Indicate by check mark if the registrant is a well-known seasoned issuer, (as defined in Rule 405 of the Securities Act).
Yes þ      No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o     No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 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. o

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

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

The aggregate market value of the registrant’s voting stock held by nonaffiliates of the registrant was $4,175,169,586 as of June 30, 2006.

The number of shares of the registrant’s common stock, $.01 par value, outstanding at February 14, 2007 was 369,559,223.

Unless the context requires otherwise, reference in this Form 10-K to “Allied”, “we”, “us” and “our”, refer to Allied Waste Industries, Inc. and its consolidated subsidiaries.

Overview

We were incorporated in Delaware in 1989 and are the second largest non-hazardous solid waste management company in the United States. We reported revenues of approximately $6.0 billion and $5.7 billion for the years ended December 31, 2006 and 2005, respectively. The non-hazardous solid waste industry in the United States generates approximately $47 billion of annual revenue from publicly-traded companies, municipalities and privately-held companies. Publicly-traded companies generate approximately 60% of the revenues. Presently, the three largest publicly-traded companies in the waste management industry in the United States generate a substantial majority of the public company revenues.

We provide collection, transfer, recycling and disposal services for residential, commercial and industrial customers. We serve our customers through a network of 304 collection companies, 161 transfer stations, 168 active landfills and 57 recycling facilities in 128 major markets within 37 states and Puerto Rico. We operate as a vertically integrated company, which entails picking up waste from businesses and residences and disposing of that waste in our own landfills to the extent that it is economically beneficial (referred to as internalization). This allows us greater stability in and control over the waste flow into our landfills and, therefore, greater control over the cash flow stability in our business.

The waste collection and disposal business is to a great extent a local business, therefore, the characteristics and opportunities differ in each of our markets. By combining local operating management with national standards for best practices, we strive to standardize the common practices across the company, while maintaining the day-to-day operating decisions at the local level, which is closest to the customer. We implement this philosophy by organizing our operations into a corporate, region and district infrastructure. We believe this model allows us to maximize the growth and development opportunities in each of our markets and contributes to our ability to operate the business efficiently, while maintaining effective controls and standards over our operations and administrative matters, including financial reporting.

We believe the primary drivers of improving stakeholder value for our business are (1) increasing revenue and earnings through profitable growth; (2) improving returns on invested capital; and (3) maximizing free cash flow to repay debt. Our business strategy emphasizes these value drivers and our operating plan establishes strategic priorities for supporting programs aimed at customer service, revenue enhancement, cost control and productivity improvements, and the efficient deployment of capital. We provide a direct link between our business strategy, operating plan and value drivers through our hiring and training practices and our incentive compensation plans, which include targets for revenue growth, improved operating performance, improved capital efficiency and free cash flow generation.

Allied files annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (SEC). You may read and copy any document we file at the SEC’s Public Reference Room at Room 1024, 450 Fifth Street, NW, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including Allied) file electronically with the SEC. The SEC’s website is www.sec.gov.

General information about us can be found at www.alliedwaste.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.

Our business strategy is aimed at increasing revenue and earnings through profitable growth, improving returns on invested capital, deploying capital to higher return businesses and maximizing free cash flow to repay debt. The components of our strategy include: (1) operating vertically integrated, non-hazardous solid waste service businesses; (2) implementing best practices throughout our organization; (3) managing our businesses locally with a strong operations focus on customer service; (4) maintaining or improving our market position through market rationalization; and (5) maintaining sufficient financial capacity and effective administrative systems and controls, and management and executive development programs to support on-going operations and future growth.

Vertical integration. Vertical integration is a key element of our business strategy. The fundamental objective of the vertical integration business model is to control the waste stream from the point of collection through disposal, thereby optimizing the economics of the waste cycle. As of December 31, 2006, approximately 72% of the waste that our collection companies pick up is disposed of at our landfills. Additionally, approximately half of the waste that is disposed of at our landfills comes from our collection companies. This means that on average, each day we open our landfills, we expect that almost half of the volume received will be delivered by our own vehicles.

Across the country we have built, through market-specific acquisitions, vertically integrated operations typically consisting of collection companies, transfer stations, recycling facilities and landfills. Within our markets, we seek to strengthen our competitive position and improve our financial returns by developing or possibly acquiring assets that provide or improve the infrastructure for a vertically integrated market, and increase the density of our collection routes and produce adequate returns. We also may divest of operations in markets in which over the long-term we cannot successfully generate adequate returns. We believe that we can realize competitive advantages by continuously implementing this strategy across existing and selected new markets in the United States.

Best practices. We continue to implement best practices across our dispersed operations with a long-term focus on permanently improving operating practices. We believe the investment we are making in implementing best practices in the areas of revenue enhancement, productivity improvement and operating cost reductions will provide benefits to the overall business through improved operating margins, increased cash flow and better returns on invested capital. Our programs are focused on improving sales productivity and pricing effectiveness, driver productivity through improved routing, maintenance efficiency through standardized operating practices, and reducing our procurement costs through more effective purchasing. In addition, we are focused on the safety and well-being of the people impacted by our organization and of the environment, along with controlling cost increases associated with safety and our health and welfare programs. This focus has resulted, for example, in significant improvements in our accident frequency rate over the last five years.

Our focus on best practices further includes initiatives to hire, train, reward and retain top performing employees at all levels of the organization. We have implemented talent management, succession planning, and incentive programs that increase retention, especially retention of key talented resources. We make investments in leadership training and development, as well as implement a systematic approach to compensation and benefits, in order to enable us to improve retention of the best people for our industry.

Focus on customer service excellence. Through hiring, developing and retaining talented employees, implementing best practices and investing in a quality asset base, we strive to achieve operational and customer service excellence. By thinking nationally and acting locally through a strong team of market oriented managers, we believe we are well-positioned to anticipate as well as respond to customer needs and changes in our markets, and to capitalize on growth opportunities.

Market growth and rationalization. We focus on achieving a sustainable rate of long-term profitable growth while efficiently operating our assets. We increase revenue by increasing the rates we charge for the services we provide. We also endeavor to increase collection and disposal volumes, but we may sacrifice volume growth to improve returns. We allocate capital to businesses, markets and development projects to maximize growth opportunities and to minimize significant risks. We

develop previously non-permitted, non-contiguous landfill sites (greenfield landfill sites). We supplement this organic growth with acquisitions of operating assets, such as landfills and transfer stations, and tuck-in acquisitions of privately owned solid waste collection and disposal operations in existing markets. We continuously evaluate our existing operating assets to determine if we are economically optimizing our markets by making efficient use of capital deployed and to be deployed. To the extent certain operating assets are not generating acceptable returns, we examine opportunities to provide greater efficiencies through tuck-in acquisitions or ultimately determine to divest of such assets and reallocate resources to other markets. We also examine opportunities when government entities privatize the operation of all or part of their solid waste systems. In addition, we seek to maintain broad domestic geographic diversification in our operations through market development initiatives.

Maintaining financial capacity and infrastructure for future growth. We seek to implement our business strategy by maintaining sufficient financial capacity and effective administrative systems and controls. Our operating cash flows have historically been sufficient to fund our debt service, working capital and capital expenditure requirements. We maintain a revolving line of credit capacity which has been sufficient to handle seasonal and other peak spending requirements. Cash flows available to pay down debt in excess of current year debt maturities have been applied to future maturities.

Our system of internal controls is implemented through clear policies and procedures and appropriate delegation of authority and segregation of responsibility. Our company policies establish a philosophy of conducting operations in a responsible and ethical manner, including the manner in which we handle operations that impact the surrounding environment. Our senior management is committed to establishing and fostering an environment of integrity and ethical conduct. Our comprehensive internal audit function assists management in the oversight and evaluation of the effectiveness of the system of internal controls. Our system of internal controls is reviewed, tested, modified and improved as changes occur in business conditions and our operations. In 2004, we implemented programs to ensure compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404). Our related report on internal controls over financial reporting for 2006 is included in Item 9A.

Our revenue mix (based on net revenues) for 2006 was approximately $4.2 billion collection, $0.4 billion transfer, $0.9 billion landfill, $0.2 billion recycling and $0.3 billion other. No one customer individually accounted for more than 1.4% of our consolidated revenue in any of the last three years.

Collection. Collection operations involve collecting and transporting non-hazardous waste from the point of generation to the site of disposal, which may be a transfer station or a landfill. Fees relating to collection services are based on collection frequency, type of equipment furnished (if any), special handling needs, the type and volume or weight of the waste collected, the distance traveled to the transfer station or disposal facility and the cost of disposal, as well as general competitive and prevailing local economic conditions. We have approximately 12,500 collection vehicles and perform the majority of vehicle maintenance at our own maintenance facilities. Depending on the customer being served, we generally provide solid waste collection under the following four service lines:

Transfer stations. A transfer station is a facility where solid waste collected by third-party and company-owned vehicles is consolidated and then transferred to and compacted in large, specially constructed trailers or containers for transportation to disposal facilities via road or rail. This consolidation reduces costs by increasing the density of the waste being transported over long distances through compaction and by improving utilization of collection personnel and equipment. We generally base fees upon such factors as the type and volume or weight of the waste transferred, the transport distance to the disposal facility, the cost of disposal and general competitive and economic conditions. We believe that as increased regulations and public pressure restrict the development of landfills in urban and suburban areas, transfer stations will continue to be used as an efficient means to transport waste over longer distances to available landfills.

Landfills. Non-hazardous solid waste landfills are the primary method of disposal of solid waste in the United States. Currently, a landfill must be designed, permitted, operated and closed in compliance with comprehensive federal, state and local regulations, most of which are promulgated under Subtitle D of the Resource Conservation and Recovery Act of 1976, as amended. Operating procedures include excavation of earth, spreading and compacting of waste, and covering of waste with earth or other inert material. Disposal fees and the cost of transferring solid waste to the disposal facility place an economic restriction on the geographic scope of landfill operations in a particular market. Access to a disposal facility, such as a landfill, is necessary for all solid waste management companies. While access to disposal facilities owned or operated by unaffiliated parties can generally be obtained, we prefer, in keeping with our business strategy, to own or operate our own disposal facilities. This strategy ensures access and allows us to internalize

disposal fees. Approximately half of our landfill volumes are delivered by our collection vehicles. Additionally, a significant portion of our landfill volume is under multi-year contracts with third-party collection companies and municipalities. This adds to the stability of our business.

We have a network of 168 owned or operated active landfills with operating lives ranging from 1 to over 150 years. Based on available capacity using annual volumes, the average life of our landfills approximates 50 years. In addition, we have closure and post-closure liabilities associated with our 112 closed landfills.

Recycling – commodity. We receive mixed waste materials at a materials recovery facility, which is often integrated into, or contiguous to, a transfer station or collection operation. At the facility, we sort, separate, accumulate, bind or place in a container ready for transport materials such as paper, cardboard, plastic, aluminum and other metals. We also engage in organic materials recycling and/or disposal. Cardboard and various grades of paper represented approximately 76% of our processed recyclable product volume in 2006. Purchasers of the recyclables generally pay for the sorted materials based on fluctuating spot-market prices. We seek to mitigate exposure to fluctuating commodity prices by entering into contractual agreements that set a minimum sales price on the recyclables and when possible, passing through profit or loss from the sale of recyclables to customers.

The waste collection and disposal business is to a great extent a local business and, therefore, the characteristics and opportunities differ in each of our markets. By combining local operating management with national standards for best practices, we strive to standardize the common practices across the company, while maintaining the day-to-day operating decisions at the local level, which is closest to the customer. We implement this philosophy by organizing our operations into a corporate, region and district infrastructure. We believe this model allows us to maximize the growth and development opportunities in each of our markets and contributes to our ability to operate the business efficiently, while maintaining effective controls and standards over our operations and administrative matters, including financial reporting.

We modified our field organizational structure by reducing our regions to five from nine during the fourth quarter of 2005, with some refinements made in the first half of 2006. Our five geographic regions are: Midwestern, Northeastern, Southeastern, Southwestern and Western. (See Note 16 to our consolidated financial statements included under Item 8 of this Form 10-K for a summary of revenues, profitability and total assets of our five geographic regional operating segments.) The geographic regions are further divided into several operating districts and each district contains a group of specific business units with individual site operations led by general managers.

Corporate management defines long-term business plans, outlines business and financial goals, establishes policies and procedures, promotes uniform standards of execution and customer service, and determines performance expectations and measures and monitors performance against goals and standards. Corporate management also oversees all compliance matters companywide. Regional management develops and implements tactical plans and monitors compliance with policies and procedures to achieve the business goals and objectives. District management is responsible for market planning and development, oversight and coordination of the local markets, as well as building and maintaining vital community relationships. Business unit management is responsible for sales growth, customer service, operational and local market execution in accordance with business plans and in compliance with policies and procedures.

The regions are responsible for, among other things, implementation of and compliance with corporate-wide policies and initiatives, business unit reviews and analyses, personnel development and training and providing functional expertise. All regional managers and most district managers have responsibility for all phases of the vertical integration model including collection, transfer, recycling and disposal. The regional staff consists primarily of a vice president, controller, operations manager, finance manager, sales manager, engineer, safety manager, human resource manager, materials marketing manager, landfill maintenance manager, route auditor and accounting and information systems support staff. Regional office facilities typically also include the local district offices in order to reduce overhead costs and to promote a close working relationship

among the regional management, district and business unit personnel. Each region has 7 to 8 districts under its management. Each of our regions, and substantially all of our districts provide collection, transfer, recycling and disposal services, which facilitate efficient and cost-effective waste handling and allow the regions and districts to maximize the efficiencies from their vertically integrated structure.

Districts consist of a group of specific business units ranging in size from approximately $65 million to $370 million in revenue. The districts are responsible for optimizing the use of company assets, pricing and market guidance, developing market plans, sales growth and state government affairs. A district’s management consists primarily of a district manager, environmental manager, district controller, sales manager and assistant controller.

A business unit consists of individual site operations, known as divisions, usually operating as a vertically integrated operation within a common marketplace. A division is generally comprised of a single operating unit, such as a collection facility, transfer station or landfill. The business units are responsible for the execution of their business plans, coordinating with other divisions within the particular market, developing and maintaining customer relationships, landfill site construction, employee safety and training and local government affairs. Business unit management usually consists primarily of a general manager, controller, and operations, sales and maintenance managers.

In addition to competitive base salaries, we compensate regional, district and local management through cash and stock incentive plans. Compensation pursuant to the cash and stock incentive plans is largely contingent upon meeting or exceeding a combination of key financial goals that tie directly to responsibilities under the individual manager’s control as well as to the overall achievement of the company’s financial goals.

We strive to provide the highest level of service to our customer base. Our policy is to periodically visit each commercial account to ensure customer satisfaction and to verify that we are providing the appropriate level of service. In addition to visiting existing customers, each salesperson develops a base of prospective customers within each market.

We also have municipal marketing representatives in most service areas who are responsible for working with each municipality or community to which we provide residential service to ensure customer satisfaction. Additionally, the municipal representatives organize and drive the effort to obtain new or renew municipal contracts in their service areas.

At December 31, 2006, we employed approximately 24,200 employees of whom approximately 23,700 were full-time employees. Of the full-time employees, approximately 3,400 were employed in clerical, administrative and sales positions; approximately 2,500 were employed in management; and the remaining were employed in collection, disposal, transfer station and other operations. Approximately 29% of our employees are currently covered by collective bargaining agreements. From time to time, our operating locations may experience union organizing efforts. We have not historically experienced any significant work stoppages. We currently have no disputes or bargaining circumstances that could cause significant disruptions in our business.

The non-hazardous waste collection and disposal industry is highly competitive. In addition to small local companies, we compete with large companies and self-operated municipalities which may have greater financial and operational flexibility. We compete on the basis of the overall value and price and the quality of our services. We also compete with the use of alternatives to landfill disposal because of certain state requirements to reduce landfill disposal. The non-hazardous waste collection and disposal industry is led by three large national waste management companies: Allied, Waste Management, Inc. and Republic Services, Inc. It also includes numerous regional and local companies. Many counties and municipalities that operate their own waste collection and

disposal facilities may benefit from tax-exempt financing and may control the disposal of waste collected within their jurisdictions.

We encounter competition in our disposal business on the basis of geographic location, quality of operations and alternatives to landfill disposal, such as recycling and incineration. Further, most of the states in which we operate landfills require counties and municipalities to formulate comprehensive plans to reduce the volume of solid waste deposited in landfills through waste planning, composting and recycling or other programs. Some state and local governments mandate waste reduction at the source and prohibit the disposal of certain types of waste, such as yard waste, at landfills.

We are subject to extensive and evolving environmental laws and regulations administered by the Environmental Protection Agency (EPA) and various other federal, state and local environmental, zoning, health and safety agencies. These agencies periodically examine our operations to monitor compliance with such laws and regulations. Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose civil or criminal penalties in case of violations. We believe that regulation of the waste industry will continue to evolve and we will adapt to such future regulatory requirements to ensure compliance.

Our operation of landfills subjects us to operational, permitting, monitoring, site maintenance, closure, post-closure and other obligations which could give rise to increased costs for compliance and corrective measures. In connection with our acquisition and continued operation of existing landfills, we must often spend considerable time, effort and money to obtain and maintain permits required to operate or increase the capacity of these landfills.

Our operations are subject to extensive regulation, principally under the following federal statutes:

The Resource Conservation and Recovery Act of 1976, as amended (RCRA). 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. On October 9, 1991, the EPA promulgated Solid Waste Disposal Facility Criteria for non-hazardous solid waste landfills under Subtitle D. Subtitle D includes location standards, facility design and operating criteria, closure and post-closure requirements, financial assurance standards and groundwater monitoring as well as corrective action standards, many of which had not commonly been in place or enforced previously at landfills. Subtitle D applies to all solid waste landfill cells that received waste after October 9, 1991, and, with limited exceptions, required all landfills to meet these requirements by October 9, 1993. Subtitle D required landfills that were not in compliance with the requirements of Subtitle D on the applicable date of implementation, which varied state by state, to close. In addition, landfills that stopped receiving waste before October 9, 1993 were not required to comply with the final cover provisions of Subtitle D. Each state must comply with Subtitle D and was required to submit a permit program designed to implement Subtitle D to the EPA for approval by April 9, 1993.

The Federal Water Pollution Control Act of 1972, as amended (the Clean Water Act). This act regulates the discharge of pollutants into streams and other waters of the United States (as defined in the Clean Water Act) from a variety of sources, including solid waste disposal sites. If runoff from our landfills or transfer stations 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. The EPA has expanded the permit program to include storm water discharges from landfills that receive, or in the past received, industrial waste. In addition, if development may alter or affect “wetlands”, we may have to obtain a permit and undertake certain mitigation measures before development may begin. This requirement is likely to affect the construction or expansion of many solid waste disposal sites, including some we own or are developing.

The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA). CERCLA addresses problems created by the release or threatened release of hazardous substances (as defined in CERCLA) into the environment. CERCLA’s primary mechanism for achieving remediation of such problems is to impose strict, joint and several liability for cleanup of disposal sites on current owners and operators of the site, former site owners and operators at the time of disposal, and parties who arranged for disposal at the facility (i.e. generators of the waste and transporters who select the disposal site). The costs of a CERCLA cleanup can be substantial. Liability under CERCLA is not dependent on the existence or disposal of “hazardous wastes” (as defined under RCRA), but can also be founded on the existence of even minute amounts of the more than 700 “hazardous substances” listed by the EPA.

The Clean Air Act of 1970, as amended (the Clean Air Act). 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 landfills. In March 1996, the EPA adopted New Source Performance Standard and Emission Guidelines (the Emission Guidelines) for solid waste landfills. These regulations impose limits on air emissions from solid waste landfills. The Emission Guidelines impose two sets of emissions standards, one of which is applicable to all solid waste landfills for which construction, reconstruction or modification was commenced before May 30, 1991. The other applies to all solid waste landfills for which construction, reconstruction or modification was commenced on or after May 30, 1991. The Emission Guidelines are being implemented by the states after the EPA approves the individual state’s program. These guidelines, combined with the new permitting programs established under the Clean Air Act, subject solid waste landfills to significant permitting requirements and, in some instances, require installation of gas recovery systems to reduce emissions to allowable limits. The EPA also regulates the emission of hazardous air pollutants from solid waste landfills, and has promulgated regulations that require measures to monitor and reduce such emissions.

The Occupational Safety and Health Act of 1970, as amended (OSHA). 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, disclosure and procedural requirements. Various standards, such as standards for notices of hazards, safety in excavation and demolition work, and the handling of asbestos, may apply to our operations.

Future federal legislation. In the future, our collection, transfer and landfill operations may also be affected by legislation that may be proposed in the United States Congress that would authorize the states to enact laws governing interstate shipments of waste. Such proposed federal legislation may allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that could be imported for disposal and may require states, under certain circumstances, to reduce the amount of waste exported to other states. If this or similar legislation is enacted, states in which we operate landfills could act to limit or prohibit the importation of out-of-state waste. Such state actions could adversely affect landfills within these states that receive a significant portion of waste originating from out-of-state. Our collection, transfer and landfill operations may also be affected by “flow control” legislation, which may be proposed in the United States Congress. This potential federal legislation may allow states and local governments to direct waste generated within their jurisdiction to a specific facility for disposal or processing. If this or similar legislation is enacted, state or local governments with jurisdiction over our landfills could act to limit or prohibit disposal or processing of waste in our landfills.

State regulation. Each state in which we operate has laws and regulations governing solid waste disposal and water and air pollution and, in most cases, regulations governing the design, operation, maintenance and closure of landfills and transfer stations. Several states have proposed or have considered adopting legislation that would regulate the interstate transportation and disposal of waste in their landfills.

Many states have also adopted legislative and regulatory measures to mandate or encourage waste reduction at the source and waste recycling. Our collection and landfill operations may be affected by the current trend toward laws requiring the development of waste reduction and recycling programs. For example, a number of states have enacted laws that require counties to adopt comprehensive plans to reduce, through waste planning, composting and recycling or other

programs, the volume of solid waste deposited in landfills. A number of states have also taken or propose to take steps to ban or otherwise limit the disposal of certain wastes, such as yard wastes, beverage containers, newspapers, unshredded tires, lead-acid batteries and household appliances into landfills.

We have implemented and will continue to implement operational practices and environmental and other safeguards that seek to comply with these governmental requirements.

We carry commercial general liability, automobile liability, workers’ compensation, employers’ liability, directors’ and officers’ liability, pollution liability and other coverage we believe is customary in the industry. We maintain high deductible programs under commercial general liability, automobile liability and workers’ compensation insurance with varying deductible thresholds up to $3 million. We do not expect the impact of any known casualty, property or environmental claims to be material to our consolidated liquidity, financial position or results of operations.

We are required to provide approximately $2.8 billion of financial assurances to governmental agencies and a variety of other entities under applicable environmental regulations relating to our landfill operations and collection contracts and financial guarantee bonds for self-insurance. We satisfy the financial assurance requirements by providing performance bonds, letters of credit, insurance policies or trust deposits. We expect no material increase in total financial assurance requirements although the mix of financial assurance instruments may change.

Our corporate governance program reflects our commitment to integrity and high ethical standards in conducting our business. We are committed to rigorously and diligently exercising our oversight responsibilities throughout the company and managing our affairs consistent with the highest principles of business ethics and the corporate governance requirements of federal law, the SEC and the New York Stock Exchange.

The current Board of Directors’ committee Charters, Corporate Governance Guidelines, Code of Business Conduct and Ethics (for all employees, officers and Board members) and Code of Ethics for Executive and Senior Financial Officers are available in print free of charge to any investor who requests them by writing to: Allied Waste Industries, Inc., Attention: Investor Relations, 18500 North Allied Way, Phoenix, Arizona 85054. This information is also available on our website at www.alliedwaste.com.

All phases of our operations are subject to a number of uncertainties, risks and other influences, many of which are outside of our control and any one of which, or a combination of which, could materially affect the results of our operations or liquidity. Important factors that could cause actual results to differ materially from our expectations are discussed below. You should carefully consider these factors before investing in our securities. These risks and uncertainties include, without limitation:

We compete with large companies and municipalities that may have greater financial and operational resources, flexibility to reduce prices and other competitive advantages that could make it difficult for us to compete effectively.

We principally compete with large national waste management companies, such as Waste Management, Inc. and Republic Services, Inc., municipalities and numerous regional and local companies for collection accounts. We compete primarily on the basis of price and the quality of services. Some of the national waste management companies and municipalities may have greater financial and operational resources than us, which may allow them to reduce prices in order to expand sales volume or win competitive bids. Many counties and municipalities that operate their own waste collection and disposal facilities may have the benefits of tax revenues, tax-exempt financing and the ability to control the disposal of waste collected within their

jurisdictions, which also would give them a competitive advantage. As a result of these factors, we may have difficulty competing effectively from time to time or in certain markets.

Price increases may not be adequate to offset the impact of inflation on our costs and/or may cause us to lose volume.

Where appropriate, we expect to raise prices for our services sufficient to offset cost increases from inflation and to improve our return on invested capital. However, competitive factors have and may continue to require us to absorb cost increases resulting from inflation, or may cause us to lose volume to competitors willing to service customers at a lower price. Consistent with industry practice, most of our contracts provide for a pass through of certain costs, including increases in landfill tipping fees and, in some cases, fuel costs.

A weak economy generally results in decreases in the volumes of waste generated. In the past, weakness in the U.S. economy has had a negative effect on our operating results, including decreases in revenues and operating cash flows. Additionally, in an economic slowdown, we may experience the negative effects of increased competitive pricing pressure and customer turnover. There can be no assurance that worsening economic conditions or a prolonged or recurring recession will not have a significant adverse impact on our operating results or liquidity. Additionally, there can be no assurance that an improvement in economic conditions will result in an immediate, if at all positive improvement in our operating results or liquidity.

Our goodwill may become impaired, which could result in a material non-cash charge to our results of operations.

We have a substantial amount of goodwill resulting from our acquisitions, including Browning-Ferris Industries, Inc. (BFI) and Laidlaw. At least annually, or when we divest a business, as defined by generally accepted accounting principles in the United States (GAAP), we evaluate this goodwill for impairment based on the fair value of each reporting unit. This estimated fair value could change if there were future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted or a permanent change to the market capitalization of our company. These changes could result in an impairment that could require a material non-cash charge to our results of operations.

We currently have matters pending with the Internal Revenue Service (IRS), which could result in large cash expenditures and could have a material adverse effect on our operating results, liquidity and financial condition.

Current examinations include federal income tax audits for calendar years 1998 through 2003. A federal income tax audit for BFI’s tax years ended September 30, 1996 through July 30, 1999 is completed except for one matter. If the outstanding matter is decided against us, we estimate it could have a potential total cash impact of approximately $280 million for federal and state taxes, of which approximately $33 million has been paid, plus accrued interest through December 31, 2006 of approximately $131 million ($79 million net of tax benefit).

Also, if an outstanding matter from 2002, relating to an exchange of partnership interests, is decided against us, we estimate it could have a potential total cash tax impact of approximately $160 million for federal and state taxes plus accrued interest through December 31, 2006 of approximately $31 million ($19 million, net of tax benefit). In addition, for both matters, the IRS may successfully impose a penalty of up to 40% of the additional income tax due.

The potential tax and interest (but not penalties or penalty-related interest) impact of the above matters has been fully reserved on our consolidated balance sheet. With regard to tax and accrued interest through December 31, 2006, a disallowance would not materially affect our consolidated results of operations; however, a deficiency payment would adversely impact our cash flow in the period the payment was made. The accrual of additional interest charges through the time these matters are resolved will affect our consolidated results of operations. In addition, the successful assertion by the IRS of penalties could have a material adverse impact on our consolidated liquidity, financial position and results of operations.

For additional information on these matters, see Note 13, Income Taxes, to our consolidated financial statements in Item 8 of this Form 10-K. Other matters may also arise in the course of tax audits that could adversely affect our financial condition, results of operations and cash flows.

Increases in the cost of fuel or oil for any extended period of time will increase our operating expenses.

Our operations are dependent on fuel to run our collection and transfer trucks and equipment used in our landfill operations. We buy fuel in the open market and the price is unpredictable and can fluctuate significantly based on political and economic factors. For example, our fuel costs were $298.4 million in 2006 compared to $241.7 million in 2005. This increase primarily reflects an increase in the price of fuel.

In addition, regulations affecting the type of fuel our trucks use are changing in 2007 and could materially increase the cost and consumption of our fuel. Our operations also require certain petroleum-based products (such as liners at our landfills) whose costs may vary with the price of oil. An increase in the price of oil could increase the cost of those products, which would increase our operating and capital costs.

Adverse weather conditions may limit our operations and increase the costs of collection and disposal.

Our collection and landfill operations could be adversely affected by long periods of inclement weather which interfere with collection and landfill operations, delay the development of landfill capacity and/or reduce the volume of waste generated by our customers. In addition, weather conditions may result in the temporary suspension of our operations, which can significantly affect our operating results during those periods.

We process recyclable materials such as paper, cardboard, plastics, aluminum and other metals for sale to third parties, generally at current market prices. All of these materials are subject to significant price fluctuations, which are driven by general market conditions, global economic conditions and seasonality. These price fluctuations may affect our future revenues, operating income and cash flows.

We may be subject to work stoppages, which could increase our operating costs and disrupt our operations.

As of December 31, 2006, 29% of our workforce was represented by various local labor unions. If our unionized workers were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations and an increase in our operating costs, which could have a material adverse effect on our results of operations and cash flows. In addition, if a greater percentage of our work force becomes unionized, our business and financial results could be materially adversely affected due to the potential for increased operating expenses resulting in lower net income.

We may not realize all of the expected benefits from our significant investment in the development and implementation of our best practices program.

We have invested in the identification, development and implementation of a best practices program intended to improve productivity, enhance the quality of our revenue collections and reduce costs. We cannot guarantee that all expected improvements will materialize or have a positive effect on operating results. For example, we have undertaken various procurement-related initiatives which we expect will ultimately save us $100 million in annual operating and capital costs. We may not be able to achieve this level of savings. If we are unable to control these and other costs, we may not be able to improve or maintain operating margins.

As part of a market rationalization plan, we are performing detailed analysis of our underperforming markets and are considering disposition in some cases. There can be no assurance that we will ultimately sell assets, and if we do, there is no assurance the asset sales will improve margins, profits or operating cash flows. Further, there can be no assurance these sales will not result in a loss on disposition at the time of the sale.

There can be no assurance that we will achieve increases in sales as a result of our business development plan. For example, it is our intention to increase our sales in part through growth in national accounts; however, such growth may not materialize. Even if we are successful in increasing national account revenue, this may negatively impact our consolidated operating margin percentage, since national accounts may have a lower operating margin than other customers.

We are committed to improving the returns on our invested capital. We may determine that certain development projects operations, landfills or markets are not expected to provide an adequate return. We may sell, abandon, or temporarily close these projects or operations which could result in lower earnings, or asset or goodwill impairments.

We are subject to costly environmental regulations that may affect our operating margins, restrict our operations and subject us to additional liability.

Our compliance with laws and regulations governing the use, treatment, storage, and disposal of solid and hazardous wastes and materials, air quality, water quality and the remediation of contamination associated with the release of hazardous substances is costly. Government laws and regulations often require us to enhance or replace our equipment and to modify landfill operations or initiate final closure of a landfill. There can be no assurance that we will be able to implement price increases sufficient to offset the cost of complying with these laws and regulations. In addition, environmental regulatory changes could accelerate or increase expenditures for closure and post-closure monitoring at solid waste facilities and obligate us to spend sums in addition to those presently accrued for such purposes.

In the future, our collection, transfer and landfill operations may also be affected by proposed federal and state legislation that may allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that can be imported for disposal and may require states, under some circumstances, to reduce the amount of waste exported to other states. If this or similar legislation is enacted in states in which we operate landfills that receive a significant portion of waste from out-of-state, our operations could be negatively affected due to a decline in landfill volumes and increased cost of alternate disposal. The United States Congress could also propose “flow control” legislation, which may allow states and local governments to direct waste generated within their jurisdiction to a specific facility for disposal or processing. If this or similar legislation is enacted, state or local governments with jurisdiction over our landfills could act to limit or prohibit disposal or processing of waste in our landfills.

In addition to the costs of complying with environmental regulations, we incur costs to defend against litigation brought by government agencies and private parties who may allege we are in violation of our permits and applicable environmental laws and regulations, or who assert claims alleging environmental damage, personal injury and/or property damage. As a result, we may be required to pay fines, implement corrective measures, or may have our permits and licenses modified or revoked. A significant judgment against us, the loss of a significant permit or license or the imposition of a significant fine could have a material negative effect on our financial condition, results of operations and liquidity.

We may incur liabilities for the deterioration of the environment as a result of our operations. We maintain high deductibles for our environmental liability insurance coverage. If we were to incur substantial financial liability for environmental damage, our insurance coverage may be inadequate to cover such liability. This may have a negative effect on our liquidity and there could be a material adverse effect on our financial condition and results of operations.

Despite our efforts, we may incur additional hazardous substances liability in excess of amounts presently known and accrued.

We are a potentially responsible party at many sites under CERCLA, which provides for the remediation of contaminated facilities and imposes strict, joint and several liability, for the cost of remediation on current owners and operators of a facility at which there has been a release or a threatened release of a “hazardous substance”, on former site owners and operators at the time of disposal of the hazardous substance(s) and on persons who arrange for the disposal of such substances at the facility (i.e., generator of the waste and transporters who selected the disposal site). Hundreds of substances are defined as “hazardous” under CERCLA and their presence, even in minute amounts, can result in substantial liability. Notwithstanding our efforts to comply with applicable regulations and to avoid transporting and receiving hazardous substances, we may have additional liability under CERCLA or similar laws in excess of our current reserves because such substances may be present in waste collected by us or disposed of in our landfills, or in waste collected, transported or disposed of in the past by acquired companies. In addition, actual costs for these liabilities could be significantly greater than amounts presently accrued for these purposes.

We cannot assure you that we will continue to operate our landfills at currently estimated volumes due to the use of alternatives to landfill disposal caused by state requirements or voluntary initiatives.

Most of the states or municipalities in which we operate landfills require counties and municipalities to formulate comprehensive plans to reduce the volume of solid waste deposited in landfills through waste planning, composting and recycling or other programs. Some state and local governments mandate waste reduction at the source and prohibit the disposal of certain types of wastes, such as yard wastes, at landfills. These actions, as well as voluntary private initiatives by customers to reduce waste or seek disposal alternatives, may reduce the volume of waste going to landfills in certain areas. If this occurs, there can be no assurances that we will be able to operate our landfills at their current estimated volumes or charge current prices for landfill disposal services due to the decrease in demand for services.

If we are unable to execute our business strategy, our waste disposal expenses could increase significantly.

Ongoing implementation of our vertical integration strategy will depend on our ability to maintain appropriate landfill capacity, collection operations and transfer stations. We cannot assure you that we will be able to replace such assets either timely or cost effectively or integrate acquisition candidates effectively or profitably. Further, we cannot assure you that we will be successful in expanding the permitted capacity of our current landfills once our landfill capacity is full. In such event, we may have to dispose of collected waste at landfills operated by our competitors or haul the waste long distances at a higher cost to another of our landfills, either of which could significantly increase our waste disposal expenses.

We may be unable to obtain required permits or to expand existing permitted capacity of our landfills, which could decrease our revenues and increase our costs.

There can be no assurance that we will successfully obtain the permits we require to operate our business because permits to operate non-hazardous solid waste landfills and to expand the permitted capacity of existing landfills have become more difficult and expensive to obtain. Permits often take years to obtain as a result of numerous hearings and compliance with zoning, environmental and other regulatory requirements. These permits are also often subject to resistance from citizen or other groups and other political pressures. Our failure to obtain the

required permits to operate non-hazardous solid waste landfills could hinder our ability to implement our vertical integration strategy and have a material negative effect on our future results of operations as 14.1% of our third-party revenues in 2006 were generated from our landfills. Additionally, landfills typically operate at a higher margin than our other operations. We also could incur higher costs due to the fact that we would be required to dispose of our waste in landfills owned by other waste companies or municipalities.

The solid waste industry is a capital-intensive industry and the amount we spend on capital expenditures may increase, which could require us to issue additional equity or debt to fund our operations or impair our ability to grow our business.

Our ability to remain competitive, grow and expand operations largely depends on our cash flow from operations and access to capital. We spent $669.3 million on capital expenditures during 2006 and expect to spend approximately $700 million in 2007. In addition, we spent approximately $84.7 million on landfill capping, closure and post-closure and environmental remediation during 2006, with a similar amount expected in 2007. If we undertake more acquisitions or further expand our operations, the amount we expend on capital, capping, closure, post-closure and environmental remediation expenditures will increase. Our cash needs will also increase if the expenditures for closure and post-closure monitoring increase above our current estimates, which may occur due to changes in federal, state, or local government requirements. Increases in expenditures will result in lower levels of working capital or require us to finance working capital deficits. We may be required to obtain additional equity and/or debt financing for debt repayment obligations in order to fund our operations and/or to grow our business. These factors could substantially increase our operating costs and debt and therefore impair our ability to invest in property and equipment.

We currently expect to maintain our capital expenditure level at approximately $700 million per year for the next several years. If our capital efficiency programs are unable to offset the impact of inflation and business growth, it may be necessary to increase the amount we spend.

Conversely, beginning in 2007, federal regulations have tightened the emission standards on class A vehicles, which includes the collection vehicles we purchase. As a result, we could experience a reduction in operating efficiency. This could cause an increase in vehicle operating costs. Also, we may reduce the number of vehicles we purchase until manufacturers adapt to the new standards to increase efficiency.

We have had and will continue to have a substantial amount of outstanding indebtedness with significant debt service requirements. At December 31, 2006, our consolidated debt was approximately $6.9 billion and our debt to total capitalization ratio was 65.8%.

The degree to which we are leveraged could have negative consequences to our business. For example, it could:

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. As of December 31, 2006, our debt agreements permitted us to incur substantial additional indebtedness under various financial ratio tests. At December 31, 2006, we had no borrowings outstanding under our $1.575 billion Revolving Credit Facility (2005 Revolver) and $398.7 million in letters of credit drawn on the 2005 Revolver that support our financial assurance obligations, leaving $1.176 billion of availability. To the extent we incur additional debt, the leverage risks described above would increase.

We may not generate a sufficient amount of cash to service our indebtedness and alternatives to service our indebtedness may not be effective.

Our ability to make payments on our indebtedness will depend on our ability to generate cash flow from operations, which is subject to general economic, financial, competitive, legislative, regulatory and other factors, which may be beyond our control. We cannot assure you that our business will generate enough cash flow from operations to service our indebtedness. If we do not have enough cash to service our debt, meet other obligations and fund other liquidity needs, we may be required to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of our existing debt or seeking additional equity capital. We cannot assure you that any of these alternatives will be effective, including that any refinancings or restructurings would be available on commercially reasonable terms or at all. In addition, the terms of existing or future debt agreements may restrict us from adopting these alternatives.

We may be unable to refinance or repay our debt at maturity, which would cause us to default under our debt instruments.

We may need to refinance our senior notes, our senior subordinated notes and/or other indebtedness to pay the principal amounts due at maturity. There can be no assurance that we will be able to refinance our debt obligations at maturity on commercially reasonable terms or at all. If we are unable to refinance or repay our debt obligations at maturity, it would constitute an event of default under our debt instruments and our lenders could proceed against the collateral securing that indebtedness. We have also refinanced our debt in the past to extend our maturities and reduce higher cost debt and cannot assure you that we will be able to refinance any of our indebtedness before maturity on commercially reasonable terms or at all in the future.

Covenants in our debt instruments may limit our ability to operate our business and any failure by us to comply with such covenants may accelerate our obligation to repay the underlying debt.

Our senior credit facility, our indentures and certain of the agreements governing our other indebtedness contain covenants that may limit our ability to operate our business or invest in other businesses. Our agreements also include covenants that restrict our ability to make distributions or other payments to our investors and creditors unless we satisfy certain financial tests, financial ratios or other criteria. Although none of our debt instruments contain net worth covenants, our senior credit facility, for example, requires us to maintain certain Debt/EBITDA and EBITDA/Interest ratios as described in Note 4 to our consolidated financial statements. In some cases, our subsidiaries are subject to similar restrictions, which may restrict their ability to make distributions to us. Our senior credit facility, our indentures and other debt agreements also contain affirmative and negative covenants that, among other items, limit our ability to incur additional indebtedness, make acquisitions and capital expenditures, sell assets, create liens or other encumbrances, and merge or consolidate. All of these restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise.

Our ability to comply with the covenants contained in our debt instruments may be affected by changes in economic or business conditions or other events beyond our control. If we do not comply with these covenants and restrictions, we could be in default under our senior credit

facility, our indentures and other debt agreements and the debt, together with accrued interest, could then be declared immediately due and payable. If we default under our senior credit facility, the lenders could cause all of our outstanding debt obligations under such senior credit facility to become due and payable, require us to apply all of our cash to repay the indebtedness under the facility or prevent us from making debt service payments on any other indebtedness we owe. If we are unable to repay any borrowings when due, the lenders under our senior credit facility could proceed against their collateral, which includes most of the assets we own, including the collateral securing the senior notes and the guarantees. In addition, any default under our senior credit facility or other debt agreements could lead to an acceleration of debt under our other debt instruments that contain cross acceleration or cross-default provisions. If the indebtedness under any of our debt instruments is accelerated, we may not have sufficient assets to repay amounts due.

A downgrade in our bond ratings could adversely affect our liquidity by increasing the cost of debt and financial assurance instruments.

Our debt instruments contain no ratings-related covenants. However, while downgrades of our bond ratings may not have an immediate impact on the cost of debt or our liquidity, they may impact the cost of debt and liquidity over the near to medium term. If the rating agencies downgrade our debt, this may increase the interest rate we must pay if we issue new debt, and it may even make it prohibitively expensive for us to issue new debt. If our debt ratings are downgraded, future access to financial assurance markets at a reasonable cost, or at all, also may be adversely impacted.

At December 31, 2006, approximately 80% of our debt was fixed and 20% was floating. At this level of floating rate debt, if interest rates increased by 100 basis points, annualized interest expense would increase by approximately $14.2 million ($8.5 million after tax). Therefore, any increase in interest rates could significantly increase our interest expense and may have a material adverse effect on our financial condition, results of operations and cash flows.

If we are unable to obtain necessary financial assurances, it could negatively impact our liquidity and capital resources.

We are required to provide financial assurance to governmental agencies and a variety of other entities under applicable environmental regulations relating to our landfill operations and collection contracts. In addition, we are required to provide financial assurance for our self-insurance program. We satisfy the financial assurances requirements by providing performance bonds, letters of credit, insurance policies or trust deposits. As of December 31, 2006, we have total financial assurance requirements of approximately $2.8 billion. Should we experience rating agency downgrades, the mix of financial assurance instruments we can obtain may change and we may be required to obtain additional letters of credit. In the event we are unable to obtain sufficient performance bonds, letters of credit, insurance policies or trust deposits at reasonable costs, or at all, we would need to rely on other forms of financial assurance that may be more expensive to obtain. This could negatively impact our liquidity and capital resources.

In connection with any acquisition made by us, there may be liabilities that we fail to discover or are unable to discover, including liabilities arising from non-compliance with environmental laws by prior owners and for which we, as successor owner, may be responsible. Similarly, we incur capitalized costs associated with acquisitions, which may never be consummated, resulting in a potential charge to earnings.

The possibility of disposal site developments, expansion projects or pending acquisitions not being completed or certain other events could result in a material charge against our earnings.

In accordance with GAAP, we capitalize certain expenditures relating to disposal site development, expansion projects, acquisitions, software development and other projects. If a facility or operation is permanently shut down or determined to be impaired, a pending acquisition is not completed, a development or expansion project is not completed or is determined to be impaired, we will charge against earnings any unamortized capitalized expenditures relating to such facility, acquisition or project that we are unable to recover 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 financial condition and results of operations.

We are required to make accounting and tax-related estimates and judgments in the ordinary course of business.

The accounting and tax-related estimates and judgments we must make in the ordinary course of business affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of our operating results during the periods presented as described under “Critical Accounting Judgments and Estimates” in Item 7 in this Form 10-K. Additionally, we are required to interpret the rules and tax law in existence as of the date of the financial statements when the rules are not specific to a particular event or transaction. If the underlying estimates or judgments are ultimately proved to be incorrect, or if auditors or regulators subsequently interpret our application of the rules differently, subsequent corrections could have a material adverse effect on our financial condition and results of operations for the current or prior periods.

The introduction of new accounting rules, laws or regulations could adversely impact our results of operations.

Complying with new accounting rules, laws or regulations could adversely affect our balance sheet, results of operations or funding requirements, or cause unanticipated fluctuations in our results of operations in future periods. For example, the adoption and application of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), beginning in 2007 may the increase volatility of our income tax expense in future years.

Not applicable.

Our principal executive offices are located at 18500 North Allied Way, Phoenix, Arizona 85054 where we currently lease approximately 145,000 square feet of office space. We also currently maintain regional administrative offices in all of our regions.

Our principal property and equipment consists of land, buildings, vehicles and equipment, substantially all of which are encumbered by liens in favor of our primary lenders. We own or lease real property in the states in which we are conducting operations. At December 31, 2006, we owned or operated 304 collection companies, 161 transfer stations, 168 active solid waste landfills and 57 recycling facilities within 37 states and Puerto Rico. Our active landfills are located in our five regions as follows: 52 are in the Midwestern, 26 are in the Northeastern, 26 are in the Southeastern, 43 are in the Southwestern and 21 are in the Western. In aggregate, our active solid waste landfills total approximately 81,315 acres, including approximately 27,935 permitted acres. We believe that our property and equipment are adequate for our current needs.

We are involved in routine litigation that arises in the ordinary course of business. We are subject to federal, state and local environmental laws and regulations. Due to the nature of our business, we are often a party to judicial or administrative proceedings involving governmental authorities and other interested parties related to environmental regulations. From time to time, we may also be subject to actions brought by citizens’ groups, adjacent landowners or others in connection with the permitting and licensing of our landfills or transfer stations, or alleging personal injury, environmental damage or violations of the permits and licenses pursuant to which we operate. We believe that costs of settlements or judgments arising from routine litigation will not have a material adverse effect on our consolidated liquidity, financial position or results of operations.

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

A consolidated amended class action complaint was filed against us and five of our current and former officers on March 31, 2005 in the U.S. District Court for the District of Arizona, consolidating three lawsuits previously filed on August 9, 2004, August 27, 2004 and September 30, 2004. The amended complaint asserted claims against all defendants under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and claims against the officers under Section 20(a) of the Securities Exchange Act. The complaint alleged that from February 10, 2004 to September 13, 2004, the defendants caused false and misleading statements to be issued in our public filings and public statements regarding our anticipated results for fiscal year 2004. The lawsuit sought an unspecified amount of damages. We filed a motion to dismiss the complaint on May 2, 2005. On December 15, 2005, the U.S. District Court for the District of Arizona granted our motion and dismissed the lawsuit with prejudice. Plaintiffs have appealed the dismissal to the 9^th Circuit Court of Appeals. On October 6, 2006 the plaintiffs filed their opening appellate brief. The company and four individual defendants filed their brief in opposition on December 15, 2006, and the plaintiffs filed their reply brief on January 24, 2007. We do not believe the outcome of this matter will have a material adverse effect on our consolidated liquidity, financial position or results of operations.

In September 1999, neighboring parties and the county drainage district filed a civil lawsuit seeking to prevent BFI from obtaining a vertical elevation expansion permit at our 131-acre landfill in Donna, Texas. They claimed BFI had agreed not to expand the landfill based on a pre-existing Settlement Agreement from an unrelated dispute years ago related to drainage discharge rights. In 2001, the Texas Commission on Environmental Quality (TCEQ) granted BFI an expansion permit (the administrative expansion permit proceeding), and, based on this expansion permit, the landfill has an estimated remaining capacity of approximately 2.4 million tons at December 31, 2006. Nonetheless, the parties opposing the expansion continued to litigate the civil lawsuit and pursue their efforts in preventing the expansion. In November 2003, a judgment issued by a Texas state trial court in the civil lawsuit effectively revoked the expansion permit that was granted by the TCEQ in 2001, which would require us to operate the landfill according to a prior permit granted in 1988. On appeal, the Texas Court of Appeals stayed the trial court’s order, allowing us to continue to place waste in the landfill in accordance with the expansion permit granted in 2001. In the administrative expansion proceeding on October 28, 2005, the Texas Supreme Court denied review of the neighboring parties’ appeal of the expansion permit, thereby confirming that the TCEQ properly granted our expansion permit.

In April 2006, the Texas Court of Appeals ruled on the civil litigation. The court dissolved the permanent injunction which would have effectively prevented us from operating the landfill under the expansion permit, but also required us to pay a damage award of approximately $2 million plus attorney fees and interest. On April 27, 2006, all parties filed motions for rehearing, which were denied by the Texas Court of Appeals. All parties have filed petitions for review to the Texas Supreme Court. The Texas Supreme Court has not yet decided if they will grant or deny review.

We have been notified that we are considered a potentially responsible party at a number of sites under CERCLA or other environmental laws. In all cases, such alleged responsibility is due to the actions of companies prior to the time we acquired them. We continually review our status with respect to each site, taking into account the alleged connection to the site and the extent of the contribution to the volume of waste at the site, the available evidence connecting the entity to that site and the number and financial soundness of other potentially responsible parties at the site. The ultimate amounts for environmental liabilities at sites where we may be a potentially responsible party cannot be determined and estimates of such liabilities made by us require assumptions about future events subject to a number of uncertainties, including the extent of the contamination, the appropriate remedy, the financial viability of other potentially responsible parties and the final apportionment of responsibility among the potentially responsible parties. Where we have concluded that our estimated share of potential liabilities is probable, a provision has been made in the consolidated financial statements. Since the ultimate outcome of these matters may differ from the estimates used in our assessments to date, the recorded liabilities are periodically evaluated as additional information becomes available to ascertain that the accrued liabilities are adequate. We have determined that the recorded liability for environmental matters as of December 31, 2006 of approximately $217.3 million represents the most probable outcome of these contingent matters. We do not expect that adjustments to estimates, which may be reasonably possible in the near term and that may result in changes to recorded amounts, will have a material effect on our consolidated liquidity, financial position or results of operations. For more information about our potential environmental liabilities see Note 7 to our consolidated financial statements in Item 8 of this Form 10-K.

On March 14, 2006, our wholly-owned subsidiary, BFI Waste Systems of Mississippi, LLC, received a Notice of Violation from the Environmental Protection Agency (the “EPA”) alleging that it was in violation of certain Clean Air Act provisions governing federal Emissions Guidelines for Municipal Solid Waste Landfills, New Source Performance Standards for Municipal Solid Waste Landfills, and the facility Operating Permit at its Little Dixie Landfill. The majority of these alleged violations involve the failure to file reports or permit applications, including but not limited to design capacity reports, NMOC emission rate reports and collection and control system design plans, with the EPA in a timely manner. If we are found to be in violation of such regulations we may be subject to remedial action under EPA regulations, including monetary sanctions of up to $32,500 per day. By letter dated January 17, 2007, the EPA notified the company that they had referred the matter to the U.S. Department of Justice for purposes of bringing an enforcement action and invited the company to engage in settlement negotiations.

On June 27, 2006, our wholly-owned subsidiary, American Disposal Services of West Virginia, Inc., received a proposed Settlement Agreement and Consent Order from the West Virginia Department of Environmental Protection seeking to assess a civil penalty of $150,000 and to require the facility to perform a Supplemental Environmental Project (SEP) with a value of not less than $100,000 to resolve several alleged environmental violations under the West Virginia Solid Waste Management Act that occurred over the past three years at its Short Creek Landfill in Ohio County, West Virginia. In a Settlement Agreement and Consent Order effective September 12, 2006, our subsidiary agreed to pay a civil penalty of $150,000 and to perform a SEP with a value of not less than $100,000.

We are currently under examination or administrative review by various state and federal taxing authorities for certain tax years, including federal income tax audits for calendar years 1998 through 2003. Two significant matters relating to these audits are discussed below.

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

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

In April 2005, the Appeals Office of the IRS upheld the disallowance of the capital loss deduction. As a result, in late April 2005 we paid a deficiency to the IRS of $23 million for BFI tax years prior to the acquisition. In July 2005, we filed a suit for refund in the United States Court of Federal Claims. In December 2005, the government filed a counterclaim for assessed interest of $12.8 million and an assessed penalty of $5.4 million. The IRS has agreed to suspend the collection of the assessed interest and penalty until a decision is rendered on our suit for refund.

Based on the complexity of the case, we estimate it will likely take a number of years to fully try the case and obtain a decision. Furthermore, depending on the circumstances at that time, the losing party may appeal the decision to the United States Court of Appeals for the Federal Circuit. A settlement, however, could occur at any time during the litigation process.

The remaining tax years affected by the capital loss issue are currently being audited or reviewed by the IRS. A decision by the Court of Federal Claims in the pending suit for refund, or by the Federal Circuit if the case is appealed, should resolve the issue in these years as well. If we were to win the case, the initial payments would be refunded to us. If we were to lose the case, the deficiency associated with the remaining tax years would be due. If we were to settle the case, the settlement would likely cover all affected tax years and any resulting deficiency would become due in the ordinary course of the audits.

On July 12, 2006, the Federal Circuit reversed a decision by the Court of Federal Claims favorable to the taxpayer in Coltec v. United States, 454 F.3d 1340 (Fed. Cir. 2006), in a case involving a similar transaction. We are not a party to this proceeding. The Federal Circuit nonetheless affirmed the taxpayer’s position regarding the technical interpretation of the relevant tax code provisions.

Although we continue to believe that our suit for refund in the Court of Federal Claims is factually distinguishable from Coltec, the legal bases upon which the decision was reached by the Federal Circuit may impact our litigation.

If the capital loss deduction is fully disallowed, we estimate it could have a potential federal and state cash tax impact (excluding penalties) of approximately $280 million, of which approximately $33 million has been paid, plus accrued interest through December 31, 2006 of approximately $131 million ($79 million net of tax benefit). Additionally, the IRS could ultimately impose penalties and interest on those penalties for any amount up to approximately $130 million, after tax.

In April 2002, we exchanged minority partnership interests in four waste to energy facilities for majority partnership interests in equipment purchasing businesses, which are now wholly-owned subsidiaries. The IRS is contending that the exchange was a sale on which a corresponding gain should have been recognized. Although we intend to vigorously defend our position on this matter, if the exchange is treated as a sale, we estimate it could have a potential federal and state cash tax impact of approximately $160 million plus accrued interest through December 31, 2006 of approximately $31 million ($19 million, net of tax benefit). Also, the IRS could propose a penalty of up to 40% of the additional income tax due. Because of several meritorious defenses, we believe the successful assertion of penalties is unlikely.

The potential tax and interest (but not penalties or penalty-related interest) impact of the above matters has been fully reserved on our consolidated balance sheet. With regard to tax and accrued interest through December 31, 2006, a disallowance would not materially affect our consolidated results of operations; however, a deficiency payment would adversely impact our cash flow in the period the payment was made. The accrual of additional interest charges through the time these matters are resolved will affect our consolidated results of operations. In addition, the successful assertion by the IRS of penalties could have a material adverse impact on our consolidated liquidity, financial position and results of operations.

No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2006.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock, $0.01 par value, is traded on the New York Stock Exchange under the symbol “AW”. The high and low closing sales prices per share for the periods indicated were as follows:

On February 14, 2007, the closing sales price of our common stock was $12.78. The number of holders of record of our common stock at February 14, 2007, was approximately 887.

We have not paid dividends on our common stock and are currently prohibited by the terms of our loan agreements from paying any dividends except as required to the Series C and Series D mandatory convertible preferred stockholders. All of the Series C senior mandatory convertible preferred stock was converted into our common stock in April 2006. For a more detailed discussion on these loan agreements, see Note 4 to our consolidated financial statements.

Not applicable.

Not applicable.

The following performance graph compares the performance of our common stock to the Standard and Poor’s 500 Stock Index and to the Dow Jones Waste and Disposal Index. The graph covers the period from December 31, 2001 to December 31, 2006. The graph assumes that the value of the investment in our common stock and each index was $100 at December 31, 2001, and that all dividends were reinvested.

The selected financial data presented below as of December 31, 2006, 2005, 2004 and 2003 and for each of the years in the four year period ended December 31, 2006 has been derived from our historical consolidated financial statements which have been audited by PricewaterhouseCoopers LLP, our Independent Registered Public Accounting Firm. The selected financial data presented below for the year ended December 31, 2002 has been derived from our unaudited historical consolidated financial statements. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes included elsewhere in this Form 10-K. (Amounts are in millions, except per share amounts and percentages.)

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

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

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

We consistently invest capital to support the ongoing operations of our landfill and collection business. Landfills are highly engineered, sophisticated facilities similar to civil works. Each year we invest capital at our 168 active landfills to ensure sufficient capacity to receive the waste volume we handle. In addition, we have approximately 12,500 collection vehicles and approximately 1.2 million containers to serve our collection customers. Our vehicles and containers endure rough conditions each day and must be routinely maintained and replaced. During the year ended December 31, 2006, we invested $669.3 million of capital into the business (see Note 2, Property and Equipment, for detail by fixed asset category). In 2007, total capital expenditures are expected to be approximately $700 million.

Cash flows in our business are generally predictable as a result of the nature of our customer base and the essential service we provide to the communities where we operate. This predictability has enabled us to consistently reinvest in the business and to service our debt obligations. Knowing this, we have incurred debt to acquire the assets we own and we have paid cash to acquire existing cash flow streams. This financial model should allow us over time to transfer the enterprise value of the company from debt holders to shareholders as we use our cash flow to repay debt. We continue to use cash flow from operations after capital expenditures to reduce our debt balance.

Net income for 2006 was $160.9 million, a decrease of $42.9 million compared to the prior year. Although we experienced higher revenues and lower interest expense, net income decreased as a result of an increase in income tax expense.

Our revenues grew $294.0 million for the year ended December 31, 2006, driven by organic revenue growth of 6.7%. Revenues increased across all service lines except for our recycling business. Operating income for the year increased by $51.9 million to $967.4 million over the prior year. Operating costs increased as a result of volume increases and normal inflation. Additionally, fuel costs increased due to the significant rise in oil prices, and subcontractor costs increased because of a strategic decision to expand our national accounts, resulting in an increase in the amount of work we subcontract to other waste handlers. Gross margin for 2006 improved 106 basis points over the prior year. Operating income for 2006 was reduced by losses from divestitures and asset impairments totaling $22.5 million. Interest expense decreased during 2006 primarily due to lower costs incurred to early extinguish and refinance debt compared to the prior year, partially offset by the impact of rising interest rates on the variable rate portion of our debt.

Income tax expense increased by $104.6 million or 78% from $133.9 million in 2005 to $238.5 million in 2006 primarily due to increased pre-tax income as well as charges totaling $58 million recorded during the fourth quarter. In 2005, income tax expense was reduced by a $25.5 million benefit related to additional stock basis associated with a divestiture.

We continue to implement best practices, including improving sales productivity and pricing effectiveness, driver productivity through improved routing and maintenance efficiency through standardized operating practices, as well as reducing our procurement costs through more effective purchasing. We are also focused on improving the effectiveness of our safety and our health and welfare programs. We realized tangible benefits from many of these initiatives during the year. In addition, we continue to focus on improving our return on invested capital by carefully evaluating the return potential of new capital expenditures and by evaluating opportunities to divest operations that do not provide an adequate return. Accordingly, we divested of operations that generated $103.6 million of annual revenue primarily in the Northeastern and Midwestern regions during 2006.

We spent $669.3 million on capital expenditures during 2006 and plan to spend approximately $700 million in 2007. We expect this investment, along with improved maintenance practices, to have a favorable impact on maintenance costs and route productivity. During the second half of 2006, maintenance and repairs expense was lower than the same period in 2005 and route productivity improved.

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

In April 2006, we completed the re-pricing of the 2005 Term Loan and Institutional Letter of Credit portions of our 2005 senior secured credit facility (2005 Credit Facility). The 2005 Term Loan and Institutional Letter of Credit Facility re-priced at LIBOR plus 175 basis points (or Alternative Base Rate (ABR) plus 75 basis points), a reduction of 25 basis points. This re-pricing is expected to generate more than $4 million in annual interest savings. The pricing will further decrease to LIBOR plus 150 basis points (or ABR plus 50 basis points) when our leverage ratio is equal to or less than 4.25x.

In May 2006, we issued $600 million of 7.125% senior notes due 2016 at a discounted price equal to 99.123% of the aggregate principal amount. The net proceeds were used to fund a portion of the tender of our 8.875% senior notes due 2008. The refinancing of the senior notes is expected to generate approximately $6 million in after-tax annual interest savings. In conjunction with the re-pricing and refinancing transactions in 2006, we expensed approximately $41.3 million of costs related to premiums paid, deferred financing and other costs.

During 2006, we made optional prepayments totaling $170 million on our 2005 Term Loan with excess cash flow from operations and proceeds from the sale of assets.

We continue to focus on maximizing cash flow to repay debt and we seek opportunities to create additional cash flow through reductions in interest cost while continuing to support our fixed asset base with appropriate capital expenditures. During 2006, we reduced our debt balance by $181.1 million to $6.9 billion. We continue to improve our debt to total capitalization ratio, which decreased to 65.8% at the end of 2006 from 67.3% at the end of 2005.

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

Revenues. We generate revenues primarily from fees charged to customers for waste collection, transfer, recycling and disposal services. We consider our core business to be our collection and disposal operations. We also generate revenue from the sale of recycled commodities. We record revenue as the services are provided, with revenue deferred in instances where services are billed in advance of the service being provided. National accounts revenue included in other revenue represents the portion of revenue generated from nationwide contracts in markets outside our operating areas, and as such, the associated waste handling services are subcontracted to local operators. Consequently, substantially all of this revenue is offset by the corresponding subcontract costs.

The following table shows our total reported revenues by service line. Intercompany revenues have been eliminated.

Our operations are not concentrated in any one geographic region. At December 31, 2006, we operated in 128 major markets in 37 states and Puerto Rico. Our regional teams focus on developing local markets in which we can operate a vertically integrated operation and maximize operating efficiency. As a result, we may choose not to operate in a market where our business objectives cannot be met. We modified our field organizational structure by reducing the number of our operating regions to five from nine, realigning some of our districts among the regions and increasing our regional support staff to add functional expertise and oversight in areas that are aligned with our strategic value drivers effective October 1, 2005, with some refinements being completed during the first half of 2006.

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

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

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

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

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

Depreciation and amortization includes depreciation of fixed assets and amortization costs associated with the acquisition, development and retirement of landfill airspace and intangible assets. Depreciation is provided on the straight-line method over the estimated useful lives of assets. The estimated useful lives of assets are: buildings and improvements (30-40 years), vehicles and equipment (3-15 years), containers and compactors (5-10 years) and furniture and office equipment (4-8 years). For building improvements, the depreciable life can be the shorter of the improvements’ estimated useful lives or related lease terms. Landfill assets are amortized at a rate per ton of waste disposed. (See Critical Accounting Judgments and Estimates and Note 7, to our consolidated financial statements in Item 8 of this Form 10-K for a discussion of landfill accounting.) Depreciation expense of vehicles increases as fully-depreciated trucks are replaced by new vehicles. Amortization of landfill assets is impacted by several factors including rates of inflation, landfill expansions and compaction rates.

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

Landfill disposal capacity and operating lives. We had available landfill disposal capacity of approximately 2.9 billion tons as of December 31, 2006. We classify this disposal capacity as either permitted (having received the final permit from the governing authorities) or probable expansion. Probable expansion disposal capacity has not yet received final approval from the regulatory agencies, but we have determined that certain critical criteria have been met and the successful completion of the expansion is probable. Throughout the year, one landfill was certified closed and there were no active landfills acquired or divested, leaving 168 active landfills as of December 31, 2006. The number of sites with probable expansion disposal capacity decreased from 23 to 21. New probable expansions were added at 5 sites and 7 sites were removed from probable expansion due to successful expansions. In addition to these seven sites, we had increases in overall permitted capacity at seven sites where the disposal capacity was not previously classified as probable expansion. (See Critical Accounting Judgments and Estimates and Note 7, Landfill Accounting for our requirements to classify disposal capacity as probable expansion.)

The following table reflects disposal capacity activity for active landfills we owned or operated for the year ended December 31, 2006 (disposal capacity in millions of tons):

The following table reflects the estimated operating lives of our landfill assets based on available disposal capacity using current annual volumes:

Interest expense and other includes the following components (in millions):

Revenues. Revenues increased 5.1% over the prior year, as all lines of business increased except for recycling — commodity. The revenue increase within the collection business was primarily driven by increases in the commercial and roll-off lines of business. The revenue increase within the disposal business was primarily attributable to landfill revenue increases. Recycling revenue decreased due to cardboard and newspaper commodity price declines as well as volume declines. Other revenue increased as a result of waste volume increases associated with the subcontracted portion of our national accounts.

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

During the year ended December 31, 2006, we generated organic revenue growth of 6.7%, of which $310.5 million or 5.9% was attributable to our average price per unit on core business. Our continued price growth reflected the results of pricing increases implemented throughout the year. Within the collection business, average per unit pricing increased 7.4%, 7.2%, 3.4% and 13.5%, respectively, in the commercial, roll-off, residential and recycling collection lines of business for the year ended December 31, 2006. Within the disposal line of business, landfill and transfer average per unit pricing increased 4.8% and 4.1%, respectively. The fuel recovery fee program, implemented in 2005 to mitigate our exposure to increases in fuel prices, generated 33% of the total price growth for the year ended December 31, 2006. This fee fluctuates with the price of fuel; and, consequently, fuel price declines would result in a decrease in our revenue, which would be more than offset by a decrease in our fuel expense.

Core business volume growth was 0.8% compared to the prior year, primarily driven by volume increases related to subcontract and transportation revenues. Within the collection business, the commercial and roll-off lines of business experienced volume increases of 0.8% and 1.0%, respectively. Volume for the residential line of business decreased slightly while recycling collection volume declined 6.8% during 2006. Within the disposal business, landfill and transfer volumes decreased by 1.4% and 0.9%, respectively. The decline in landfill volume was primarily due to reductions in special waste volumes in the current year. We are improving our pricing structure and return criteria for special waste jobs in an effort to improve the returns on this area of landfill volume. Subcontract and transportation volume increased 49.8% and 9.5%, respectively, primarily driven by the growth associated with our national accounts in 2006.

Cost of operations. Cost of operations increased 3.4% in 2006 compared to the prior year, driven by increases in fuel, transportation and subcontractor costs, partially offset by decreases in risk management and other expenses. The increase in transportation and subcontractor costs primarily reflected our volume growth in our national accounts and fuel cost increases. Risk management costs decreased due to favorable adjustments associated with risk and health insurance as a result of changes in estimates due to favorable claims experience. Other expense decreased partly as a result of an $8 million favorable adjustment to our environmental reserves in 2006, primarily due to the selection by the U.S. Environmental Protection Agency of a lower cost remediation plan for a Superfund site at which we are a potentially responsible party.

Fuel costs increased because of higher fuel prices and the expiration of certain fixed price purchase contracts. A significant portion of these contracts expired in early 2005. All fixed price purchase contracts expired as of March 31, 2006, and, unless new contracts are executed, all future fuel purchases will be at market rates. For the year ended December 31, 2006, the contracts in place reduced fuel costs by $5.9 million when compared to then current market prices. We expect that our fuel recovery fee will offset a portion of the volatility in fuel costs arising from future market price fluctuations. At December 31, 2006, approximately 57% of our customers participated in the fuel recovery fee program.

Labor costs remained constant in 2006 primarily due to our on-going labor efficiency efforts. Maintenance and repairs costs increased only slightly compared to the same period in the prior year primarily due to the increased level of vehicle purchases and improved maintenance practices in the last two years. These costs actually declined in the second half of 2006 compared to the same period a year ago.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 14.6% in 2006 as compared to 2005 primarily relating to salaries, professional fees and other expenses. The increase in salaries included the impact of higher incentive compensation resulting from improved performance in 2006, severances associated with an initiative to control labor costs and other unrelated separations that occurred during 2006. In addition, the increase in salaries in 2006 also reflected the impact of normal inflation, benefits costs and stock option expense recognized due to the adoption of SFAS 123(R) as of January 1, 2006. Professional fees increased as a result of consulting fees related to initiatives to standardize sales programs, invest in national accounts systems improvements and implement procurement programs during the year. The increase in other expense was primarily attributable to a $22.1 million reversal of litigation reserves during 2005.

Depreciation and amortization. Depreciation and amortization expense increased 2.7% in the year ended December 31, 2006 as compared to 2005. Depreciation expense related to vehicles and equipment increased primarily due to increases in capital expenditures in recent periods. For the year ended December 31, 2006, landfill amortization increased slightly due to increased amortization rates, partially offset by volume decreases.

Loss from divestitures and asset impairments. During 2006, we recorded losses of approximately $22.5 million related to divestitures and asset impairments. Asset sales, completed as a result of our market rationalization focus, generated a loss of approximately $7.6 million. These losses primarily related to operations in our Northeastern and Midwestern regions. During 2006, we also recorded landfill asset impairment charges of approximately $9.7 million as a result of management’s decision to discontinue development and/or operations of three landfill sites. Additionally, during 2006 we recognized a $5.2 million expense associated with the relocation of our operations support center.

Interest expense and other. Interest expense and other decreased by 3.4% in 2006 as compared to 2005. Gross interest expense increased slightly during the year as a result of rising interest rates on the variable portion of our debt, offset by lower debt levels as a result of our continued de-leveraging strategy and the refinancing of debt at lower interest rates in the first quarter of 2005 (2005 Refinancing plan) and second quarter of 2006. In connection with the refinancing transactions, we incurred costs to early extinguish and refinance debt of $41.3 million and $62.6 million, respectively, during the years ended December 31, 2006 and 2005.

Income tax expense. The effective tax rate for the year ended December 31, 2006 was 59.7% compared to 40.9% in 2005. Income tax expense increased by $104.6 million or 78% from $133.9 million in 2005 to $238.5 million in 2006 primarily due to increased pre-tax income. Other factors contributing to the increase included interest charges totaling $21.5 million on previously recorded liabilities currently under review by the applicable taxing authorities as a result of developments during the fourth quarter; adjustments attributable to prior periods totaling $13.4 million relating to two state income tax matters involving tax years prior to 2003 which were identified during the fourth quarter and which were determined to be immaterial to prior years’ financial statements (an additional $3.6 million was charged to goodwill for one of these matters); and a net increase in the valuation allowance of $9.5 million for the deferred tax assets relating to certain of our state net operating loss carryforwards (including a $12.0 million charge recorded in the fourth quarter) due to an updated recoverability assessment. In 2005, income tax expense was reduced by a $25.5 million benefit related to additional stock basis associated with a divestiture.

Dividends on preferred stock. Dividends on preferred stock were $42.9 million and $52.0 million for the years ended December 31, 2006 and 2005, respectively. The decrease of $9.1 million for the year ended December 31, 2006 resulted from the conversion of the Series C mandatory convertible preferred stock (Series C preferred stock). The Series C preferred stock was converted into approximately 34.1 million shares of common stock on April 1, 2006, eliminating approximately $21.6 million of annual dividends. This decrease was partially offset as a result of having the Series D mandatory convertible preferred stock (Series D preferred stock) issued in March 2005 outstanding for the full year.

Revenues. Revenues increased 4.0% over the prior year driven by increases in our collection and disposal lines of business. The revenue increase within the collection business was driven by increases in each of the residential, commercial and roll-off lines of business. Within the disposal business, landfill revenue increased while transfer revenue remained flat year over year. Recycling revenue decreased as commodity prices declined during the year while other revenue increased primarily due to the increase in national account-related revenue.

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

Revenue growth relating to our average price per unit on core business was $110.5 million compared to $55.3 million in the prior year. Our price growth of 2.2% reflected the result of our continued focus on our pricing initiatives during 2005. Average per unit pricing for all lines within the collection business and for the transfer and landfill businesses increased. The improvement in price resulted from more central control of pricing. The fuel recovery fee program implemented during 2005 generated $86.9 million or 78.6% of the total price growth in the current year.

Core business volume growth for the year ended December 31, 2005 was 2.8%, of which approximately 1.3% primarily related to subcontract revenue from national accounts and hurricane clean-up work resulting from the Gulf Coast hurricanes. Commercial and roll-off volumes increased by 2.0% and 1.5%, respectively. Landfill volume increased 6.0%, while volume for the transfer business decreased slightly from the prior year. The growth in our volume reflected improvement in the economy, increases in special waste jobs, more effective sales practices and the impact of hurricane debris clean-up work.

Cost of operations. Cost of operations increased 6.6% in 2005 compared to the prior year due to increases in labor, maintenance and repairs, transportation and subcontract costs, fuel and risk management expenses. Labor costs increased as a function of inflation and higher benefits costs. The increase in maintenance and repair expenses was attributable to additional repair costs due to fleet age. This trend improved during the year, with maintenance and repairs actually decreasing in the fourth quarter of 2005 compared to the same period a year ago. Transportation and subcontractor costs increased primarily as a function of volume increases from national accounts, additional subcontract costs for hurricane debris clean-up work during the third and fourth quarters and increases in pass-through fuel expenses. Fuel costs increased due to the impact of higher fuel prices during the year. The increase in risk management expenses was driven primarily by $8.3 million of insurance liability adjustments incurred during the current year due to adverse property and casualty experience.

Also included in other operating costs were $3.6 million of charges related to lost or damaged equipment and facilities in the areas affected by the Gulf Coast hurricanes in 2005 and a $4.8 million loss on assets held for sale.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $34.5 million or 6.2% in 2005 primarily relating to decreases in professional fees and other expenses, partially offset by increases in salaries. The year over year decrease in professional fees of $20.4 million is attributable to prior year expenses associated with the implementation of SOX 404 and the best practices program. The decrease in other expenses primarily related to $22.1 million of the reversals of litigation reserves in 2005. Of that amount, $13.3 million pertained to a favorable court ruling involving BFI that had been pending appeal since 2000. Salary expenses in 2004 included $18 million of costs associated with an executive departure and our field organization realignment in the fourth quarter of 2004.

Depreciation and amortization. Depreciation and amortization decreased 0.9% in 2005 as compared to 2004. The decrease in amortization expenses is primarily related to lower amortization rates due to increases in landfill capacity from expansions and compaction improvement, partially offset by increased volumes. Depreciation expense related to equipment increased during 2005, primarily due to increases in capital expenditures in the second half of 2004 and throughout 2005.

Interest expense and other. Interest expense and other decreased by 22.5% in 2005. The decrease in gross interest expense was attributable primarily to the repayment of debt and refinancing of debt at lower interest rates. We expensed $62.6 million of costs to early extinguish and refinance debt during 2005, compared to $156.2 million of costs for similar activities during 2004.

Income tax expense. The effective tax rate for the year ended December 31, 2005 was 40.9% compared to 55.5% for the same period in 2004. Income tax expense for the year ended December 31, 2005 included a benefit of approximately $25.5 million related to additional stock basis associated with a divestiture pending at December 31, 2005 that was completed in February 2006. The decrease in the effective income tax rate in 2005 was also partly due to provision to return adjustments resulting from the finalizing of 2004 income tax returns in the fourth quarter of 2005 and the increase in annual earnings before taxes in 2005.

Discontinued operations. There were no divestitures during 2005 that have been presented as discontinued operations. However, discontinued operations in 2005 included a previously deferred gain of approximately $15.3 million ($9.2 million gain, net of tax). This deferred gain was attributable to a divestiture that occurred in 2003 where the acquirer had the right to sell the operations back to us for a period of time (a “put” agreement), thus constituting a form of continuing involvement on our part that precluded recognition of the gain in 2003. In the third quarter of 2005, these operations were sold to another third-party and the put agreement was cancelled. Discontinued operations in the year 2005 also included a $2.7 million pre-tax benefit ($1.6 million after tax) resulting from a revision of our insurance liabilities related to divestitures previously reported as discontinued operations.

Dividends on preferred stock. Dividends on preferred stock were $52.0 million and $21.6 million for the year ended December 31, 2005 and 2004, respectively. The increase of $30.4 million for the year ended December 31, 2005 was a result of the 6.25% dividends payable in cash for the Series D preferred stock issued in March 2005. Dividends on preferred stock also included the 6.25% dividends payable in cash for the Series C preferred stock issued in April 2003.

Our capital structure consists of 66% debt and 34% equity at December 31, 2006. The majority of our debt was incurred to acquire solid waste companies between 1990 and 2000. We incurred and assumed over $11 billion of debt to acquire BFI in 1999. Since the acquisition of BFI, we have repaid debt with cash flow from operations, asset sales and the issuance of equity. We intend to continue to reduce our debt balance until we reach credit ratios we believe will allow us to benefit from a cost of capital afforded by investment grade companies. We believe that as we move towards these ratios, we will have additional opportunities to reduce our cost of debt below our current level on a basis relative to interest rates at the time. We expect these opportunities will increase liquidity and shareholder value, and provide more flexibility in deciding the most appropriate use of our cash flow.

We may refinance or repay portions of our debt to ensure a capital structure that supports our operating plan, as well as continue to seek opportunities to extend our maturities in the future with actions that are economically beneficial. The potential alternatives include continued application of cash flow from operations, asset sales and capital markets transactions. We continue to evaluate the performance of and opportunities to divest operations that do not maximize operating efficiencies or provide an adequate return on invested capital. Capital markets transactions could include issuance of debt with longer maturities, issuance of equity, or a combination of both.

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

When we cannot meet our liquidity needs with operating cash flow, we meet those needs with borrowings under our 2005 Credit Facility. We have a $1.575 billion commitment until 2010 under our 2005 Credit Facility, which we believe is adequate to meet our liquidity needs based on current conditions. At December 31, 2006, we had no loans outstanding and $398.7 million in letters of credit drawn on the 2005 Revolver, leaving approximately $1.176 billion of availability. Both the $25 million Incremental Revolving Letter of Credit Facility and $490 million Institutional Letter of Credit Facility were fully utilized at December 31, 2006. During the third and fourth quarters of 2006, we made optional prepayments of $40 million and $130 million, respectively, on the 2005 Term Loan. These payments were made with excess cash flow from operations and proceeds from the sale of assets.

Our cash flows from operating, investing and financing activities for the last three years were as follows (in millions):

Cash provided by operating activities from continuing operations increased 29% in 2006 compared to 2005. The increase was primarily due to an increase in net income from continuing operations after adjusting for the impact of deferred taxes and a decreased use of working capital of approximately $125.0 million, primarily related to the timing of operating activities and capital expenditure disbursements. Cash used for investing activities declined by 11% over 2005, as a result of the increase in proceeds from divestitures, net of costs of acquisitions of approximately $50.2 million, and slightly lower capital expenditures. Debt repayments, including the $170 million Term Loan prepayments in the third and fourth quarters and the change in disbursement account are the primary drivers in the increase of cash used for financing activities. The disbursement account represents outstanding checks as of December 31, 2006.

Following is a summary of the primary sources and uses of cash during 2006, 2005 and 2004 (in millions):

Capital expenditures. In addition to funding our working capital needs and reducing debt, we are committed to efficiently investing in our capital asset base. Our goal is to generate returns that are above our weighted average cost of capital. Our capital expenditures are primarily for the construction and build-out of our landfills, for the vehicles and containers used by our collection operations and for heavy equipment used in both our collection and landfill operations. We maintain a level of annual capital expenditures in order to control repair and maintenance costs, improve productivity and improve quality of customer service. We expect our capital expenditures to be approximately $700 million in 2007. We expect this investment, along with improved maintenance practices, to reduce the total cost of our truck fleet ownership.

Following is a summary of capital expenditures for the years ended December 31 (in millions):

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

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

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

In April 2006, we completed the re-pricing of the 2005 Term Loan and Institutional Letter of Credit portions of our 2005 Credit Facility. The 2005 Term Loan and Institutional Letter of Credit Facility re-priced at LIBOR plus 175 basis points (or ABR plus 75 basis points), a reduction of 25 basis points. This re-pricing is expected to generate more than $4 million in annual interest savings. The pricing will further decrease to LIBOR plus 150 basis points (or ABR plus 50 basis points) when our leverage ratio is equal to or less than 4.25x.

In May 2006, we issued $600 million of 7.125% senior notes due 2016 at a discounted price equal to 99.123% of the aggregate principal amount and used the net proceeds to fund a portion of the tender offer for our 8.875% senior notes due 2008. The refinancing of the senior notes is expected to generate approximately $6 million in annual interest savings. In conjunction with the re-pricing and refinancing transactions in 2006, we expensed approximately $41.3 million of costs related to premiums paid, deferred financing and other costs.

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

Following is a summary of our debt structure and the associated interest cost (in millions, except percentages):