WASTE MANAGEMENT INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-12154

WASTE MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 73-1309529
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

1001 FANNIN STREET, SUITE 4000 77002
HOUSTON, TEXAS (Zip code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 512-6200

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
5.75% CONVERTIBLE SUBORDINATED NOTES DUE 2005

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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at June 28, 2002, was approximately $15.8 million. The aggregate
market value was computed by using the closing price of the common stock as of
that date on the New York Stock Exchange ("NYSE"). (For purposes of calculating
this amount only, all directors and executive officers of the registrant have
been treated as affiliates.)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
The number of shares of Common Stock, $0.01 par value, of the registrant
outstanding at February 18, 2003, was 594,964,062 (excluding treasury shares of
35,318,399).

DOCUMENTS INCORPORATED BY REFERENCE

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TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

GENERAL

Waste Management, Inc. is our industry's leading provider of integrated
waste services in North America. Through our subsidiaries, we provide
collection, transfer, recycling and resource recovery, and disposal services. We
are also a leading developer, operator and owner of waste-to-energy facilities
in the United States. Our customers include commercial, industrial, municipal
and residential customers, other waste management companies, governmental
entities and independent power market participants. During 2002, none of our
customers accounted for more than 5% of our operating revenue. We employed
approximately 53,000 people as of December 31, 2002.

The Company was incorporated in Oklahoma in 1987 under the name "USA Waste
Services, Inc." and was reincorporated as a Delaware company in 1995. In 1998,
we merged with Waste Management, Inc., who became our 100% owned subsidiary and
whose name we changed to Waste Management Holdings, Inc., or "WM Holdings" (the
"WM Holdings Merger"). At the same time, we changed our name to Waste
Management, Inc. When the terms "Waste Management," "WMI," the "Company," "we,"
"us" or "our" are used in this document, those terms are being used to refer to
Waste Management, Inc., its subsidiaries, affiliates and predecessors, unless
the context requires otherwise. The Company's principal executive offices are
located at 1001 Fannin Street, Suite 4000, Houston, Texas 77002. Our telephone
number at that address is (713) 512-6200. Our website address is
http://www.wm.com. Our annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K are all available, free of charge, on our
website as soon as practicable after we file the reports with the SEC. Our stock
is traded on the New York Stock Exchange under the symbol "WMI."

STRATEGY

Our goal is operational excellence and financial strength, which we seek to
achieve by concentrating on (i) providing excellent customer service, (ii)
generating higher profit margins, (iii) increasing cash flow and (iv)
maintaining our credit ratings at investment grade. The key initiatives that we
have focused on and continue to make progress in include:

- Asset Utilization -- We have, and continue to develop, integrated local
business strategies for our operations, including collection, disposal
(including waste-to-energy plants), and transfer, to achieve higher rates
of internalization and to improve our overall utilization of our asset
base;

- Service Excellence -- We continue to design and implement new procedures
to better meet our customers' requirements;

- Economies of Scale and Cost Efficiencies -- We continue to implement a
procurement and sourcing process that leverages our size and total
purchasing ability to realize savings and discounts through consolidation
and reduction of the number of suppliers we use; we continue to manage
closely our capital and other expenditures;

- Price/Revenue Management -- We are improving our pricing analysis
capabilities, and developing and implementing new revenue management
systems;

- Sales Force Effectiveness -- We continue to provide tools, leadership and
incentives throughout our organization that are designed to enable and
encourage our sales force to improve its effectiveness and increase
revenue; and

- Shareholder Value -- We focus on enhancing shareholder value by such
things as our share repurchases as well as emphasizing earnings and cash
flow growth, while continuing to maintain a strong, liquid and flexible
financial condition. We also strive to maintain close relationships with
banks, bondholders, credit rating agencies, surety companies and
regulators to ensure adequate access to a variety of capital markets and
funding sources.

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OPERATIONS

GENERAL

In 2002, we adopted and implemented a new organizational structure designed
to better align collection, transport, recycling and disposal resources within
market areas. We believe the new structure will yield a number of benefits,
including clearer accountability and responsibility for business performance and
profitability in specific markets; simplification of structure; cost savings
through consolidation of duplicate administrative and other support functions;
improved utilization of operating assets; and better customer responsiveness.

In March 2002 all of our operations, other than Wheelabrator Technologies
Inc. ("WTI") and Canadian Waste Services ("CWS"), were restructured to reduce
the number of field layers of management from four to three and the number of
field layers that have administrative staff from four to two. Under the new
structure, our approximately 1,200 operating sites, including waste collection
depots, transfer stations, landfills and recycling facilities, were restructured
into approximately 82 newly established Market Areas. These Market Areas are
responsible for the sales and marketing of our services and for directing the
delivery of service by the districts. The Market Area is also the profit center,
and the districts, all of which used to be profit centers, became cost centers.
The largest Market Areas are headed by a Vice President and the others are
headed by a General Manager. The Market Areas consolidate financial reporting
and provide a range of assistance in the areas of finance and accounting,
procurement, people, market planning and development, fleet services, recycling,
legal services, engineering, regulatory compliance, safety and public affairs to
support the districts. These Market Areas all report to one of our four Groups
that divide the United States geographically into the Eastern, Midwest, Southern
and Western operations we formerly called "Areas." CWS, which was restructured
into ten newly established Market Areas in July 2002, and WTI, which manages our
waste-to-energy facilities and independent power production plants ("IPPs"),
were the fifth and sixth Areas under our previous structure and continue as the
fifth and sixth Groups under the new structure.

Our North American Solid Waste ("NASW") operations are comprised of our six
Groups, along with our other NASW services, which include our national
recycling, national accounts and methane gas recovery operations that provide
services throughout the Groups. Each of the Groups within NASW and the other
NASW services is reported as a separate segment. We also had international waste
management and non-solid waste services, all of which were divested by March 31,
2002. However, these operations did impact our prior years results of
operations, as discussed further in Management's Discussion and Analysis of
Financial Condition and Results of Operations, and are therefore included in our
presentations in this report as "Other."

The table below shows for each of the years in the three-year period ended
December 31, 2002 the total revenues (in millions) contributed by each of our
reportable segments. The prior year information has been restated to conform to
the current year presentation as described above. More information about our
results of operations by reportable segment is included in Note 15 to the
consolidated financial statements.

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NASW

The services provided by our NASW segments include collection, disposal
(solid waste and hazardous waste landfills), transfer, WTI's waste-to-energy
facilities and IPPs, recycling and other services, as described below. The
following table shows for each of the years in the three-year period ended
December 31, 2002 revenues (in millions) contributed by our principal services.

Collection. Our commitment to the customer begins with a vast waste
collection network. Collection involves picking up and transporting waste from
where it was generated to a transfer station or disposal site. Depending on the
type of customer being served, we generally provide collection services under
one of two types of arrangements:

- For commercial and industrial collection services, there is generally a
one to three-year service agreement. The fees under the agreements are
determined by factors such as collection frequency, type of collection
equipment furnished by us, type and volume or weight of the waste
collected, the distance to the disposal facility, labor cost and cost of
disposal. As part of the service, we provide steel containers to most of
the customers to store their solid waste. The containers range in size
from one to 50 cubic yards and are designed so that they can be lifted
mechanically and either emptied into a truck's compaction hopper or
directly into a disposal site. By using these containers, we can service
most of our commercial and industrial customers with trucks operated by
only one employee.

- For most residential collection services, there is a contract with, or
franchise granted by, a municipality or regional authority that has
granted us the exclusive right to service all or a portion of the homes
in that area. These contracts or franchises are typically for one to five
years, but can sometimes be longer. The fees for residential collection
are either paid by the authorities from their tax revenues or service
charges, or are paid directly by the residents receiving the service.

Landfill. Landfills are the main depository for solid waste in North
America and we have the largest network of landfills in North America. Solid
waste landfills are built and operated under prescribed procedures. Currently,
solid waste landfills in the United States must be designed, permitted,
operated, closed and maintained after closure in compliance with federal, state
and local regulations pursuant to Subtitle D of the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"). The operation of a solid waste
landfill includes excavation, construction of liners and final caps, continuous
spreading and compacting of waste, and covering of waste with earth or other
inert material at least once a day. These operations are carefully planned to
maintain sanitary conditions, to ensure the best possible use of the airspace
and to prepare the site so it can ultimately be used for other purposes.

Access to a disposal facility, such as a solid waste landfill, is a
necessity for all solid waste management companies. While access can be obtained
to disposal facilities owned or operated by third parties, we believe it is
usually preferable for our collection operations to use disposal facilities that
we own or operate, which we refer to as internalization. When we have
internalization, we pay ourselves instead of a third party and generally are
able to realize higher consolidated margins and stronger operating cash flows.
The fees charged at disposal facilities, which are known as "tipping fees," are
based on market factors and the type and weight or volume of solid waste
deposited and the type and size of the vehicles used in the transportation of
the waste.

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We also operate secure hazardous waste landfills in the United States.
Under RCRA, all hazardous waste landfills must be permitted by the federal
government, and all of ours have obtained such permits. These landfills must
also comply with certain operating standards, and our hazardous waste landfills
have received the permits and approvals needed to accept hazardous waste,
although some of them can only accept certain kinds of hazardous waste. Only
hazardous waste in a stable, solid form, which meets applicable regulatory
requirements, can be deposited in our secure disposal cells. In some cases,
hazardous waste can be treated before disposal. Generally, these treatments
involve the separation or removal of solid materials from liquids and chemical
treatments that involve the transformation of wastes into inert materials that
are no longer hazardous. Our hazardous waste landfills are sited, constructed
and operated in a manner designed to provide long-term containment of the waste.
We also operate a hazardous waste facility at which we isolate treated hazardous
wastes in liquid form by injection into deep wells that have been drilled in
rock formations far below the base of fresh water to a point that is separated
by other substantial geological confining layers.

We owned or operated 288 solid waste and 5 hazardous landfills at December
31, 2002. The landfills that we operate but do not own are generally operated
through a lease agreement or under an operating contract. The differences
between the two arrangements usually relates to the owner of the permit.
Generally, with a lease agreement, the permit is in our name and we operate the
landfill for its entire life and make payments to the lessor, who is generally a
private landowner, based either on a percentage of revenue or a rate per ton
received. We are generally responsible for closure and post-closure requirements
under our lease agreements. For operating contracts, the owner of the property,
generally a municipality, usually owns the permit and we operate the landfill
based on a contracted term, which may be the life of the landfill. The property
owner is generally responsible for closure and post-closure obligations under
our operating contracts.

Based on remaining permitted capacity as of December 31, 2002 and projected
annual disposal volumes, the average remaining landfill life for all operating
landfills is approximately 22 years. Many of our existing landfills have the
potential for expanded disposal capacity beyond what is currently permitted. We
monitor the availability of permitted disposal capacity at each of our landfills
and evaluate whether to pursue an expansion at a given landfill based on
estimated future waste volumes and prices, remaining capacity and likelihood of
obtaining an expansion. We are currently seeking to expand permitted capacity at
91 of our landfills for which we consider expansions to be probable. Although no
assurances can be made that all future expansions will be permitted as designed,
the average remaining landfill life for all landfills is approximately 33 years
when considering remaining permitted capacity, probable expansion capacity and
projected annual disposal volume. At December 31, the expected remaining
airspace capacity in cubic yards and tonnage of waste that can be accepted at
our operating landfills is shown below (in millions):

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The following table reflects landfill capacity and airspace changes, as
measured in tons, for landfills operated during the years ended December 31,
2002 and December 31, 2001, respectively (in millions):

The estimated operating lives, based on remaining permitted and probable
expansion capacity and projected annual disposal volume, in years, as of
December 31, 2002, is as follows:

The tonnage volume that we received in 2002 and 2001 at all of our
landfills is shown below (tons in thousands):

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(a) This amount includes approximately 1.2 million tons that were received at
the landfill but never placed within the permitted airspace due to
alternative use of the disposed material.

When a landfill has reached its permitted waste capacity and has been
permanently capped and receives certification of closure from the applicable
regulatory agency, management of the site, including any remediation activities,
is transferred to our closed sites management group. At December 31, 2002, 167
closed landfills, which we owned or operated, were managed by our closed sites
management group, which is part of our Corporate function for segment reporting
purposes.

Transfer. A transfer station is a facility located near residential and
commercial collection routes where collection trucks take the solid waste that
has been collected. The solid waste is then transferred via transfer trucks or
rail to disposal sites. Fees at transfer stations are usually based on the type
and volume or weight of

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the waste transferred and the distance to the disposal site. At December 31,
2002, we operated 346 transfer stations in North America. There are two main
reasons for using transfer stations:

- Using transfer stations reduces the costs associated with transporting
waste to final disposal sites. This cost reduction is due to the fact
that the trucks, railcars or rail containers that we use for transfer
have a larger capacity than collection trucks, allowing more waste to be
transported to the disposal facility in each trip. The consolidation of
the waste also increases the efficiency of our collection personnel and
equipment since they are able to focus on collection activities rather
than making trips to the disposal sites.

- The use of transfer stations also improves internalization by allowing us
to retain fees that we would otherwise pay a third party to dispose of
waste we collect. A greater percentage of the waste we collect can be
disposed of at one of our own disposal sites because the waste coming
into one of our transfer stations will usually be taken to one of our own
disposal facilities. Additionally, more waste is internalized since the
transfer vehicles can transport waste longer distances more efficiently
as described above.

The transfer stations that we operate but do not own are generally operated
through a lease agreement under which we lease the land and/or the improvements
on the land from a third party. There are some instances where the transfer
station is operated under contract, generally for municipalities. In most
instances, we are the owner of the permit and will be responsible for all of the
closure requirements under the lease and operating agreements.

WTI. Through WTI, we own, or operate under agreements, 16 waste-to-energy
facilities that accept solid waste for disposal. Our waste-to-energy facilities
are capable of processing up to 23,825 tons of solid waste each day. In 2002 and
2001, we received approximately 7,175,000 total tons, or approximately 19,700
tons per day, and approximately 7,400,000 total tons, or approximately 20,000
tons per day, respectively, at our waste-to-energy facilities. The solid waste
is burned at high temperatures in specially designed boilers at these
facilities, producing heat that is converted into high-pressure steam. We use
that steam to generate electricity for sale to electric utilities under
long-term contracts. Our waste-to-energy facilities can generate up to 671
megawatts ("mW") of renewable electricity per hour.

Also included in our WTI operations are our eight IPPs that convert various
waste and conventional fuels into electricity. The IPPs combust wood waste,
anthracite coal waste (culm), tires, landfill gas and natural gas. The wood
waste facilities are integral to the solid waste industry, disposing of urban
wood, waste tires, railroad ties and utility poles. Our anthracite culm facility
in Pennsylvania processes the waste materials left over from coal mining
operations from over half a century ago. Ash remaining after burning the culm
piles at the facility is used to reclaim the land damaged by decades of coal
mining. In addition to electricity production, the IPPs also produce steam,
which is sold to industrial and commercial users. The IPPs can produce a total
of 272 mW of electricity per hour.

Recycling. We provide recycling services in the United States and Canada
through our Recycle America(R), Recycle Canada(R) and other complementary
programs. Recycling involves the removal of reusable materials from the waste
stream for processing and resale or other disposition for use in various
applications. Our commercial and industrial operations include collection, data
destruction, shredding, automated sorting and construction and demolition
processing. We use state-of-the-art technology for sorting and processing glass
to remove contaminants and color separate the glass, which increases material
recovery and delivers higher quality recovered materials to manufacturers. We
also provide complete marketing programs for processing, inventory and sale of
recovered plastic and rubber. Our recycling operations also include the recovery
of electronic scrap, instituting programs for the collection and recycling of
electronic materials.

As part of our residential solid waste collection services, we also engage
in curbside collection of recyclable materials from residences in the United
States and Canada. Curbside recycling services generally involve the collection
of recyclable paper, glass, plastic and metal waste materials, which may be
separated by residents into different waste containers or disposed of together,
all as recyclable materials. Recyclable materials are deposited by one of our
collection trucks, or by residents themselves, at a local materials recovery

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facility ("MRF") for weighing, processing and marketing. We operate 146 MRFs,
where paper, glass, metals, plastics and compost are recovered for resale, and
18 secondary processing facilities, where materials received from MRFs are
processed into raw products used in the manufacturing of consumer goods. Our
recycling operations include the marketing and reselling of recyclable materials
on behalf of our own facilities as well as for third parties.

Fees for recycling services are determined by such considerations as market
factors, frequency of collection, type and volume or weight of the recyclable
material, degree of processing required and the market value of the recovered
material.

As part of our recycling operations, we also have a commodities trading
operation that started in the fourth quarter of 2001. The primary purpose of our
trading operation is to hedge our exposure to price fluctuations on sales of
waste paper products from our MRFs. We also enter into derivatives for trading
purposes with the objective of generating profits from exposure to changes in
the market price of waste paper and other fiber products. All hedging and
trading transactions are subject to our risk management policy which limits the
amount of total net exposure during stated periods. See Note 10 to the
consolidated financial statements for further discussion.

In January 2003, we announced the formation of a new recycling entity,
Recycle America Alliance, LLC ("RAA"). Our goal is to optimize the capacity and
improve the profitability of our recycling line of business by combining assets
and operations with other key domestic recycling processors and marketers. RAA
is a majority owned and consolidated subsidiary. See Recent Developments for
more information.

Other Services. Landfill gas is produced through the natural breakdown of
waste deposited in a landfill. Landfill gas is a readily available, renewable
energy source that can be gathered and used directly as medium British thermal
unit ("Btu") gas for industrial use or sold to gas-to-energy plants to fuel
engine generators that, in turn, generate electricity. We actively pursue
landfill gas-to-energy projects and are currently supplying methane gas at 72 of
our solid waste landfills. For 44 of these landfills, the processed gas is
delivered to engine generators to produce electricity. The generated electricity
is then sold under renewable energy sales contracts, usually to public
utilities, municipal utilities, or power cooperatives, often under terms or
conditions which are subject to approval by regulatory authorities. For 26
landfills, the gas is delivered via pipeline to industrial customers as a direct
substitute for fossil fuels in industrial processes such as steam boilers,
cement kilns and utility plants. At the remaining two landfills, the gas is
further processed to pipeline-quality natural gas, and sold to natural gas
suppliers.

In addition, as part of our other operations, we rent and service portable
restroom facilities to municipalities and commercial customers under the name
Port-o-let(R), and provide street and parking lot sweeping services. We also
provide in-plant services, in which we outsource our employees to provide full
service waste management to customers at their plants. Our vertically integrated
waste management operations allow us to provide these customers with full
management of their waste, including choosing the right sized containers,
finding recycling opportunities, minimizing their waste, and transporting and
disposing of their waste.

COMPETITION

The solid waste industry is very competitive. Competition comes from a
number of publicly-held companies, locally-owned private solid waste services
companies, and large commercial and industrial companies handling their own
waste collection or disposal operations. We also have competition from
municipalities and other regional government authorities with respect to
residential and commercial solid waste collection and solid waste landfills. The
municipalities and other regional governmental authorities can sometimes offer
lower direct charges to the customer for the same service by subsidizing the
cost of services through the use of tax revenues and tax-exempt financing.

Operating costs, disposal costs and collection fees vary widely throughout
the geographic areas in which we operate. The prices that we charge are
determined locally, and typically vary by the volume, type of waste collected,
treatment requirements, risks involved in the handling or disposing of waste,
frequency of

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collections, distance to final disposal sites, labor costs and amount and type
of equipment furnished to the customer. We face intense competition for both
quality of service and pricing considerations. From time to time, competitors
may reduce the price of their services and accept lower profit margins in an
effort to expand or maintain market share or to successfully obtain
competitively bid contracts.

EMPLOYEES

At December 31, 2002, we had approximately 53,000 full-time employees, of
which approximately 9,000 were employed in administrative and sales positions
and the balance in operations. Approximately 14,800 of our employees are covered
by collective bargaining agreements. We have not experienced a significant work
stoppage, and management considers its employee relations to be good.

FINANCIAL ASSURANCE AND INSURANCE OBLIGATIONS

Financial assurance is generally a requirement for obtaining municipal and
governmental waste management contracts. It is also a requirement for obtaining
or retaining disposal site or transfer station operating permits. Municipal and
governmental waste management contracts typically require performance bonds or
bank letters of credit to secure performance. We are also required to provide
financial assurance for the closure and post-closure obligations with respect to
our landfills.

We establish financial assurance in different ways, depending on the
jurisdiction, including escrow-type accounts funded by revenues during the
operational life of a facility, letters of credit from third parties, surety
bonds, trust agreements and traditional insurance. We also use insurance
policies issued by a wholly-owned insurance subsidiary, National Guaranty
Insurance Company of Vermont ("NGIC"), the sole business of which is to issue
policies to us in order to secure such obligations. NGIC is authorized to write
up to $989 million in insurance policies or surety bonds for our closure and
post-closure requirements. In those instances where the use of captive insurance
is not allowable, we have available alternative bonding mechanisms.

We carry a broad range of insurance coverages, including general liability,
automobile liability, real and personal property, workers' compensation,
directors' and officers' liability, pollution legal liability, and other
coverages we believe are customary to the industry. Except as discussed in Notes
8 and 20 to the consolidated financial statements, we do not expect the impact
of any known casualty, property, environmental insurance or other contingency to
be material to our financial condition, results of operations or cash flows.

As of December 31, 2002, we had obtained letters of credit of approximately
$1.75 billion (approximately $1.63 billion of which are issued under our
revolving credit facilities), surety bonds of approximately $2.55 billion and
insurance policies of approximately $817 million (including $785 million written
by NGIC), funded trust agreements of approximately $96 million, and written
financial guarantees on behalf of our subsidiaries of approximately $141 million
to municipalities, customers and regulatory authorities supporting tax-exempt
bonds, performance of landfill closure and post-closure requirements, insurance
contracts, municipal contracts and financial guarantee obligations.

Through December 31, 2002, we have not experienced any unmanageable
difficulty in obtaining insurance, performance bonds or letters of credit for
our current requirements. However, in an ongoing effort to mitigate the risks of
future cost increases and reductions in available capacity, we are continually
evaluating various options to access cost-effective sources of financial
assurance.

REGULATION

Our business is subject to extensive and evolving federal, state,
provincial and local environmental, health, safety, and transportation laws and
regulations. These laws and regulations are administered by the EPA and various
other federal, state and local environmental, zoning, transportation, land use,
health, and safety agencies in the United States and various agencies in Canada.
Many of these agencies regularly examine our operations to monitor compliance
with these laws and regulations and have the power to enforce compliance, obtain
injunctions or impose civil or criminal penalties in case of violations.

8

Because the major component of our business is the collection and disposal
of solid waste in an environmentally sound manner, a significant amount of our
capital expenditures is related, either directly or indirectly, to environmental
protection measures, including compliance with federal, state and local
provisions that have been enacted or adopted regulating the discharge of
materials into the environment. There are costs associated with siting, design,
operations, monitoring, site maintenance, corrective actions, financial
assurance, and facility closure and post-closure obligations. In connection with
our acquisition, development or expansion of a disposal facility or transfer
station, we must often spend considerable time, effort and money to obtain or
maintain necessary required permits and approvals. There cannot be any
assurances that we will be able to obtain or maintain necessary governmental
approvals. Once obtained, operating permits are subject to modification and
revocation by the issuing agency. Compliance with these and any future
regulatory requirements could require us to make significant capital and
operating expenditures. However, most of these expenditures are made in the
normal course of business and do not place us at any competitive disadvantage.

The primary United States federal statutes affecting our business are
summarized below:

- RCRA regulates the handling, transportation and disposal of hazardous and
non-hazardous wastes and delegates authority to states to develop
programs to ensure the safe disposal of solid wastes. In 1991, the EPA
issued its final regulations under Subtitle D of RCRA, which set forth
minimum federal performance and design criteria for solid waste
landfills. These regulations must be implemented by the states, although
states can impose requirements that are more stringent than the Subtitle
D standards. We incur costs in complying with these standards in the
ordinary course of our operations. However, all of our planned landfill
developments and expansions will be engineered to meet or exceed
applicable Subtitle D requirements and we do not believe that such costs
would have a material adverse effect on our operations.

- The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, which is also known as Superfund ("CERCLA"),
provides for federal authority to respond directly to releases or
threatened releases of hazardous substances into the environment.
CERCLA's primary means for avoiding such releases is to impose liability
for cleanup of disposal sites on current owners and operators, the owners
and operators at the time of disposal as well as the generators of the
waste and the transporters who select the disposal site. Liability under
CERCLA is not dependent on the intentional disposal of hazardous wastes;
it can be based upon the release or threatened release even as a result
of lawful, unintentional and non-negligent action, of any one of the more
than 700 "hazardous substances" listed by the EPA, even in very small
quantities.

- The Federal Water Pollution Control Act of 1972 (the "Clean Water Act"),
establishes rules for regulating the discharge of pollutants into
streams, rivers, groundwater, or other surface waters from a variety of
sources, including solid waste disposal sites. If run-off from our
operations may be discharged into surface waters, the Clean Water Act
requires us to apply for and obtain discharge permits, conduct sampling
and monitoring, and, under certain circumstances, reduce the quantity of
pollutants in those discharges. In 1990, the EPA issued additional rules
under the Clean Water Act, which establish standards for management of
storm water runoff from landfills and which require landfills to obtain
storm water discharge permits. In addition, if a landfill or a transfer
station discharges wastewater through a sewage system to a publicly-owned
treatment works, the facility must comply with discharge limits imposed
by the treatment works. Also, if development of a landfill may alter or
affect "wetlands," a permit may have to be obtained before such
development could commence, affecting the construction or expansion of
many landfill sites. The Clean Water Act provides for civil, criminal and
administrative penalties for violations of its provisions.

- The Clean Air Act of 1970, as amended (the "Clean Air Act"), provides for
increased federal, state and local regulation of the emission of air
pollutants. The EPA has applied the Clean Air Act to certain of our
operations, including solid waste landfills and waste collection
vehicles. Additionally, in 1996 the EPA issued new source performance
standards for new landfills and emission guidelines for existing
landfills to control emissions of landfill gases. The regulations impose
limits on air emissions from solid waste landfills, subject most of our
solid waste landfills to certain permitting requirements and, in some

9

instances, require installation of methane gas recovery systems to reduce
emissions to allowable limits. We currently are supplying methane gas to
landfill gas-to-energy projects at 72 of our solid waste landfills. We do
not believe that continued costs of compliance with Clean Air Act
permitting and emission control requirements will have a material adverse
effect on us.

- The Occupational Safety and Health Act of 1970, as amended ("OSHA"),
establishes certain employer responsibilities, including maintenance of a
workplace free of recognized hazards likely to cause death or serious
injury, compliance with standards promulgated by the Occupational Safety
and Health Administration, and various record keeping, disclosures and
procedural requirements. Various standards for notices of hazards, safety
in excavation and demolition work, and the handling of asbestos, may
apply to our operations.

There are also various state and local regulations that affect our
operations. Generally, states have their own laws and regulations. Sometimes
states' regulations are more strict than comparable federal laws and
regulations. Additionally, our collection and landfill operations could be
affected by the trend toward requiring the development of waste reduction and
recycling programs. Legislative and regulatory measures to either require or
encourage waste reduction at the source and waste recycling have also been
considered by the United States Congress and the EPA.

Various states have enacted, or are considering enacting, laws that
restrict the disposal within the state of solid waste generated outside the
state. While laws that overtly discriminate against out-of-state waste have been
found to be unconstitutional, some laws that are less overtly discriminatory
have been upheld in court. Additionally, certain state and local governments
have enacted "flow control" regulations, which attempt to require that all waste
generated within the state or local jurisdiction be deposited at specific sites.
In 1994, the United States Supreme Court ruled that a flow control ordinance was
unconstitutional. However, other courts have refused to apply the Supreme Court
precedent in various circumstances. In addition, from time to time, the United
States Congress has considered legislation authorizing states to adopt
regulations, restrictions, or taxes on the importation of out-of-state or
out-of-jurisdiction waste. These congressional efforts have to date been
unsuccessful. The United States Congress' adoption of legislation allowing
restrictions on interstate transportation of out-of-state or out-of-jurisdiction
waste or certain types of flow control, the adoption of legislation affecting
interstate transportation of waste at the state level, or the courts'
interpretation or validation of flow control legislation could adversely affect
our solid waste management services.

Many states and local jurisdictions have enacted "fitness" laws that allow
the agencies that have jurisdiction over waste services contracts or permits to
deny or revoke these contracts or permits based on the applicant or permit
holder's compliance history. Some states and local jurisdictions go further and
consider the compliance history of the parent, subsidiaries or affiliated
companies, in addition to the applicant or permit holder. These laws authorize
the agencies to make determinations of an applicant or permit holder's fitness
to be awarded a contract to operate and to deny or revoke a contract or permit
because of unfitness unless there is a showing that the applicant or permit
holder has been rehabilitated through the adoption of various operating policies
and procedures put in place to assure future compliance with applicable laws and
regulations.

FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS

When we make statements containing projections about our accounting and
finances, plans and objectives for the future, future economic performance, or
when we make statements containing any other projections or estimates about our
assumptions relating to these types of statements, we are making forward-looking
statements. These statements usually relate to future events and anticipated
revenues, earnings or other aspects of our operations or operating results. We
make these statements in an effort to keep stockholders and the public informed
about our business and have based them on our current expectations about future
events. You should view such statements with caution. These statements are not
guarantees of future performance or events. All phases of our business are
subject to uncertainties, risks and other influences, many of which we have no
control over. Any of these factors, either alone or taken together, could have a
material adverse effect on us and could change whether any forward-looking
statement ultimately turns out to be true. Additionally,

10

we assume no obligation to update any forward-looking statements as a result of
future events or developments.

Outlined below are some of the risks that we face and that could affect our
business and financial statements for 2003 and beyond. However, they are not the
only risks that we face. There may be additional risks that we do not presently
know of or that we currently believe are immaterial which could also impair our
business.

WE COULD BE LIABLE FOR ENVIRONMENTAL DAMAGES RESULTING FROM OUR OPERATIONS

We could be liable if our operations cause environmental damage to our
properties or to that of nearby landowners, particularly as a result of the
contamination of drinking water sources or soil. Under current law, we could
even be held liable for damage caused by conditions that existed before we
acquired the assets or operations involved. Also, we could be liable if we
arrange for the transportation, disposal or treatment of hazardous substances
that cause environmental contamination, or if a predecessor owner made such
arrangements and under applicable law we are treated as a successor to the prior
owner. Any substantial liability for environmental damage could have a material
adverse effect on our financial condition, results of operations and cash flows.
In the ordinary course of our business, we have in the past, and may in the
future, become involved in a variety of legal and administrative proceedings
relating to land use and environmental laws and regulations. These include
proceedings in which:

- agencies of federal, state, local or foreign governments seek to impose
liability on us under applicable statutes, sometimes involving civil or
criminal penalties for violations, or to revoke or deny renewal of a
permit we need; and

- citizen groups, adjacent landowners or governmental agencies oppose the
issuance of a permit or approval we need, allege violations of the
permits under which we operate or laws or regulations to which we are
subject, or seek to impose liability on us for environmental damage.

The adverse outcome of one or more of these proceedings could result in,
among other things, material increases in our liabilities.

From time to time, we have received citations or notices from governmental
authorities that our operations are not in compliance with our permits or
certain applicable environmental or land use laws and regulations. In the future
we may receive additional citations or notices. We generally seek to work with
the authorities to resolve the issues raised by such citations or notices. If we
are not successful in such resolutions, we may incur fines, penalties or other
sanctions that could result in material unanticipated costs or liabilities.

The amount of insurance required to be maintained for environmental
liability is governed by statutory requirements. We believe that the cost for
such insurance is high relative to the coverage it would provide, and therefore,
our coverages are generally maintained at the minimum statutorily required
levels. We face the risk of incurring liabilities for environmental damage if
our insurance coverage is ultimately inadequate to cover those damages.

In addition, to fulfill our financial assurance obligations with respect to
environmental closure and post-closure liabilities, we generally obtain letters
of credit or surety bonds, or rely on insurance, including captive insurance. We
currently have in place all necessary financial assurance instruments, and we do
not anticipate any difficulties obtaining financial assurance instruments in the
future, although the cost of such assurance instruments has increased and may
continue to increase. However, in the event we are unable to obtain sufficient
surety bonding, letters of credit or third-party insurance coverage at
reasonable cost, or one or more states cease to view captive insurance as
adequate coverage, we would need to rely on other forms of financial assurance.
These types of financial assurance could be more expensive to obtain, which
could negatively impact our liquidity and capital resources and our ability to
meet our obligations as they become due.

11

GOVERNMENTAL REGULATIONS OR LEVIES MAY RESTRICT OUR OPERATIONS OR INCREASE OUR
COSTS OF OPERATIONS

Stringent government regulations at the federal, state, provincial, and
local level in the United States and Canada have a substantial impact on our
business. A large number of complex laws, rules, orders and interpretations
govern environmental protection, health, safety, land use, zoning,
transportation and related matters. Among other things, they may restrict our
operations and adversely affect our financial condition, results of operations
and cash flows by imposing conditions such as:

- limitations on the siting and construction of new waste disposal,
transfer or processing facilities or the expansion of existing
facilities;

- limitations, regulations or levies on collection and disposal prices,
rates and volumes;

- limitations or bans on disposal or transportation of out-of-state waste
or certain categories of waste; or

- mandates regarding the disposal of solid waste.

Regulations also affect the siting, design and closure of landfills and
could require us to undertake investigatory or remedial activities, curtail
operations or close a landfill temporarily or permanently. Future changes in
these regulations may require us to modify, supplement or replace equipment or
facilities. The costs of complying with these regulations could be substantial.

In order to develop, expand or operate a landfill or other waste management
facility, we must have various facility permits and other governmental
approvals, including those relating to zoning, environmental protection and land
use. The permits and approvals are often difficult, time consuming and costly to
obtain and could contain conditions that limit operations.

THE POSSIBILITY OF PENDING ACQUISITIONS, DISPOSAL SITE DEVELOPMENTS OR
EXPANSION PROJECTS NOT BEING COMPLETED OR CERTAIN OTHER EVENTS COULD RESULT IN
A MATERIAL CHARGE AGAINST OUR EARNINGS

In accordance with generally accepted accounting principles, we capitalize
certain expenditures and advances relating to acquisitions, pending
acquisitions, and disposal site development and expansion projects. We expense
indirect acquisition costs, such as executive salaries, general corporate
overhead, public affairs and other corporate services, as incurred. Our policy
is to charge against earnings any unamortized capitalized expenditures and
advances relating to any facility or operation that is permanently shut down or
determined to be impaired, any pending acquisition that is not consummated and
any disposal site development or expansion project that is not completed or
determined to be impaired. The charge against earnings is reduced by any portion
of the capitalized expenditure and advances that we estimate will be
recoverable, through sale or otherwise. In future periods, we may be required to
incur charges against earnings in accordance with this policy, or due to other
events that cause impairments. Depending on the magnitude, any such charges
could have a material adverse effect on our results of operations and possibly
our financial covenants, which could negatively affect our liquidity.

THE DEVELOPMENT AND ACCEPTANCE OF ALTERNATIVES TO LANDFILL DISPOSAL AND
WASTE-TO-ENERGY FACILITIES COULD REDUCE OUR ABILITY TO OPERATE AT FULL
CAPACITY

Our customers are increasingly using alternatives to landfill disposal,
such as recycling and composting. In addition, some state and local governments
mandate recycling and waste reduction at the source and prohibit the disposal of
certain types of wastes, such as yard wastes, at landfills or waste-to-energy
facilities. Although such mandates are a useful tool to protect our environment,
these developments reduce the volume of waste going to landfills and
waste-to-energy facilities in certain areas, which may affect our ability to
operate our landfills and waste-to-energy facilities at full capacity, as well
as the prices that we can charge for landfill disposal and waste-to-energy
services.

OUR BUSINESS IS SEASONAL IN NATURE AND OUR REVENUES AND RESULTS VARY FROM
QUARTER-TO-QUARTER

Our operating revenues are usually lower in the winter months, primarily
because the volume of waste relating to construction and demolition activities
usually increases in the spring and summer months, and the

12

volume of industrial and residential waste in certain regions where we operate
usually decreases during the winter months. Our first and fourth quarter results
of operations typically are adversely affected by this seasonality. In addition,
particularly harsh weather conditions may result in the temporary suspension of
certain of our operations.

FLUCTUATIONS IN COMMODITY PRICES AFFECT OUR OPERATING REVENUES

Our recycling operations process for sale certain recyclable materials,
including fibers, aluminum and glass, all of which are subject to significant
price fluctuations. The majority of the recyclables that we process for sale are
fibers, including old corrugated cardboard, or ("OCC"), and old newsprint, or
("ONP"). We enter into financial swaps in an effort to mitigate some of the
variability in cash flows from the sales of fibers at floating prices. In the
past three years, the year-over-year changes in the quarterly average market
prices for OCC ranged from a decrease of as much as 63% to an increase of as
much as 109%. The same comparisons for ONP have ranged from a decrease of as
much as 46% to an increase of as much as 47%. These fluctuations can affect
future operating income and cash flows; for example, our operating revenues for
the year ended December 31, 2002 were approximately $69 million more than the
corresponding prior period due to such fluctuations.

Additionally, there may be significant price fluctuations in the price of
methane gas, electricity and other energy related products that are marketed and
sold by our landfill gas recovery, waste-to-energy and independent power
production plants operations. Our landfill gas recovery and waste-to-energy
operations generally enter into long-term sales agreements. Therefore, market
fluctuations do not have a significant effect on these operations in the
short-term. However, revenues from our IPPs can be effected by price
fluctuations. In the past two years, the year-over-year changes in the average
quarterly electricity prices have ranged from increases of as much as 78% to
decreases of as much as 52%. For the year ended December 31, 2002, our revenues
decreased, when compared to the prior year, by $34 million due to lower
electricity prices.

WE FACE UNCERTAINTIES RELATING TO PENDING LITIGATION AND INVESTIGATIONS

On three different occasions during July and August 1999, we lowered our
expected earnings per share for the three months ended June 30, 1999. More than
30 lawsuits that claim to be based on our 1999 announcements have been filed
against us and some of our current and former officers and directors. These
lawsuits, which have been consolidated into one action, assert various claims
alleging we violated the anti-fraud provisions of the federal securities laws by
making false or misleading statements or by not making statements that were
necessary in order to not mislead investors. The plaintiffs also claim that
certain of our current and former officers and directors sold their common stock
during times when they knew the price of our common stock was artificially
inflated by the alleged misstatements and omissions.

On November 7, 2001, we announced that we had reached a settlement
agreement with the plaintiffs in this case, resolving all claims against us as
well as claims against our current and former officers and directors. The
agreement provides for a payment of $457 million to members of the class and for
us to consent to the certification of a class for the settlement of purchasers
or acquirers of our securities from June 11, 1998 through November 9, 1999.
Additionally, as part of the settlement agreement, at our 2002 annual meeting of
stockholders, we proposed and our stockholders approved an amendment to our
certificate of incorporation so that all of our directors are elected annually.
A hearing was held April 29, 2002 at which the settlement was approved. The
settlement approval is still subject to any appeals that may be filed within
thirty days of the approval becoming final. There is currently a motion to
vacate pending before the court, and the appeal period will begin to run once
that motion has been decided. If the motion to vacate is granted, or the
plaintiff files an appeal, we may have to defend ourself in further litigation.

Other lawsuits relating to the facts described above, and the February 1998
restatements by WM Holdings of its prior-period financial statements, including
purported class actions, have been filed against WM Holdings and us. These
include lawsuits brought by individuals who purchased our stock or stock of WM
Holdings, sold businesses or assets to us or WM Holdings, or held their stock
allegedly in reliance on

13

statements we made. For a more detailed discussion of our current litigation,
see Note 20 to the consolidated financial statements.

We and some of our subsidiaries are also currently involved in other civil
litigation and governmental proceedings relating to the conduct of our business.
The timing of the final resolutions to these matters is uncertain. Additionally,
the possible outcomes or resolutions to these matters could include judgments
against us or settlements, either of which could require substantial payments by
us, adversely affecting our liquidity.

INTENSE COMPETITION COULD REDUCE OUR PROFITABILITY

We encounter intense competition from governmental, quasi-governmental and
private sources in all aspects of our operations. In North America, the industry
consists of large national waste management companies, and local and regional
companies of varying sizes and financial resources. We compete with these
companies as well as with counties and municipalities that maintain their own
waste collection and disposal operations. These counties and municipalities may
have financial competitive advantages because tax revenues and tax-exempt
financing are available to them. Also, such governmental units may attempt to
impose flow control or other restrictions that would give them a competitive
advantage. In addition, competitors may reduce their prices to expand sales
volume or to win competitively bid municipal contracts.

EFFORTS BY LABOR UNIONS TO ORGANIZE OUR EMPLOYEES COULD DIVERT MANAGEMENT
ATTENTION AND INCREASE OUR OPERATING EXPENSES

Labor unions constantly make attempts to organize our employees, and these
efforts will likely continue in the future. Certain groups of our employees have
chosen to be represented by unions, and we have negotiated collective bargaining
agreements with some of the groups. Additional groups of employees may seek
union representation in the future, and the negotiation of collective bargaining
agreements could divert management attention and result in increased operating
expenses and lower net income. If we are unable to negotiate acceptable
collective bargaining agreements, we might have to wait through "cooling off"
periods, which are often followed by union-initiated work stoppages, including
strikes. Depending on the type and duration of any labor disruptions, our
operating expenses could increase significantly, which could adversely affect
our financial condition, results of operations and cash flows.

FLUCTUATIONS IN FUEL COSTS COULD AFFECT OUR OPERATING EXPENSES AND RESULTS

The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including geopolitical developments, supply and
demand for oil and gas, actions by OPEC and other oil and gas producers, war and
unrest in oil producing countries, regional production patterns and
environmental concerns. Fuel is needed to run our collection and transfer
trucks, and any price escalations or reductions in the supply could increase our
operating expenses and have a negative impact on our consolidated financial
condition, results of operations and cash flows. We have implemented a fuel
surcharge to partially offset increased fuel costs. However, we are not always
able to pass through all of the increased fuel costs due to the terms of certain
customers' contracts.

WE FACE RISKS RELATING TO GENERAL ECONOMIC CONDITIONS

We face risks related to general economic and market conditions, including
the potential impact of the status of the economy and interest rate
fluctuations. We also face risks related to other adverse external economic
conditions, such as the ability of our insurers to timely meet their commitments
and the effect that significant claims or litigation against insurance companies
may have on such ability. Any negative general economic conditions could
materially adversely affect our financial condition, results of operations and
cash flows.

WE MAY NEED ADDITIONAL CAPITAL

We currently expect to meet our anticipated cash needs for capital
expenditures, acquisitions and other cash expenditures with our cash flows from
operations and, to the extent necessary, additional financings.

14

However, our Board of Directors has approved a stock repurchase program pursuant
to which we may, at management's discretion, repurchase up to $1 billion of our
common stock in both 2003 and 2004. We also expect to pay $230 to $240 million
(net of a tax benefit, insurance and related settlement costs) in settlement of
the class action lawsuit during 2003. If our cash flows from operations are less
than is currently expected, or our capital expenditures or acquisitions
increase, we may elect to incur more indebtedness. However, there can be no
assurances that we will be able to obtain additional financings on acceptable
terms. In these circumstances, we would likely use our revolving credit
facilities to meet our cash needs.

Our credit facilities require us to comply with certain financial ratios.
However, if our cash flows are less than expected, our capital requirements are
more than expected or we incur additional indebtedness, we may not be in
compliance with the ratios. This would result in a default under our credit
facilities. If we were unable to obtain waivers or amendments to the credit
facilities, the lenders could choose to declare all outstanding borrowings
immediately due and payable, which we may not be able to pay in full. The
default under or unavailability of our credit agreements could have a material
adverse effect on our ability to meet our borrowing and bonding needs.

WE MAY ENCOUNTER DIFFICULTIES DEPLOYING OUR ENTERPRISE SOFTWARE

Upon implementation of a new revenue management system, currently in the
test phase, we may experience problems that could adversely affect, or even
temporarily disrupt, all or a portion of our operations until resolved.

ITEM 2. PROPERTIES

Our principal executive offices are in Houston, Texas, where we lease
approximately 400,000 square feet under leasing arrangements expiring at various
times through 2010. We also have U.S. field-based administrative offices in
Arizona, Illinois, Pennsylvania, New Hampshire and Georgia and a field-based
administrative office in Ontario, Canada.

Our principal property and equipment consist of land (primarily landfills
and other disposal facilities, transfer stations and bases for collection
operations), buildings, and vehicles and equipment. We own or lease real
property in most locations where we have operations. We have operations in each
of the fifty states, other than Montana and Wyoming. We also have operations in
the District of Columbia, Puerto Rico and throughout Canada.

At December 31, 2002, of our 293 active landfills, 246 were either owned or
operated through lease agreements. These sites occupy approximately 131,000
acres of land, including approximately 33,000 permitted acres and approximately
5,900 acres we consider to be probable expansion acreage for landfill use. Our
remaining 47 landfills were operated through contractual agreements, primarily
with municipalities. At December 31, 2002, we operated 346 transfer stations,
146 MRFs and 18 secondary processing facilities. We also owned, or operated
through agreements, 16 waste-to-energy facilities and eight IPPs as of December
31, 2002.

We believe that our vehicles, equipment, and operating properties are
adequately maintained and adequate for our current operations. However, we
expect to continue to make investments in additional equipment and property for
expansion, for replacement of assets, and in connection with future
acquisitions. For more information, see the Management's Discussion and Analysis
of Financial Condition and Results of Operations section of this report.

ITEM 3. LEGAL PROCEEDINGS

Information regarding our legal proceedings can be found under the
"Litigation" section of Note 20 in the consolidated financial statements
included in this report.

15

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to a vote of our stockholders during the
fourth quarter of 2002.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "WMI." The following table sets forth the range of the high and low
per share sales prices at market close for our common stock as reported on the
NYSE.

On February 18, 2003, the closing sale price as reported on the NYSE was
$22.10 per share. The number of holders of record of our common stock at
February 18, 2003, was 23,197.

We declared and paid cash dividends of $0.01 per share, or approximately $6
million, during each of 2001 and 2002. See Note 11 to the consolidated financial
statements for a discussion of restrictions that limit our ability to pay
dividends.

In February 2002, we announced that our Board of Directors had approved a
stock repurchase program for up to $1 billion in annual repurchases for each of
2002, 2003 and 2004, to be implemented at management's discretion. The purchases
may be made in either open market or privately negotiated transactions. During
2002, we repurchased approximately 38 million shares for approximately $1
billion. See Note 11 to the consolidated financial statements for additional
discussion.

16

The following is a summary of all of our equity compensation plans,
including plans that were assumed through acquisitions and individual
arrangements that provide for the issuance of equity securities as compensation,
as of December 31, 2002. See Note 12 to the consolidated financial statements
for additional discussion.

- ---------------

(a) Includes the Company's 2000 Broad-Based Employee Plan described in Note 12
to the consolidated financial statements. Also includes 372,000 shares
issuable upon exercise of outstanding, fully vested warrants issued between
1994 and 1997 as compensation for goods or services, with exercise prices
ranging from $10.00 to $42.25 and expiring through 2007.

(b) The total securities to be issued upon exercise of outstanding options,
warrants and rights does not agree to common stock options and warrants
outstanding as detailed in Note 12 to the consolidated financial
statements. The difference is attributable to warrants outstanding at
December 31, 2002 that were issued as consideration for business
acquisitions. As these warrants were not issued as compensation, they have
been excluded from the table above.

17

ITEM 6. SELECTED FINANCIAL DATA

The information below was derived from the audited consolidated financial
statements included in this report and in reports we have previously filed with
the SEC. This information should be read together with those consolidated
financial statements and the notes to the consolidated financial statements.
These historical results are not necessarily indicative of the results to be
expected in the future.

- ---------------

(a) For more information regarding this financial data, see Management's
Discussion and Analysis of Financial Condition and Results of Operations
section included in this report.

(b) During 1999, we initiated a comprehensive internal review of our accounting
records, systems, processes and controls at the direction of our Board of
Directors. We experienced significant difficulty in the integration and
conversion of information and accounting systems subsequent to the WM
Holdings Merger, which was accounted for as a pooling of interests. As a
result of these systems and process issues, and other issues raised during
the 1999 accounting review, we recorded $1.2 billion in after-tax charges.
These charges had a pervasive impact on the December 31, 1999 Statement of
Operations. See our Annual Report on Form 10-K for the year ended December
31, 1999 for further discussion.

(c) In 1998, we recognized significant charges related to the costs associated
with the WM Holdings Merger. Our plans to integrate WM Holdings after the
merger included significant employee severance costs, restructuring costs,
transaction costs and changes in certain employee benefit programs, as well
as charges for businesses to be sold and assets to be abandoned. See our
Annual Report on Form 10-K for the year ended December 31, 1998 for further
discussion.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Below is a discussion of our operations for the three years ended December
31, 2002. This discussion may contain forward-looking statements that anticipate
results based on management's plans that are subject to uncertainty. We discuss
in more detail various factors that could cause actual results to differ from
expectations in Item 1 of this report, under the section "Factors Influencing
Future Results and Accuracy of Forward-Looking Statements." This discussion
should be read in light of that disclosure and together with the consolidated
financial statements and the notes to the consolidated financial statements.

Critical Accounting Estimates and Assumptions

In preparing our financial statements, we make several estimates and
assumptions that affect our assets and liabilities and revenues and expenses. We
must make these estimates and assumptions because certain of the information
that is used in the preparation of our financial statements is dependent on
future events, cannot be calculated with a high degree of precision from
available data or is simply not capable of being readily calculated based on
generally accepted methodologies. In some cases, these estimates are
particularly difficult to determine and we must exercise significant judgment.
The most difficult, subjective and complex estimates and the assumptions that
deal with the greatest amount of uncertainty are related to our accounting for
landfills, environmental liabilities and asset impairments, as described below.

The discussion below details our accounting policies for landfills through
December 31, 2002. As of January 1, 2003, our practice will change upon adoption
of Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for
Asset Retirement Obligations ("SFAS No. 143"). See Note 25 to the consolidated
financial statements for additional information.

Accounting for Landfills -- We utilize the life cycle method of accounting
for landfill costs and the units of consumption method to amortize landfill
construction costs and record closure and post-closure obligations over the
estimated remaining useful life of a landfill. Under this method we include
future estimated construction costs, as well as costs incurred to date, in the
amortization base. Additionally, we include probable expansion airspace that has
yet to be permitted in the calculation of the total remaining useful life of the
landfill. This accounting method requires us to make estimates and assumptions,
as described below. Any changes in our estimates will impact our income from
operations prospectively from the date the changes are made.

Landfill Costs -- We assess the total cost to develop each landfill site to
its final capacity. This includes certain projected landfill costs that are
uncertain because they are dependent on future events. The total cost to develop
a site to its final capacity includes amounts previously expended and
capitalized, net of accumulated airspace amortization, and projections of future
purchase and development costs, landfill final capping costs, liner construction
costs, operating construction costs, and capitalized interest costs.

While the precise amount of these future costs cannot be determined with
certainty, we expect to incur $7.3 billion during the remaining operating lives
of the landfills. The future costs will be capitalized as incurred and expensed
over the useful lives of the landfills as airspace is consumed.

Closure and Post-Closure Costs -- The costs for closure and post-closure
obligations at landfills we own or operate are estimated based on our
interpretations of current requirements and proposed or anticipated regulatory
changes. The estimates for landfill final closure and post-closure costs also
consider when the costs would actually be paid and factor in, where appropriate,
inflation and discount rates. The possibility of changing legal and regulatory
requirements and the forward-looking nature of these types of costs make any
estimation or assumption uncertain.

While the precise amount of future closure and post-closure costs cannot be
determined with certainty, we estimate that the aggregate cost of landfill
closure and post-closure as of December 31, 2002 is approximately $2.6 billion.

Available Airspace -- Our engineers determine the useful life at our
landfills by estimating the available airspace. This is done by using surveys
and other methods to calculate, based on height restrictions and other

19

factors, how much airspace is left to fill and how much waste can be disposed of
at a landfill before it has reached its final capacity.

Expansion Airspace -- We also include currently unpermitted airspace in our
estimate of available airspace in certain circumstances. First, to include
airspace associated with an expansion effort, we must generally expect the
expansion permit application to be submitted within one year, and the expansion
permit to be received within five years. Second, we must believe the success of
obtaining the expansion permit is probable, using the following criteria:

- Personnel are actively working to obtain land use and local and state
approvals for an expansion of an existing landfill;

- At the time the expansion is added to the permitted site life, it is
probable that the approvals will be received within the normal
application and processing time periods for approvals in the jurisdiction
in which the landfill is located;

- Either we or the respective landfill owners have a legal right to use or
obtain land to be included in the expansion plan;

- There are no significant known technical, legal, community, business, or
political restrictions or similar issues that could impair the success of
such expansion;

- Financial analysis has been completed, and the results demonstrate that
the expansion has a positive financial and operational impact; and

- Airspace and related costs, including additional closure and post-closure
costs, have been estimated based on conceptual design.

These criteria are initially evaluated by our field-based engineers,
accountants, managers and others to identify potential obstacles to obtaining
the permits. However, our policy provides that, based on the facts and
circumstances of a specific landfill, if these criteria are not met, inclusion
of unpermitted airspace may still be allowed. In these circumstances, inclusion
must be approved through a landfill-specific process that includes approval of
the Chief Financial Officer and a review by the Audit Committee of the Board of
Directors on a quarterly basis. Of the 91 landfill sites with expansions at
December 31, 2002, 26 landfills required the Chief Financial Officer to approve
the inclusion of the unpermitted airspace. Approximately two-thirds of these
landfills required approval by the Chief Financial Officer because of legal or
community issues that could impede the expansion process, while the remaining
were primarily due to permit application processes beyond the one-year limit,
which in most cases were due to state-specific permitting procedures. When we
include the expansion airspace in our calculations of available airspace, we
also include the projected costs for development, final capping, and closure and
post-closure of the expansion in the amortization basis of the landfill.

It is possible that any of our estimates or assumptions could ultimately
turn out to be significantly different from actual results. In some cases we may
be unsuccessful in obtaining an expansion permit or we may determine that an
expansion permit that we previously thought was probable has become unlikely. To
the extent that such estimates, or the assumptions used to make those estimates,
prove to be significantly different than actual results, or our belief that we
will receive an expansion permit changes adversely in a significant manner, the
costs of the landfill, including the costs incurred in the pursuit of the
expansion, may be subject to impairment testing, as described below, and lower
profitability may be experienced due to higher amortization rates, higher
closure and post-closure rates, and higher expenses or asset impairments related
to the removal of previously included expansion airspace.

After determining the costs at our landfills, including closure and
post-closure costs, and the available and probable expansion airspace, we then
determine the per ton rate that will be expensed. We look at factors such as the
waste stream, geography and rate of compaction, among others, to determine the
number of tons necessary to fill the available and probable expansion airspace.
We then divide our costs by that number of tons, giving us the rate per ton to
expense.

20

The average landfill airspace amortization cost per ton for the 293
landfills operating at December 31, 2002 was $3.57 per ton as compared to $3.70
for the 302 landfills at December 31, 2001. As of December 31, 2002 and 2001,
the net book value recorded for capitalized landfill site costs was $5.1 billion
and $5.0 billion, respectively.

The average landfill closure and post-closure expense, on a per ton basis,
for the 293 landfills operating at December 31, 2002 was $0.23 per ton as
compared to $0.24 for the 302 landfills at December 31, 2001. As of December 31,
2002 and 2001, we had recorded landfill closure and post-closure liabilities of
$655 million and $625 million, respectively.

Environmental Remediation Liabilities -- Under current laws and
regulations, we may have liability for environmental damage caused by our
operations, or for damage caused by conditions that existed before we acquired a
particular site. Remedial costs are all costs relating to the remedy of any
identified situation that occurs by natural causes or human error not expected
in the normal course of business. These costs include legal defense, potentially
responsible party ("PRP") investigation, settlement, and consultant fees, as
well as costs directly associated with site investigation and clean up, such as
materials and incremental internal costs directly related to the remedy. We
estimate costs required to remediate sites where liability is probable based on
site-specific facts and circumstances. We routinely review and evaluate sites
that require remediation, including sites listed on the EPA's National
Priorities List ("NPL sites"). We consider whether we were an owner, operator,
transporter, or generator at the site, the amount and type of waste hauled to
the site and the number of years we were connected with the site. Next, we
review the same information with respect to other named and unnamed PRPs. We
then estimate the cost for the likely remedy, which is based on:

- Management's judgment and experience in remediating our own and unrelated
parties' sites;

- Information available from regulatory agencies as to costs of
remediation;

- The number, financial resources and relative degree of responsibility of
other PRPs who may be liable for remediation of a specific site; and

- The typical allocation of costs among PRPs.

These estimates are sometimes a range of reasonably possible outcomes. In
those cases, we use the amount within the range that constitutes our best
estimate. If no amount within the range appears to be a better estimate than any
other, we use the amounts that are the low ends of such ranges in accordance
with SFAS No. 5, Accounting for Contingencies, ("SFAS No. 5") and its
interpretations. Were we to use the high ends of such ranges, our potential
liability would be approximately $220 million higher on a discounted basis in
the aggregate than the estimate recorded in the consolidated financial
statements as of December 31, 2002. As used in this context, "reasonably
possible" means we believe it is more than remote but less than likely. As of
December 31, 2002 and 2001, we had recorded liabilities of $343 million and $321
million, respectively, for the present value of remediation costs for our sites.

Asset Impairments -- Our long-lived assets, including landfills and
landfill expansions, are carried on our financial statements based on their cost
less accumulated depreciation or amortization. However, accounting standards
require us to write-down these assets if they become impaired. If significant
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable, we perform a test of recoverability by comparing the
carrying value of the asset or asset group to its undiscounted expected future
cash flows. If the carrying values are in excess of undiscounted expected future
cash flows, we measure any impairment by comparing the fair value of the asset
to its carrying value. Fair value is determined by either an actual third-party
evaluation or an internally developed discounted projected cash flow analysis of
the asset. Cash flow projections are sometimes based on a group of assets,
rather than a single asset. If cash flows cannot be separately and independently
identified for a single asset, we will determine whether an impairment has
occurred for the group of assets for which we can identify the projected cash
flows. If the fair value of an asset is determined to be less than the carrying
amount of the asset or asset group, an impairment in the amount of the
difference is recorded in the period that the impairment indicator occurs.

21

Typical indicators that an asset may be impaired include:

- A significant decrease in the market price of an asset or asset group;

- A significant adverse change in the extent or manner in which an asset or
asset group is being used or in its physical condition;

- A significant adverse change in legal factors or in the business climate
that could affect the value of an asset or asset group, including an
adverse action or assessment by a regulator;

- An accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset;

- Current period operating or cash flow losses combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset or asset group; or

- A current expectation that, more likely than not, a long-lived asset or
asset group will be sold or otherwise disposed of significantly before
the end of its previously estimated useful life.

If any of these or other indicators occur, we review the asset to determine
whether there has been an impairment. Several of these indicators are beyond our
control, and we cannot predict with any certainty whether or not they will
occur. Additionally, estimating future cash flows requires significant judgment
and our projections may vary from cash flows eventually realized. There are
additional considerations for impairments of landfills and goodwill, as
described below.

Landfills -- There are certain indicators listed above that require
significant judgment and understanding of the waste industry when applied to
landfill development or expansion projects. For example, a regulator may
initially deny a landfill expansion permit application though the expansion
permit is ultimately granted. In addition, management may periodically divert
waste from one landfill to another to conserve remaining permitted landfill
airspace. Therefore, certain events could occur in the ordinary course of
business and not necessarily be considered indicators of impairment due to the
unique nature of the waste industry.

Goodwill -- We assess whether goodwill is impaired on an annual basis. Upon
determining the existence of goodwill impairment, we measure that impairment
based on the amount by which the book value of goodwill exceeds its implied fair
value. The implied fair value of goodwill is determined by deducting the fair
value of a reporting unit's identifiable assets and liabilities from the fair
value of the reporting unit as a whole, as if that reporting unit had just been
acquired and the purchase price were being initially allocated. Additional
impairment assessments may be performed on an interim basis if we encounter
events or changes in circumstances, such as those listed above, that would
indicate that, more likely than not, the book value of goodwill has been
impaired.

22

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the period to
period change in dollars (in millions) and percentages for the various statement
of operations line items.

23

The following table presents, for the periods indicated, the percentage
relationship that the various statement of operations line items bear to
operating revenues:

24

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002

OPERATING REVENUES

Our operating revenues in 2002 were $11.1 billion, compared to $11.3
billion in 2001 and $12.5 billion in 2000. Our revenues decreased from 2000 to
2001 primarily because we sold our international operations, most of our
non-solid waste businesses, and certain non-integrated NASW operations. As shown
below, NASW is our principal operation, which is comprised of six operating
groups within North America, along with our other NASW services. Our "Other"
operations consisted of waste management services in international markets and
non-solid waste services, all of which were divested as of March 31, 2002.

Our NASW operating revenues generally come from fees charged for our
collection, disposal, and transfer station services. Some of the fees we charge
to our customers for collection services are billed in advance; a liability for
future service is recorded when we bill the customer and operating revenues are
recognized as services are actually provided. Revenues from our disposal
operations consist of tipping fees charged to third parties based on the volume
and type of waste being disposed of at our disposal facilities and are normally
billed monthly or semi-monthly. Fees charged at transfer stations are based on
the volume of waste deposited, taking into account our cost of loading,
transporting, and disposing of the solid waste at a disposal site. Intercompany
revenues between our operations have been eliminated in the consolidated
financial statements.

The mix of NASW operating revenues from our different services is reflected
in the table below (in millions).

25

The period to period change in NASW revenues is reflected in the table
below (dollars in millions).

NASW revenues decreased by $28 million in 2002 as compared to 2001. We
experienced negative internal growth in our NASW operations of 0.9%, or $92
million, which was substantially volume related. The negative volume decline of
1.6%, or $174 million, compared to 2001 is largely related to commercial and
industrial collection services throughout our operations, with the exception of
the southern portion of the United States, where we realized slight volume
increases. We also experienced declines in disposal revenue due to volume
primarily in the eastern and western portions of the United States. We believe
that the overall decreased volumes, particularly in the higher margin commercial
and industrial collection services, were attributable to the lagging economy and
increased competition. However, offsetting these declines were increases in
volumes related to our recycling operations of $19 million in 2002 as compared
to 2001.

Offsetting the decrease in revenue due to volume declines were price
related revenue increases of $82 million, or 0.7%, in 2002 as compared to 2001.
Of this increase, $69 million, or 0.6%, is attributable to the significant
increase in commodity prices of OCC and ONP. OCC prices increased to an average
price of $74 per ton for 2002 as compared to an average price of $49 per ton for
2001. Reduced electricity rates in California and reduced fuel surcharges
negatively impacted the price related revenue change by $59 million, or 0.5% .
Revenue change due to price in our base business reflected an increase of $72
million, or 0.6%, was derived from our commercial and residential collection and
transfer station operations. These price related revenue increases were offset
partially by decreased pricing in our landfill special waste operations.

We also experienced increases in revenue of $82 million in 2002 from
acquisitions consummated during 2002 and the full year effect of acquisitions
completed in 2001. Offsetting this was a decrease in revenue of $18 million due
to divestitures and the effect of foreign currency fluctuations related to the
Canadian dollar.

NASW revenues decreased from 2000 to 2001 by $260 million due primarily to
divestitures of our non-integrated NASW operations during 2000. We also
experienced a reduction of revenue due to volume of $86 million, largely
attributable to the overall slowing of the North American economy, the
termination of unprofitable accounts and the impact of our policy change for
third party brokers, which required more stringent contract requirements,
resulting in the loss of some brokered waste. NASW operating revenues also
declined because of fluctuations in the foreign currency exchange rate of the
Canadian dollar, which reduced revenues by $20 million. In addition, revenue
changes due to price reflected a decline of $8 million due to combined revenue
declines of $171 million from recycling commodities and electricity sales by
IPPs, substantially offset by increased revenues due to price in the base
business of $162 million. Offsetting these revenue declines were the acquisition
of certain NASW operations in 2001 and the year-over-year effect of acquisitions
of NASW operations in 2000.

26

OPERATING COSTS AND EXPENSES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN
BELOW)

Our operating costs and expenses include direct and indirect labor and
related taxes and benefits, fuel, maintenance and repairs of equipment and
facilities, tipping fees paid to third party disposal facilities and transfer
stations, and accruals for future landfill closure and post-closure costs and
environmental remediation. Certain direct landfill development expenditures are
capitalized and amortized over the estimated useful life of a site as capacity
is consumed, and include acquisition, engineering, upgrading, construction,
capitalized interest, and permitting costs. Additionally, we sometimes receive
reimbursements from insurance carriers relating to environmentally related
remedial, defense and tort claim costs. Such recoveries are included in
operating costs and expenses as an offset to environmental expenses. Our
operating costs and expenses increased 1.2% in 2002 as compared to 2001, and
decreased 11.6% in 2001 as compared to 2000. As a percentage of operating
revenues, operating costs and expenses decreased from 60.4% in 2000 to 58.9% in
2001 and increased to 60.5% in 2002.

The most significant factor causing the change in operating expenses
between 2002 and 2001 was the offset to operating costs and expenses of
approximately $105 million recorded in 2001 for the recovery of claims against
insurers for reimbursement of environmental expenses. Operating expenses were
also higher in 2002 as compared to 2001 because of (i) increases in salary,
wages and employee benefit costs, (ii) higher workers' compensation costs, (iii)
increases in disposal and subcontractor costs and (iv) higher costs associated
with recycling commodities.

The headcount reductions associated with our March 2002 reorganization
allowed us to realize significant cost reductions. However, the reorganization
also resulted in a re-characterization of certain costs that were reported as
selling, general and administrative expenses in prior periods due to changes in
certain roles and responsibilities. This change, along with additional costs
associated with annual merit increases, more than offset the decrease in
operating expenses as a result of the headcount reductions.

Disposal cost increases were primarily related to increased taxes on the
disposal of waste in Pennsylvania, which were partially offset by decreases in
disposal costs due to declines in volumes in 2002 as compared with 2001.
Subcontractor cost increases included increased utilization of subcontractors
for certain of our national account customers in areas where services are not
provided by us and increased use of third party transportation of waste to
disposal facilities. The increased costs associated with recycling commodities
were due primarily to an increase in market prices paid for OCC and ONP, which
resulted in increased rebates paid to customers.

Offsetting these increases was the effect of divestitures of our
international operations in 2001 and the non-solid waste operations in the first
quarter of 2002. The divestitures decreased operating expenses by approximately
$115 million in 2002 as compared to 2001. Also offsetting the increased costs
and expenses in 2002 as compared with 2001 were lower fuel costs, including fuel
used to operate our IPPs, reduced maintenance costs and lower construction
services at certain of our waste-to-energy facilities that we operate but do not
own.

The year-to-year decline in operating costs and expenses between 2000 and
2001 was primarily caused by the sales of our international, non-solid waste and
non-integrated NASW operations. These sales occurred throughout 2000 and into
2001. Adding to the decrease was the effect of the volume declines in 2001 as
compared to 2000, as described in the discussion of NASW operating revenues.
Additionally, in 2000 we initiated cost saving improvements in our procurement
practices and began to develop more standardized operating procedures. Our
improvements continued in 2001 and caused further decreases in operating costs
and expenses into 2001. In 2001 we implemented other cost saving initiatives,
such as preventative maintenance programs that created an overall reduction in
repair and maintenance costs. Finally, in 2001 we aggressively pursued our
claims against insurers for reimbursement of environmental expenses, recovering
approximately $105 million in 2001 as compared to $2 million in 2000, which were
recorded as an offset to operating costs and expenses. If we excluded the
insurance recoveries, operating costs and expenses as a percentage of revenues
would have been 59.8% in 2001.

27

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Our selling, general and administrative expenses include management
salaries, clerical and administrative costs, marketing costs, professional
services, facility rentals, provision for doubtful accounts and related
insurance costs, as well as costs related to our sales force and customer
service.

Our selling, general and administrative expenses decreased $93 million, or
5.7%, in 2002 as compared to 2001, and decreased $116 million, or 6.7%, in 2001
compared to 2000. As a percentage of operating revenues, our selling, general
and administrative expenses were 13.7% for 2002, 14.3% for 2001 and 13.9% for
2000.

The decrease in selling, general and administrative expenses in 2002 as
compared to 2001 is primarily attributable to management's focus on reducing
spending related to professional fees, travel and entertainment, and other
administrative costs. Additionally, expenses decreased due to headcount
reductions and the re-characterization of certain expenses as costs of
operations rather than selling, general and administrative expenses as a result
of the March 2002 restructuring. Finally, costs further decreased due to the
divestitures of non-solid waste and international operations in 2001 and in
early 2002.

The reductions in selling, general and administrative expenses were offset
partially by increased costs associated with both litigation settlements and
expense, higher bad debt expense largely attributable to the weaker economy,
workers compensation costs, and property-related costs such as property taxes,
maintenance and security. Selling, general and administrative expenses as a
percentage of operating revenues decreased in 2002 as compared with 2001 because
of these same factors, since operating revenues remained essentially flat
between the two periods.

The increase in selling, general and administrative costs as a percentage
of revenues from 2000 to 2001 is due to the decrease in NASW revenues in the
corresponding periods as discussed above. However, the decrease in actual
selling, general and administrative expenses from 2001 as compared to 2000 is
due mostly to the divestitures that we completed throughout 2000. In addition,
as discussed below, we had significant costs in 2000 related to accounting and
process improvement initiatives. These costs were not as significant in 2001, as
we were able to stabilize our accounting systems and substantially complete our
process improvement initiatives in the second half of 2000. Offsetting these
decreases were costs related to corporate staffing increases, which began
primarily in 2000 and continued in 2001.

In 2000, we incurred significant costs for our process improvement
initiatives and accounting assistance. These costs were mainly in the first half
of 2000 because, by the second half of 2000, we had stabilized our accounting
systems and completed our process improvement initiatives, which significantly
reduced our ongoing need for these services. In 2000, we incurred approximately
$196 million for professional accounting and process improvement consulting
services and consulting services related to the implementation of new enterprise
information systems. We also incurred approximately $51 million related to our
divestitures, improvements to our billing systems and verification of our
customer base, and legal fees related to certain stockholder litigation and
other SEC matters. However, in 2000 we were successful in collecting certain
accounts that were reserved for in 1999, favorably impacting our provision for
bad debt in 2000.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization includes (i) amortization of intangible
assets with a definite life other than goodwill on a straight-line basis,
generally 3 to 7 years, or over the definitive terms of the related agreements;
(ii) depreciation of property and equipment on a straight-line basis from 3 to
50 years; and (iii) amortization of landfill costs on a units-of-consumption
method as landfill airspace is consumed over the estimated remaining capacity of
a site. In 2001 and 2000, depreciation and amortization expense also included
the amortization of goodwill on a straight-line basis over a period of 40 years
or less, commencing on the dates of the respective acquisition.

Depreciation and amortization expense decreased 10.9% in 2002 as compared
to 2001 and decreased 4.1% in 2001 as compared to 2000. As a percentage of
operating revenues, depreciation and amortization expense was 11.0% in 2002,
12.1% in 2001 and 11.4% in 2000.

28

The decrease in depreciation and amortization expense in 2002 is primarily
attributable to our adoption of SFAS No. 142, which required that the
amortization of all goodwill cease on January 1, 2002. Goodwill amortization for
2001 was $156 million, or 1.4% of operating revenues. Excluding the effect of
goodwill amortization expense in 2001, depreciation and amortization expense as
a percentage of revenues increased 0.3% from 2001 compared to 2002.

The decrease in depreciation and amortization in 2001 is attributable to
the amortization expense of goodwill on operations that were divested throughout
2000, more cost-effective use of our landfill assets in 2001 and a temporary
increase in fully depreciated trucks and other equipment associated with delays
in receiving new equipment in the first half of 2001.

The following schedule reflects the 2001 and 2000 adjusted net income
(excluding goodwill and negative goodwill amortization) as compared to the
results of operations for December 31, 2002 (in millions, except per share
amounts).

RESTRUCTURING

In 2002, we adopted and implemented a new organizational structure to
better align collection, transport, recycling and disposal resources within
market areas. We believe the new structure will yield a number of benefits,
including clearer accountability and responsibility for business performance and
profitability in specific markets; simplification of structure; cost savings
through consolidation of duplicate administrative and other support functions;
improved utilization of operating assets; and better customer responsiveness.

In March 2002 all of our operations, other than WTI and CWS, were
restructured to reduce the number of field layers of management from four to
three and the number of field layers that have administrative staff from four to
two. Under the new structure, our approximately 1,200 operating sites, including
waste collection depots, transfer stations, landfills and recycling facilities,
were restructured into approximately 82 newly established Market Areas. These
Market Areas all report to one of four Groups that divide the United States
geographically into the Eastern, Midwest, Southern and Western operations, and
which were formerly known as our "Areas." CWS, which was restructured into ten
newly established Market Areas in July 2002, and WTI were the fifth and sixth
Areas under our previous structure continue as the fifth and sixth Groups under
the new structure.

We recorded $38 million of pre-tax charges for costs associated with the
implementation of the new organizational structure. These charges include $36
million for employee severance and benefit costs and $2 related to abandoned
operating lease agreements.

29

Under the new structure approximately 1,900 field-level administrative and
operational positions have been eliminated. Our obligation for severance
payments will continue into 2003. As of December 31, 2002, payments of $33
million for employee severance and benefits and for abandoned leases had been
recorded against the restructuring liability that was previously established.

ASSET IMPAIRMENTS AND UNUSUAL ITEMS

In 2002, the net gain for asset impairments and unusual items was due
primarily to (i) our receipt of approximately $11 million related to a
non-revenue producing asset written down as an asset impairment in 1998, (ii)
net gains of approximately $8 million on divestitures during the year and (iii)
reductions to legal and loss contract reserves of approximately $8 million and
$7 million, respectively, that we deemed were in excess of current requirements
and that were initially recognized as a charge to asset impairments and unusual
items.

In 2001, the expense was comprised mainly of a charge of $374 million,
which is net of the recovery from our insurers and the stockholders derivative
suit against our former independent public accountant, Arthur Andersen LLP, for
the settlement reached in connection with the stockholder class action lawsuit
filed against us in July 1999 alleging violations of the federal securities
laws. The settlement, which is subject to court approval, provides for our
payment to the class of $457 million, and we believe the payment, which is
expected to be made in 2003, will result in a net cash outflow of approximately
$230 to $240 million after considering insurance, tax deductions and related
settlement costs. In addition, we recorded a held-for-sale adjustment of
approximately $15 million related to our international operations along with a
held-for-sale adjustment for an investment in Mexican solid waste operations of
approximately $28 million. Offsetting these expenses was a net gain of $24
million (comprised of the reversal of the held-for-sale impairment of $109
million and a held-for-use impairment of $85 million) from our decision during
the third quarter of 2001 not to sell all but one of our IPPs, and the
reclassification in the third quarter of 2001 of all but one of our IPPs from
held-for-sale to held-for-use. Also included in asset impairments and unusual
items for 2001 are reversals of certain loss contract reserves of $13 million
that we determined to be in excess of current requirements.

In 2000, these costs were primarily due to our sale of our international
operations and the termination of WM Holdings' defined benefit pension plan,
which are more fully described in Notes 16 and 13, respectively, to the
consolidated financial statements.

INTEREST EXPENSE

Our interest expense decreased consistently each year from 2000 to 2002.
The primary factor for the decrease in interest expense in 2002 is our interest
rate derivative contracts, which are utilized to manage our interest rate
exposure and the general decline in interest rates. Interest rate swap
agreements reduced interest expense by $86 million for 2002 and contributed to
the decrease by $39 million in 2001. The remaining decrease in interest expense
in 2001 is primarily due to the pay down of debt with proceeds from our
divestitures and cash flows from operations. In 2002, the refinancing of debt
instruments at lower interest rates created additional interest expense savings.
Additionally, to further reduce interest expense we have increased our
utilization of tax-exempt bond financing over the past two years as a lower-cost
source of funding.

OTHER INCOME

We experienced an increase in other income in 2002 as compared to prior
years due primarily to the sale of an equity investment. In 2002, a company in
which we held an approximately 17% interest was acquired by another entity. We
held a note from the acquired company that was paid off in connection with the
acquisition. The proceeds from the repayment of the note and the sale of our
equity investment resulted in a gain of approximately $43 million in the fourth
quarter of 2002.

30

PROVISION FOR INCOME TAXES

We recorded a provision for income taxes of $424 million, $284 million and
$418 million for 2002, 2001 and 2000, respectively, resulting in an effective
income tax rate of 34.0%, 36.1% and 130.2% for each of the three years,
respectively.

The difference in federal income taxes computed at the federal statutory
rate and reported income taxes for 2002 is primarily due to state and local
income taxes, offset in part by non-conventional fuel tax credits. In addition,
we recognized a tax benefit of approximately $16 million due to a capital gain
generated in 2002 that enabled us to utilize a previously unbenefited capital
loss that arose from a divestiture. A tax benefit of approximately $31 million
was also recognized in 2002 related to the carry-back of losses by our Dutch
subsidiary.

The difference in federal income taxes computed at the federal statutory
rate and reported income taxes for 2001 is primarily due to state and local
income taxes, non-deductible costs associated with the impairment of certain
businesses, the cost associated with remitting the earnings of certain foreign
subsidiaries that are no longer permanently reinvested, offset in part by
non-conventional fuel tax credits. Additionally, in 2001 scheduled Canadian
federal and provincial tax rate reductions resulted in a benefit of $42 million,
which was offset in part by a tax expense of $24 million related to our plan to
repatriate certain capital and earnings previously deemed permanently invested
in Canada.

The 130.2% effective tax rate in 2000 is significantly higher than the
federal statutory rate due to state and local income taxes, non-deductible costs
relating to acquired intangibles, write down of investments in subsidiaries and
minority interest, sales of foreign subsidiaries and the cost associated with
remitting earnings of foreign subsidiaries that are no longer permanently
reinvested, offset in part by non-conventional tax credits.

EXTRAORDINARY ITEMS

During the first quarter of 2002, we refinanced approximately $49 million
of fixed-rate tax exempt bonds maturing in 2011 with variable-rate tax exempt
bonds maturing in 2022. As a result, we incurred prepayment penalties and other
fees for a total charge, net of tax benefit, of approximately $1 million.

During the fourth quarter of 2002, we elected to repay approximately $145
million of our senior debt issuances prior to their maturity dates. In
connection with these repayments, we recognized an extraordinary charge of
approximately $2 million, net of tax benefit, for the prepayment penalties and
other costs related to the retired debt.

In the first quarter of 2001, we worked with local governmental authorities
to refinance $339 million of fixed-rate tax-exempt bonds maturing through 2008
with $326 million of variable-rate tax-exempt bonds maturing through 2011 and
$17 million of fixed-rate bonds that matured later in 2001. We recorded a net
extraordinary loss of $1 million for the remaining unamortized premium and
issuance costs related to the retired debt.

On July 17, 1998, we issued $600 million of 6 1/8% mandatorily tendered
senior notes, due July 15, 2011. The notes were subject to certain mandatory
tender features as described in the indenture, which allowed us to purchase all
of the outstanding notes on July 15, 2001. We used available cash on hand along
with funds from our credit facility to purchase the notes in July 2001. During
the third quarter of 2001, we recorded an extraordinary loss of approximately $1
million, net of taxes, for the retirement of this debt.

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE

As a result of adopting SFAS No. 141, Accounting for Business Combinations,
("SFAS No. 141") on January 1, 2002, we were required to write-off amounts of
negative goodwill that had been recorded in prior periods through purchase
accounting. The aggregate amount of negative goodwill was $2 million and was
recorded as a credit to cumulative effect of change in accounting principle in
the first quarter of 2002.

31

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended ("SFAS No. 133"), became effective for us as of January 1, 2001.
Adoption of SFAS No. 133, resulted in a gain, net of tax, of approximately $2
million in the first quarter of 2001.

LIQUIDITY AND CAPITAL RESOURCES

The following is a summary of our cash balances and cash flows for the
years ended December 31, 2002, 2001 and 2000 (in millions):

Cash and cash equivalents consist primarily of cash on deposit,
certificates of deposit, money market accounts, and investment grade commercial
paper purchased with original maturities of three months or less.

Our cash balances decreased $466 million from December 31, 2001 to December
31, 2002. This decrease is primarily attributable to capital expenditures, our
stock repurchase program and the repayment of portions of our senior note
issuances prior to their maturity dates, which exceeded our existing cash
balances and our $2.2 billion of operating cash flow.

In 2002, cash flow from operations was favorably impacted by cash received
of $166 million from counterparties for certain interest rate swap agreements
that we terminated prior to the scheduled maturities, offset by cash paid of $66
million to counterparties for the settlement of hedging agreements entered into
to secure underlying interest rates related to our 2002 debt issuances. Included
in our investing activities was cash paid of $1.3 billion for capital
expenditures and $162 million for acquisitions of solid waste businesses. These
expenditures were offset by proceeds of $487 million from other investing
activities, primarily proceeds from sales of assets and net cash receipts from
restricted funds. Included in our financing activities was cash paid of $982
million for the repurchase of shares of our common stock. In addition we paid
$697 million for net debt reductions and received $27 million from exercises of
common stock options and warrants.

In 2001, we generated cash flows from operations of approximately $2.4
billion. Favorably impacting cash flows from operations was cash received of $59
million for the settlement of environmental related claims that we had against
certain insurance carriers and $64 million that we received from counterparties
when we terminated certain interest rate swap agreements prior to the scheduled
maturities. Included in our investing activities was $1.3 billion of capital
expenditures and $116 million for acquisitions of solid waste businesses. These
expenditures were offset by proceeds from sales of assets and other investing
activities of $212 million. In addition, we used $485 million for financing
activities, which is comprised of $510 million of net debt reductions and $25
million of other financing activities, offset by proceeds of $50 million from
exercises of common stock options and warrants, and other financing activities.

In 2000, we spent $231 million to acquire businesses, $1.3 billion in
capital expenditures and $3.3 billion on net debt reductions. We financed these
cash expenditures primarily with $2.1 billion of cash flows from operations and
$2.6 billion of proceeds from our divestitures. A tax refund of approximately
$200 million and our improvements in accounts receivable average days sale
outstanding favorably impacted cash flows from operations in 2000.

We operate in a capital intensive business and continuing access to various
financing sources is vital to our operations. In the past, we have been
successful in obtaining financing from a variety of sources on terms we consider
attractive. Based on several key factors we believe considered by credit rating
agencies and

32

financial markets to be important in determining our future access to financing,
we expect to continue to maintain access to capital sources in the future. These
factors include:

- the essential nature of the services we provide and our large and diverse
customer base;

- our ability to generate strong and consistent cash flows;

- our asset base; and

- our commitment to maintaining a moderate financial profile and
disciplined capital allocation.

In addition to our working capital needs for ongoing operations, we have
capital requirements for (i) capital expenditures for construction and expansion
of landfill sites, as well as new trucks and equipment for collection and other
operations, (ii) refurbishments and improvements at waste-to-energy facilities
and (iii) business acquisitions. For 2003, we currently expect to spend
approximately $1.1 billion to $1.2 billion for capital expenditures.

In February 2002 we announced that our Board of Directors had approved a
stock repurchase program for up to $1 billion in annual repurchases for each of
2002, 2003 and 2004, to be implemented at management's discretion. We expect to
utilize cash flows from operations for purchases made in either open market or
privately negotiated transactions.

The following is a summary of 2002 activity for our stock repurchase
program (in millions, except shares in thousands and price per share in
dollars).

- ---------------

(a) We accounted for the initial payment as a purchase of treasury stock and
classified the future settlement with the counterparty as an equity
instrument because we had the option under the agreement to settle our
obligation, if any, in shares of our common stock.

(b) The weighted average daily market price of our stock during the valuation
period times the number of shares we purchased was approximately $18
million less than the approximately $300 million we initially paid.
Pursuant to the terms of the agreement, the counterparty paid us this
difference of approximately $18 million at the end of the valuation period,
which occurred during the third quarter of 2002, to settle the agreement.
We accounted for the cash receipt as an adjustment to the carrying value of
treasury stock and have therefore included it in common stock repurchases
within financing activities in the consolidated statement of cash flows.

(c) The weighted average daily market price of our stock during the valuation
period times the number of shares we purchased was approximately $3 million
less than the approximately $42 million we initially paid. Pursuant to the
terms of the agreement, the counterparty will pay us the difference of
approximately $3 million at the end of the valuation period to settle the
agreement.

(d) We engaged in open market purchases when trading was allowed pursuant to
law and our insider trading policy.

33

The following table summarizes our contractual obligations as of December
31, 2002 and the anticipated effect of these obligations on our liquidity in
future years (in millions):

- ---------------
(a) Environmental liabilities include final closure, post-closure and
environmental remediation costs. See Note 8 to the consolidated financial
statements for additional discussion.

(b) See Note 20 to the consolidated financial statements for discussion on the
nature and terms of our unconditional purchase obligations.

We have contingencies, including guarantee arrangements, that are deemed
not reasonably likely and thus not included in the above table. See Note 20 to
the consolidated financial statements for further discussion.

Additionally, we expect a net cash outflow, after considering insurance,
tax deductions and related settlement costs, of approximately $230 to $240
million in 2003 for settlement of our securities class action lawsuit. The
settlement fund began to accrue interest, at the Federal Funds rate, during the
second quarter of 2002, although payment will not become due until the judgment
is final, which we expect to occur in 2003.

To meet our capital needs and contractual obligations, as described above,
our strategy is to utilize cash flows from operations. We also have bank
borrowings available to meet our capital needs and contractual obligations and,
when appropriate, will obtain financing by issuing debt or common stock.

As of December 31, 2002, we had a $650 million syndicated revolving credit
facility (the "Three Year Revolver"), and a $1.75 billion syndicated revolving
credit facility (the "Five Year Revolver"). The Three Year Revolver matures in
June 2005 and the Five Year Revolver matures in June 2006. As of December 31,
2002, we had letters of credit in the aggregate amount of approximately $1.75
billion (of which approximately $1.63 billion are issued under the revolving
credit facilities) that generally have terms allowing automatic renewal after a
year. At December 31, 2002, no balances were outstanding under our revolving
credit facilities and we had unused and available credit capacity under these
facilities of approximately $770 million.

As of December 31, 2002, the financial covenants we are required to
maintain under our credit facilities include (i) an interest coverage ratio;
(ii) total debt to EBITDA and; (iii) minimum net worth, all as defined in the
credit facilities solely for the purpose of determining compliance with the
covenants. The interest coverage ratio requires that at the end of any fiscal
quarter we will not permit the ratio of (A) our consolidated net income plus
interest expense and income taxes ("EBIT") for the four fiscal quarters then
ending to (B) consolidated total interest expense for such period to be less
than 2.5 to 1 for quarters ending on or before December 31, 2002 and 3 to 1
thereafter. The total debt to EBITDA covenant requires that at the end of any
fiscal quarter, we will not permit the ratio of (A) all indebtedness and certain
contingent liabilities such as financial guarantees to (B) EBIT plus
depreciation and amortization expense ("EBITDA") for the four fiscal quarters
then ending to exceed 3 to 1. Our minimum net worth covenant requires that we
will not allow the sum of stockholders' equity to be less than $3.5 billion plus
75% of our cumulative consolidated net income for each fiscal quarter, beginning
with the first fiscal quarter ended March 31, 2001. At December 31, 2002, we are
in compliance with all covenants under our credit facilities and all other debt
instruments. In January 2003, our total debt to EBITDA covenant was amended to
not permit that ratio to exceed 3.25 to 1 rather than 3 to 1.

In November 2002, we privately placed $400 million of 6 3/8% senior
unsecured notes due 2012. Interest on the notes is due on May 15 and November 15
of each year. The net proceeds of the offering were approximately $396 million
after deducting underwriters' discounts and expenses. We used these proceeds
primarily to pay the $350 million of 6.5% senior notes that came due December
15, 2002.

34

In May 2002, we privately placed $500 million of 7 3/4% senior unsecured
notes due 2032. Interest on the notes is due on November 15 and May 15 of each
year. The net proceeds of the offering were approximately $498 million, after
deducting underwriters' discounts and expenses. We used these proceeds to pay
the $300 million of 6.625% senior notes that matured on July 15, 2002 and a
portion of the $285.7 million of 7.7% senior notes that matured on October 1,
2002.

Additionally, we have issued industrial revenue bonds primarily for the
construction of various facilities. Proceeds from these financing arrangements
are directly deposited into trust funds and we do not have the ability to
utilize the funds in regular operating activities. Accordingly, these amounts
are reported as an investing activity when the cash is released from the trust
funds and a financing activity when the industrial revenue bonds are repaid. At
December 31, 2002, approximately $412 million of cash was held in trust to meet
future capital expenditures at various facilities.

We have $434 million of 6.375% senior notes due December 1, 2003. We also
have $450 million of 7.1% senior notes due August 1, 2026 that are subject to
early redemption on August 1, 2003 at the option of the holders. We have
classified approximately $770 million of these borrowings as long-term at
December 31, 2002 based upon our ability to use our revolving credit facilities,
which are both long-term, to refinance these borrowings at their respective
maturity or repayment date. We intend to pursue other sources of long-term
financing to refinance the borrowings; however, in the event other sources of
long-term financing are not available, we intend to use our revolving credit
facilities.

We manage the interest rate risk of our debt portfolio principally by using
interest rate derivatives to achieve a desired position of fixed and floating
rate debt, which is approximately 70% fixed and 30% floating at December 31,
2002. In addition, we periodically enter into derivative transactions to secure
the then current market interest rate in anticipation of senior debt issuances.

During 2002, we entered into hedging agreements to secure the underlying
treasury rates in anticipation of our 2002 senior note issuances. We settled
with the counterparties for approximately $66 million, which was paid
concurrently with related 2002 senior note issuances discussed above.

In 2002, we elected to terminate several interest rate swap agreements with
a notional amount of $2.95 billion prior to the scheduled maturities and
received cash of approximately $200 million (which is comprised of $166 million
for the fair value of the swaps that were terminated and $34 million of accrued
but unpaid interest receivable) from the counterparties to the interest rate
swaps. Under the hedge method of accounting for these types of derivatives, the
unamortized adjustment to long-term debt for the terminated swaps remains
classified as long-term debt. The proceeds received from the termination of the
interest rate swap agreements have been classified as a change in other assets
or other liabilities within operating activities in the consolidated statement
of cash flows.

VARIABLE INTEREST ENTITIES

On June 30, 2000, two limited liability companies ("LLCs") were established
to purchase interests in existing leveraged lease financings at three
waste-to-energy facilities that we operate under an agreement with the owner.
John Hancock Life Insurance Company ("Hancock") has a 99.5% ownership in one of
the LLCs, the second LLC is 99.5% collectively owned by Hancock and the CIT
Group ("CIT") and we own the remaining 0.5% interest in each. Hancock and CIT
made an initial investment of approximately $167 million in the LLCs. The LLCs
used these proceeds to purchase the three waste-to-energy facilities that we
operate and assumed the seller's indebtedness related to these facilities. Under
the LLC agreements, the LLCs shall be dissolved upon the occurrence of any of
the following events: (i) a written decision of all the members of the LLCs to
dissolve, (ii) December 31, 2063, (iii) the entry of a decree of judicial
dissolution under the Delaware Limited Liability Company Act, or (iv) the LLCs
ceasing to own any interest in these waste-to-energy facilities. Income, losses
and cash flows are allocated to the members based on their initial capital
account balances until Hancock and CIT achieve targeted returns; thereafter, the
amounts will be allocated 20% to Hancock and CIT and 80% to us. We do not expect
Hancock and CIT to achieve the targeted returns in 2003 or at any time during
the initial base term of the lease. We account for the underlying leases as
operating leases. We are required under certain circumstances to make capital
contributions to the LLCs in the amount of the difference between the stipulated
loss amounts and termination values under the LLC

35

agreements to the extent they are different from the underlying lease
agreements. We believe that the likelihood of the occurrence of these
circumstances is remote.

During 2002, we had aggregate lease payments of approximately $62 million.
Under the LLC agreements, if we exercise certain renewal options under the
leases, we will be required to make capital contributions to the LLCs for the
difference, if any, between fair market rents and the scheduled renewal rents.
As of December 31, 2002, the remaining aggregate lease commitments related to
these waste-to-energy facilities are $526 million, which includes $158 million
in required capital contributions to the LLC for the amount of the difference
between bargain renewals and the fair value of the lease. These minimum lease
payments are included in the table of non-cancelable rental obligations as
discussed in Note 20 of the consolidated financial statements.

We are the manager of the LLCs but there are significant limitations on the
powers of the manager under the LLC agreements. Accordingly, we account for our
interest in the LLCs under the equity method of accounting. These investments
had a carrying value of approximately $1 million at both December 31, 2002 and
December 31, 2001. If we were required to consolidate the LLCs, we would record
approximately $414 million in assets, and $208 million of debt as of December
31, 2002. The remaining balance that would be recorded would primarily be
minority interest. There would be no material net impact to our results of
operations if we consolidated the LLCs instead of accounting for them under the
equity method.

ACCOUNTING FOR STOCK OPTIONS

We account for our stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, as amended, under which no compensation cost for
stock options is recognized when granted with an exercise price equal to fair
value. SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
establishes accounting and annual disclosure requirements for options granted
after 1994 using a fair-value-based method of accounting. As of December 31,
2002, 2001, and 2000, we had approximately 44.5 million, 41.5 million and 40.3
million stock options and warrants outstanding, respectively. The weighted
average fair value per share of stock options granted during 2002, 2001 and 2000
as determined under SFAS No. 123 was $12.16, $10.83 and $6.78, respectively.

The fair value of each common stock option granted to employees or
directors during 2002, 2001 and 2000 is estimated utilizing the Black-Scholes
option pricing model. Black-Scholes is a formula that calculates an estimated
value of stock options based on appreciation and interest rate assumptions and
therefore, the fair value calculation of a stock option using Black-Scholes is
not necessarily indicative of the actual value of a stock option. The following
weighted average assumptions were used: dividend yield of 0%, risk-free interest
rates which vary for each grant and range from 2.91% to 6.19%, expected life of
four to seven years for all grants, and stock price volatility primarily ranging
from 23.7% to 50.4%.

The following schedule reflects the impact on net income and earnings per
common share if we had applied the fair value recognition provisions of SFAS No.
123 to stock based employee compensation (in millions, except per share
amounts).

36

SEASONALITY AND INFLATION

Our operating revenues tend to be somewhat lower in the winter months,
which corresponds with our first and fourth quarters. This is mostly because (i)
the volume of construction and demolition waste is lower in the winter because
there is less construction activity and (ii) the volume of industrial and
residential waste in certain regions where we operate tends to decrease during
the winter months.

We do not believe that inflation has, nor do we expect it to have, any
material adverse effect on our results of operations in the near future.

RECENT DEVELOPMENTS

In January 2003, we announced that we had formed a new recycling entity,
Recycle America Alliance, L.L.C. ("RAA"), a wholly-owned subsidiary, in an
effort to optimize the capacity and improve the profitability of our recycling
operations. In connection with the formation of RAA, we transferred
substantially all recycling assets and businesses of our other subsidiaries to
RAA. RAA's strategy includes combining its assets and operations with a number
of key processors and marketers. On January 10, 2003, the Peltz Group, the
largest privately-held recycler in the United States, contributed all of its
assets to RAA in exchange for an initial payment by RAA of approximately $58
million in cash and the issuance of approximately 9% of the equity interest in
RAA.

In February 2003, we announced that we will implement further restructuring
to reorganize our operations into a smaller number of Market Areas in an effort
to reduce overhead costs. As part of the restructuring, there will be a net
workforce reduction of about 700 employees and 270 contract workers. We
anticipate a charge of approximately $23 million for this restructuring.

NEW ACCOUNTING PRONOUNCEMENTS AND OTHER ACCOUNTING CHANGES

NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 143

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143. SFAS No. 143 applies to all legally enforceable obligations associated
with the retirement of tangible long-lived assets and provides the accounting
and reporting requirements for such obligations. SFAS No. 143 requires amounts
initially recognized as an asset retirement obligation to be measured at fair
value. The recognized asset retirement cost is capitalized as part of the cost
of the asset and is depreciated over the useful life of the asset.

SFAS No. 143, which will primarily impact the accounting for our landfill
operations, does not change the basic landfill accounting followed historically
by us along with others in the waste industry. In general, the waste industry
has recognized expenses associated with both amortization of capitalized costs
and future closure and post-closure obligations on a units-of-consumption basis
as airspace is consumed over the life of the related landfill. This practice,
referred to as life cycle accounting within the waste industry, will continue to
be followed upon adoption of SFAS No. 143, except as discussed below.

Under the new rules, costs associated with future final capping activities
that occur during the operating life of a landfill, which are currently
recognized on an undiscounted basis over the operating life of the landfill as
airspace is consumed, will be accounted for as an asset retirement obligation,
on a discounted basis. We expect to recognize landfill retirement obligations
that relate to closure and post-closure activities over the operating life of a
landfill as landfill airspace is consumed and the obligation is incurred. We
expect to recognize our final capping obligations on a discrete basis for each
expected future final capping event over the number of tons of waste that each
final capping event is expected to cover. These obligations will be initially
measured at estimated fair value. Fair value will be measured on a present value
basis, using a credit-adjusted, risk-free rate, initially 7.25%, which is higher
than the risk-free rate previously used for discounting closure and post-closure
obligations. Interest will be accreted on all landfill retirement obligations
using the effective interest method. Landfill retirement costs arising from
closure and post-closure obligations, which will be capitalized as part of the
landfill asset, will be amortized using our existing landfill accounting
practices.

37

Landfill retirement costs arising from final capping obligations, which will
also be capitalized as part of the landfill asset, will be amortized on a
units-of-consumption basis over the number of tons of waste that each final
capping event covers.

The table below reflects the significant changes between our current
landfill accounting practices and the requirements of SFAS No. 143.

We will adopt SFAS No. 143 beginning January 1, 2003 and, based on current
estimates, will record an after-tax expense ranging from $180 million to $230
million as a cumulative effect of a change in accounting principle. We expect
that the impact of adopting SFAS No. 143 in 2003 will decrease earnings per
share from our previous method by approximately $0.08 per diluted share. The
adoption of SFAS No. 143 will have no net effect on our cash flow.

SFAS No. 145

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS No. 145"). SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they meet
the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30").
Applying the provisions of Opinion No. 30 will distinguish transactions that are
part of an entity's recurring operations from those that are unusual and
infrequent and meet the criteria for classification as an extraordinary item.
SFAS No. 145 is effective for us beginning January 1, 2003. Upon the adoption of
SFAS No. 145, we will reclassify certain items in our prior period statements of
operations to conform to the presentation required by SFAS No. 145. Under SFAS
No. 145, we will report gains and losses on the extinguishment of debt in
pre-tax earnings rather than in extraordinary items.

SFAS No. 146

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities, such as restructurings, involuntarily terminating employees, and
consolidating facilities initiated after December 31, 2002. The implementation
of SFAS No. 146 will not require the restatement of previously issued financial
statements. Implementation of the pronouncement will therefore have no impact on
our current year financial statements. We will apply SFAS No. 146 requirements
to our 2003 restructuring. See Note 26 to the consolidated financial statements
for further discussion.

39

FIN 45

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). It clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee, including its
ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The
objective of the initial measurement of the liability is the fair value of the
guarantee at its inception. The initial recognition and initial measurement
provisions of FIN 45 are effective for us on a prospective basis to guarantees
issued after December 31, 2002. We will record the fair value of future material
guarantees, if any. See Note 20 to the consolidated financial statements for
current disclosure requirements related to our guarantee arrangements.

FIN 46

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"). FIN 46
requires that unconsolidated variable interest entities be consolidated by their
primary beneficiaries. A primary beneficiary is the party that absorbs a
majority of the entity's expected losses or residual benefits. FIN 46 applies
immediately to variable interest entities created after January 31, 2003 and to
existing variable interest entities in the periods beginning after June 15,
2003. See Note 21 to the consolidated financial statements for discussion on our
existing variable interests. We have yet to determine the impact that the
adoption of FIN 46 will have on our consolidated financial statements.

OTHER ACCOUNTING CHANGES

Repairs and Maintenance

Through December 31, 2002, we accrued in advance for major repairs and
maintenance expenditures at our waste-to-energy facilities and IPPs. Effective
January 1, 2003, we changed our policy from this method to one that expenses
these costs as they are incurred. In the first quarter of 2003, we expect to
record approximately $30 million, net of taxes, as a credit to cumulative effect
of an accounting change.

Loss Contract Accrual

Through December 31, 2002, we accrued for future losses for contracts that
over the contract life were projected to have direct costs greater than
revenues. Effective January 1, 2003, we changed our policy from this method to
one that expenses these costs as they are incurred. In the first quarter of
2003, we expect to record approximately $30 million, net of taxes, as a credit
to cumulative effect of an accounting change.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

In the normal course of business, we are exposed to market risk, including
changes in interest rates, foreign currency rates, certain commodity prices and
certain equity prices. From time to time, we and certain of our subsidiaries use
derivatives to manage some portion of these risks. Our derivatives are
agreements with independent third parties that provide for payments based on a
notional amount, with no multipliers or leverage. As of December 31, 2002, all
of the derivatives were related to actual or anticipated exposures of our
transactions, with the exception of certain derivatives related to the fiber
commodity markets that were entered into for trading purposes. We are exposed to
credit risk in the event of non-performance by counterparties to derivatives.
However, we monitor our derivative positions by regularly evaluating our
positions and the creditworthiness of the counterparties, all of whom we either
consider credit worthy, or who have issued letters of credit to support their
performance. See Note 10 to the consolidated financial statements for discussion
regarding terminated fiber agreements with Enron North America Corp. ("Enron").

We have performed sensitivity analyses to determine how market rate changes
might affect the fair value of our market risk sensitive derivatives and related
positions. This analysis is inherently limited because it represents a singular,
hypothetical set of assumptions. Actual market movements may vary significantly
from

40

our assumptions. The effects of market movements may also directly or indirectly
affect our assumptions and our rights and obligations not covered by sensitivity
analysis. Fair value sensitivity is not necessarily indicative of the ultimate
cash flow or the earnings effect from the assumed market rate movements.

Interest Rate Exposure. Our exposure to market risk for changes in
interest rates relates primarily to our debt obligations, which are denominated
in U.S. dollars. In addition, we use interest rate swaps to either lock-in or
limit the variability in the interest rates to manage the mix of fixed and
floating rate debt obligations. An instantaneous, one percentage point decrease
in interest rates across all maturities and applicable yield curves would
increase the fair value of our combined debt and interest rate swap positions at
December 31, 2002 and 2001 by approximately $482 million and $394 million,
respectively. This analysis does not reflect the effect that declining interest
rates would have on other items, such as new borrowings, nor the favorable
impact they would have on interest expense and cash payments for interest. Since
a significant portion of our debt is at fixed rates, changes in market interest
rates would not significantly impact operating results until and unless our
fixed rate debt would need to be refinanced at maturity.

Currency Rate Exposure. From time to time, we and certain of our
subsidiaries have used foreign currency derivatives to mitigate the impact of
currency translation on cash flows on intercompany foreign-currency denominated
debt. An instantaneous ten percent decrease in foreign exchange rates at
December 31, 2002 would have no material impact to the Company. We had no
foreign currency derivatives at December 31, 2001.

Commodities Price Exposure. We market recycled waste paper products such
as ONP and OCC from our material recovery facilities. We enter into financial
fiber swaps to mitigate the variability in cash flows from a portion of these
sales. Under these swap agreements, we pay a floating index price and receive a
fixed price for a fixed period of time. We also enter into fiber swap agreements
for trading purposes with the objective of generating profits from changes in
market prices of waste paper and other paper products. We record changes in the
fair value of these fiber swap agreements not designated as hedges immediately
to earnings. All derivative transactions are subject to our risk management
policy which governs the type of instruments that may be used and our risk
exposure limits. An instantaneous ten percent increase in OCC and ONP prices at
December 31, 2002 would decrease the fair value of our hedges by approximately
$11.2 million. This analysis excludes the underlying physical commodity sales
positions that are being hedged. An instantaneous ten percent increase in prices
at December 31, 2002 on our derivatives entered into for trading purposes would
have no material impact on us.

At December 31, 2001, all, except two, of our fiber agreements were with
Enron. Due to Enron's financial situation, collectibility of the funds
associated with these instruments was not probable at December 31, 2001 and
therefore these instruments were estimated to have no fair value. The
derivatives with Enron were subsequently terminated in early 2002. The net fair
value of the two derivatives with counterparties other than Enron at December
31, 2001 was not material.

See Notes 2, 7 and 10 to the consolidated financial statements for further
discussion of the use of and accounting for derivative instruments.

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS

42

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Waste Management, Inc.

We have audited the accompanying consolidated balance sheet of Waste Management,
Inc. (the "Company") as of December 31, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of the
Company as of December 31, 2001 and for each of the years in the two year period
ended December 31, 2001 were audited by other auditors who have ceased
operations and whose report dated February 25, 2002 expressed an unqualified
opinion on those statements before the restatement adjustments and disclosures
described below and in Notes 2, 6 and 15.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Waste Management, Inc. at December 31, 2002, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 6 to the consolidated financial statements, effective
January 1, 2002 the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").

As discussed above, the consolidated financial statements of the Company as of
December 31, 2001, and for each of the years in the two year period ended
December 31, 2001, were audited by other auditors who have ceased operations.
However, the Company made certain adjustments and disclosures to prior years'
financial statements to conform with the current year's presentation or to
comply with adoption requirements of new accounting pronouncements, as follows:

(i) As described in Note 2, the Company reclassified $137 million of accrued
interest payable from accounts payable to accrued liabilities in the 2001
consolidated balance sheet. We audited the adjustment that was applied to
reclassify accrued interest payable in the 2001 consolidated balance
sheet. Our procedures included (a) agreeing the amount of accrued interest
payable to the Company's underlying records obtained from management, and
(b) testing the mathematical accuracy of the restatement of accrued
interest payable within the consolidated financial statements.

(ii) As described in Note 6, the 2001 and 2000 consolidated financial
statements have been revised to include the transitional and other
disclosures required by SFAS 142, which the Company adopted as of January
1, 2002. Our procedures with respect to the disclosures in Note 6
regarding 2001 and 2000 included (a) agreeing the previously reported net
income (in total and the related earnings-per-share amounts) to the
previously issued consolidated financial statements and the adjustments to
amounts representing amortization expense (including any related tax
effects) recognized in those periods related to goodwill and negative
goodwill as a result of initially applying SFAS 142 to the Company's
underlying records obtained from management, (b) testing the mathematical
accuracy of the reconciliation of adjusted net income to previously
reported net income and the related earnings-per-share amounts.
Additionally, our procedures with respect to the disclosures in Note 6
regarding 2001 included (a) agreeing the cost basis and accumulated
amortization of customer contracts and customer lists, covenants
not-to-compete and licenses, permits and other to the Company's underlying
records obtained from management, (b) testing the mathematical accuracy of
the reconciliation of other intangible assets,

43

net, to the 2001 consolidated balance sheet and (c) agreeing 2001
amortization expense for other intangible assets to the Company's
underlying records obtained from management.

(iii) As described in Note 15, the Company changed the composition of its
reportable segments in 2002, and the amounts in the 2001 and 2000
consolidated financial statements relating to reportable segments have
been restated to conform to the 2002 composition of reportable segments.
We audited the adjustments that were applied to restate the disclosures
for reportable segments reflected in the 2001 and 2000 consolidated
financial statements. Our procedures included (a) agreeing the adjusted
amounts of segment gross operating revenues, intercompany operating
revenues, net operating revenues, income from operations, depreciation and
amortization, capital expenditures and total assets to the Company's
underlying records obtained from management, (b) testing the mathematical
accuracy of the reconciliations of segment amounts to the consolidated
financial statements, and (c) agreeing goodwill amortization expense to
the Company's underlying records obtained from management.

(iv) In the table presented in Note 5, the Company reclassified $262 million
from land to landfills in the December 31, 2001 Property and Equipment
presentation. We audited the adjustment that was applied to reclassify
this amount. Our procedures included (a) agreeing the amount of the
restatement adjustment to the Company's underlying records obtained from
management, and (b) testing the mathematical accuracy of the restatement
within the table in Note 5.

In our opinion, the adjustments and disclosures described in (i), (ii), (iii)
and (iv) above are appropriate and have been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the 2001 and 2000
consolidated financial statements of the Company other than with respect to such
adjustments and disclosures and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 and 2000 consolidated financial
statements taken as a whole.

/s/ Ernst & Young LLP

Houston, Texas
February 14, 2003

44

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and the Board of Directors of Waste Management, Inc.

We have audited the accompanying consolidated balance sheets of Waste
Management, Inc., a Delaware corporation, and subsidiaries (the "Company"), as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the years in the
three year period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waste Management, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 2002

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP
IN CONNECTION WITH WASTE MANAGEMENT, INC.'S FILING ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. SEE EXHIBIT 23.2 FOR
FURTHER DISCUSSION.

45

WASTE MANAGEMENT, INC.

CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PAR VALUE AMOUNTS)

See notes to consolidated financial statements.

46

WASTE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

See notes to consolidated financial statements.

47

WASTE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

See notes to consolidated financial statements.

48

WASTE MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN MILLIONS, EXCEPT SHARES IN THOUSANDS)

See notes to consolidated financial statements.

49

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

1. BUSINESS

Waste Management, Inc., a Delaware corporation, and subsidiaries ("Waste
Management" or the "Company") is its industry's leading provider of integrated
waste services in North America. Through its subsidiaries, the Company provides
collection, transfer, recycling and resource recovery, and disposal services.
The Company is also a leading developer, operator and owner of waste-to-energy
facilities in the United States.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries after elimination of all material intercompany balances and
transactions. Investments in affiliated companies in which the Company has a
controlling interest are consolidated for financial reporting purposes.
Investments in affiliated entities in which the Company does not have a
controlling interest are accounted for under either the equity method or cost
method of accounting, as appropriate. These investments are regularly reviewed
for impairment issues and propriety of current accounting treatment.

Reclassifications -- Certain reclassifications have been made to the prior
year balance sheet to conform to the current year presentation. In the Company's
Annual Report on Form 10-K for the year ended December 31, 2001, the Company
reported accrued interest of $137 million as a component of accounts payable. In
2002, the Company started reporting accrued interest as a component of accrued
liabilities instead of accounts payable. In order to conform the prior period
presentation of accrued interest to the current period presentation, the Company
has reclassified the $137 million of accrued interest at December 31, 2001 to
accrued liabilities in the consolidated balance sheet presented elsewhere
herein.

Cash and cash equivalents -- Cash and cash equivalents consist primarily of
cash on deposit, certificates of deposit, money market accounts, and investment
grade commercial paper purchased with original maturities of three months or
less.

Concentrations of credit risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions and limits the amount
of credit exposure with any one institution. Concentrations of credit risk with
respect to accounts receivable are limited because a large number of
geographically diverse customers comprise the Company's customer base, thus
spreading the trade credit risk. At December 31, 2002 and 2001, no single group
or customer represented greater than 5% of total accounts receivable. The
Company controls credit risk through credit evaluations, credit limits, and
monitoring procedures. The Company performs credit evaluations for commercial
and industrial customers and performs ongoing credit evaluations of its
customers, but generally does not require collateral to support accounts
receivable. Credit losses are provided for in the financial statements. Credit
risk relating to derivative instruments results from the fact the Company enters
into interest rate and commodity price swap agreements with various
counterparties. However, the Company monitors its derivative positions by
regularly evaluating its positions and the credit worthiness of the
counterparties, all of whom the Company considers credit worthy, or who have
issued letters of credit to support their performance. See Note 10 for
discussion related to the previously outstanding waste paper swap agreements
with Enron North America Corp. ("Enron").

Trade, notes and other receivables -- The Company's receivables are
recorded when billed, advanced or accrued and represent claims against third
parties that will be settled in cash. The carrying value of the Company's
receivables, net of the allowance for doubtful accounts, represents their
estimated net realizable value. The Company estimates its allowance for doubtful
accounts based on historical collection trends, type

50

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of customer such as municipal or non-municipal, the age of outstanding
receivables and existing economic conditions. If events or changes in
circumstances indicate that specific receivable balances may be impaired,
further consideration is given to the collectiblity of those balances and the
allowance is adjusted accordingly. Past-due receivable balances are written-off
when the Company's internal collection efforts have been unsuccessful in
collecting the amount due. Also, the Company generally recognizes interest
income on long-term interest-bearing notes receivable as the interest accrues
under the terms of the note.

Operations held-for-sale -- On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). That statement
requires that assets held-for-sale be recorded at the lower of their carrying
amount or their fair value less cost to sell. Held-for-sale assets are not
depreciated. Assets are classified as held-for-sale only if (i) management
commits to a plan to sell the asset, (ii) the asset is available for immediate
sale, (iii) the asset is actively being marketed for sale at a price that is
reasonable in relation to its current fair value and (iv) management believes
the sale of the asset is probable and expects transfer within one year. See Note
22 for further discussion of operations held-for-sale.

Property and equipment -- Property and equipment are recorded at cost.
Expenditures for major additions and improvements are capitalized. Except for
the Company's waste-to-energy facilities and independent power production plants
("IPPs"), minor replacements, maintenance and repairs are charged to expense as
incurred.

At the Company's waste-to-energy facilities and IPPs, the Company accrues
for major repair and maintenance expenditures. Such accruals are based upon
planned maintenance expenditures and are classified as current or non-current
liabilities based on the expected timing of the expenditures. In the first
quarter of 2003, the Company changed its method of accounting to one that
expenses these costs as incurred. See Note 25 for further discussion.

When property and equipment are retired, sold, or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations as increases or
offsets to operating expense for the respective period. Depreciation is provided
over the estimated useful lives of the related assets using the straight-line
method. The Company assumes no salvage value for its depreciable property and
equipment. The estimated useful lives for significant property and equipment
categories are as follows (in years):

The Company capitalizes certain costs associated with developing or
obtaining internal-use software. These costs include external direct costs of
materials and services used in developing or obtaining the software and payroll
and payroll-related costs for employees directly associated with the software
development project. For the years ended December 31, 2002 and 2001, the Company
capitalized $110 million and $63 million, respectively, of software development
costs that are primarily related to the development of the Company's
enterprise-wide software systems. The Company includes these costs as office
equipment within furniture and fixtures and depreciates the software development
costs over a period up to five years once the systems are placed in service.

51

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Leases -- The Company leases certain office space and plant and equipment
for varying periods. The Company's leases have varying terms. Some may include
renewal or purchase options, escalation clauses, restrictions, penalties or
other obligations that we consider in determining minimum lease payments
disclosed in Note 20. The leases are classified as either capital leases or
operating leases, as appropriate.

Assets under capital leases are capitalized using interest rates
appropriate at the inception of each lease and are amortized over the shorter of
either the useful life of the asset in accordance with the Company's policy for
owned assets or the lease term on a straight line basis. The present value of
the related lease payment is recorded as a debt obligation. The Company's future
minimum annual capital lease payments are included in the Company's total future
debt obligations as disclosed in Note 7.

Management expects that in the normal course of business, operating leases
will be renewed or replaced by other leases. See Note 20 for the Company's
future contractual operating lease payments.

Landfill accounting -- The discussion below details the Company's
accounting policies for landfills through December 31, 2002. As of January 1,
2003, the Company's practice will change upon the Company's adoption of SFAS No.
143, Accounting for Asset Retirement Obligations ("SFAS No. 143"). See Note 25
for additional information.

The Company utilizes the life cycle method of accounting for landfill
costs. Landfill site costs that qualify for capitalization are recorded at cost.
Capitalized landfill site costs, net of recorded amortization, are added to
estimated projected capitalizable costs to be incurred over the remaining life
of the landfill, to determine the amount to be amortized over the remaining
capacity of a site as discussed below. Amortization is recorded on a units of
consumption basis, applying cost as a rate per ton over the remaining capacity
of a site. Landfill site costs are amortized to expected net realizable value
upon closure of a landfill. See Note 3 for discussion on landfill related
estimates.

The Company has material financial commitments for the costs associated
with its future obligations for closure and post-closure obligations with
respect to the landfills it owns or operates as prescribed by the EPA's
Subtitles C and D regulations. The difference between the present value of a
landfill's estimated total closure and post-closure costs and amounts accrued to
date is accrued prospectively on a units of consumption basis by applying a rate
per ton over the remaining capacity of the landfill. The present value of
closure and post-closure costs is fully accrued for each landfill once the site
discontinues accepting waste and is included in environmental liabilities.

The remaining capacity of a landfill is determined by the unused permitted
airspace and expansion airspace when the success of obtaining an expansion
permit is probable. Remaining capacity is estimated in cubic yards and converted
to tons using a landfill-specific airspace utilization factor. These factors are
developed by Company engineers and are reviewed by management, typically at
least once per year.

To include airspace associated with an expansion effort in remaining
capacity, the Company must generally expect the expansion permit application to
be submitted within one year, and the expansion permit to be received within
five years. Also, the Company must believe the success of obtaining the
expansion permit is probable, using the following criteria:

- Personnel are actively working to obtain land use and local and state
approvals for an expansion of an existing landfill;

- At the time the expansion is added to the permitted site life, it is
probable that the approvals will be received within the normal
application and processing time periods for approvals in the jurisdiction
in which the landfill is located;

- Either the Company or the respective landfill owners have a legal right
to use or obtain land to be included in the expansion plan;

52

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- There are no significant known technical, legal, community, business, or
political restrictions or similar issues that could impair the success of
such expansion;

- Financial analysis has been completed, and the results demonstrate that
the expansion has a positive financial and operational impact; and

- Airspace and related costs, including additional closure and post-closure
costs, have been estimated based on conceptual design.

These criteria are initially evaluated by the Company's field-based
engineers, accountants, managers and others to identify potential obstacles to
obtaining the permits. However, the Company's policy provides that, based on the
facts and circumstances of a specific landfill, if these criteria are not met,
inclusion of unpermitted airspace may still be allowed. In these circumstances,
inclusion must be approved through a landfill-specific process that includes
approval of the Chief Financial Officer and a review by the Audit Committee of
the Board of Directors on a quarterly basis. Of the 91 landfill sites with
expansions at December 31, 2002, 26 landfills required the Chief Financial
Officer to approve the inclusion of the unpermitted airspace. Approximately
two-thirds of these landfills required approval by the Chief Financial Officer
because of legal or community issues that could impede the expansion process,
while the remaining were primarily due to permit application processes beyond
the one-year limit, which in most cases were due to state-specific permitting
procedures. When expansion airspace is included in the calculation of available
airspace, the projected costs for development and final capping of the expansion
are included in the amortization base of the landfill, and the projected costs
for closure and post-closure of the expansion are considered in determining
closure and post-closure expense. See Note 3 for further discussion on related
estimates and assumptions.

After determining the costs at its landfills, including closure and
post-closure costs, and the remaining capacity, the Company then determines the
per ton rate that will be expensed. Factors considered include the waste stream,
geography and rate of compaction, among others, to determine the number of tons
it will take to fill the remaining capacity. The determined costs are then
divided by that number of tons, giving the Company the rate per ton to expense.

Business combinations -- All acquisitions since January 1, 2000 have been
accounted for using the purchase method of accounting. The Company allocates the
cost of the acquired business to the assets acquired and the liabilities assumed
based on estimates of fair values thereof. These estimates are revised during
the allocation period as necessary if, and when, information regarding
contingencies becomes available to further define and quantify assets acquired
and liabilities assumed. The allocation period generally does not exceed one
year. To the extent contingencies such as preacquisition environmental matters,
litigation and related legal fees are resolved or settled during the allocation
period, such items are included in the revised allocation of the purchase price.
After the allocation period, the effect of changes in such contingencies is
included in results of operations in the periods in which the adjustments are
determined. The Company does not believe potential differences between its fair
value estimates and actual fair values are material.

In certain business combinations, the Company agrees to pay additional
amounts to sellers contingent upon achievement by the acquired businesses of
certain negotiated goals, such as targeted revenue levels, targeted disposal
volumes or the issuance of permits for expanded landfill airspace. Contingent
payments, when incurred, are recorded as purchase price adjustments or
compensation expense, as appropriate, based on the nature of each contingent
payment.

Goodwill and other intangible assets -- Goodwill is the excess of cost over
net assets of acquired businesses. In accordance with SFAS No. 142, Accounting
for Goodwill and Other Intangible Assets ("SFAS No. 142"), the Company did not
amortize goodwill that arose from purchases after June 30, 2001. In addition,
the Company continued through December 31, 2001 the amortization of goodwill
which arose from purchase business combinations completed prior to or on June
30, 2001. All amortization of goodwill ceased

53

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

January 1, 2002. Other intangible assets consist primarily of customer
contracts, customer lists, covenants not-to-compete, licenses and permits (other
than landfill permits, as all landfill related intangible assets are combined
with landfill tangible assets and amortized using the Company's landfill
amortization policy). Other intangible assets are recorded at cost and amortized
on a straight-line basis. Customer contracts and customer lists are generally
amortized over five to seven years. Covenants not-to-compete are amortized over
the term of the agreement, which is generally three to five years. Licenses,
permits and other contracts are amortized over the definitive terms of the
related agreements. If the underlying agreement does not contain definitive
terms and the useful life is determined to be indefinite, the asset is not
amortized. As of December 31, 2002, the Company has approximately $3 million of
other intangible assets that are not amortized. For further discussion, see Note
6.

Restricted funds held by trustees -- Restricted funds held by trustees are
included in other non-current assets and consist principally of funds held in
trust for the construction of various facilities, funds deposited in connection
with landfill closure and post-closure obligations and insurance escrow
deposits. Of the restricted funds balance of $533 million at December 31, 2002,
$412 million relates to industrial revenue bonds issued primarily for the
construction of various facilities. Proceeds from these financing arrangements
are directly deposited into trust funds, and the Company does not have the
ability to utilize the funds in regular operating activities. Accordingly, these
amounts are reported as an investing activity when the cash is released from the
trust funds and as a financing activity when the industrial revenue bonds are
repaid out of the Company's cash balances. In 2002, proceeds from tax-exempt
borrowings, net of principal payments made directly from trust funds were $424
million. These transactions were treated as non-cash financing activities for
purposes of the statement of cash flows.

Asset impairments -- Long-lived assets consist primarily of property, plant
and equipment, goodwill and other intangible assets. Property, plant, equipment
and other intangible assets are carried on the Company's financial statements
based on their cost less accumulated depreciation or amortization. The
recoverability of these assets is tested whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable.
Typical indicators that an asset may be impaired include:

- A significant decrease in the market price of an asset or asset group;

- A significant adverse change in the extent or manner in which an asset or
asset group is being used or in its physical condition;

- A significant adverse change in legal factors or in the business climate
that could affect the value of an asset or asset group, including an
adverse action or assessment by a regulator;

- An accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset;

- Current period operating or cash flow losses combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset or asset group; or

- A current expectation that, more likely than not, a long-lived asset or
asset group will be sold or otherwise disposed of significantly before
the end of its previously estimated useful life.

If any of these or other indicators occur, the asset is reviewed to
determine whether there has been an impairment. An impairment loss is recorded
as the difference between the carrying amount and fair value of the asset. See
Note 3 for further discussion on related estimates and assumptions. There are
other considerations for impairments of landfills and goodwill, as described
below.

Landfills -- There are certain indicators listed above that require
significant judgment and understanding of the waste industry when applied to
landfill development or expansion projects. For example, a regulator may

54

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

initially deny a landfill expansion permit application though the expansion
permit is ultimately granted. In addition, management may periodically divert
waste from one landfill to another to conserve remaining permitted landfill
airspace. Therefore, certain events could occur in the ordinary course of
business and not necessarily be considered indicators of impairment due to the
unique nature of the waste industry.

Goodwill -- The Company assesses whether goodwill is impaired on an annual
basis. Upon determining the existence of goodwill impairment, the Company
measures that impairment based on the amount by which the book value of goodwill
exceeds its implied fair value. The implied fair value of goodwill is determined
by deducting the fair value of a reporting unit's identifiable assets and
liabilities from the fair value of the reporting unit as a whole, as if that
reporting unit had just been acquired and the purchase price were being
initially allocated. Additional impairment assessments may be performed on an
interim basis if the Company encounters events or changes in circumstances, such
as those listed above, that would indicate that, more likely than not, the book
value of goodwill has been impaired.

Income taxes -- Deferred income taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities. The deferred income tax provision represents the change during the
reporting period in the deferred tax assets and deferred tax liabilities, net of
the effect of acquisitions and dispositions. Deferred tax assets include tax
loss and credit carryforwards and are reduced by a valuation allowance if, based
on available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.

Foreign currency -- The functional currency of the Company's foreign
operations is the local currency of the country in which the Company operates.
Adjustments resulting from the translation of financial information are included
in comprehensive income.

Revenue recognition -- The Company recognizes revenues when all four
criteria noted below have been satisfied:

- Persuasive evidence of an arrangement exists, such as executed service
agreements, new customer account forms or other relevant documentation.

- Services, such as providing hauling services and accepting waste at the
Company's disposal facilities, are rendered or products are delivered.

- The Company's price to the buyer is fixed or determinable.

- Collectibility is reasonably assured.

The Company bills for certain services prior to performance. Such services
include, among others, certain residential contracts that are billed on a
quarterly basis and rights to utilize assets such as containers or other
equipment rentals continuously over time. These advance billings are included in
deferred revenues and recognized as revenue in the period earned for services
provided.

Loss contracts -- The Company reviews its revenue-producing contracts in
the ordinary course of business to determine if the direct costs, exclusive of
any non-variable costs, to service the contractual arrangements exceed the
revenues to be produced by the contract. Any resulting net loss over the life of
the contract is expensed at the time of such determination. During the life of a
contract that is deemed to be a loss contract, the Company may estimate
intermittent periods of contract profitability. Intermittent profitability
projected or realized on loss contracts is deferred to offset future projected
losses. In 2002, the Company reduced expenses by approximately $26 million
through the utilization of the accrual to offset actual losses. The Company also
increased loss contract reserves by approximately $15 million as additional
operating expenses for projected future losses on contracts.

In the first quarter of 2003, the Company changed its method of accounting
to one that expenses losses on contracts as they are incurred. See Note 25 for
further discussion.

55

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Self-insurance property and casualty -- The Company has retained a portion
of the risks related to its automobile, general liability and workers'
compensation insurance programs. The exposure for unpaid claims and associated
expenses, including incurred but not reported losses, is determined by external
actuaries. The related liability is included in accrued liabilities if expected
to be settled within one year or otherwise is included in other long term
liabilities.

Derivative financial instruments -- SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("SFAS No. 133"), became
effective for the Company on January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards requiring that all derivative instruments,
including certain derivative instruments embedded in other contracts, be
recorded as either assets or liabilities measured at fair value. SFAS No. 133
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Adoption of SFAS No. 133 resulted in a gain, net of tax, of approximately $2
million in the first quarter of 2001, which is reflected as a cumulative effect
of change in accounting principle. See further discussion at Note 7 and Note 10.

The Company utilizes derivative financial instruments to manage its foreign
currency, interest rate and commodity pricing exposure. The estimated fair
values of derivatives used to hedge risks fluctuate over time. These changes in
fair values should be viewed in relation to the underlying hedging transaction
and to the overall management of the Company's exposure to fluctuations in
foreign exchange rates, interest rates and commodity prices.

The fair value of derivatives is included in other current assets, other
long-term assets, accrued liabilities or other long-term liabilities, as
appropriate. The offsetting amounts for those derivatives designated as fair
value hedges are recorded as an adjustment to the carrying value of the hedged
instrument. Upon termination, this carrying value adjustment is amortized to
earnings over the remaining life of the hedged instrument. The offsetting
amounts for those derivatives designated as cash flow hedges are recorded in
other comprehensive income. Upon termination, the associated balance in other
comprehensive income is amortized to earnings as the hedged cash flows occur.
Any ineffectiveness present in either fair value or cash flow hedges is
recognized immediately in earnings without offset.

Capitalized interest -- Interest is capitalized on certain projects under
development, including landfill projects and probable landfill expansion
projects, and on certain assets under construction, including internal-use
softwares, operating landfills and waste-to-energy facilities. The
capitalization of interest for operating landfills is based on the costs
incurred on discrete cell construction projects, plus an allocated portion of
the common site costs. The common site costs include the development costs of a
landfill project or the purchase price of an operating landfill, and the ongoing
infrastructure costs benefiting the lifecycle of the landfill. Cell construction
costs include the construction of cell liners and final capping during the
operating life of the site. During 2002, 2001 and 2000, total interest costs
were $482 million, $557 million and $770 million, respectively, of which $20
million, $16 million and $22 million, respectively, were capitalized primarily
for landfill construction costs.

Accounting for stock options -- The Company accounts for its stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25") and Financial Accounting Standards Board ("FASB") Interpretation No. 44
("FIN 44"). The Company makes disclosures regarding its stock-based compensation
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
No. 123"). In accordance with APB 25, the Company does not recognize
compensation cost for stock options granted to employees as all employee options
are granted with an exercise price equal to the fair market value of the
underlying stock.

As of December 31, 2002, 2001, and 2000, the Company had approximately 44.5
million, 41.5 million and 40.3 million stock options and warrants outstanding,
respectively. The weighted average fair value per

56

WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share of stock options granted during 2002, 2001 and 2000 was $12.16, $10.83 and
$6.78, respectively. See Note 12 for further discussion on the Company's common
stock options and warrants.

The fair value of each common stock option granted to employees or
directors during 2002, 2001 and 2000 was estimated utilizing the Black-Scholes
option pricing model. The following weighted average assumptions were used:
dividend yield of 0%, risk-free interest rates which vary for each grant and
range from 2.91% to 6.19%, expected life of four to seven years for all grants,
and stock price volatility primarily ranging from 23.7% to 50.4%. Black-Scholes
is a formula that calculates an estimated value of stock options based on
appreciation and interest rate assumptions and therefore, the fair value
calculation of a stock option using Black-Scholes is not necessarily indicative
of the actual value of a stock option.

The following schedule reflects the impact on net income and earning per
common share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock based employee compensation (in millions, except per share
amounts).

3. USE OF ESTIMATES AND ASSUMPTIONS

In preparing the Company's financial statements, several estimates and
assumptions are made that affect the accounting for and recognition of assets,
liabilities, revenues and expenses. These estimates and assumptions must be made
because certain of the information that is used in the preparation of the
Company's financial statements is dependent on future events, cannot be
calculated with a high degree of precision from data available or is simply not
capable of being readily calculated based on generally accepted methodologies.
In some cases, these estimates are particularly difficult to determine and the
Company must exercise significant judgment. The most difficult, subjective and
complex estimates and the assumptions that deal with the greatest amount of
uncertainty are related to the Company's accounting for landfills, environmental
liabilities and asset impairments, as described below.

The discussion below details the Company's accounting policies for
landfills through December 31, 2002. As of January 1, 2003, the Company's
practice will change upon the Company's adoption of SFAS No. 143. See Note 25
for additional information.

Accounting for Landfills -- The Company utilizes the life cycle method of
accounting for landfill costs and the units of consumption method to amortize
landfill construction costs and record closure and post-closure obligations over
the estimated remaining capacity of a landfill. Under this method the Company

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includes future estimated construction costs, as well as costs incurred to date,
in the amortization base. Additionally, the Company includes probable expansion
airspace (yet to be permitted airspace) in the calculation of the total
remaining capacity of the landfill. See Note 2 for further discussion.

This accounting method requires the Company to make estimates and
assumptions, as described below. Any changes in the Company's estimates will
impact the Company's income from operations prospectively from the date changes
are made.

Landfill Costs -- The Company estimates the total cost to develop each
landfill site to its final capacity. This includes certain projected
landfill site costs that are uncertain because they are dependent on future
events. The total cost to develop a site to its final capacity includes
amounts previously expended and capitalized, net of accumulated airspace
amortization, and projections of future purchase and development costs,
landfill final capping costs, liner construction costs, operating
construction costs, and capitalized interest costs.

Closure and Post-Closure Costs -- The costs for closure and
post-closure obligations at landfills the Company owns or operates are
generally estimated based on interpretations of current requirements and
proposed or anticipated regulatory changes. The estimates for landfill
closure and post-closure costs also consider when the costs would actually
be paid and factor in, where appropriate, inflation and discount rates. The
possibility of changing legal and regulatory requirements and the
forward-looking nature of these types of costs make any estimation or
assumption less certain.

Available Airspace -- The Company's engineers determine the remaining
capacity at landfills by estimating the available airspace. This is done by
using surveys and other methods to calculate, based on height restrictions
and other factors, how much airspace is left to fill and how much waste can
be disposed of at a landfill before it has reached its final capacity.

Expansion Airspace -- The Company will also consider currently
unpermitted airspace in the estimate of remaining capacity in certain
circumstances.

It is possible that the Company's estimates or assumptions will ultimately
turn out to be significantly different from actual results. In some cases the
Company may be unsuccessful in obtaining an expansion permit or the Company may
determine that an expansion permit that the Company previously thought was
probable has become unlikely. To the extent that such estimates, or the
assumptions used to make those estimates, prove to be significantly different
than actual results, or the belief that the Company will receive an expansion
permit changes adversely in a significant manner, the costs of the landfill,
including the costs incurred in the pursuit of the expansion, may be subject to
impairment testing, as described below, and lower profitability may be
experienced due to higher amortization rates, higher closure and post-closure
rates, and higher expenses or asset impairments related to the removal of
previously included expansion airspace.

Environmental Remediation Liabilities -- Under current laws and
regulations, the Company may have liability for environmental damage caused by
operations, or for damage caused by conditions that existed before a particular
site was acquired. Remedial costs are all costs relating to the remedy of any
identified situation that occurs by natural causes or human error not expected
in the normal course of business. These costs include costs relating to legal
defense, potentially responsible party ("PRP") investigation, settlement, and
consultant fees, as well as costs directly associated with site investigation
and clean up, such as materials and incremental internal costs directly related
to the remedy. Costs required to remediate sites where liability is probable
based on site-specific facts and circumstances are estimated. The Company
routinely reviews and evaluates sites that require remediation, including sites
listed on the EPA's National Priorities List ("NPL sites"). Consideration is
given to whether the Company was an owner, operator, transporter, or generator
at the site, the amount and type of waste hauled to the site and the number of
years the Company was connected

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with the site. Next, the same information with respect to other named and
unnamed PRPs is reviewed. The cost for the likely remedy is then estimated based
on:

- Management's judgment and experience in remediating Company and unrelated
parties' sites;

- Information available from regulatory agencies as to costs of
remediation;

- The number, financial resources and relative degree of responsibility of
other PRPs who may be liable for remediation of a specific site; and

- The typical allocation of costs among PRPs.

See Note 8 for further discussion.

Asset Impairments -- Accounting standards require that assets be written
down if they become impaired. If significant events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable, a test of
recoverability is performed by comparing the carrying value of the asset or
asset group to its undiscounted expected future cash flows. If the carrying
values are in excess of undiscounted expected future cash flows, impairment is
measured by comparing the fair value of the asset to its carrying value. Fair
value is determined by either an actual third-party evaluation or an internally
developed discounted projected cash flow analysis of the asset. Cash flow
projections are sometimes based on a group of assets, rather than a single
asset. If cash flows cannot be separately and independently identified for a
single asset, the Company will determine whether an impairment has occurred for
the group of assets for which the projected cash flows can be identified. If the
fair value of an asset is determined to be less than the carrying amount of the
asset or asset group, an impairment in the amount of the difference is recorded
in the period that the impairment indicator occurs. Several impairment
indicators are beyond the Company's control, and cannot be predicted with any
certainty whether or not they will occur. Estimating future cash flows requires
significant judgment and projections may vary from cash flows eventually
realized. Also, there are other considerations for impairments of landfills and
goodwill as discussed in Note 2. Also see Note 16 for further discussion.

Other -- Other estimates and assumptions that the Company considers to be
significant in the preparation of its financial statements include the
following:

- Allowance for Doubtful Accounts -- The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and
the evaluation of the likelihood of success in collecting the receivable.

- Acquisition Accounting -- The Company estimates the fair value of assets
and liabilities when allocating the purchase price of an acquisition.

- Derivative Financial Instruments -- In order to estimate the fair market
value of derivative financial instruments to be recorded on the balance
sheet, the Company estimates future prices of commodity fiber products
and obtains current valuations of interest rate and foreign currency
hedging instruments from third parties.

- Income Taxes -- The Company assumes the deductibility of certain costs in
its income tax filings and estimates the future recovery of deferred tax
assets.

- Contingent Liabilities -- The Company estimates the amount of potential
exposure it may have with respect to litigation, claims and assessments
in accordance with SFAS No. 5, Accounting for Contingencies, ("SFAS No.
5").

- Loss Contracts -- The Company evaluates its revenue-producing contracts
to determine whether the projected revenues of such contracts exceed the
direct costs to service such contracts. These evaluations include
estimates of future revenues and expenses. Accruals for loss contracts
are adjusted upward or downward based on these evaluations. In the first
quarter of 2003, the Company changed

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from this accounting method to one that recognizes losses on contracts as
they are incurred. See Note 25 for further discussion.

- Self-Insurance Reserves -- Through the use of actuarial calculations, the
Company estimates the amounts required to settle asserted and unasserted
insurance claims.

- Facility Maintenance Accruals -- The Company accrues for major repair and
maintenance expenditures at its waste-to-energy and IPP facilities. Such
accruals, which include only anticipated third party costs, are based
upon planned maintenance expenditures and are classified as current or
noncurrent liabilities based on the expected timing of the expenditures.
In the first quarter of 2003, the Company changed from this accounting
method to one that expenses major repair and maintenance expenditures at
its waste-to-energy and IPP facilities as incurred. See Note 25 for
further discussion.

Actual results could differ materially from the estimates and assumptions
that the Company uses in the preparation of its financial statements.

4. BUSINESS COMBINATIONS AND DIVESTITURES

PURCHASE ACQUISITIONS

In both 2002 and 2001, the Company consummated over 50 acquisitions of
North American Solid Waste ("NASW") operations that were accounted for under the
purchase method of accounting. Cash paid for acquisitions, net of cash acquired,
was approximately $162 million and $116 million for 2002 and 2001, respectively.
As a result of 2002 acquisitions, the Company recorded approximately $183
million in additional assets, including $81 million of goodwill, approximately
$17 million of other intangible assets, and $21 million in additional
liabilities. See Note 15 for information regarding goodwill acquired by each
reportable segment as a result of 2002 purchase acquisitions.

DIVESTITURES

The approximate aggregate sales prices for divestitures of the Company's
non-integrated North American operations in 2002 and 2001 was $103 million and
$23 million, respectively, which was comprised substantially of cash proceeds.
As a result of divestitures during 2002, the Company recorded a reduction in net
assets of approximately $80 million.

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5. PROPERTY AND EQUIPMENT

Property and equipment at December 31 consisted of the following (in
millions):

Depreciation and amortization expense for property and equipment for 2000,
2001 and 2002 was $1.21 billion, $1.18 billion and $1.19 billion, respectively.
In 2002, depreciation and amortization expense, which includes amortization on
assets recorded as capital leases, was comprised of $778 million for the
depreciation of tangible property and equipment and $409 million for the
amortization of landfill airspace.

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company's other intangible assets as of December 31, 2002 and 2001 were
comprised of the following (in millions):

Landfill operating permits are not presented above and are recognized on a
combined basis with other landfill assets and amortized using the Company's
landfill amortization method. Amortization expense for other intangible assets
was $35 million and $37 million for 2002 and 2001, respectively. The intangible
asset amortization expense estimated as of December 31, 2002, for the five years
following 2002 is as follows (in millions):

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Amortization expense for goodwill and other intangible assets was $193
million and $219 million for 2001 and 2000, respectively. In accordance with
SFAS No. 142, the Company did not amortize goodwill that arose from purchases of
businesses after June 30, 2001. The Company continued, through December 31,
2001, the amortization of goodwill that was recorded prior to July 1, 2001.
Amortization of goodwill ceased on January 1, 2002.

The Company incurred no impairment of goodwill upon its initial adoption of
SFAS No. 142, or as a result of its annual goodwill impairment test. However,
there can be no assurance that goodwill will not be impaired at any time in the
future. Additionally, adopting SFAS No. 141, Accounting for Business
Combinations, ("SFAS No. 141") required the Company to write-off net negative
goodwill of approximately $2 million, which was recorded as a credit to
cumulative effect of change in accounting principle in the first quarter of
2002. During interim periods in 2002, the Company did not encounter any events
or changes in circumstances that indicated that impairment was more likely than
not.

The following schedule reflects the 2001 and 2000 adjusted net income
(excluding goodwill and negative goodwill amortization) as compared to the
results of operations for December 31, 2002 (in millions, except per share
amounts).

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7. DEBT AND INTEREST RATE AND FOREIGN CURRENCY DERIVATIVES

DEBT

Debt at December 31 consisted of the following (in millions):

The schedule of debt (including the current portion) maturities for the
next five years and thereafter is as follows (in millions):

- ---------------

(a) The Company has $434 million of 6.375% senior notes due December 1, 2003.
The Company also has $450 million of 7.1% senior notes due August 1, 2026
that are subject to early redemption on August 1, 2003 at the option of the
holder. The Company has classified $770 million of these borrowings as
long-term at December 31, 2002 based upon its ability to use its revolving
credit facilities, which are both long-term, to refinance these borrowings
at their respective maturity or repayment date. The Company intends to
pursue other sources of long-term financing to refinance the borrowings;
however, in the event other sources of long-term financing are not
available, the Company intends to use its revolving credit facilities.

(b) The Company has $546 million of tax-exempt bonds at December 31, 2002 that
mature through 2031 that are remarketed weekly by a remarketing agent. The
Company has classified these borrowings as long-term at December 31, 2002
because the borrowings are supported by letters of credit issued under the
Company's bank credit facilities, which are long-term.

As of December 31, 2002, the Company had a $650 million syndicated
revolving credit facility (the "Three Year Revolver"), and a $1.75 billion
syndicated revolving credit facility (the "Five Year Revolver"). The Three Year
Revolver matures in June 2005 and the Five Year Revolver matures in June 2006.
As of December 31, 2002, the Company had letters of credit in the aggregate
amount of approximately $1.75 billion (of which approximately $1.63 billion are
issued under the revolving credit facilities) that generally have terms allowing
automatic renewal after one year. At December 31, 2002, no balances were
outstanding under the Company's revolving credit facilities and it had unused
and available credit capacity under these facilities of approximately $770
million.

As of December 31, 2002, the financial covenants the Company is required to
maintain under its credit facilities include (i) an interest coverage ratio;
(ii) total debt to EBITDA and; (iii) minimum net worth, all as defined in the
credit facilities solely for the purpose of determining compliance with the
covenants. The interest coverage ratio requires that at the end of any fiscal
quarter the Company will not permit the ratio of (A) the Company's consolidated
net income plus interest expense and income taxes ("EBIT") for the four fiscal
quarters then ending to (B) consolidated total interest expense for such period
to be less than 2.5 to 1 for quarters ending on or before December 31, 2002 and
3 to 1 thereafter. The total debt to EBITDA covenant

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requires that at the end of any fiscal quarter, the Company will not permit the
ratio of (A) all indebtedness and certain contingent liabilities such as
financial guarantees to (B) EBIT plus depreciation and amortization expense
("EBITDA") for the four fiscal quarters then ending to exceed 3 to 1. The
Company's minimum net worth covenant requires that the Company will not allow
the sum of stockholders' equity to be less than $3.5 billion plus 75% of the
Company's cumulative consolidated net income for each fiscal quarter, beginning
with the first fiscal quarter ended March 31, 2001. At December 31, 2002, the
Company is in compliance with all covenants under its credit facilities and all
other debt instruments.

The Company's 5.75% convertible subordinated notes due 2005 are
subordinated to all existing and future senior indebtedness of the Company. Each
note bears cash interest at the rate of two percent per annum of the $1,000
principal amount at maturity, payable semi-annually. The stated discount is
$282.20 . At the option of the holder, each note was redeemable for cash by the
Company on March 15, 2000, at $843.03 along with the related accrued unpaid
interest. The notes have been callable by the Company since March 15, 2000, for
cash at the stated issue price plus accrued stated discount and accrued interest
through the date of redemption. In addition, each note is convertible at any
time prior to maturity into approximately 18.9 shares of the Company's common
stock, subject to adjustment upon the occurrence of certain events. Upon any
such conversion, the Company has the option of paying cash equal to the market
value of the shares which would otherwise be issuable.

During the fourth quarter of 2002, the Company elected to repay
approximately $145 million of its senior debt issuances prior to their maturity
dates. In connection with these repayments, the Company recognized an
extraordinary charge of approximately $2 million, net of tax benefit, for
prepayment penalties and other costs incurred.

In November 2002, the Company privately placed $400 million of 6 3/8%
senior unsecured notes due November 15, 2012. Interest on the notes is due on
May 15 and November 15 of each year. The net proceeds of the offering were
approximately $396 million after deducting underwriters discounts and expenses.
The Company used these proceeds primarily to pay the $350 million of 6.5% senior
notes that came due December 15, 2002.

In May 2002, the Company privately placed $500 million of 7 3/4% senior
unsecured notes due May 15, 2032. Interest on the notes is due on November 15
and May 15 of each year. The net proceeds of the offering were approximately
$498 million, after deducting underwriters' discounts and expenses. The Company
used these proceeds to pay the $300 million of 6.625% senior notes that matured
on July 15, 2002 and a portion of the $285.7 million of 7.7% senior notes that
matured on October 1, 2002.

During the first quarter of 2002, the Company refinanced approximately $49
million of fixed-rate tax-exempt bonds maturing in 2011 with variable-rate
tax-exempt bonds maturing in 2022. As a result, the Company incurred prepayment
penalties and other fees for a total extraordinary item charge, net of tax
benefit, of approximately $1 million. Also in the first quarter of 2002, the
Company retired its 4% convertible subordinated notes due February 2002 by
payment of $427 million to the holders of the outstanding notes.

The Company's debt balances are generally unsecured, except for
approximately $618 million of the tax-exempt and project bonds outstanding at
December 31, 2002 that are issued by the Company's subsidiaries and are secured
by the related subsidiary's assets and revenue.

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INTEREST RATE SWAPS

The Company manages the interest rate risk of its debt portfolio
principally by using interest rate derivatives to achieve a desired position of
fixed and floating rate debt, which is approximately 70% fixed and 30% floating
at December 31, 2002. Interest rate swap agreements that were outstanding as of
December 31, 2002 and 2001 are set forth in the table below (dollars in
millions):

- ---------------

(a) The fair value of interest rate derivatives is included in the Company's
balance sheets as components of other long-term assets and other long-term
liabilities. Fair values of these interest rate derivatives are based on
third party pricing models.

(b) The interest rate derivative contract's terms do not qualify for hedge
accounting. Therefore, the contract is accounted for at fair value with
changes in fair value recognized immediately in interest expense.

(c) The fair value for these interest rate derivatives at December 31, 2001, is
comprised of $20 million long-term assets and $20 million long-term
liabilities.

In 2002, the Company elected to terminate several interest rate swap
agreements with a notional amount of $2.95 billion prior to the scheduled
maturities and received cash of $200 million (which is comprised of $166 million
for the fair value of the swaps that were terminated and $34 million of accrued
but unpaid interest receivable) from the counterparties to the interest rate
swaps. The Company had designated these swap agreements as fair value hedges,
and as such the unamortized adjustment to long-term debt for the change in fair
value of the swaps remains classified with long-term debt. The proceeds received
from the termination of the interest rate swap agreements have been classified
as a change in other assets or other liabilities within operating activities in
the accompanying consolidated statement of cash flows.

The carrying value of debt instruments has been increased by approximately
$239 million and $62 million as of December 31, 2002 and December 31, 2001,
respectively, related to fair value hedge accounting for interest rate swap
contracts. The following table summarizes the accumulated fair value adjustments
from interest rate swap agreements by underlying debt instrument category at
December 31 (in millions):

Interest rate swap agreements reduced net interest expense by $86 million
and $39 million for the years ended 2002 and 2001, respectively. The significant
terms of the interest rate contracts and the underlying debt instruments are
identical, thus no ineffectiveness has been realized.

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INTEREST RATE LOCKS

During 2002, the Company entered into cash flow hedges to secure the
underlying interest rates in anticipation of its 2002 senior note issuances. The
Company settled with the counterparties for approximately $66 million, which was
paid concurrently with the related 2002 senior note issuance. In 2001, the
Company completed a similar cash flow hedge to secure the then current market
interest rate in anticipation of senior unsecured note issuances. These 2001 and
2002 hedging agreements resulted in a deferred loss, net of taxes, of $43
million at December 31, 2002, which is included in accumulated other
comprehensive income. Of this amount, $7 million (on a pre-tax basis) is
scheduled to be reclassified into interest expense in 2003. The ineffective
portion of these hedges was immaterial to the Company in 2002.

FOREIGN CURRENCY DERIVATIVES

During June 2002, the Company entered into forward contracts and
cross-currency swaps, which expire through May 2004, with net notional amounts
of $165 million Canadian dollars, to mitigate the risk of foreign currency
exchange rate fluctuations associated with the conversion of Canadian dollars
into US dollars. These instruments hedge the expected future cash flows
associated with an intercompany note denominated in Canadian dollars and are
therefore accounted for as cash flow hedges. At December 31, 2002, these
derivatives have a net fair value of approximately $3 million and are included
in other long-term assets. The Company did not incur any ineffectiveness with
respect to these derivative transactions. The Company had no foreign currency
derivatives outstanding at December 31, 2001.

8. ENVIRONMENTAL LIABILITIES

The Company has material financial commitments for closure and post-closure
obligations with respect to the landfills it owns or operates. Estimates of
closure and post-closure costs are developed using input from the Company's
engineers and accountants and are reviewed by management, typically at least
once per year. Adjustments for closure and post-closure estimates are accounted
for prospectively over the remaining capacity of the landfill. The estimates are
based on the Company's interpretation of current requirements and proposed
regulatory changes. For landfills, the present value of closure and post-closure
liabilities is accrued using a calculated rate per ton and charged to expense as
airspace is consumed. Each year the Company revises its calculated rate per ton
to reflect accretion on the present value of the liability. The revised rate per
ton is calculated by dividing the revised present value of the liability, less
the accumulated liability recognized to date, by the estimated remaining
capacity of the landfill. The present value of total estimated closure and
post-closure costs will be fully accrued for each landfill at the time the site
discontinues accepting waste and is closed. Closure and post-closure accruals
consider estimates for the cap and cover for the site, methane gas control,
leachate management and groundwater monitoring, and other operational and
maintenance costs to be incurred after the site discontinues accepting waste,
which is generally expected to be for a period of up to thirty years after final
site closure. For purchased disposal sites, the Company assesses and records a
present value-based closure and post-closure liability at the time the Company
assumes closure and post-closure responsibility. This liability is based on the
estimated closure and post-closure costs and the percentage of airspace used as
of the date the Company has assumed this responsibility. Thereafter, the
difference between the closure and post-closure liability recorded at the time
of acquisition and the present value of total estimated closure and post-closure
costs to be incurred is accrued using the calculated rate and charged to
operating costs as airspace is consumed.

In the United States, the closure and post-closure requirements are
established by the EPA's Subtitles C and D regulations, as implemented and
applied on a state-by-state basis. The costs to comply with these requirements
could increase in the future as a result of legislation or regulation.

The Company routinely reviews and evaluates sites that require remediation,
including sites listed on the EPA's NPL sites. The Company considers whether the
Company was an owner, operator, transporter, or
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generator at the site, the amount and type of waste hauled to the site and the
number of years the Company was connected with the site. The Company also
reviews the same information with respect to other named and unnamed PRPs. The
Company then reviews the estimated cost for the likely remedy, which is based on
management's judgment and experience in remediating such sites for the Company
as well as for unrelated parties, information available from regulatory agencies
as to costs of remediation, and the number, financial resources and relative
degree of responsibility of other PRPs who may be liable for remediation of a
specific site, as well as the typical allocation of costs among PRPs. These
estimates are sometimes a range of reasonably possible outcomes. In those cases,
the Company uses the amount within the range that constitutes its best estimate.
If no amount within the range appears to be a better estimate than any other,
the Company uses the amounts that are the low ends of such ranges in accordance
with SFAS No. 5 and its interpretations. Were the Company to use the high ends
of such ranges, the Company's potential liability would be approximately $220
million higher on a discounted basis in the aggregate than the estimate recorded
in the consolidated financial statements as of December 31, 2002. As used in
this context, "reasonably possible" means the Company believes it is more than
remote but less than likely.

Estimates of the Company's degree of responsibility for remediation of a
particular site and the method and ultimate cost of remediation require a number
of assumptions and are inherently difficult, and the ultimate outcome may differ
materially from current estimates. It is possible that technological, regulatory
or enforcement developments, the results of environmental studies, the inability
to identify other PRPs, the inability of other PRPs to contribute to the
settlements of such liabilities, or other factors could necessitate the
recording of additional liabilities that could be material. Additionally, the
Company's ongoing review of its remediation liabilities could result in
revisions that could cause upward or downward adjustments to income from
operations. These adjustments could be material in any given period. See Note 20
for further discussion.

As part of its ongoing operations, the Company reviews its reserve
requirements for remediation and other environmental matters based on an
analysis of, among other things, the regulatory context surrounding landfills
and remaining airspace capacity in light of changes to operational efficiencies.
Accordingly, revisions to remediation reserve requirements may result in upward
or downward adjustments to income from operations, which may be material, in any
given period. Adjustments for closure and post-closure estimates are accounted
for prospectively over the remaining capacity of the landfill.

Where the Company believes that both the amount of a particular
environmental liability and the timing of the payments are reliably
determinable, the cost in current dollars is inflated (at 2% at both December
31, 2002 and 2001) until expected time of payment and then discounted to present
value (at 5.0% and 5.5% at December 31, 2002 and 2001, respectively). The
inflation rate and discount rates, which are based on the rates for United
States Treasury bonds, are reviewed on an annual basis. For landfills that are
in the post-closure monitoring period and for remedial liabilities at all sites,
interest accretion is included in operating costs and expenses and is based on
the effective interest method. For operating landfills, the accretion of the
interest related to the discounted environmental liabilities is included in the
annual calculation of the landfill's closure and post-closure cost per ton and
is charged to operating costs as landfill airspace is consumed. The Company's
method of accounting for landfill closure and post-closure, as well as landfill
final capping, will change upon the Company's adoption of SFAS No. 143. See Note
25 for additional discussion on SFAS No. 143. The portion of the Company's
recorded environmental liabilities that has never been subject to inflation or
discounting was approximately $79 million and $108 million at December 31, 2002
and 2001, respectively. Had the Company not discounted any portion of its
liability, the amount recorded would have been increased by approximately $462
million at December 31, 2002.

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Liabilities for closure, post-closure and environmental remediation costs
consisted of the following (in millions):

The changes to environmental liabilities are as follows (in millions):

- ---------------

(a) The majority of the $67 million of transactions in 2002 classified as
acquisitions, divestitures and other adjustments relates to
reclassification entries to increase environmental liabilities and
correspondingly increase other long-term assets.

Anticipated payments (based on current costs) of currently identified
environmental liabilities for the next five years and thereafter are as follows
(in millions):

The Company has, from time to time, filed suit against insurance carriers
seeking reimbursement for environmentally related remedial, defense and tort
claim costs at a number of sites. The majority of these claims have been
settled. The Company is actively pursuing its remaining claims. For 2002, 2001,
and 2000, the Company recorded approximately $1 million, $105 million, and $2
million, respectively, of such recoveries from insurance carriers. These
recoveries are included as reductions to operating costs and expenses.

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9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value amounts of the Company's financial instruments
have been determined by the Company using available market information and
commonly accepted valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company or holders of the instruments could realize in a
current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair values. The fair
value estimates presented herein are based on information available to
management as of December 31, 2002 and 2001. Such amounts have not been revalued
since those dates, and current estimates of fair value may differ significantly
from the amounts presented herein.

The carrying values of cash and cash equivalents, short-term investments,
trade accounts receivable, trade accounts payable, financial instruments
included in notes and other receivables and financial instruments included in
other assets or other liabilities are estimated to approximate their fair values
principally because of the short-term maturities of these instruments. At
December 31, 2002 and 2001, the carrying amount of debt was $8.29 billion and
$8.22 billion, and the fair value of debt was estimated at $8.68 billion and
$8.19 billion, respectively. The fair value of the Company's senior notes and
convertible subordinated notes are based on quoted market prices. The fair value
of project debt and other debt is estimated using discounted cash flow analysis,
based on rates the Company would currently pay for similar types of instruments.

10. FIBER DERIVATIVES AND HEDGING TRANSACTIONS

The Company is a market maker in over the counter derivatives for waste
paper and other paper commodities ("fiber derivatives"). Since there is no
regulated exchange market for these commodities, fair value assessments of the
Company's fiber derivatives are based on information from independent, third
party broker dealers, alternate price sources, and the Company's view of the
market's economic fundamentals. Although these assessments represent the
Company's best estimates on any given day, the values, as reported on December
31, 2002, will change over time due to subsequent fluctuations in market
conditions.

The Company has entered into certain fiber swap agreements with the
objective of generating profits from changes in market prices of waste paper and
other paper products. These derivatives are not designated as hedges and are
accounted for at fair value, with changes in value reflected immediately in
earnings. These derivatives increased revenues by approximately $2 million for
the year ended December 31, 2002.

The Company also enters into fiber swap agreements to mitigate the
variability in cash flows of certain paper products expected to be sold from its
material recovery facilities and accounts for these derivatives as cash flow
hedges. The Company's fiber swap agreements have an average term of
approximately two years with the maximum term being five years. The terms of the
agreements represent the span of time over which the Company is hedging its
exposure to variability in future cash flows from the sale of waste paper
products. The ineffective portion of these hedges was immaterial to the Company
in 2002.

The notional amounts and terms of fiber derivatives outstanding at December
31, 2002 are summarized in the table below (dollars in millions):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 2002, the Company has included in accumulated other
comprehensive income a net deferred gain of approximately $1 million, which is
net of taxes. Approximately $408,000 (on a pre-tax basis) of deferred gain is
expected to be reclassified to revenues in 2003.

As of December 31, 2001, the Company had two fiber financial swap
transactions with counterparties other than Enron. The fair value of these swaps
was not material to the Company at December 31, 2001. Due to Enron's bankruptcy
in December of 2001, the Company recorded a loss in 2001 of approximately $11
million to adjust the fair value of these swap agreements to zero. In February
2002, the Company terminated its derivative instruments with Enron. Included in
accumulated other comprehensive income at December 31, 2002 is a deferred gain,
net of tax of approximately $2 million for fiber swap agreements the Company had
with Enron in 2001. This deferred gain is being amortized into earnings as the
forecasted transactions that were previously hedged actually occur and
approximately $2 million (on a pre-tax basis) is expected to be reclassified
into earnings in 2003.

11. CAPITAL STOCK

The Board of Directors is authorized to issue preferred stock in series,
and with respect to each series, to fix its designation, relative rights
(including voting, dividend, conversion, sinking fund, and redemption rights),
preferences (including dividends and liquidation), and limitations. The Company
has ten million shares of authorized preferred stock, $0.01 par value, none of
which is currently outstanding.

The Company declared cash dividends of $0.01 per common share, or
approximately $6 million, during each of 2002, 2001 and 2000. As of December 31,
2002, the Company has the ability, under its most restrictive loan covenant
financial tests, to make dividend payments and repurchase shares in the
aggregate amount of up to approximately $800 million, plus 25% of future net
income.

In February 2002 the Company announced that its Board of Directors had
approved a stock repurchase program for up to $1 billion in annual repurchases
each year for 2002 through 2004 to be implemented at management's discretion.
Any purchases may be made in either open market or privately negotiated
transactions primarily using cash flows from operations.

The following is a summary of 2002 activity for the Company's stock buyback
program (in millions, except shares in thousands and price per share).

- ---------------

(a) The Company accounted for the initial payment as a purchase of treasury
stock and classified the future settlement with the counterparty as an
equity instrument because the Company had the option under the agreement to
settle its obligations, if any, in shares of its common stock.

(b) The weighted average daily market price of the Company's stock during the
valuation period times the number of shares it purchased was approximately
$18 million less than the approximately $300 million the Company paid for
the repurchase. Pursuant to the terms of the agreement, the counterparty
paid the Company this difference of approximately $18 million at the end of
the valuation period, which occurred during the third quarter of 2002, to
settle the agreement. The Company accounted for the cash receipt as an
adjustment to the carrying value of treasury stock and has therefore
included it in common stock repurchases within financing activities in the
accompanying consolidated statement of cash flows.

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(c) The weighted average daily market price of our stock during the valuation
period times the number of shares the Company purchased was approximately
$3 million less than the approximately $42 million the Company initially
paid. Pursuant to the agreement the counterparty will pay the Company the
difference of approximately $3 million at the end of the valuation period
to settle the agreement.

(d) The Company engaged in open market purchases when trading was allowed
pursuant to law and the Company's insider trading policy.

12. COMMON STOCK OPTIONS AND WARRANTS

Under the Company's 1993 Stock Option Incentive Plan and the Company's 2000
Stock Option Incentive Plan, options to purchase 26.5 million and 29.0 million
shares, respectively, of the Company's common stock may be granted to officers,
directors, and key employees. Options are granted under these plans at exercise
prices at least equal to the fair market value of common stock on the date of
grant. The option plans have various vesting periods, and expire up to ten years
from the date of grant. The Company also has a 2000 Broad-Based Employee Plan
under which options to purchase an aggregate of 3.0 million shares can be
granted to any non-officer employees. The exercise prices for options under the
Broad-Based Plan are at least equal to the fair market value of common stock on
the date of grant, may vest over various periods, and expire up to ten years
from the date of grant. Stock options granted by the Company in 2002, 2001 and
2000 generally have ten year terms and vest over four or five years.

During the majority of 2000, the Company made original issuances of its
common stock upon exercises of stock options and warrants. Beginning in the
fourth quarter of 2000, the Company issued treasury stock upon exercises of
stock options and warrants. When issuing shares of treasury stock, the
difference between the stock option exercise price and the average treasury
stock cost is recorded as an addition to or deduction from additional
paid-in-capital.

Under the Company's 1996 Stock Option Plan for Non-Employee Directors, the
Company's outside directors receive an annual grant of 10,000 options on each
January 1. In accordance with the plan, options to purchase up to 2.4 million
shares of the Company's common stock may be granted, with one-year vesting
periods and expiration dates ten years from the date of grant. The options are
granted at exercise prices equal to the fair market value of the common stock on
the date of grant.

The Company also has outstanding options and warrants related to various
predecessor plans acquired through merger and acquisition activity. These
options and warrants generally continue to vest under their original schedules
which range up to five years from the date of grant, although some vested
immediately upon the change of control related to the merger or acquisition.

The following table summarizes common stock option and warrant transactions
under the aforementioned plans and various predecessor and assumed plans for
2002, 2001 and 2000 (shares in thousands):

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Outstanding and exercisable stock options and warrants at December 31,
2002, were as follows (shares in thousands):

The Company's President, CEO, and Chairman of the Board was granted 650,000
stock options upon joining the Company in November 1999. The options, which are
included in the above tables, vest according to certain performance goals in
lieu of the normal vesting schedules. Notwithstanding these performance goals,
all of these options will vest no later than five years from the date of grant.

13. EMPLOYEE BENEFIT PLANS

The Waste Management Retirement Savings Plan ("Savings Plan") covers
employees (except those working subject to collective bargaining agreements,
which do not provide for coverage under such plans) following a 90 day waiting
period after hire, and allows eligible employees to contribute up to 15% of
their annual compensation, as limited by IRS regulations. Under the Savings
Plan, the Company matches in cash employee contributions up to 3% of their
eligible compensation and matches 50% of employee contributions in excess of 3%
but no more than 6% of eligible compensation. Both employee and Company
contributions vest immediately. Charges to operations for the Company's defined
contribution plans were $43 million, $41 million and $38 million, during 2002,
2001 and 2000, respectively.

In addition, Company subsidiaries sponsor defined benefit plans that cover
employees not covered by the Savings Plan but are members of a bargaining unit
whose agreement provides for participation in the plan (the "Collectively
Bargained Employees Plan"). The normal form of benefit is a monthly annuity
payable over the lifetime of the participant, commencing on his or her normal
retirement at age 65, or after 30 years of benefit service if a participant is
at least age 50.

Waste Management Holdings, Inc. ("WM Holdings") had a qualified defined
benefit pension plan (the "Plan") for all eligible non-union domestic employees
which was terminated as of October 31, 1999 in connection with the Company's
acquisition of WM Holdings in July 1998 (the "WM Holdings Merger"). The Company
contributed approximately $145 million to the Plan's trusts during 2000 and
contributed approximately $14 million in 2001 related to the final liquidation
of the Plan. The Company recorded an expense for the Plan during 2000 of
approximately $197 million, which was included in asset impairment and unusual
items. No expense was recorded in 2001 or 2002.

In conjunction with the WM Holdings Merger, the Company terminated certain
non-qualified supplemental benefit plans for certain officers and non-officer
managers, the most significant plan being the WM Holdings' Supplemental
Executive Retirement Plan ("SERP") (collectively the "Supplemental Plans").

The Plan, Supplemental Plans and Collectively Bargained Employees Plan are
combined in the tables below under the caption "Pension Benefits."

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

WM Holdings and certain of its subsidiaries provided post-retirement health
care and other benefits to eligible employees. In conjunction with the WM
Holdings Merger, the Company limited participation in these plans to
participating retired employees as of December 31, 1998. These plans are
combined under the caption "Other Benefits" in the tables that follow.
Additionally, the Company sponsors an ongoing post-retirement plan that is fully
funded and is also included in "Other Benefits" in the tables below.

The following tables provide a reconciliation of the changes in the benefit
obligations and the fair value of assets over the two-year period ended December
31, 2002, a statement of the funded status for both years for the related plans
and the amount recognized in the consolidated balance sheets as of December 31
for both years (in millions):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table provides the components of net periodic benefit cost
for 2002, 2001 and 2000 (in millions):

The assumptions used in the measurement of the Company's benefit
obligations are shown in the following table (weighted average assumptions as of
December 31):

The principal element of the "other benefits" referred to above is the
post-retirement health care plan. Participants in the WM Holdings
post-retirement plan (one of two plans that comprise the "other benefits"
information) contribute to the cost of the benefit, and for retirees since
January 1, 1992, the Company's contribution is capped at between $0 and $600 per
month per retiree, based on years of service. For measurement purposes, a 12.0%
annual rate of increase in the per capita cost of covered health care claims was
assumed for 2002 (being an average of the rate used by all plans); the rate was
assumed to decrease to 6.0% in 2006 and remain at that level thereafter.

A 1% change in assumed health care cost trend rates has no significant
effect on total service and interest cost components of net periodic
post-retirement health care costs. A 1% increase or decrease in assumed health
care cost trend rates would increase or decrease the accumulated post-retirement
benefit obligation by approximately $5 million.

Company subsidiaries participate in various multi-employer pension plans
and in two instances, site or contract specific plans (one of which terminated
and completed liquidation in 2002), covering certain employees not covered under
the Company's pension plans. These multi-employer plans are generally defined
benefit plans; however, in many cases, specific benefit levels are not
negotiated with or known by the employer contributors. The projected benefit
obligation, plan assets and unfunded liability of the multi-employer pension
plans, and the site or contract specific plans are not material and are not
included in the tables above. Contributions of $31 million, $23 million and $28
million for subsidiaries' defined benefit plans were charged to operations in
2002, 2001 and 2000, respectively.

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14. INCOME TAXES

For financial reporting purposes, income (loss) before income taxes and
extraordinary item and cumulative effect of change in accounting principle,
showing domestic and international sources, was as follows (in millions):

The provision for income taxes before extraordinary item and cumulative
effect of change in accounting principle consisted of the following (in
millions):

The federal statutory rate is reconciled to the effective rate as follows:

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The components of the net deferred tax assets (liabilities) at December 31
are as follows (in millions):

At December 31, 2002 the Company's subsidiaries have approximately $19
million of federal net operating loss ("NOL") carryforwards, $3.6 billion of
state NOL carryforwards, and $32 million of foreign NOL carryforwards. The NOL
carryforwards have expiration dates through the year 2022. The Company's
subsidiaries have approximately $1 million of alternative minimum tax credit
carryforwards that may be used indefinitely; state tax credit carryforwards of
$13 million; and foreign tax credit carryforwards of $18 million.

Valuation allowances have been established for uncertainties in realizing
the benefit of tax loss and credit carryforwards and other deferred tax assets.
While the Company expects to realize the deferred tax assets, net of the
valuation allowances, changes in estimates of future taxable income or in tax
laws may alter this expectation. The valuation allowance increased approximately
$9 million and $10 million in 2002 and 2001, respectively, primarily due to the
uncertainty of realizing foreign and state NOL carryforwards and tax credits.

With respect to its Canadian operations, the Company provided $24 million
for the repatriation of $230 million of capital in 2001. Unremitted earnings in
foreign operations were approximately $167 million at December 31, 2002, which
the Company intends to reinvest. It is not practicable to determine the amount
of United States based income taxes that would be payable upon remittance of the
assets that represent those earnings.

15. SEGMENT AND RELATED INFORMATION

The Company manages and evaluates its operations primarily through six
operating Groups, the Company's Eastern, Midwest, Southern, Western, Canadian
Waste Services Inc. ("CWS" or "Canada"), and Wheelabrator Technologies Inc.
("WTI") groups. These six operating Groups are presented below as the Company's
reportable segments. These reportable segments, when combined with certain other
operations not managed through the six operating Groups ("Other NASW"), comprise
the Company's NASW operations. NASW, the Company's core business, provides
integrated waste management services consisting of collection, disposal (solid
waste landfill and hazardous waste landfill), transfer, waste-to-energy
facilities and IPPs that are managed by WTI, recycling and other miscellaneous
services to commercial, industrial, municipal and residential customers
throughout the United States, Puerto Rico and Canada. The Company also had
international waste management and non-solid waste services, all of which were
divested by March 31, 2002. These operations are included in the table below as
"Other."

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized financial information concerning the Company's reportable
segments for the respective years ended December 31 is shown in the following
table (in millions). In the Company's prior year footnotes to the consolidated
financial statements, NASW was presented as one reportable segment. For the
current year presentation, prior period information has been restated to conform
to the current year presentation.

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- ---------------

(a) Other NASW includes national recycling, national accounts and methane gas
recovery operations that provide services throughout the Groups. Also
included are certain year-end adjustments related to the reportable
segments but not included in the measure of segment profit or loss used to
assess their performance for the periods disclosed.

(b) Corporate functions include the treasury, legal, information technology,
tax, insurance, management of closed landfills and related insurance
recoveries, centralized service center and other typical administrative
functions.

(c) Intercompany operating revenues reflect each segment's total intercompany
sales including intercompany sales within a segment and between segments.
Transactions within and between segments are generally made on a basis
intended to reflect the market value of the service.

(d) For those items included in the determination of income from operations,
the accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies (see Note 2).
Income from operations included goodwill amortization of $180 million and
$156 million for the years ended December 31, 2000 and 2001 respectively.
As discussed in Note 6, the Company ceased amortizing goodwill upon
adoption of SFAS No. 142 on January 1, 2002. In 2002, the Company's
corporate functions charged NASW operations an expense similar in amount to
prior goodwill amortization. For the year ended December 31, 2002, this
charge increased income from operations for the corporate functions by $148
million and decreased income from operations by the same amount for NASW.

(e) The reconciliation of total assets reported above to total assets on the
consolidated balance sheets is as follows (in millions):

(f) Goodwill is included in total assets. The reconciliation of changes in
goodwill during 2002 by reportable segment is as follows (in millions):

(g) Income from operations for the years ended December 31, 2000 and 2001
included certain significant items for the Company's WTI segment that were
unusual in nature. See Note 22 for further discussion.

The table below shows the total revenues contributed by the Company's
principal lines of business within NASW (in millions).

- ---------------

(a) Intercompany revenues between lines of business are eliminated on the
consolidated financial statements.

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Revenues decreased from 2000 to 2001 due to the Company selling its
international operations, which was done on a country by country basis. At
December 31, 2001, the Company had divested all of its international operations.
As of December 31, 2000, the Company's international operations included certain
operations in Sweden, and operations in Argentina and Israel. The property and
equipment of the Company's international operations, as well as certain of the
Company's North American operations in Mexico (which is considered non-solid
waste), was reflected in current assets held-for-sale at December 31, 2000.
Therefore, property and equipment relating to Europe and other foreign areas are
appropriately not reflected in the table below. Operating revenues and property
and equipment (net) relating to operations in the United States and Puerto Rico,
Europe, Canada and all other geographic areas ("other foreign") are as follows
(in millions).

16. ASSET IMPAIRMENTS AND UNUSUAL ITEMS

In 2002, 2001 and 2000, the Company recorded certain charges and credits
for asset impairments and unusual items as follows (in millions):

- ---------------

(a) Due primarily to (i) an $11 million contingency payment received by the
Company related to a non-revenue producing property written down as an
asset impairment in 1998 and (ii) a net gain of $8 million relating to
divestitures.

(b) Consisted of held-for-sale impairment losses for international operations
outside of North America of approximately $15 million along with an
impairment loss for an investment in an operation in Mexico of
approximately $28 million. In addition, the Company recorded a net gain of
approximately $24 million from the Company's re-evaluation of its business
alternatives related to its IPPs during the third quarter of 2001 and a
gain of approximately $1 million for other held-for-sale impairment
adjustments. See Note 22 for further discussion regarding IPP reporting.

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(c) Primarily attributable to agreements that were reached to settle the
stockholder class action lawsuit filed against the Company in July 1999
alleging violations of the federal securities laws and the stockholder
derivative suit against the Company's auditor for the period, Arthur
Andersen LLP, which resulted in a net charge of $374 million.

(d) Consisted of (i) a net gain of $127 million on divestitures of certain
international operations, (ii) losses of $524 million resulting from the
recognition of currency translation adjustment upon the divestitures of
certain international operations, and (iii) a loss of $146 million on the
impairment of domestic operations, which was net of $79 million in domestic
gains on asset sales and other items.

(e) See Note 13 for discussion on the termination of WM Holdings defined
benefit plan.

(f) Primarily comprised of reversals of loss contract accruals that were
initially recognized as a charge to asset impairments and unusual items.

17. RESTRUCTURING

In 2002, the Company adopted and implemented a new organizational structure
to better align collection, transport, recycling and disposal resources within
market areas. The Company believes the new structure will yield a number of
benefits, including clearer accountability and responsibility for business
performance and profitability in specific markets; simplification of structure;
cost savings through consolidation of duplicate administrative and other support
functions; improved utilization of operating assets; and better customer
responsiveness.

In March 2002 all of the Company's operations, other than WTI and CWS, were
restructured to reduce the number of field layers of management from four to
three and the number of field layers that have administrative staff from four to
two. Under the new structure, its approximately 1,200 operating sites, including
waste collection depots, transfer stations, landfills and recycling facilities,
were restructured into approximately 82 newly established Market Areas. These
Market Areas are responsible for the sales and marketing of the Company's
services and for directing the delivery of service by the districts. The Market
Area is also the profit center, and the districts, all of which used to be
profit centers, became cost centers. The largest Market Areas are headed by a
Vice President and the others are headed by a General Manager. The Market Areas
consolidate financial reporting and provide a range of assistance in the areas
of finance and accounting, procurement, people, market planning and development,
fleet services, recycling, legal services, engineering, regulatory compliance,
safety and public affairs to support the districts. These Market Areas all
report to one of the Company's four Groups that divide the United States
geographically, into the Eastern, Midwest, Southern and Western operations,
which the Company formerly called "Areas." CWS, which was restructured in July
2002, and WTI were the fifth and sixth Areas under the previous structure and
continue as the fifth and sixth Groups under the new structure.

The Company recorded $38 million of pre-tax charges for costs associated
with the implementation of the new structure for 2002. These charges include $36
million for employee severance and benefit costs and $2 related to abandoned
operating lease agreements.

Under the new structure approximately 1,900 field-level administrative and
operational positions have been eliminated. The Company's obligation for
severance payments will continue into 2003. As of December 31, 2002, payments of
$33 million for employee severance and benefits and for abandoned leases had
been recorded against the restructuring liability that was previously
established.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. EARNINGS PER SHARE

The following reconciles income before extraordinary item and cumulative
effect of changes in accounting principle as presented on the consolidated
statements of operations with diluted net income for the purposes of calculating
diluted earnings per common share (in millions):

The following reconciles the number of common shares outstanding at
December 31 of each year to the weighted average number of common shares
outstanding and the weighted average number of common and dilutive potential
common shares outstanding for the purposes of calculating basic and dilutive
earnings per common share (shares in millions):

For 2001 and 2000, the effect of the Company's convertible subordinated
notes and debentures is excluded from the dilutive earnings per share
calculation since inclusion of such items would be antidilutive. For 2000, the
effect of the Company's common stock options and warrants is excluded from the
dilutive earnings per share calculation since inclusion of such items would be
antidilutive.

At December 31, 2002, there were approximately 45.2 million shares of
common stock potentially issuable with respect to stock options, warrants, and
convertible debt, of which approximately 33.0 million shares were not included
in the diluted earnings per share computation because their exercise price was
greater than the average per share market price of the Company's stock for the
year ended 2002. Including the impact of these potentially issuable shares in
the current period calculations would have been antidilutive for the periods
presented, but could further dilute earnings per share in the future.

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19. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) represents the change in the Company's equity
from transactions and other events and circumstances from nonowner sources and
includes all changes in equity except those resulting from investments by owners
and distributions to owners. The components of accumulated other comprehensive
income (loss) were as follows (in millions):

20. COMMITMENTS AND CONTINGENCIES

Financial instruments -- The Company has provided letters of credit,
performance bonds, trust agreements, financial guarantees and insurance policies
to support tax-exempt bonds, contracts, performance of landfill closure and
post-closure requirements, and other obligations. The Company also uses
insurance policies issued by a wholly-owned insurance company, the sole business
of which is to issue policies to the Company, in order to secure such
obligations. In those instances where the use of captive insurance is not
allowable, the Company generally has available alternative bonding mechanisms.
Because virtually no claims have been made against these financial instruments
in the past, and considering the Company's current financial position,
management does not expect that these instruments will have a material adverse
effect on the Company's consolidated financial statements. The Company has not
experienced any unmanageable difficulty in obtaining performance bonds or
letters of credit for its current operations. In an ongoing effort, to mitigate
risks of future cost increases and reductions in available capacity, the Company
continues to evaluate various options to access cost-effective sources of
financial assurance.

For the 14 months ended January 1, 2000, the Company insured certain risks,
including auto, general and workers' compensation, with Reliance National
Insurance Company ("Reliance"), whose parent filed for bankruptcy in June 2001.
While it is not possible to predict the outcome of proceedings involving
Reliance, the Company believes that because of various insurance guarantee funds
and potential recoveries from the liquidation, it is unlikely that events
relating to Reliance will have a material adverse impact on the Company's
financial statements.

Insurance -- The Company carries a broad range of insurance coverages for
protection of its assets and operations from certain risks including pollution
legal liability insurance for certain of its disposal sites, transfer stations,
recycling and other facilities. The Company's current programs carry
self-insurance exposures of up to $500,000, $20,000 and $500,000 per incident
with regards to workers compensation, auto and general liability, respectively.
Self-insurance claims reserves acquired as part of the WM Holdings Merger were
discounted at 5.0% and 5.5% at December 31, 2002 and 2001, respectively.
Included in the accompanying balance sheet in accrued liabilities are
approximately $143 million and $128 million at December 31, 2002 and 2001,
respectively, and in other long-term liabilities are approximately $229 million
and $253 million at December 31, 2002 and 2001, respectively, for
insurance-related liabilities for the Company's self-insured

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exposures. During 2002, the Company incurred approximately $167 million in
self-insurance expenses related to property and casualty risk programs and paid
approximately $176 million to fund related liabilities.

Operating leases -- Rental expense for leased properties was $166 million,
$162 million and $186 million during 2002, 2001 and 2000, respectively. These
amounts primarily include rents under long-term operating leases, which include
landfill lease obligations that may be based on either a percentage of revenue
or a rate per ton received. Contractual payments due during the next five years
and thereafter on long-term operating lease obligations are as follows (in
millions):

Other long-term commitments -- The Company has the following unconditional
purchase obligations.

- The Company's primary purchase obligations are for the purchases of
equipment such as containers and trucks. The Company has minimum purchase
obligations for these items with a number of counterparties that
terminate through 2006.

- The Company has entered into contracts that provide firm disposal rights.
These contracts require the Company to dispose of minimum tons of waste
at third party disposal facilities through 2019.

- The Company is a party to fuel contracts that expire through 2004. Under
these take-or-pay contracts, the Company is obligated to pay for a
minimum amount of fuel even if such amounts are not required for
operations.

The Company's unconditional purchase obligations are quantity driven.
Contractual payments for these purchase obligations during the next five years
and thereafter are noted in the table below (in millions). These amounts are
estimates based on underlying market values.

Guarantees -- The Company has entered into the following guarantee
agreements associated with its continuing operations.

- WM Holdings, which is 100% owned by the Company ("Parent"), has fully and
unconditionally guaranteed the senior indebtedness of the Parent that
matures through 2032. The Parent has fully and unconditionally guaranteed
the senior indebtedness of WM Holdings that matures through 2026 and WM
Holdings' 5.75% convertible subordinated notes due 2005. Performance
under these guarantee agreements would be required if either party
defaulted on their respective obligations. No additional liability has
been recorded for these guarantees because the underlying obligations are
reflected in the Company's consolidated balance sheets. See Note 24 for
further information.

- The Company has guaranteed the tax-exempt bonds of its subsidiaries. If a
subsidiary fails to meet its obligations associated with tax-exempt bonds
as they come due, the Company will be required to perform under the
related guarantee agreement. No additional liability has been recorded
for these guarantees because the underlying obligations are reflected in
the Company's consolidated balance sheets. See Note 7 for information on
tax-exempt balances and maturities.

- The Company has guaranteed approximately $51 million of debt primarily
for unaffiliated entities that it accounts for under the equity method of
accounting. The related debt, which matures through 2021, is not recorded
on the Company's consolidated balance sheets, and the Company has not
recorded any liability for these guarantees. The Company has ongoing
projects with the entities and has deemed that performance will not be
likely to occur.

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- Certain of the Company's subsidiaries have guaranteed the market value of
certain homeowners' property that are adjacent to landfills. These
guarantee agreements extend over the life of the landfill. Under these
agreements, the Company would be responsible for the difference between
the sale value and the market value. The Company does not believe it is
possible to determine the contingent obligation associated with these
guarantees.

- The Company or its subsidiaries have indemnified the purchasers of
businesses or assets for the occurrence of specified events under certain
of its divestiture agreements. The Company does not believe that it is
possible to determine the contingent obligations associated with these
indemnifications.

The Company believes that it is not reasonably likely that it will be
required to perform under these guarantee agreements or that any performance
requirement would have a material impact on its consolidated financial
statements.

Environmental matters -- The Company's business is intrinsically connected
with the protection of the environment. As such, a significant portion of the
Company's operating costs and capital expenditures could be characterized as
costs of environmental protection. Such costs may increase in the future as a
result of legislation or regulation, however, the Company believes that in
general it tends to benefit when environmental regulation increases, which may
increase the demand for its services, and that it has the resources and
experience to manage environmental risk.

As part of its ongoing operations, the Company provides for the present
value of estimated closure and post-closure monitoring costs over the estimated
operating life of disposal sites as airspace is consumed. The Company has also
established procedures to evaluate potential remedial liabilities at closed
sites which it owns or operated, or to which it transported waste, including 75
sites listed on the EPA's NPL sites as of December 31, 2002. Where the Company
concludes that it is probable that a liability has been incurred, provision is
made in the consolidated financial statements.

Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult, and the ultimate
outcome may differ materially from current estimates. However, the Company
believes that its extensive experience in the environmental services industry,
as well as its involvement with a large number of sites, provides a reasonable
basis for estimating its aggregate liability. As additional information becomes
available, estimates are adjusted as necessary. It is reasonably possible that
technological, regulatory or enforcement developments, the results of
environmental studies, the nonexistence or inability of other PRPs to contribute
to the settlements of such liabilities, or other factors could necessitate the
recording of additional liabilities which could be material.

The Company or certain of its subsidiaries have been identified as PRPs in
a number of governmental investigations and actions relating to waste disposal
facilities that may be subject to remedial action under the Comprehensive
Environmental Response, Compensation and Liabilities Act of 1980, as amended
("CERCLA" or "Superfund"), or similar state laws. The majority of these
proceedings involve allegations that certain subsidiaries of the Company (or
their predecessors) transported hazardous substances to the sites in question,
often prior to acquisition of such subsidiaries by the Company. CERCLA generally
provides for liability for those parties owning, operating, transporting to or
disposing at the sites. Such proceedings arising under Superfund typically
involve numerous waste generators and other waste transportation and disposal
companies and seek to allocate or recover costs associated with site
investigation and cleanup, which costs could be substantial and could have a
material adverse effect on the Company's consolidated financial statements.

As of December 31, 2002, the Company or its subsidiaries had been notified
that they are PRPs in connection with 75 locations listed on the NPL. Of the 75
NPL sites at which claims have been made against
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the Company, 17 are sites which the Company has come to own over time. All of
the NPL sites owned by the Company were initially developed by others as land
disposal facilities. At each of the 17 owned facilities, the Company is working
in conjunction with the government to characterize or remediate identified site
problems. In addition, at these 17 owned facilities, the Company has either
agreed with other legally liable parties on an arrangement for sharing the costs
of remediation or is pursuing resolution of an allocation formula. The Company
generally expects to receive any amounts due from these parties at, or near, the
time that the remedial expenditures are made. The 58 NPL sites at which claims
have been made against the Company and that are not owned by the Company are at
different procedural stages under Superfund. At some of these sites, the
Company's liability is well defined as a consequence of a governmental decision
as to the appropriate remedy and an agreement among liable parties as to the
share each will pay for implementing that remedy. At others where no remedy has
been selected or the liable parties have been unable to agree on an appropriate
allocation, the Company's future costs are uncertain. Any of these matters could
have a material adverse effect on the Company's consolidated financial
statements.

From time to time, the Company and certain of its subsidiaries are named as
defendants in personal injury and property damage lawsuits, including purported
class actions, on the basis of a Company's subsidiary having owned, operated or
transported waste to a disposal facility that is alleged to have contaminated
the environment or, in certain cases, conducted environmental remediation
activities at sites. Some of the lawsuits may seek to have the Company or its
subsidiaries pay the costs of groundwater monitoring and health care
examinations of allegedly affected persons for a substantial period of time even
where no actual damage is proven. While the Company believes it has meritorious
defenses to these lawsuits, their ultimate resolution is often substantially
uncertain due to the difficulty of determining the cause, extent and impact of
alleged contamination (which may have occurred over a long period of time), the
potential for successive groups of complainants to emerge, the diversity of the
individual plaintiffs' circumstances, and the potential contribution or
indemnification obligations of co-defendants or other third parties, among other
factors. Accordingly, it is possible such matters could have a material adverse
impact on the Company's consolidated financial statements.

For more information regarding commitments and contingencies with respect
to environmental matters, see Note 8.

Litigation -- A group of companies that sold assets in exchange for common
stock in March 1996 to WM Holdings brought an action against the Company in
March 2000 for breach of contract and fraud, among other things. The parties
settled this dispute through arbitration in December 2002.

In December 1999, an individual brought an action against the Company, five
former officers of WM Holdings, and WM Holdings' former auditor, Arthur Andersen
LLP ("Andersen"), in Illinois state court on behalf of a proposed class of
individuals who purchased WM Holdings common stock before November 3, 1994, and
who held that stock through February 24, 1998, for alleged acts of common law
fraud, negligence, and breach of fiduciary duty. In May 2001, the court granted
in part and denied in part the defendants' motion to dismiss. This action is
currently in the discovery stage and the extent of possible damages, if any, has
not yet been determined.

The Company is one of the defendants in a class action lawsuit arising from
events related to its earnings announcements in July and August of 1999. On
November 7, 2001, the Company announced that it had reached a settlement
agreement with the plaintiff in this case, resolving all claims against it as
well as claims against its current and former officers and directors. The
agreement provides for a payment of $457 million to members of the class and for
the Company to consent to the certification of a class for the settlement of
purchasers or acquirers of the Company's securities from June 11, 1998 through
November 9, 1999. The payment provided for by the settlement agreement is
included in the accompanying consolidated balance sheets as a component of
accrued liabilities. A hearing was held April 29, 2002 at which the settlement
was approved. There is currently pending before the court a motion to vacate the
final approval order brought by a
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non-class member whose motion to intervene was disallowed by the court. The same
would-be intervener, along with one other person (both former participants in WM
Holdings' ERISA plans), has also filed a separate case in Washington, D.C.
against the Company and others attempting to increase the recovery of a class of
ERISA plan participants based on allegations related to both the events alleged
in and the settlements relating to the class action against WM Holdings that was
settled in 1998 and the complaint in this action.

Also on November 7, 2001, the Company announced that it would receive $20
million (less fees of approximately $5 million awarded to counsel for the
derivative plaintiffs) as a result of a settlement reached between the
derivative plaintiffs and Andersen in a stockholder derivative suit filed on
July 3, 2001 in Texas state court against Andersen, as the Company's former
independent auditor. The derivative plaintiffs alleged, among other things, that
Andersen engaged in professional malpractice in connection with certain services
that it performed for the Company. Andersen informed the Company that neither
the complaint nor the settlement affected its independence in 2001 or prior
years, when Andersen served as the Company's independent auditor. The settlement
was approved in May 2002. Andersen's payment will become due at the same time
the Company's payment to the plaintiffs in settlement of the class action
lawsuit described above becomes due, which is the date that all time periods for
appeal have lapsed or the judgment becomes final after all appeals have been
exhausted. Because of current motions before the Court and the possible appeals
process, the Company cannot predict when the class action payment will be due,
and thus cannot predict when the Andersen receivable will become due. Although
Andersen has ceased operations the Company presently has no reason to believe
that the settlement amount will not be paid and the receivable that the Company
has recorded will not be collected. Any prolonged delay in the payment
ultimately becoming due could make such payment more uncertain, depending on
Andersen's financial status at such time. If such uncertainties develop in the
future, it is reasonably possible that the Company will be required to write
down the receivable up to the full amount due from Andersen.

On June 29, 2000, a putative class action was filed against the Company in
Delaware state court by a class of plaintiffs in the class action lawsuit. The
plaintiffs allege that the Company stock they received in exchange for their
Eastern Environmental Services, Inc. shares was overvalued for the same reasons
alleged in the consolidated class actions in Texas. The named plaintiffs in the
Delaware case excluded themselves from the Texas class action settlement and
pursued their claims as individuals, which were resolved in December 2002.

Three groups of stockholders have filed separate lawsuits in state courts
in Texas and federal court in Illinois against the Company and certain of its
former officers. The petitions allege that the plaintiffs are substantial
stockholders of the Company's common stock who intended to sell their stock in
1999, or to otherwise protect themselves against loss, but that the individual
defendants made false and misleading statements regarding the Company's
prospects that, along with public statements, induced the plaintiffs to retain
their stock or not to take other measures. Plaintiffs assert that the value of
their retained stock declined dramatically. Plaintiffs assert claims for fraud,
negligent misrepresentation, and conspiracy. The Texas state court granted the
Company's motion for summary judgment in the first of these cases in March 2002,
which the plaintiffs have appealed. The other two cases are in early stages, and
the extent of damages, if any, cannot yet be determined.

The Company's business is intrinsically connected with the protection of
the environment, and there is the potential for the unintended or unpermitted
discharge of materials into the environment. From time to time, the Company pays
fines or penalties in environmental proceedings relating primarily to waste
treatment, storage or disposal facilities. As of December 31, 2002, there were
eight proceedings involving Company subsidiaries where the sanctions involved in
each could potentially exceed $100,000. The matters involve allegations that
subsidiaries (i) operated a hazardous waste incinerator in such a way that its
air emissions exceeded permit limits, (ii) engaged in the importation and
disposal of hazardous waste in contravention of applicable federal regulations,
(iii) are responsible for remediation of landfill gas and chemical compounds

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required pursuant to a Unilateral Administrative Order associated with an NPL
site, (iv) are responsible for late performance of work required under a
Unilateral Administrative Order, (v) improperly operated a solid waste landfill
and caused excess odors, (vi) improperly operated a solid waste landfill by
failing to maintain required records, properly place and cover waste and adhere
to proper leachate levels, (vii) violated the state's clean water act, and
(viii) did not comply with air regulations requiring control of emissions at a
closed landfill. The Company does not believe that the fines or other penalties
in these matters will, individually or in the aggregate, have a material adverse
effect on the Company's financial condition or results of operations.

It is not possible at this time to predict the impact that the above
lawsuits, proceedings, investigations and inquiries may have on the Company, nor
is it possible to predict whether any other suits or claims may arise out of
these matters in the future. The Company and each of its subsidiaries intend to
defend themselves vigorously in all the above matters. However, it is reasonably
possible that the outcome of any of these matters may have a material adverse
impact on the Company's financial conditions or results of operations in one or
more future periods.

The Company and certain of its subsidiaries are also currently involved in
other routine civil litigation and governmental proceedings relating to the
conduct of their business. The Company does not believe that any of these
matters will have a material adverse impact on the Company's consolidated
financial statements.

Other -- The Company was previously a party to an agreement pursuant to
which it was obligated to purchase certain operating assets in Montreal, Canada
no later than December 2005. However, there was an option in the agreement that
allowed either party to cause an earlier purchase. The purchase price was based
on certain calculations of the financial performance of the assets to be
acquired, which were to be determined at the time of purchase. In addition, the
Company had subcontracted certain business to the owner of the assets to be
purchased. A number of commercial disputes evolved into litigation between the
parties. In a series of transactions completed in November 2002, the existing
agreements were terminated, the Company made a lump sum payment and the
litigation was settled. Additionally, the Company sold its Montreal hauling
business and entered into a long-term put or pay disposal agreement. The Company
incurred a net settlement cost pursuant to the transactions of approximately $26
million.

Tax matters -- The Company is currently under audit by the Internal Revenue
Service and from time to time is audited by other taxing authorities. The
Company is fully cooperating with all audits, but plans to defend its positions
vigorously. These audits are in various stages of completion. Results of audit
assessments by taxing authorities could have a material effect on the Company's
quarterly or annual cash flows. However, the Company does not believe that any
of these matters will have a material adverse impact on the Company's results of
operations.

21. VARIABLE INTEREST ENTITIES

On June 30, 2000, two limited liability companies ("LLCs") were established
to purchase interests in existing leveraged lease financings at three
waste-to-energy facilities that the Company operates under an agreement with the
owner. John Hancock Life Insurance Company ("Hancock") has a 99.5% ownership in
one of the LLCs, the second LLC is 99.5% collectively owned by Hancock and the
CIT Group ("CIT") and the Company owns the remaining 0.5% interest in each.
Hancock and CIT made an initial investment of approximately $167 million in the
LLCs. The LLCs used these proceeds to purchase the three waste-to-energy
facilities that the Company operates and assumed the seller's indebtedness
related to these facilities. Under the LLC agreements, the LLCs shall be
dissolved upon the occurrence of any of the following events: (i) a written
decision of all the members of the LLCs to dissolve, (ii) December 31, 2063,
(iii) the entry of a decree of judicial dissolution under the Delaware Limited
Liability Company Act, or (iv) the LLCs ceasing to own any interest in these
waste-to-energy facilities. Income, losses and cash flows are allocated to the
members based on their initial capital account balances until Hancock and CIT
achieve targeted returns; thereafter, the amounts will be allocated 20% to
Hancock and CIT and 80% to the Company. The Company
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does not expect Hancock and CIT to achieve the targeted returns in 2003 or at
any time during the initial base term of the lease. The Company accounts for the
underlying leases as operating leases. The Company is required under certain
circumstances to make capital contributions to the LLCs in the amount of the
difference between the stipulated loss amounts and termination values under the
LLC agreements to the extent they are different from the underlying lease
agreements. The Company believes that the likelihood of the occurrence of these
circumstances is remote.

During 2002, the Company had aggregate lease payments of approximately $62
million. Under the LLC agreements, if the Company exercises certain renewal
options under the leases, it will be required to make capital contributions to
the LLCs for the difference, if any, between fair market rents and the scheduled
renewal rents. As of December 31, 2002, the remaining aggregate lease
commitments related to these waste-to-energy facilities are $526 million, which
includes $158 million in required capital contributions to the LLC for the
amount of the difference between bargain renewals and the fair value of the
lease. These minimum lease payments are included in the table of non-cancelable
rental obligations as discussed in Note 20.

The Company is the manager of the LLCs but there are significant
limitations on the powers of the manager under the LLC agreements. Accordingly,
the Company accounts for its interest in the LLCs under the equity method of
accounting. These investments have a carrying value of approximately $1 million
at both December 31, 2002 and December 31, 2001. If the Company was required to
consolidate the LLCs, it would record approximately $414 million in assets, and
$208 million of debt as of December 31, 2002. The remaining balance that would
be recorded would primarily be minority interest. There would be no material net
impact to its results of operations if the Company consolidated the LLCs instead
of accounting for them under the equity method.

22. OPERATIONS HELD-FOR-SALE

The Company adopted SFAS No. 144 on January 1, 2002. In accordance with
SFAS No. 144, all held-for-sale assets are classified as current within other
current assets or accrued liabilities as applicable. These assets are actively
being marketed for sale and are expected to be sold in 2003. The Company's
held-for-sale assets at December 31, 2002 had balances of $41 million included
in other current assets and $12 million included in other current liabilities.
These assets consist of surplus real estate along with other non-integrated
operations within the WTI segment.

At the beginning of 2001, the Company had its IPPs classified as
held-for-sale. The Company re-evaluated its business alternatives related to its
IPPs during 2001, and based on these assessments, the Company decided to hold
and operate its IPPs with the exception of one facility. Accordingly, the
Company reclassified all but one of its IPPs from held-for-sale to held-for-use
in 2001. As a result of this reclassification, the Company reversed its
previously recorded held-for-sale impairment loss of $109 million through asset
impairments and unusual items and recorded depreciation of $6 million that had
been suspended through the held-for-sale period. The Company also subjected its
IPPs to impairment testing on a held-for-use basis, which resulted in an
impairment charge of $85 million, and is a component of asset impairments and
unusual items in 2001.

At December 31, 2001, the primary components within operations
held-for-sale were non-integrated operations within the WTI segment, other
non-integrated operations within the remaining NASW segments and the Company's
surplus real estate portfolio. These assets had balances of $96 million included
in other current assets and $36 million included in other current liabilities.

Had the Company not classified any operations as held-for-sale, the
depreciation expense would have been greater by $1 million, $7 million and $99
million for 2002, 2001 and 2000, respectively.

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23. QUARTERLY FINANCIAL DATA (UNAUDITED)

Historically, the Company's quarterly operating results have fluctuated.
The fluctuations may be caused by many factors, including revenue mix and
general economic conditions. The Company's revenues and income from operations
typically reflect seasonal patterns. The Company's operating revenues tend to be
somewhat lower in the winter months, primarily due to the lower volume of
construction and demolition waste. The volumes of industrial and residential
waste in certain regions where the Company operates also tend to decrease during
the winter months. The Company's first and fourth quarter results of operations
typically reflect this seasonality.

The following table summarizes the unaudited quarterly results of
operations for 2002 and 2001 (in millions, except per share amounts):

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- ---------------

(a) SFAS No. 142 required that amortization of all goodwill cease on January 1,
2002. See Note 6 for further discussion.

(b) In March 2002, the Company recorded a $37 million pre-tax charge for costs
associated with the implementation of its new structure. In July 2002, the
Company recorded an additional $1 million pre-tax charge for its subsequent
restructuring of CWS. See Note 17 for further discussion.

(c) The Company experienced an increase in other income in 2002 as compared to
prior years due primarily to the sale of an equity investment. In 2002, an
entity in which the Company held an approximately 17% interest was acquired
by another company. The Company had a note from the acquired company that
was paid off in connection with the acquisition and the Company also
recorded a pre-tax gain of approximately $43 million in the fourth quarter
of 2002 for the sale of the related shares. Additionally, during the fourth
quarter of 2002, the Company elected to repay approximately $145 million of
the Company's senior debt issuances prior to their maturity dates. In
connection with this repayment, the Company recognized an extraordinary
charge of approximately $2 million, net of tax benefit, for the prepayment
penalties and other costs related to the retired debt. In the fourth quarter
of 2002, the Company also recorded a tax benefit of approximately $31
million related to the carry-back of losses by the Company's Dutch
subsidiary. Additionally, a legal dispute was resolved and a net settlement
cost of $26 million was recognized in the fourth quarter of 2002.

(d) Included in the third quarter 2001 income from operations is a pre-tax
charge to asset impairments and unusual items expense of $354 million
primarily attributable to agreements that were reached to settle the
shareholder class action lawsuit filed against the Company in July 1999. See
Note 16 for further discussion.

Basic and diluted earnings per common share for each of the quarters
presented above is based on the respective weighted average number of common and
dilutive potential common shares outstanding for each period and the sum of the
quarters may not necessarily be equal to the full year basic and diluted
earnings per common share amounts. For certain periods presented, the effect of
the Company's common stock options and warrants and the effect of the Company's
convertible subordinated notes and debentures are excluded from the diluted
earnings per share calculations since inclusion of such items would be
antidilutive for those periods.

24. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

WM Holdings ("Guarantor"), which is 100% owned by the Parent, has fully and
unconditionally guaranteed all of the senior indebtedness of the Parent, as well
as the Parent's 4% convertible subordinated notes that matured and were repaid
in February 2002. The Parent has fully and unconditionally guaranteed all of the
senior indebtedness of WM Holdings, as well as WM Holdings' 5.75% convertible
subordinated debentures due 2005. However, none of the Company's, nor WM
Holdings' debt is guaranteed by any of the Parent's indirect subsidiaries or WM
Holdings' subsidiaries ("Non-Guarantors"). Accordingly, the following condensed
consolidating balance sheets as of December 31, 2002 and 2001 and the related
condensed consolidating statements of operations for 2002, 2001 and 2000, along
with the related statements of cash flows, have been provided below (in
millions).

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CONDENSED CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2002

DECEMBER 31, 2001

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

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25. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER ACCOUNTING CHANGES (UNAUDITED)

NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 143

In June 2001, the FASB issued SFAS No. 143. SFAS No. 143 applies to all
legally enforceable obligations associated with the retirement of tangible
long-lived assets and provides the accounting and reporting requirements for
such obligations. SFAS No. 143 requires amounts initially recognized as an asset
retirement obligation to be measured at fair value. The recognized asset
retirement cost is capitalized as part of the cost of the asset and is
depreciated over the useful life of the asset.

SFAS No. 143, which will primarily impact the accounting for the Company's
landfill operations, does not change the basic landfill accounting followed
historically by the Company along with others in the waste industry. In general,
the waste industry has recognized expenses associated with both amortization of
capitalized costs and future closure and post-closure obligations on a
units-of-consumption basis as airspace is consumed over the life of the related
landfill. This practice, referred to as life cycle accounting within the waste
industry, will continue to be followed upon adoption of SFAS No. 143, except as
discussed below.

Under the new rules, costs associated with future final capping activities
that occur during the operating life of a landfill, which are currently
recognized on an undiscounted basis over the operating life of the landfill as
airspace is consumed, will be accounted for as an asset retirement obligation,
on a discounted basis. The Company expects to recognize landfill retirement
obligations that relate to closure and post-closure activities over the
operating life of a landfill as landfill airspace is consumed and the obligation
is incurred. The Company expects to recognize its final capping obligations on a
discrete basis for each expected future final capping event over the number of
tons of waste that each final capping event is expected to cover. These
obligations will be initially measured at estimated fair value. Fair value will
be measured on a present value basis, using a credit-adjusted, risk-free rate,
initially 7.25%, which is higher than the risk-free rate previously used for
discounting closure and post-closure obligations. Interest will be accreted on
all landfill retirement obligations using the effective interest method.
Landfill retirement costs arising from closure and post-closure obligations,
which will be capitalized as part of the landfill asset, will be amortized using
our existing landfill accounting practices. Landfill retirement costs arising
from final capping obligations, which will also be capitalized as part of the
landfill asset, will be amortized on a units-of-consumption basis over the
number of tons of waste that each final capping event covers.

The table below reflects the significant changes between the Company's
current landfill accounting practices and the requirements of SFAS No. 143.

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The Company expects to adopt SFAS No. 143 beginning January 1, 2003 and,
based on current estimates, will record an after-tax expense ranging from $180
million to $230 million as a cumulative effect of a change in accounting
principle. The Company expects that the impact of adopting SFAS No. 143 in 2003
will decrease earnings per share from our previous method by approximately $0.08
per diluted share. The adoption of SFAS No. 143 will have no net effect on the
Company's cash flow.

SFAS No. 145

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS No. 145"). SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they meet
the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30").
Applying the provisions of Opinion No. 30 will distinguish transactions that are
part of an entity's recurring operations from those that are unusual and
infrequent and meet the criteria for classification as an extraordinary item.
SFAS No. 145 is effective for the Company beginning January 1, 2003. Upon the
adoption of SFAS No. 145, the Company will reclassify certain items in its prior
period statements of operations to conform to the presentation required by SFAS
No. 145. Under SFAS No. 145, the Company will report gains and losses on the
extinguishment of debt in pre-tax earnings rather than in extraordinary items.

SFAS No. 146

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities, such as restructurings, involuntarily terminating employees, and
consolidating facilities initiated after December 31, 2002. The implementation
of SFAS No. 146 will not require the restatement of previously issued financial
statements. Implementation of the pronouncement will therefore have no impact on
the Company's current year financial statements. The Company will apply SFAS No.
146 requirements to its 2003 restructuring. See Note 26 for further discussion.

FIN 45

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). It clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee, including its
ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The
objective of the initial measurement of the liability is the fair value of the
guarantee at its

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WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

inception. The initial recognition and initial measurement provisions of FIN 45
are effective for the Company on a prospective basis to guarantees issued after
December 31, 2002. The Company will record the fair value of future material
guarantees, if any. See Note 20 for current disclosure requirements related to
the Company's guarantee arrangements.

FIN 46

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"). FIN
46 requires that unconsolidated variable interest entities must be consolidated
by their primary beneficiaries. A primary beneficiary is the party that absorbs
a majority of the entity's expected losses or residual benefits. FIN 46 applies
immediately to variable interest entities created after January 31, 2003 and to
existing variable interest entities in the periods beginning after June 15,
2003. See Note 21 for discussion on the Company's existing variable interests.
Management has yet to determine the impact that the adoption of FIN 46 will have
on the Company's consolidated financial statements.

OTHER ACCOUNTING CHANGES

Repairs and Maintenance

Through December 31, 2002, the Company accrued in advance for major repairs
and maintenance expenditures at its waste-to-energy facilities and IPPs.
Effective January 1, 2003, the Company changed its policy from this method to
one that expenses these costs as they are incurred. In the first quarter of
2003, the Company expects to record approximately $30 million, net of taxes, as
a credit to cumulative effect of an accounting change.

Loss Contract Accrual

Through December 31, 2002, the Company accrued for future losses for
contracts that over the contract life were projected to have direct costs
greater than revenues. Effective January 1, 2003, the Company changed its policy
from this method to one that expenses these costs as they are incurred. In the
first quarter of 2003, the Company expects to record approximately $30 million,
net of taxes, as a credit to cumulative effect of an accounting change.

26. SUBSEQUENT EVENTS

In January 2003, the Company announced that it had formed a new recycling
entity, Recycle America Alliance, L.L.C. ("RAA"), a wholly-owned subsidiary of
the Company, in an effort to optimize the capacity and improve the profitability
of the Company's recycling operations. In connection with the formation of RAA,
the Company transferred substantially all of the recycling assets and businesses
of its other subsidiaries to RAA. RAA's strategy includes combining its assets
and operations with a number of key processors and marketers. On January 10,
2003, the Peltz Group, the largest privately-held recycler in the United States,
contributed all of its assets to RAA in exchange for an initial payment by RAA
of approximately $58 million in cash and the issuance of approximately 9% of the
equity interest in RAA.

In February 2003, the Company announced that it will implement further
restructuring to reorganize operations into a smaller number of Market Areas in
an effort to reduce overhead costs. As part of the restructuring, there will be
a net workforce reduction of about 700 employees and 270 contract workers. The
Company anticipates a charge of approximately $23 million for this
restructuring.

97

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

A change in independent auditors from Arthur Andersen LLP to Ernst and
Young LLP was reported in a Current Report on Form 8-K dated March 27, 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item concerning directors of the Company
is set forth under the caption "Election of Directors" in the Company's
definitive Proxy Statement for its 2003 Annual Meeting of Stockholders, to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, and is incorporated herein by reference.

EXECUTIVE OFFICERS OF THE REGISTRANT

Below are the names and ages, as of December 31, 2002, of the Company's
executive officers and summaries of their business experience for the past 5
years.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is set forth under the
caption -- "Executive Compensation" in the 2003 Proxy Statement and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this Item is set forth under the caption
"Director and Officer Stock Ownership" in the 2003 Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is set forth under the caption
"Related Party Transactions" in the 2003 Proxy Statement and is incorporated
herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this Form 10-K, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Administrative
Officer (Principal Financial Officer) of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the Chief Executive Officer and
Chief Administrative Officer, concluded that the Company's disclosure controls
and procedures were effective. There have been no significant changes in the
Company's

99

internal controls and procedures or in other factors that could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.

PART IV

ITEM 15. FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K

(a)(1) Consolidated Financial Statements:

Report of Independent Auditors
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements

(a)(2) Consolidated Financial Statement Schedules:

Schedule II -- Valuation and Qualifying Accounts

All other schedules have been omitted because the required information is
not significant or is included in the financial statements or notes thereto, or
is not applicable.

(a)(3) Exhibits:

100

- ---------------

* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the Company's file number under that Act is
1-12154.

(a) Reports on Form 8-K:

None.

101

CERTIFICATIONS

I, A. Maurice Myers, certify that:

1. I have reviewed this annual report on Form 10-K of Waste Management,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

By: /s/ A. MAURICE MYERS
------------------------------------
A. Maurice Myers
President and Chief Executive
Officer

Date: February 24, 2003

102

I, William L. Trubeck, certify that:

1. I have reviewed this annual report on Form 10-K of Waste Management,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

By: /s/ WILLIAM L. TRUBECK
------------------------------------
William L. Trubeck
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)

Date: February 24, 2003

103

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

WASTE MANAGEMENT, INC.

By: /s/ A. MAURICE MYERS
------------------------------------
A. Maurice Myers
President, Chief Executive Officer
and
Chairman of the Board

Date: February 24, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

104

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Waste Management, Inc.

We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Waste Management, Inc.
(the "Company") as of December 31, 2002, and for the year then ended, and have
issued our report thereon dated February 14, 2003 (included elsewhere in this
Form 10-K). Our audit also included the financial statement schedule as of
December 31, 2002, and for the year then ended, listed in Item 14(a) of this
Form 10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. The financial
statement schedule listed in Item 14(a) of this Form 10-K as of December 31,
2001 and 2000, and for each of the years then ended, was audited by other
auditors who have ceased operations and whose report dated February 25, 2002
expressed an unqualified opinion.

In our opinion, the 2002 financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

/s/ Ernst & Young LLP

Houston, Texas
February 14, 2003

INFORMATION REGARDING CONSENT OF ARTHUR ANDERSEN LLP.

Section 11(a) of the Securities Act of 1933, as amended (the "Securities
Act"), provides that if part of a registration statement at the time it becomes
effective contains an untrue statement of a material fact, or omits a material
fact required to be stated therein or necessary to make the statements therein
not misleading, any person acquiring a security pursuant to such registration
statement (unless it is proved that at the time of such acquisition such person
knew of such untruth or omission) may assert a claim against, among others, an
accountant who has consented to be named as having certified any part of the
registration statement or as having prepared any report for use in connection
with the registration statement.

In June of 2002, Arthur Andersen LLP ("Andersen") was convicted of
obstructing justice, which is a felony offense. The SEC prohibits firms
convicted of a felony from auditing public companies. Andersen is thus unable to
consent to the incorporation of Andersen's opinion with respect to Waste
Management, Inc.'s Schedule II as of December 31, 2001 and for the two years in
the period then ended. Under these circumstances, Rule 437a under the Securities
Act permits Waste Management, Inc. to file this Annual Report on Form 10-K,
which is incorporated by reference into the Registration Statements, without a
written consent from Andersen. As a result, with respect to transactions in
Waste Management Inc. securities pursuant to the Registration Statements that
occur subsequent to the date this Annual Report on Form 10-K is filed with the
Securities and Exchange Commission, Andersen will not have any liability under
Section 11(a) of the Securities Act for any untrue statements of a material fact
contained in the financial statements audited by Andersen or any omissions of a
material fact required to be stated therein. Accordingly, you would be unable to
assert a claim against Andersen under Section 11(a) of the Securities Act.

WASTE MANAGEMENT, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)

- ---------------

(A) Reserves for doubtful accounts related to purchase of business
combinations, reserves associated with dispositions of businesses, reserves
reclassified to operations held for sale, and reclasses among reserve
accounts.

(B) Includes reserves for doubtful accounts receivable and long-term notes
receivable.

(C) Accruals are included in accrued liabilities and other liabilities. These
accruals represent transaction or deal costs, employee severance,
separation, and transitional costs.

(D) For major maintenance expenditures at the Company's waste-to-energy and
independent power facilities.

EXHIBIT INDEX

- ---------------

* In the case of incorporation by reference to documents filed under the
Securities Exchange Act of 1934, the Company's file number under that Act is
1-12154.