Summary of ALLIED WASTE INDUSTRIES INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our unaudited 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. See "Disclosure Regarding Forward-Looking Statements" below.
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 38 states and Puerto Rico, geographically identified as the East, Midwest, South and West regions. 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 consistently invest 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 158 owned or operated active landfills to provide sufficient capacity to receive the waste volume we handle. In addition, we have approximately 11,400 collection vehicles and approximately 1.2 million containers to serve our collection customers. Our vehicles and containers endure rough conditions each day and must be routinely maintained and replaced. During the nine months ended September 30, 2008, we invested $501.0 million of capital into the business (see Note 3, Property and Equipment, for detail by fixed asset category). In 2008, total capital expenditures are expected to be approximately $650 million.
Cash flows in our business are generally predictable as a result of the nature of our customer base and the essential service we provide to the communities where we operate. This predictability has enabled us to consistently reinvest in the business and to service our debt obligations. As a result, 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 continue to allow us over time to transfer the enterprise value of the company from debt holders to shareholders as we continue to use our cash flow from operations after capital expenditures and other investments in our business to reduce our debt balance.
Income from continuing operations for the three months ended September 30, 2008 increased to $112.5 million, or $0.26 per diluted share, from $66.9 million, or $0.15 per diluted share, for the three months ended September 30, 2007. Income from continuing operations for the nine months ended September 30, 2008 was $296.5 million, or $0.68 per diluted share, compared to $192.2 million, or $0.44 per diluted share, for the same period in the prior year. The increase during the three and nine months ended September 30, 2008 was primarily attributable to higher operating income and lower interest expense, partially offset by higher income tax expense.
Our organic revenue growth was 3.2% for the three months ended September 30, 2008 compared to 1.9% for the same period in the prior year. Revenue during the third quarter of 2008 increased across all lines of business except for the recycling - commodity line of business. Operating income during the third quarter of 2008 increased by $66.9 million over the same period in 2007, driven by increases in revenues as a result of favorable price growth, lower depreciation and amortization expense and the absence of divestiture loss and asset impairment charges compared to the same period in the prior year. The increase is partially offset by higher costs of operation as well as merger related costs. We incurred $12.5 million of merger related costs, primarily consisting of financial advisor and legal fees, in association with our proposed merger with Republic Services, Inc. (Republic). See Note 1 to our consolidated financial statements.

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Organic revenue growth for the nine months ended September 30, 2008 was 2.4% compared to 2.6% for the same period in the prior year. Revenue during the nine months ended September 30, 2008 increased across all primary lines of business except for our transfer and other lines of business. The increase in operating income during the nine months ended September 30, 2008 of $101.0 million was driven by favorable price growth, lower selling, general and administrative costs as well as lower divestiture loss and asset impairment charges compared to the same period in the prior year. These improvements were partially offset by higher costs of operations and merger related costs.
During 2008, we recorded loss from divestitures and asset impairment charges totaling $23.5 million, primarily consisting of impairment charges associated with two landfill closures in our Midwest region. We have recorded our related capping, closure and post closure accruals at amounts which we believe are adequate based on currently existing information; however, as the closure process continues and additional information becomes known, our estimated costs may change.
Our pricing programs and operational effectiveness initiatives continue to drive improved profitability and improved returns on invested capital. These programs help mitigate the impact of inflation on our cost of operations, particularly preventing margin deterioration in an economically challenging environment. Our cost of operations as a percentage of revenues in the three and nine months ended September 30, 2008 has decreased to 61.4% and 62.2% compared to 62.0% and 62.7% during the same periods in the prior year. In addition, we continue to focus on improving our return on invested capital by evaluating the return potential of new capital expenditures and by evaluating opportunities to divest operations that do not provide an adequate return.
We plan to invest approximately $650 million in capital expenditures during 2008, a portion of which relates to investment in our fleet. We spent $144.1 million and $501.0 million, respectively, on capital expenditures during the three and nine months ended September 30, 2008. We expect this investment, along with improved maintenance practices, to continue to have a favorable impact on safety, maintenance costs and route productivity. Maintenance and repairs for the three and nine months ended September 30, 2008 decreased to $117.1 million or 4.6% and $349.7 million or 4.1% from the comparable periods in 2007 as we continued to benefit from a newer fleet coupled with improved maintenance practices.
We employ a strategy of reducing our debt balance with our cash flow from operations after capital expenditures and other investments in our business. Upon achieving optimal credit ratios, we should have the opportunity to choose the best use of any excess cash flow: further repay debt, repurchase stock, pay a dividend, to the extent permitted by our debt agreements, or reinvest in our company. We may take advantage of opportunities that arise to repay debt in advance of maturities as long as the opportunities are economically advantageous. We also explore and evaluate other ways to enhance shareholder value. Accordingly, where appropriate we may pursue acquisitions, divestitures, joint ventures and other transactions or investments in our business that complement or enhance our strategic position, services, geographical footprint or assets, or otherwise drive shareholder value.
In January 2008, we repaid $161.2 million of our 6.375% senior notes at the stated maturity with available cash.
On February 13, 2008, we paid to the IRS $196 million for tax and interest related to the capital loss deductions taken on our 1999 income tax return due to the interest rate being assessed on this matter. We funded this payment with available cash flows and borrowings from our 2005 Revolver. During the fourth quarter of 2008, we expect to pay the IRS and state tax authorities approximately $163 million of tax and interest related to this matter, primarily associated with our 2000 through 2003 income tax returns. These payments do not represent a settlement with respect to the potential tax, interest or penalty related to the outstanding matter nor do they prevent us from contesting the IRS tax adjustment applicable to our 1999 through 2003 taxable years in a federal refund action.

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Effective March 1, 2008, each of the outstanding shares of our Series D preferred stock automatically converted into 25.3165 shares of our common stock pursuant to the terms of the certificate of designations governing the Series D preferred stock. This increased our common shares outstanding by approximately 60.8 million shares and eliminated annual cash dividends of $37.5 million. In May 2008, we renewed our $400 million accounts receivable securitization program, which matures in May 2009. In September 2008, we amended the definition of "change of control" in our $400 million accounts receivable securitization facility to allow for the proposed merger with Republic. Also during 2008, we issued in aggregate approximately $125 million of variable rate, unsecured tax-exempt bonds with stated maturity dates between 2016 and 2024. Proceeds from these tax-exempt bonds are used to finance qualifying expenditures at our landfills, transfer and hauling facilities.
During the third quarter of 2008, we made optional prepayments of $135 million on the 2005 Term Loan. These payments were made with excess cash flow from operations.
Our debt to total capitalization ratio was 60.5% and 63.0% at September 30, 2008 and December 31, 2007, respectively.
We continue to focus on maximizing cash flow from operations after capital expenditures and other investments in our business. We seek opportunities to create additional cash flow through reductions in interest cost while continuing to support our fixed asset base with appropriate capital expenditures, and where appropriate, pursue acquisitions, divestitures, joint ventures and other transactions or investments in our business that complement or enhance our strategic position, services, geographical footprint or assets, or otherwise drive shareholder value.
On June 22, 2008, we entered into a definitive merger agreement with Republic which is expected to be completed in the fourth quarter of 2008. Under the terms of the agreement, our shareholders will receive 0.45 shares of Republic common stock for each share of Allied common stock held. In completing the transaction, Republic is expected to issue approximately 196.2 million shares of common stock to Allied shareholders, representing approximately 52% ownership of the combined company on a diluted basis. On July 14, 2008, Waste Management, Inc. (Waste Management) announced an unsolicited offer to acquire Republic. On July 18, 2008, Republic announced that it would not engage in discussions with Waste Management because the offer could not reasonably be expected to be superior to the Republic-Allied merger. On August 11, 2008, Waste Management announced a revised unsolicited proposal to acquire Republic. On August 14, 2008, Republic determined that the revised proposal did not meet the standard in the definitive merger agreement to allow Republic to furnish information to, or have discussions or negotiations with Waste Management. On October 13, 2008, Waste Management announced its withdrawal from the bid for Republic.

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Results of Operations
Three and nine months ended September 30, 2008 and 2007
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).

                                                          Three Months Ended September 30,
                                                        2008                            2007
Revenues                                      $ 1,606.2          100.0 %      $ 1,556.3          100.0 %
Cost of operations                                986.0           61.4            966.7           62.0
Selling, general and administrative
expenses                                          155.6            9.7            156.5           10.1
Merger related costs                               12.5            0.8                -              -
Depreciation and amortization                     134.1            8.3            142.7            9.2
(Gain) loss from divestitures and asset
impairments                                        (0.3 )         (0.0 )           39.0            2.5

Operating income                                  318.3           19.8            251.4           16.2
Interest expense and other                        108.8            6.8            130.3            8.4

Income from continuing operations before
income taxes                                      209.5           13.0            121.1            7.8
Income tax expense                                 96.9            6.0             53.8            3.5
Minority interests                                  0.1            0.0              0.4            0.0

Income from continuing operations                 112.5            7.0             66.9            4.3
Discontinued operations, net of tax                   -              -            (39.7 )         (2.6 )

Net income                                        112.5            7.0             27.2            1.7
Dividends on preferred stock                          -              -             (9.4 )         (0.6 )

Net income available to common
shareholders                                  $   112.5            7.0 %      $    17.8            1.1 %




                                                          Nine Months Ended September 30,
                                                        2008                            2007
Revenues                                      $ 4,672.7          100.0 %      $ 4,548.4          100.0 %
Cost of operations                              2,906.3           62.2          2,853.5           62.7
Selling, general and administrative
expenses                                          447.7            9.6            480.7           10.6
Merger related costs                               21.5            0.4                -              -
Depreciation and amortization                     411.6            8.8            412.6            9.1
Loss from divestitures and asset
impairments                                        23.5            0.5             40.5            0.9

Operating income                                  862.1           18.5            761.1           16.7
Interest expense and other                        324.9            7.0            424.4            9.3

Income from continuing operations before
income taxes                                      537.2           11.5            336.7            7.4
Income tax expense                                239.7            5.2            144.1            3.2
Minority interests                                  1.0            0.0              0.4            0.0

Income from continuing operations                 296.5            6.3            192.2            4.2
Discontinued operations, net of tax                   -              -            (33.9 )         (0.7 )

Net income                                        296.5            6.3            158.3            3.5
Dividends on preferred stock                       (6.2 )         (0.1 )          (28.1 )         (0.6 )

Net income available to common
shareholders                                  $   290.3            6.2 %      $   130.2            2.9 %

Revenues. We generate revenues primarily from fees charged to customers for waste collection, transfer, recycling and disposal services. Although 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 customers are billed in advance of the service being provided. National Accounts revenue included in other revenue represents the portion of revenue generated from nationwide contracts in markets outside our 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.

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The following table shows our total reported revenues by service line. Intercompany revenues have been eliminated.
Revenues by service line (in millions, except percentages):

                                  Three Months Ended September 30,                        Nine Months Ended September 30,
                                  2008                        2007                        2008                        2007
Collection
Residential              $   312.3         19.5 %    $   304.9         19.6 %    $   917.7         19.6 %    $   899.5         19.8 %
Commercial                   422.2         26.3          390.5         25.1        1,234.1         26.4        1,140.9         25.1
Roll-off (1)                 333.0         20.7          332.0         21.3          970.9         20.8          969.5         21.3
Recycling                     59.5          3.7           53.8          3.5          172.9          3.7          155.2          3.4

Total collection           1,127.0         70.2        1,081.2         69.5        3,295.6         70.5        3,165.1         69.6

Disposal
Landfill                     220.1         13.7          214.9         13.8          634.7         13.6          624.4         13.7
Transfer                     114.4          7.1          112.7          7.2          319.0          6.8          330.6          7.3

Total disposal               334.5         20.8          327.6         21.0          953.7         20.4          955.0         21.0

Recycling - commodity         61.0          3.8           66.4          4.3          193.7          4.2          190.9          4.2

Other(2)                      83.7          5.2           81.1          5.2          229.7          4.9          237.4          5.2

Total revenues           $ 1,606.2        100.0 %    $ 1,556.3        100.0 %    $ 4,672.7        100.0 %    $ 4,548.4        100.0 %

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

(2) Consists primarily of revenue from our National Accounts where the work has been subcontracted, revenue generated from transporting waste via railway and revenue from liquid waste disposal.

Revenues increased 3.2% and 2.7% during the three and nine months ended September 30, 2008 over the same periods in 2007. Revenue increase in the commercial line of business accounted for the majority of the total collection business increase during both periods. Disposal revenue during the third quarter of 2008 experienced revenue growth in both the landfill and transfer lines of business. Disposal revenue declined slightly during the nine months ended September 30, 2008 as the decrease in transfer revenue more than offset the landfill revenue increase. Recycling - commodity revenue decreased during the third quarter of 2008 primarily driven by volume decline while the increase during the nine months ended September 30, 2008 resulted from increases in cardboard and newspaper commodity pricing, partially offset by lower volume. Other revenue increased slightly during the third quarter in 2008 and declined during the nine months ended September 30, 2008. The decrease in other revenue during 2008 was primarily attributable to volume declines in the subcontract portion of our National Accounts.
Following is a summary of the change in revenues (in millions):

                                                     Three Months       Nine Months
                                                        Ended              Ended
                                                    September 30,      September 30,
 Reported revenues in 2007                          $      1,556.3     $      4,548.4
 Core business organic growth
 Increase from average base per unit price change             57.2              184.4
 Increase from fuel recovery fees                             54.1              113.2
 Decrease from net volume change                             (64.7 )           (192.7 )
 Net divested revenues and adjustments                        13.6               21.9
 Decrease in recycling and other                             (10.3 )             (2.5 )

 Reported revenues in 2008                          $      1,606.2     $      4,672.7

We analyze our revenue by organic growth, which excludes the effect of net divested revenues and adjustments, and revenue from recycling and other. We generated organic revenue growth of 3.2% and 1.9% during the three months ended September 30, 2008 and 2007, respectively, and 2.4% and 2.6% during the nine months ended September 30, 2008 and 2007, respectively.

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Revenue increased $111.3 million or 7.6%, and $297.6 million or 6.9%, respectively, from core business pricing growth, inclusive of fuel recovery fees of $54.1 million or 3.7%, and $113.2 million or 2.6%, respectively, during the three and nine months ended September 30, 2008. Within the collection business, average per unit pricing increased 11.2%, 7.5%, 7.1% and 6.8%, respectively, in the commercial, roll-off, residential and recycling collection lines of business during the third quarter of 2008. For the nine months ended September 30, 2008, average per unit pricing in the commercial, roll-off, residential and recycling collection lines of business increased 10.5%, 6.9%, 5.8% and 6.2%, respectively. Within the disposal line of business, landfill and transfer average per unit pricing increased 6.1% and 3.9%, respectively, and 5.6% and 4.6%, respectively, for the three and nine months ended September 30, 2008. The fuel recovery fee program, implemented in 2005 to mitigate our exposure to increases in fuel prices, generated $54.1 million or 48.6%, and $113.2 million or 38.0%, respectively, of the total price growth in the three and nine months ended September 30, 2008. This fee fluctuates with the price of fuel and, consequently, any increase in fuel prices would result in an increase in our revenue.
Core business volume decreased 4.4% during the third quarter of 2008 and 4.5% during the nine months ended September 30, 2008 compared to the same periods in the prior year as a result of lower volume across all major lines of business. Within the collection business, the commercial, roll-off and residential lines of business experienced volume declines of 3.4%, 8.7% and 4.4%, respectively, and 2.7%, 7.3% and 3.5%, respectively, during the three and nine months ended September 30, 2008. Within the disposal business, landfill and transfer volume decreased 4.4% and 4.2%, respectively, and 4.2% and 8.9%, respectively, during the three and nine months ended September 30, 2008. The volume decreases were primarily attributable to the decline in the home construction business combined with softer demand in other economically-sensitive areas of business. Our operations are not concentrated in any one geographic region. At September 30, 2008, we operated in 122 markets in 38 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 objectives cannot be met.
In the first quarter of 2008, we realigned our organizational structure and reduced the number of our geographic regions from five to four. Accordingly, we reclassified prior period segment results to reflect our current organizational structure.
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 September 30,                        Nine Months Ended September 30,
                             2008                        2007                        2008                        2007
East                $   420.7         26.2 %    $   412.2         26.5 %    $ 1,224.9         26.2 %    $ 1,210.4         26.6 %
Midwest                 385.9         24.0          361.8         23.3        1,098.3         23.5        1,040.7         22.9
South                   346.6         21.6          336.3         21.6        1,025.1         21.9        1,001.1         22.0
West                    414.1         25.8          404.8         26.0        1,218.8         26.1        1,178.8         25.9
Other(2)                 38.9          2.4           41.2          2.6          105.6          2.3          117.4          2.6

Total revenues      $ 1,606.2        100.0 %    $ 1,556.3        100.0 %    $ 4,672.7        100.0 %    $ 4,548.4        100.0 %

(1) See discussion in Note 12, Segment Reporting, to our consolidated financial statements.

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

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 includes 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

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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 costs; 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 costs of operations and as a percentage of revenues (in millions, except percentages):

. . .