crownover		316,624,140		11,480,861
David I. Foley		317,164,162		10,940,839
Joshua J. Harris		316,865,236		11,239,765
Dennis R. Hendrix		316,464,246		11,640,755
Nolan Lehmann		311,680,819		16,424,182
Steven Martinez		317,104,667		11,000,334
James A. Quella		316,864,687		11,240,314
Antony P. Ressler		316,898,871		11,206,130


		Results of the Vote
								Broker
		Affirmative		Against		Abstentions		Non-Votes
(2)	To ratify the appointment of Pricewaterhouse Coopers LLP as our independent registered public accounting firm (“independent auditor”) for fiscal year 2006		326,255,906		736,453		1,098,172		14,470

(3)	To approve the amendment and restatement of the 1991 Incentive Stock Plan into the 2006 Incentive Stock Plan		258,101,399		25,171,441		1,137,058		43,695,103

(4)	To approve the 2006 Executive Incentive Compensation Plan		315,346,682		10,248,640		1,222,976		1,286,703

(5)	Stockholder proposal on majority voting for director nominees		100,882,871		181,305,880		2,221,327		43,694,923

(6)	Stockholder proposal on approval of severance agreements by stockholders		106,845,876		175,602,499		1,961,703		43,694,923

Item 5. Other Information

On July 28, 2006, Anthony P. Ressler informed the Company of his resignation as a Director of the Company and member of the Management Development/Compensation Committee.

Mr. Ressler served as a Shareholder Designee on the Company’s Board of Directors pursuant to the Third Amended and Restated Shareholders Agreement, dated December 18, 2003, between the Company and Apollo II, L.P. and Blackstone Capital Partners II Merchant Bank Fund L.P. (collectively, the “Apollo/Blackstone Investors”). The Apollo/Blackstone Investors are expected to nominate a replacement for this vacancy in the near future pursuant to their rights under the Shareholders Agreement.

Item 6. Exhibits

	4.1		Seventeenth Supplemental Indenture governing the 7-1/8% Senior Notes due 2016, dated May 17, 2006, among Allied Waste North America, Inc., Allied Waste Industries, Inc., the guarantors party thereto and U.S. Bank National Association, as trustee. Exhibit 1.01 to Allied’s Current Report on Form 8-K dated May 17, 2006 is incorporated herein by reference.

	4.2		Second supplemental indenture to the sixth supplemental indenture governing the 7-7/8% Senior Notes due 2008, dated May 17, 2006, by and among Allied Waste North America, Inc., the guarantors signatory thereto and U.S. Bank National Association, as trustee. Exhibit 1.03 to Allied’s Current Report on Form 8-K dated May 17, 2006 is incorporated herein by reference.

	10.1*		Second amendment dated as of March 30, 2006, to the Credit Agreement dated as of July 21, 1999, as amended and restated as of March 21, 2005, among Allied Waste Industries, Inc., Allied Waste North America, Inc., the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent for the Lenders and as collateral trustee for the Shared Collateral Secured Parties.

	10.2*		2006 Incentive Stock Plan.

	10.3*		2006 Executive Incentive Compensation Plan.

	10.4*		Participation Agreement between the Company and CoreTrust Purchasing Group LLC, the exclusive agent, for the purchase by the Company of certain goods and services effective July 1, 2006.

	10.5		Registration Rights Agreement, dated as of May 17, 2006, by and among the Allied Waste North America, Inc., Allied Waste Industries, Inc., the guarantors party thereto, and the initial purchasers of the 7-1/8% Senior Notes due 2016. Exhibit 1.02 to Allied’s Current Report on Form 8-K dated May 17, 2006 is incorporated herein by reference.

	31.1*		Section 302 Certification of John J. Zillmer, Chairman of the Board of Directors and Chief Executive Officer.

	31.2*		Section 302 Certification of Peter S. Hathaway, Executive Vice President and Chief Financial Officer.

	32*		Certification Pursuant to 18 U.S.C.§1350 of John J. Zillmer, Chairman of the Board of Directors and Chief Executive Officer and Peter S. Hathaway, Executive Vice President and Chief Financial Officer.


*		Filed herewith


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets			1
Consolidated Statements of Operations			2
Consolidated Statements of Cash Flows			3
Notes to Consolidated Financial Statements			4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31

Item 3. Quantitative and Qualitative Disclosures About Market Risk			45

Item 4. Controls and Procedures			46

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			47

Item 1A. Risk Factors			47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48

Item 3. Defaults upon Senior Securities			48

Item 4. Submission of Matters to a Vote of Security Holders			48

Item 5. Other Information			48

Item 6. Exhibits			49

Signatures			50
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32


		ALLIED WASTE INDUSTRIES, INC.

		By:		/s/ PETER S. HATHAWAY

				Peter S. Hathaway
				Executive Vice President and Chief Financial Officer

		By:		/s/ JAMES E. GRAY

				James E. Gray
				Senior Vice President, Controller and
				Chief Accounting Officer