Summary of WASTE SERVICES, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein as well as our annual report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission, including the factors set forth in the section titled "Cautionary Statement Regarding Forward-Looking Statements" and factors affecting future results as well as our other filings made with the Securities and Exchange Commission. Overview
We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based, whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are located in the United States and Canada. Our U.S. operations are located in Florida and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia). We divested our Jacksonville, Florida operations in March 2008, and as a result, these operations are presented as discontinued for all periods presented.
Sources of Revenue
Our revenue consists primarily of fees charged to customers for solid waste collection, landfill disposal, transfer and recycling services.
We derive our collection revenue from services provided to commercial, industrial and residential customers. Collection services are generally performed under service agreements or pursuant to contracts with municipalities. We recognize revenue when services are rendered. Amounts billed to customers prior to providing the related services are reflected as deferred revenue and reported as revenue in the periods in which the services are rendered.
We provide collection services for commercial and industrial customers generally under one to five year service agreements. We determine the fees we charge our customers based on a variety of factors, including collection frequency, level of service, route density, the type, volume and weight of the waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged by competitors for similar services. Our contracts with commercial and industrial customers typically allow us to pass on increased costs resulting from variable items such as disposal and fuel costs and surcharges. Our ability to pass on cost increases is however, sometimes limited by the terms of our contracts.
We provide residential waste collection services through a variety of contractual arrangements, including contracts with municipalities, owners and operators of large residential complexes, mobile home parks and homeowner associations or through subscription arrangements with individual homeowners. Our contracts with municipalities are typically for a term of three to ten years and contain a formula, generally based on a predetermined published price index, for adjustments to fees to cover increases in some, but not all, of our operating costs. Certain of our contracts with municipalities contain renewal provisions. The fees we charge for residential solid waste collection services provided on a subscription basis are based primarily on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices we charge in the market for similar services.
We charge our landfill and transfer station customers a tipping fee on a per ton or per cubic yard basis for disposing of their solid waste at our transfer stations and landfills. We generally base our landfill tipping fees on market factors and the type and weight of, or volume of the waste deposited. We generally base our transfer station tipping fees on market factors and the cost of processing the waste deposited at the transfer station, the cost of transporting the waste to a disposal facility and the cost of disposal.
Material recovery facilities generate revenue from the sale of recyclable commodities. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our customers. However, sustained declines in the price of recycled commodities, including but not limited to, aluminum, used corrugated cardboard or news print would lower our revenue from such commodities and adversely affect our margins and profitability.

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Expense Structure
Our cost of operations primarily includes tipping fees and related disposal costs, labor and related benefit costs, equipment maintenance, fuel, vehicle, liability and workers' compensation insurance and landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated operations where possible, using transfer stations to link collection operations with our landfills to increase internalization of our waste volume. Internalization lowers our disposal costs by allowing us to eliminate tipping fees otherwise paid to third party landfill or transfer station operators. We believe that internalization provides us with a competitive advantage by allowing us to be a low cost provider in our markets. We expect that our internalization will gradually increase over time as we develop our network of transfer stations and maximize delivery of collection volumes to our landfill sites.
In markets where we do not have our own landfills, we seek to secure disposal arrangements with municipalities or private owners of landfills or transfer stations. In these markets, our ability to maintain competitive prices for our collection services is generally dependent upon our ability to secure competitive disposal pricing. If owners of third party disposal sites discontinue our arrangements, we would have to seek alternative disposal sites which could impact our profitability and cash flow. In addition, if third party disposal sites increase their tipping fees and we are unable to pass these increases on to our collection customers, our profitability and cash flow would be negatively impacted.
We believe that the age and condition of our vehicle fleet has a significant impact on operating costs, including, but not limited to, repairs and maintenance, insurance and driver training and retention costs. Through capital investment, we seek to maintain an average fleet age of approximately six to seven years. We believe that this enables us to best control our repair and maintenance costs, safety and insurance costs and employee turnover related costs.
Selling, general and administrative expenses include managerial costs, information systems, sales force, administrative expenses and professional fees.
Depreciation, depletion and amortization includes depreciation of fixed assets over their estimated useful lives using the straight-line method, depletion of landfill costs, including capping, closure and post-closure obligations using the units-of-consumption method, and amortization of intangible assets including customer relationships and contracts and covenants not-to-compete, which are amortized over the expected life of the benefit to be received from such intangibles.
Costs associated with acquisitions are expensed as they are incurred. These costs may include transaction related costs and internal costs, including executive salaries, overhead and travel costs. Prior to our adoption of Statement of Financial Accounting Standards ("SFAS") No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)") on January 1, 2009, we capitalized certain third-party costs related to pending acquisitions that are no longer capitalizable following our adoption of this standard. There were no transition adjustments relative to our adoption of SFAS 141(R). Recent Developments
Acquisitions and Dispositions
In January 2009, we acquired a "tuck-in" hauling operation in southwest Florida for an aggregate purchase price of $0.6 million.
In December 2008, we acquired RIP, Inc., the owner of a construction and demolition waste landfill in Citrus Country, Florida (the "RIP Landfill"), for an aggregate purchase price of $7.7 million. Should the site be permitted as a Class I landfill, Class III landfill or as a transfer station, the sellers are entitled to future royalties at varied rates per ton based on the volume and type of waste deposited at the site.
In December 2008, we acquired the assets of Commercial Clean-up Enterprises, Inc. ("Commercial Clean-up"), a construction and demolition hauling operation in Fort Myers, Florida, for a total purchase price of $6.1 million, of which $1.6 million is deferred and payable as we collect waste volumes from our pre-existing waste streams within the counties of Charlotte, Lee and Collier, Florida. We are internalizing the waste volumes associated with this acquisition to our SLD Landfill in southwest Florida.

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In March 2008, we sold our hauling and material recovery operations and a construction and demolition landfill site in the Jacksonville, Florida market to an independent third party. The proceeds from this sale approximated $56.7 million of cash, including working capital. At the time of close, we were actively pursuing an expansion at the landfill. If the construction and demolition landfill site did not obtain certain permits relating to an expansion, we would have been required to refund $10.0 million of the purchase price and receive title to the expansion property. Accordingly, at the time of closing we deferred this portion of the proceeds, net of our $3.0 million cost basis. During December 2008, the permits relating to the expansion were secured and the deferred gain was recognized. Simultaneously with the closing of the sale transaction we entered into an operating lease with the buyer for certain land and buildings used in the Jacksonville, Florida operations, for a term of five years at $0.5 million per year. The lessee had the option to purchase the leased assets for a purchase price of $6.0 million, which it exercised in March 2009 resulting in a gain on sale of $3.3 million in the quarter. The proceeds from the sale of the leased assets were utilized to repay amounts under the revolver portion of our Credit Facilities. At the time of close in March 2008, we utilized $42.5 million of the proceeds to make a prepayment of the term loan under our Senior Secured Credit Facilities. Accordingly, we expensed approximately $0.5 million of unamortized debt issue costs relating to this retirement. For the year ended 2008, we recognized a pre-tax gain on disposal of $18.4 million ($11.1 million net of tax) relative to the sale of the Jacksonville, Florida operations, of which $11.5 million ($7.0 million net of tax) was realized during the first quarter of 2008. Included in the calculation of the gain on disposal for the Jacksonville, Florida operations was approximately $23.6 million of goodwill. Subsequent to the disposal of the Jacksonville, Florida operations, we adjusted the pre-tax gain on disposal for the settlement of working capital of approximately $0.2 million.
We have presented the net assets and operations of our Jacksonville, Florida operations, as discontinued operations for all periods presented. Revenue and pre-tax income from discontinued operations was $4.7 million and $0.7 million for the three months ended March 31, 2008, respectively. The transaction to dispose of the Jacksonville, Florida operations was completed in 2008 and accordingly, these operations had no impact on our 2009 results. Goodwill
We account for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). We test for impairment of goodwill annually on December 31 and whenever events or circumstances change between annual tests that would indicate a possible impairment. Examples of such events may include:
(i) a significant adverse change in legal factors or in the business climate;
(ii) an adverse action or assessment by a regulator; (iii) a more likely than not expectation that a reporting unit or a significant portion thereof will be sold; (iv) continued or sustained losses at a reporting unit; (v) a significant decline in our market capitalization as compared to our book value or (vi) the testing for recoverability under SFAS 144 of a significant asset group within the reporting unit. We test for impairment using the two-step process prescribed by SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. During the first quarter of 2009, our market capitalization declined from that of the fourth quarter of 2008. We considered this decline to be an indicator of possible impairment of goodwill. As of March 31, 2009, we performed the step one screen for impairment, which we passed and accordingly, we did not proceed to the second step, and we concluded that our goodwill was not impaired. Consistent with our goodwill tests performed in prior years, we have defined our reporting units to be consistent with our operating segments: Eastern Canada, Western Canada and Florida. In determining fair value, we primarily utilize discounted future cash flows. However, we may compare the results of fair value calculated using discounted cash flows to other fair value techniques including:
(i) operating results based on a comparative multiple of earnings or revenues;
(ii) offers from interested investors, if any; or (iii) appraisals. There may be instances where these alternative methods provide a more accurate measure or indication of fair value. Significant estimates used in the fair value calculation utilizing discounted future cash flows include, but are not limited to: (i) estimates of future revenue and expense growth by reporting unit;
(ii) future estimated effective tax rates, which we estimate to range between 32% and 40%; (iii) future estimated capital expenditures as well as future required investments in working capital; (iv) estimated discount rate, which we estimate to range between 11% and 12%; (v) the ability to utilize certain domestic tax attributes and (vi) the future terminal value of the reporting unit, which is based on its ability to exist into perpetuity. Significant estimates used in the fair value calculation utilizing market value multiples include but are not limited to: (i) estimated future growth potential of the reporting unit; (ii) estimated multiples of revenue or earnings a willing buyer is likely to pay; and (iii) estimated control premium a willing buyer is likely to pay. There have been no substantial changes in the methodologies employed, significant assumptions used, or calculations applied in the first step of the SFAS 142 impairment test for the first quarter of 2009 compared to our annual test for 2008.

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In preparing our interim test for impairment, we determined that the sum of our reporting unit fair values exceeded our market capitalization. We determined market capitalization as the fair value of our common shares outstanding using the twenty-day weighted average to March 31, 2009. We believe one of the primary reconciling differences between fair value and our market capitalization relates to control premium. Control premium is the savings and / or synergies a market participant could realize by obtaining control and eliminating duplicative overhead costs and realizing operating efficiencies from the consolidation of routes and internalization of waste streams. Additionally, we believe there are qualitative factors that externally influence our market capitalization including, but are not limited to:
� The fact that, to a significant extent, our shares are held by insiders and affiliates, reducing market liquidity.

� One of our larger shareholders, due to circumstances unrelated to us, is liquidating their position putting pressure on the market price of our shares.

� We believe that in general, the market continues to discount the value of common equity, believing that current leverage ratios are not sustainable and companies will be required to refinance debt at higher rates and / or issue additional equity thereby diluting current shareholders. However, as a result of the October 2008 refinancing of our Senior Secured Credit Facilities, we believe our capital structure to be stable, but such stability is not reflected in our share price.

We will continue to monitor market trends in our business, the related expected cash flows and our calculation of market capitalization for purposes of identifying possible indicators of impairment. Should our book value per share continue to exceed our market price per share, or we have other indicators of impairment, as previously discussed, we will be required to perform additional interim goodwill impairment analyses, which may lead to the recognition of a goodwill impairment. Additionally, we would then be required to review our remaining long-lived assets for potential impairment.
Future events, including but not limited to continued declines in economic activity, loss of contracts or a significant number of customers and / or a rapid increase in costs or capital expenditures, could cause us to conclude that impairment indicators exist and that goodwill associated with the reporting units is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. Results of Operations for the Three Months Ended March 31, 2009 and 2008 A portion of our operations is domiciled in Canada. For each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars, in accordance with SFAS No. 52, "Foreign Currency Translation", ("SFAS 52"). Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of our Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of our Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of our Canadian operations into U.S. dollars are reported as a separate component of shareholders' equity and are included in comprehensive income or loss. Monetary assets and liabilities, as well as intercompany balances denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.
Exchange rates for the Canadian dollar to U.S. dollar that are applicable for the periods covered by the accompanying Unaudited Condensed Consolidated Financial Statements are summarized as follows:

As of:

                      March 31, 2009                $ 0.7928
                      December 31, 2008             $ 0.8210
                      For the three months ended:
                      March 31, 2009                $ 0.8035
                      March 31, 2008                $ 0.9953

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Our consolidated results of operations for the three months ended March 31, 2009 and 2008 are as follows (in thousands):

                                                      Three Months Ended March 31, 2009
                                    Florida                        Canada                          Total
Revenue                    $ 50,243          100.0 %      $ 45,549          100.0 %      $ 95,792          100.0 %
Operating expenses:
Cost of operations           31,975           63.6 %        31,233           68.6 %        63,208           66.0 %
Selling, general and
administrative
expense                       6,446           12.8 %         6,763           14.8 %        13,209           13.8 %
Depreciation,
depletion and
amortization                  6,364           12.7 %         3,996            8.8 %        10,360           10.8 %
Gain on sale of
property and
equipment, foreign
exchange and other           (3,474 )         -6.9 %           164            0.4 %        (3,310 )         -3.5 %

Income from
operations                 $  8,932           17.8 %      $  3,393            7.4 %      $ 12,325           12.9 %




                                                      Three Months Ended March 31, 2008
                                    Florida                        Canada                          Total
Revenue                    $ 60,090          100.0 %      $ 56,519          100.0 %      $ 116,609          100.0 %
Operating expenses:
Cost of operations           38,916           64.8 %        37,628           66.6 %         76,544           65.6 %
Selling, general and
administrative
expense                       8,100           13.5 %         8,265           14.6 %         16,365           14.0 %
Depreciation,
depletion and
amortization                  6,759           11.2 %         4,943            8.7 %         11,702           10.1 %
Gain on sale of
property and
equipment, foreign
exchange and other             (200 )         -0.3 %            27            0.1 %           (173 )         -0.1 %

Income from
operations                 $  6,515           10.8 %      $  5,656           10.0 %      $  12,171           10.4 %

 Revenue
   A summary of our revenue is as follows (in thousands):

                                                Three Months Ended March 31,
                                               2009                      2008
        Collection                     $  82,261        77.2 %   $  96,505        74.8 %
        Landfill disposal                  9,574         9.0 %      11,829         9.2 %
        Transfer station                  12,974        12.2 %      14,671        11.4 %
        Material recovery facilities       1,572         1.5 %       5,786         4.5 %
        Other specialized services           201         0.1 %         192         0.1 %

                                         106,582       100.0 %     128,983       100.0 %
        Intercompany elimination         (10,790 )                 (12,374 )

                                       $  95,792                 $ 116,609

Revenue was $95.8 million and $116.6 million for the three months ended March 31, 2009 and 2008, respectively, a decrease of $20.8 million or 17.8%. The decrease in revenue from our Florida operations for the three months ended March 31, 2009 of $9.8 million or 16.3% was driven by decreased collection volumes, primarily in our industrial and commercial lines of business of $2.9 million, coupled with lower third-party transfer station, recycling and landfill volumes of $2.6 million. Declining fuel costs resulted in lower surcharges of $2.6 million and other net decreases of $3.5 million, primarily related to the expiration of certain residential recycling collection contracts. Offsetting these decreases were net price increases of $1.3 million, which was adversely affected by commodity pricing declines of $0.8 million, and increases from acquisitions of $0.5 million.

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The decrease in revenue from our Canadian operations for the three months ended March 31, 2009 of $11.0 million or 19.5% was primarily due to the unfavorable effect of foreign exchange movements of $10.9 million. After considering foreign exchange rate changes, revenue from our Canadian operations was relatively flat. We realized net price increases of $1.9 million, which were adversely affected by net commodity pricing declines of $0.3 million, and organic volume growth of $0.1 million. Offsetting these increases were decreases in fuel surcharges of $1.0 million resulting from lower fuel costs, and other decreases of $1.1 million, primarily related to the loss of residential contracts.
Cost of Operations
Cost of operations was $63.2 million and $76.5 million for the three months ended March 31, 2009 and 2008, respectively, a decrease of $13.3 million or 17.4%. As a percentage of revenue, cost of operations was 66.0% and 65.6% for the three months ended March 31, 2009 and 2008, respectively.
The decrease in cost of operations from our Florida operations for the three months ended March 31, 2009 of $6.9 million or 17.7% was due to lower costs for third-party disposal due to overall lower collection volumes of $2.6 million, lower variable labor costs of $2.0 million, decreased fuel costs of $1.6 million and decreases in other operating costs, primarily repair and maintenance, of $1.0 million. Offsetting these decreases were increased insurance and support costs of $0.3 million, which is primarily related to unfavorable claim development related to prior periods. As a percentage of revenue, cost of operations for our Florida operations was 63.6% and 64.8% for the three months ended March 31, 2009 and 2008, respectively. The improvement in our domestic gross margin is primarily due to wage and cost controls implemented in the fourth quarter of 2008.
The decrease in cost of operations from our Canadian operations for the three months ended March 31, 2009 of $6.4 million or 17.0% was primarily due to the favorable effect of foreign exchange movements of $7.5 million. After considering foreign exchange rate changes, the increase in cost of operations from our Canadian operations of $1.1 million primarily relates to increased disposal rates for waste volumes shipped to the United States of $0.9 million, increased labor costs of $0.4 million, repair, maintenance and other increases of $0.8 million, offset by decreased fuel costs of $1.0 million. As a percentage of revenue, cost of operations for our Canadian operations was 68.6% and 66.6% for the three months ended March 31, 2009 and 2008, respectively. The decline in our Canadian gross margin is primarily due to lower commodity revenue coupled with low margin waste streams disposed of at our transfer stations and higher operating costs, as previously discussed.
Selling, General and Administrative Expense Selling, general and administrative expense was $13.2 million and $16.4 million for the three months ended March 31, 2009 and 2008, respectively, a decrease of $3.2 million or 19.5%. As a percentage of revenue, selling, general and administrative expense was 13.8% and 14.0% for the three months ended March 31, 2009 and 2008, respectively. The overall decrease in selling, general and administrative expense was affected by a restructuring of corporate overhead and other administrative and operational functions that we completed during the fourth quarter of 2008, which is more fully described in our annual report on Form 10-K for the year ended December 31, 2008. These restructuring efforts have, for the most part, resulted in decreased salaries, wages, bonuses and other benefits of $1.4 million and decreased consulting and other . . .