FINANCIAL HIGHLIGHTS
(in thousands, except per share data)


<TABLE>
For years ended December 31                                                 2001           2000              Change
-----------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
(CONTINUING OPERATIONS)
<S>                                                                     <C>            <C>                    <C>
Customer level revenue (1) ..........................................   $ 5,146,000    $ 4,897,000              5%

Operating revenue ...................................................     3,601,429      3,485,517              3%
Operating income before charge for impaired assets
  and other items (2) ...............................................       309,298        333,742             (7%)
Operating income after charge for impaired assets and other items (2)       (87,445)       333,742

Net income from continuing operations before charge for impaired
  assets and other items (2) ........................................       113,761        136,796            (17%)
Net income (loss) from continuing operations after
  charge for impaired assets and other items (2) ....................      (171,779)       136,796
Net income from discontinued operations (2) .........................       330,234         48,192
Extraordinary loss in 2001 and accounting change in 2000 ............        (3,422)       (11,161)
                                                                        ------------   ------------
Reported net income .................................................   $   155,033    $   173,827

Diluted earnings per share: (3)
Continuing operations before charge for impaired assets and
  other items .......................................................   $      0.38    $      0.45            (16%)
Charge for impaired assets and other items ..........................         (0.92)             -
                                                                        ------------   ------------
Net income (loss) from continuing operations ........................   $     (0.54)   $      0.45
Discontinued operations, net ........................................          1.06           0.16
Extraordinary loss ..................................................         (0.01)             -
Cumulative effect of accounting change ..............................             -          (0.04)
                                                                        ------------   ------------
Diluted earnings per share - reported ...............................   $      0.51    $      0.57            (11%)

Pro Forma Results (4)
Diluted earnings per share:(3)
Continuing operations before charge for impaired assets
  and other items ...................................................   $      0.38    $      0.45            (16%)
Interest expense reduction (4) ......................................          0.06           0.07
Diluted earnings per share equivalent of reduced amortization
  expense under new accounting rules (4) ............................          0.14           0.13
                                                                        ------------   ------------
AS ADJUSTED DILUTED EARNINGS PER SHARE ..............................   $      0.58    $      0.65            (11%)

Cash dividends per share ............................................   $      0.40    $      0.38              5%
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total assets ........................................................   $  3,674,739   $ 3,979,834
Total debt ..........................................................      1,140,677     1,818,117
Shareholders' equity ................................................      1,220,961     1,161,588
-----------------------------------------------------------------------------------------------------------------------
SHARE PRICE RANGE
(Traded on the New York Stock Exchange under the symbol SVM)
High price ..........................................................   $      14.20   $     14.94
Low price ...........................................................           9.84          8.25
Closing price .......................................................          13.80         11.50
-----------------------------------------------------------------------------------------------------------------------

</TABLE>


(1)  Customer level revenue  represents  the combined  revenues of the Company's
     direct  operations and the estimated  revenues of its various  domestic and
     international independent licensees and franchisees.

(2)  In the fourth quarter of 2001, the Company's Board of Directors  approved a
     series of  actions  related to the  strategic  review of its  portfolio  of
     businesses that commenced  earlier in the year.  These actions included the
     sale in November 2001 of the Company's Management Services business (with a
     related pretax gain of $640 million, $384 million after-tax) as well as the
     decision  to exit  certain  non-strategic  and  underperforming  businesses
     including TruGreen LandCare  Construction and Certified  Systems,  Inc., as
     well  as  certain  other  operations.  These  operations  are  included  in
     "Discontinued  operations"  in  all  periods.  In  2001,  net  income  from
     discontinued  operations  consisted of; income from the Management Services
     segment ($34  million),  net loss from other  discontinued  operations  ($7
     million),  and the gain on the sale of  Management  Services  net of losses
     from the  disposition of other entities  ($303  million).  The Company also
     recorded a pretax charge of $397 million  ($286  million  after-tax) in the
     fourth quarter of 2001, related primarily to goodwill and asset impairments
     as well as other  items.  See the  Management  Discussion  and  Analysis of
     Financial  Condition  and Results of  Operations  for a  discussion  of the
     components of discontinued operations and of the charge for impaired assets
     and other items.

(3)  Diluted  earnings per share is calculated  based on 311,408  shares in 2001
     and 305,518  shares in 2000. In 2001, the  calculation of diluted  earnings
     per share includes the impact of convertible securities.  See the "Earnings
     Per  Share"  section  in  the  footnotes  to  the  consolidated   financial
     statements  for the impact of the  convertible  securities  to the  diluted
     earnings per share calculation.

(4)  The Company has calculated pro forma earnings per share assuming:  (1) only
     continuing  operations  existed,  (2) after-tax  proceeds from the sales of
     Management  Services and certain European pest control operations were used
     to repay debt, and (3) SFAS 142 ("Goodwill  and Other  Intangible  Assets")
     was effective.

     Continuing operations exclude Management Services,  LandCare  Construction,
     CSI(the  professional  employer  organization)  and the sold  European pest
     control  operations.  As noted, these businesses were either sold or exited
     in the fourth  quarter of 2001.  The Company  received  approximately  $740
     million of after-tax  proceeds,  net of expected cash payments  relating to
     the sale and exit of these businesses.  Therefore, the Company is expecting
     to reduce its annual interest  expense by $22 million  (after-tax) by using
     the net  proceeds  to pay down  debt.  This  will be  inherent  in the 2002
     earnings.  In addition,  SFAS 142, which is required to be adopted in 2002,
     effectively  eliminates  amortization of goodwill expense. This elimination
     of expense will result in an adjustment of $.14 in 2001 and $.13 in 2000 to
     the  previous  earnings  per  share  which  were  calculated  under the old
     accounting rules (APB 17).


                                       1
<PAGE>
Management  Discussion  and  Analysis  of  Financial  Condition  and  Results of
Operations
(Results of the Company's Portfolio Review and Strategic Actions)


2001 COMPARED WITH 2000
Revenues from  continuing  operations in 2001 increased  three percent to a $3.6
billion.  The Company  reported an operating loss after recording a $397 million
charge for goodwill and asset  impairments  and other  items.  Operating  income
excluding the charge  decreased seven percent to $309 million.  Operating income
margins on this basis  decreased to 8.6 percent of revenues  from 9.6 percent in
2000. The decrease in margins  reflected  strong growth in the Terminix and Home
Maintenance  and  Improvement  segments  offset  primarily  by  lower  operating
earnings in TruGreen and increased investments in various enterprise initiatives
and incentives. Reported net income was $155 million in 2001 and $174 million in
2000 and diluted  earnings per share was $.51 in 2001 and $.57 in 2000.  Diluted
earnings per share includes various components as detailed below:

                                                2001      2000
---------------------------------------------------------------
Continuing operations before
  charge for impaired assets
  and other items                            $   .38     $  .45
Charge for impaired
  assets and other items                        (.92)         -
---------------------------------------------------------------
Continuing operations - reported                (.54)       .45

Discontinued operations                         1.06        .16
Extraordinary loss and
  accounting change*                            (.01)      (.04)
----------------------------------------------------------------
Diluted earnings per share                   $   .51     $  .57
================================================================

* Reflects  an  extraordinary  loss  resulting  from the  repurchase  of certain
  ServiceMaster corporate bonds in 2001 and a cumulative effect of an accounting
  change in 2000.


DISCONTINUED OPERATIONS
On  October  3,  2001 the  Company's  Board of  Directors  approved  a series of
strategic  actions which were the culmination of an extensive  portfolio  review
process  that was  initiated  in the first  quarter.  The goal of the  portfolio
review was to  increase  shareholder  value by  creating a focused  and  aligned
company  that  provides the greatest  return and growth  potential.  The Company
determined  it could best  achieve  these goals with a portfolio  of  businesses
which support the business strategy to become America's Home Service Company and
have attractive cash flow and return  characteristics.  In addition, the Company
believed it was critical to  strengthen  its balance sheet through the reduction
of debt,  thereby  providing it with  financial  flexibility to invest in future
growth  opportunities.

As part of this  determination,  the  Company's  Board of Directors  approved an
agreement  to sell the  Management  Services  business  to  ARAMARK  Corporation
(ARAMARK) for  approximately  $800 million.  The  Management  Services  business
provided  a  variety  of  supportive   management   services  to   institutional
healthcare,  education,  and  commercial  facilities.  The all-cash  transaction
closed on November  30, 2001 and the Company  recorded an  after-tax  accounting
gain of $384 million,  or $1.23 per diluted share from this sale. As part of the
sale of  Management  Services,  the  Company  also agreed to sell to ARAMARK its
headquarters  facilities located in Downers Grove,  Illinois and agreed to allow
ARAMARK to use the  ServiceMaster  name for a period of time in related markets.
Deferred  royalty  income  was  recorded  upon  the  sale of this  business  and
provisions for legal claims,  severance and other smaller items were established
for the remaining  Company  obligations.  From the proceeds of this transaction,
the Company has remaining  approximately  $7 million of after-tax  cash payments
which are expected to be made in 2002 along with $70 million of taxes  resulting
from the sale of this business.

In the fourth  quarter,  the Company's Board of Directors also approved the exit
of non-strategic  and  underperforming  businesses  including  TruGreen LandCare
Construction  and Certified  Systems Inc.  (CSI), as well as certain other small
operations.

The Company sold its TruGreen LandCare Construction  operations to Environmental
Industries, Inc. (EII) in certain markets and entered into an agreement with EII
to manage the wind-down of commercial landscaping  construction contracts in the
remaining markets.  In addition,  the Company sold all of its customer contracts
relating to the exit of CSI (the Company's professional employer  organization),
to AMS Staff Leasing,  N.A., Inc. and has almost  completed the wind-down of its
remaining operations.

In connection  with the exit of LandCare  Construction  and CSI,  certain assets
(including accounts receivable, inventory and fixed assets) were written down to
net realizable  value. Due to revised cost estimates,  the Company also recorded
an adjustment  relating to its  construction  contracts which were accounted for
under the percentage of completion methodology. Provisions for transaction fees,
severance, increased health and workers' compensation insurance costs, and lease
terminations  were also  recorded.  There remains  approximately  $38 million of
after-tax  payments to be made relating to these  discontinued  operations which
will be  partially  offset  by  approximately  $20  million  of  after-tax  cash
collections from the remaining  assets.

On October 30, 2001, the Company closed the sale of certain  subsidiaries of its
European pest control and property  services  operations  for $101 million.  The
consideration  consisted  of $94  million  of cash and the  transfer  of certain
liabilities to the acquirer and $7 million in seller  financing.  The net impact
of this transaction was not material to the  consolidated  statements of income.
The Company continues to provide pest control services in the United Kingdom and
Ireland.

Reported "Discontinued operations" include the operating results of the sold and
discontinued  businesses  noted  above  as well as the  gain  from  the  sale of
Management Services,  net of losses from the disposition of other entities.  The
components of discontinued  operations are as follows:


(In thousands)                 2001             2000           1999
-----------------------------------------------------------------------
Management
 Services  income*           $ 33,705        $ 40,150        $ 47,298
Income (loss) from
 other  discontinued
 operations                    (7,068)          8,042          13,567
Gain on sale of
 Management Services,
 net  of  losses
 from  disposition  of
 other  entities               303,597              -               -
-----------------------------------------------------------------------
Discontinued
 operations                  $ 330,234       $ 48,192        $ 60,865
=======================================================================

* This  business was sold on November 30,  2001,  consequently  the 2001 results
  reflect eleven months of operations.


CHARGE FOR IMPAIRED ASSETS AND OTHER ITEMS
As noted  previously,  the  Company  recorded  a $397  million  charge for asset
impairments  and other items in the fourth quarter of 2001. This charge included
the  write-down of $350 million of goodwill;  $300 million  associated  with the
landscaping  operations and $50 million  related to the remaining  European pest
control  operations.  The remaining  amount of the charge includes  accruals for
guarantees  relating  to the  residual  value of certain  properties,  severance
arrangements for former  executives and terminated  employees,  and other items.
There is approximately $22 million (after-tax) in cash payments expected for the
property guarantees and severance,  with the majority expected to be paid out in
2002.  The Company has  reviewed  the  impairment  provisions  of  Statement  of
Financial  Accounting  Standards No.142,  "Goodwill and Other Intangible Assets"
and,  based  on this  assessment,  the  Company  does  not  expect  any  further
impairment charges upon adoption of this statement in 2002.


                                       2
<PAGE>

Management  Discussion  and  Analysis  of  Financial  Condition  and  Results of
Operations (cont.)


EXTRAORDINARY LOSS
In the fourth  quarter of 2001,  the Company used a portion of the cash proceeds
from the sale of  Management  Services to pay down debt balances and recorded an
extraordinary  loss of $.03 per diluted share ($9 million  after-tax)  resulting
from  the  early  extinguishment  of  debt.  This was  partially  offset  by the
realization of gains ($.02 per diluted share;  $6 million  after-tax)  resulting
from the  repurchase  of  certain  ServiceMaster  corporate  bonds in the  first
quarter.

OUTLOOK  AND  STRATEGIC  ACTIONS
The Company has  calculated  pro forma  earnings  per share  assuming:  (1) only
continuing  operations  existed,  (2)  after-tax  proceeds  from  the  sales  of
Management  Services and certain  European pest control  operations were used to
repay  debt  and (3) SFAS 142  ("Goodwill  and  Other  Intangible  Assets")  was
effective.  On that basis,  earnings per share for 2001 was $.58  compared  with
$.65 for 2000.

                                             2001               2000
----------------------------------------------------------------------
Continuing  operations before
 charge for impaired assets
 and other items                             $.38                $.45
Interest  expense  reduction
 from proceeds of sales                       .06                 .07
SFAS 142 impact                               .14                 .13
----------------------------------------------------------------------
As adjusted  diluted earnings
per share                                    $.58                $.65
======================================================================


The Company received  approximately $740 million of after-tax  proceeds,  net of
expected cash payments  related to the sale and exit of  businesses.  Therefore,
the Company is  expecting to reduce its annual  interest  expense by $22 million
(after-tax) by using the net proceeds to pay down debt.  SFAS 142 requires that,
beginning in 2002,  goodwill will no longer be amortized.  Had the provisions of
SFAS 142 been  applied to 2001 and 2000,  amortization  expense  would have been
reduced by $61 million ($42  million,  after-tax)  and $59 million ($41 million,
after-tax), respectively.

With fewer  competing  priorities  and goals the  Company  will  concentrate  on
organic  growth and take action to build greater  process  discipline  and drive
data measurement  throughout the  organization.  On the adjusted basis explained
above,  management  anticipates  that  earnings per share in 2002 will be in the
range of $.60 to $.63.  Operating  income from the business units is expected to
grow  at  double-digit   rates  offset  in  part,  by  investments  and  certain
non-operating  items.  This outlook  includes an estimate of $20 million for the
implementation  of Six Sigma and  initiatives  to measure  customer and employee
satisfaction. The Company is also making additional investments to improve sales
and  customer  retention,  and to rollout a pilot  marketing  program  with Home
Depot.  The  Company  expects  an  offsetting  return  on these  initiatives  of
approximately  $15  million in 2002 and for them to be  accretive  in 2003.  The
Company  has begun  implementing  Six Sigma,  with a  broadening  rollout of the
program expected to occur over a twelve to twenty-four  month period.  Six Sigma
is a continuous  improvement  methodology that drives improved business results.
The Company has identified team leaders across the Company and in November hired
a senior executive who has overall  responsibility for the implementation of Six
Sigma. The Company has engaged a recognized leader in customer and employee data
collection to assist in its effort to measure and analyze  customer and employee
satisfaction.  Earnings  per  share  growth  in the  second  half of the year is
expected to be stronger than in the first half as the growth and savings related
to the investments are expected to materialize later in the year.

The outlook  also  reflects a reduction in earnings  from certain  non-operating
items  compared  to 2001  levels,  including  the  elimination  of $6 million in
minority  interest income as well as a reduction of  approximately $8 million in
investment income generated through venture capital and other portfolio gains.

CONTINUING OPERATIONS
The events of September  11th and the already  weakened  economy  contributed to
earnings  pressure during the third and fourth quarters by bringing  caution and
changes  in  consumer  buying  behavior.   Although  the  potential  effects  in
ServiceMaster's business will primarily be based on longer-term economic trends,
some impacts have already  begun to be seen  including  customers  deferring the
replacement  of HVAC units,  a reduced  propensity  of  landscape  and lawn care
customers  to  purchase  enhancements,  and  increased  skips  in maid  service.
Although  certain areas of the Company  experienced  heavily  dampened sales and
renewal  activity in  September,  the Company has seen much of the activity come
back.  The home services  market has proven to be very  resilient and management
believes that families view home services as being less  discretionary than ever
before.  The stability of the Company's  recurring  base of business  results in
more pressure on new sales in an economic  downturn,  but revenue overall is not
as dramatically affected as in many other sectors of the economy.

TRUGREEN SEGMENT
The TruGreen segment includes lawn care operations  performed under the TruGreen
ChemLawn  brand  name and  landscape  maintenance  services  provided  under the
TruGreen  LandCare  brand name.  This  segment's  results for both 2001 and 2000
exclude the discontinued TruGreen LandCare Construction  business.  The combined
unit  reported  revenues  of $1.4  billion,  consistent  with  the  prior  year.
Operating  income  decreased to $143  million from $166 million last year.  2001
operating  income  includes  approximately  $9 million of expense  relating to a
revised estimate of prior year insurance  reserves which arose in the process of
splitting out the construction business from the balance sheet.

Revenues  in the  lawn  care  business  were  consistent  with the  prior  year,
reflecting the realization of price increases and growth in ancillary  services,
offset by a decrease in customer counts. The lawn care operations'  results were
impacted by winter weather  conditions that persisted much later in 2001 than in
the prior year,  resulting in reduced  production  levels and lower margins from
sub-optimal labor utilization and fixed cost leverage.  In addition,  management
was optimistic  that the selling  season,  which had been delayed due to adverse
weather  in March  and  April,  was going to  rebound  in the  second  and third
quarters.  However,  sales were below  expectations and margins in the lawn care
operations  were  unfavorably  impacted by a cost structure that was in place to
support a higher anticipated level of demand.

Landscaping  services  revenues  increased  one  percent  compared to last year.
Top-line  growth was  affected  by  management's  decision  to enforce  stricter
profitability  standards on contract sales and renewals as well as soft sales in
enhancement  services.  Operating  margins in the  landscaping  operations  were
lower, reflecting the impact of integration challenges that had not yet begun to
emerge in the prior year period.  In addition,  higher plant and material  costs
were a factor, offset in part by improving labor efficiency.

The  leadership  in TruGreen is  implementing  a number of programs  designed to
address many of the issues that have contributed to the 2001  performance.  Some
of these programs will require investments. Under the direction of new marketing
leadership,  several  initiatives  have been  started  that enhance the database
information,  segment the customers and improve  management's  understanding  of
customer satisfaction drivers. Additional programs are focused on increasing the
effectiveness   of  procurement   initiatives  to  improve  the  segment's  cost
structure. Capital employed decreased six percent primarily reflecting continued
improvement of working capital and the reduction of excess equipment levels.


                                       3
<PAGE>


TERMINIX  SEGMENT
The Terminix  segment,  which  includes  the  domestic  termite and pest control
services,  reported a 16 percent  increase in revenue to $839  million from $725
million in 2000 and  operating  income growth of 22 percent to $104 million from
$85 million last year. This strong growth  reflects the impact of  acquisitions,
the  continued  migration  of the  customer  base to  termite  baiting  systems,
improved customer retention, and the impact of price increases. In January 2001,
the Company acquired the Allied Bruce Terminix Companies,  the Company's largest
Terminix  franchise  and the fourth  largest pest control  company in the United
States.  On October 3, 2001 the Company  completed  the  acquisition  of certain
assets  of Sears  Termite  and  Pest  Control,  Inc.  The  integration  of these
businesses are meeting  management's  expectations  and Terminix is experiencing
good lead flow from this base of new  customers.  The  improvement in Terminix's
operating margins reflects the benefit of acquisitions,  the continued increased
mix of higher margin termite renewals, the impact of price increases, as well as
ongoing productivity  improvements and overhead  efficiencies.  Capital employed
increased 15 percent  primarily  due to  acquisitions,  offset in part by higher
prepaid contracts and improved working capital management.

HOME  MAINTENANCE  AND  IMPROVEMENT   SEGMENT
The Home Maintenance and Improvement segment includes heating,  ventilation, air
conditioning   (HVAC),   and  plumbing  services  provided  under  the  American
Residential  Services (ARS),  Rescue Rooter,  and American  Mechanical  Services
(AMS) (for commercial accounts) brand names; home systems and appliance warranty
contracts offered through American Home Shield;  and the franchised  operations,
ServiceMaster  Clean and Merry  Maids.  The  segment  achieved  revenues of $1.3
billion,  an increase of eight  percent from $1.2  billion last year.  Operating
income  increased six percent to $112 million  compared with $106 million in the
prior year.

The ARS operations achieved modest revenue growth,  reflecting  acquisitions and
the impact of price  increases.  Call volume for  residential  plumbing and HVAC
services was below  management's  expectations and appears to have been impacted
by cooler weather conditions and the softening economic  environment.  Of all of
the  businesses  in the  ServiceMaster  portfolio,  ARS has the  largest  mix of
non-recurring revenue and is most affected by new construction, and consequently
appears to be most  impacted by the  condition of the  economy.  In an effort to
mitigate the impact of the volume  shortfall on operating  margins,  the Company
implemented a detailed cost reduction  program in the second and third quarters.
AMS reported  strong  growth in revenue,  however the  business is  experiencing
reduced project bidding activity from overall lower construction activity in the
market.   American  Home  Shield  reported  a  double-digit   revenue  increase,
continuing  its  strong  growth  across  all major  distribution  channels.  The
franchise operations, ServiceMaster Clean and Merry Maids, achieved double-digit
growth,  reflecting strong growth in disaster restoration services,  the benefit
of successful marketing programs,  national account relationships,  and employee
retention  initiatives.  Capital  employed in this unit  increased  six percent,
primarily reflecting acquisitions at ARS.

OTHER OPERATIONS  SEGMENT
Other   Operations   consists  of  the   Company's   international   operations;
ServiceMaster  Home Service Center  (formerly  WeServeHomes.com);  the Company's
headquarters  operations;  and certain  operations the Company divested prior to
2001.  Revenues in the Other Operations segment declined,  reflecting the impact
of operations that were divested prior to 2001. The decrease in operating income
primarily reflects investments in initiatives and incentives at the parent level
as well as  increased  expense  in the Home  Service  Center and the impact of a
marketing arrangement that is no longer in place.

CONSOLIDATED INFORMATION
On a consolidated  basis, costs of services rendered and products sold increased
two percent and  decreased as a percentage  of revenue to 70.7 percent from 71.4
percent in 2000.  Selling and  administrative  expenses increased 13 percent and
increased as a percentage of revenue to 20.7 percent from 19.0 percent in 2000.

Interest  expense  decreased from the prior year,  primarily due to reduced debt
levels from improved  cash flows,  debt  retirements  with the proceeds from the
Management  Services  sale,  and the sale of certain of the  Company's  accounts
receivable  throughout the year.  Interest income  decreased  primarily due to a
lower level of investment gains realized on the American Home Shield  investment
portfolio.

Minority interest and other expense reflected $19 million more expense than last
year due to lower minority  interest  income related to the  ServiceMaster  Home
Service Center  venture,  increased  minority  interest  expense  related to the
equity security issued in the Allied Bruce acquisition, and the loss recorded on
the  Company's  sale of  receivables.  Throughout  2000 and until May 2001,  the
operating  losses of  ServiceMaster  Home Service Center had been offset through
minority   interest  income  (below  the  operating   income  line)  because  of
investments in the venture made by Kleiner,  Perkins,  Caufield & Byers.  In May
2001, the cumulative operating losses of ServiceMaster Home Service Center began
exceeding the funding  provided by Kleiner Perkins.  As a result,  the operating
losses since May have been  absorbed in the  accompanying  financial  statements
without an offset at the minority interest income line.

As also described in the Notes to the  Consolidated  Financial  Statements,  the
Company settled a lawsuit favorably involving a former salesman,  Ray D. Martin.
The  plaintiff  claimed  that the  Company  had not paid him the full  amount of
commissions  due to him. In  September  1999,  a jury had  awarded  compensatory
damages  and fees of  approximately  $1  million  and  punitive  damages of $135
million.  In June 2000, the trial court reduced the total award to approximately
$46 million  including  punitive  damages of $45 million.  In November 2001, the
Georgia Court of Appeals held that the claim for unpaid  commissions should have
been limited to breach of employment contract.  The court remanded the case back
to the trial court for a new trial,  noting that the  plaintiff was not entitled
to punitive damages and that  ServiceMaster's  motion to dismiss the tort claims
should have been granted.  In January 2002, the Company announced that this case
had been settled out of court. The total  compensatory  damages and fees paid by
the Company in the settlement were under $1 million.

2000 COMPARED WITH 1999

CONTINUING  OPERATIONS

Revenues in 2000 totaled $3.5  billion,  an increase of 11 percent.  This growth
reflected the full year impact of the American Residential Services and LandCare
Maintenance businesses which were acquired in 1999, offset, in part, by the sale
of certain small businesses in 2000.  Operating income before  restructuring and
other items recorded in 1999  decreased nine percent to $334 million.  Operating
income  margins on this basis  decreased  to 9.6 percent of  revenues  from 11.7
percent in 1999.  The losses  related to the  ServiceMaster  Home Service Center
initiative  accounted  for four percent of the decrease in operating  income and
about 40 basis points of the decrease in  operating  margins.  These losses were
allocated  to the  Company's  minority  partner in  ServiceMaster  Home  Service
Center,  Kleiner Perkins,  and are offset in net minority  interest income below
the operating  income line.  The remaining 170 basis point decrease in operating
margins primarily  reflects the impact of significantly  lower operating margins
at TruGreen LandCare and reduced margins in the lawn care operations


                                       4
<PAGE>

of TruGreen ChemLawn. Reported net income was $174 million in both 2000 and 1999
and  diluted  earnings  per  share  was $.57 in 2000  compared  to $.55 in 1999.
Diluted earnings per share includes various components as detailed below:

                                         2000          1999
--------------------------------------------------------------
Continuing  operations before
 charge for impaired assets
 and other items                        $ .45         $ .52
Charge for impaired
 assets and other items                     -          (.16)
--------------------------------------------------------------
Continuing operations - reported          .45           .36

Discontinued operations                   .16           .19
Cumulative effect of
 accounting change                       (.04)            -
--------------------------------------------------------------
Diluted earnings per share              $ .57         $ .55
==============================================================

The Staff of the  Securities  and Exchange  Commission  issued Staff  Accounting
Bulletin (SAB) No.101,  "Revenue Recognition",  leading the Company to change in
2000 its method of accounting  for revenue from its termite  baiting  contracts.
The  cumulative net income effect of  retroactively  applying the new accounting
method as of January 1, 2000 totaled $11.1 million,  or $.04 per share,  and was
recognized entirely in 2000. In the second quarter of 1999, the Company realized
an  after-tax  gain of $30  million  relating  to the sale of  certain  non-core
businesses and recorded a one-time  after-tax  charge of $81 million relating to
its Diversified  Health Services  business.  These items reduced net income from
ongoing operations by $51 million and diluted earnings per share by $.16.

TRUGREEN SEGMENT
The  TruGreen  segment has been  restated  for both 2000 and 1999 to exclude the
discontinued TruGreen LandCare Construction business. On that basis, the segment
reported  revenues of $1.4 billion,  an increase of 12 percent,  reflecting  one
additional  quarter  of  revenue  from the  LandCare  USA  acquisition,  smaller
regional  acquisitions  completed  during 1999, and internal  growth.  Operating
income  decreased 22 percent to $166  million,  primarily due to the slower than
anticipated  integration  of  the  individual  landscape  companies  and  higher
production  costs  such as  labor,  healthcare,  fuel and  other  costs.  In the
landscaping operations, the process of bringing separate business units into one
company has taken longer than  anticipated.  TruGreen  addressed the integration
issues by  strengthening  the  management  infrastructure  in  several  regions,
integrating  these operations with the lawn care business,  and made significant
progress in establishing greater operating disciplines and in improving the cost
structure.  Many year-end lawn care services that were scheduled to be completed
were canceled due to the severe winter and snow conditions in several regions of
the country.  This caused the Company to report dramatically lower than expected
profits in the fourth  quarter.  Capital  employed by TruGreen  increased  eight
percent to $1.1 billion,  lower than the 12 percent revenue growth,  as a result
of tighter working capital management.

TERMINIX SEGMENT
The Terminix segment reported a nine percent increase in revenue to $725 million
and operating income of $85 million, 18 percent above 1999. This growth reflects
acquisitions  as well as solid  increases in new termite  contracts and contract
renewals,  bolstered by productivity  improvements and strong overhead controls.
Capital  employed by Terminix  increased one percent to $526 million with strong
working capital management offsetting the impact of acquisitions.

HOME MAINTENANCE AND IMPROVEMENT SEGMENT
The Home  Maintenance and Improvement  segment achieved a 34 percent increase in
revenue to $1.2 billion  reflecting good internal growth at all of the companies
and an additional  four months of  operations  from the ARS  acquisition  (which
closed in late April 1999).  Operating  income grew 19 percent to $106  million,
reflecting  lower margins  primarily  attributable to the full year inclusion of
ARS which currently has lower operating  margins than the rest of this unit and,
to a lesser  extent,  from the increase in claim costs at American  Home Shield.
The  integration of ARS has continued in line with  expectations  and management
made  significant  progress in improving the financial  condition,  controls and
employee morale at many of the ARS branch locations that were performing  poorly
at the time of the  acquisition.  Progress  was made in  fulfilling  the service
needs of American Home Shield  customers  through ARS and Rescue Rooter,  with a
threefold increase in completed service  transactions during 2000. The franchise
operations,  ServiceMaster  Clean and Merry Maids,  achieved  solid  revenue and
profit  increases,  reflecting  strong growth in  Company-owned  operations  and
productivity improvements. Capital employed by this unit increased seven percent
to $636 million,  reflecting  acquisition  activity partially offset by improved
working capital management.

OTHER OPERATIONS SEGMENT
In the Other  Operations  segment,  revenues  and  capital  employed  decreased,
reflecting  the impact of  operations  that were divested in 2000 and late 1999.
Operating  profits  before  non-recurring  items in this segment  decreased from
1999,   reflecting   the  impact  of  losses  ($14  million)   relating  to  the
ServiceMaster Home Service Center initiative. These losses were allocated to the
Company's  minority  partner  in  ServiceMaster  Home  Service  Center,  Kleiner
Perkins,  and are offset in minority  interest income below the operating income
line.

CONSOLIDATED INFORMATION

On a consolidated  basis, costs of services rendered and products sold increased
15 percent,  primarily due to general business growth and acquisitions.  Cost of
services  increased as a percentage of revenue to 71.4 percent from 69.2 percent
in 1999.  This growth  primarily  reflects  increases  in direct  materials  and
service  related  costs,  including  labor,  insurance  and  fuel.  Selling  and
administrative expenses increased 10 percent, due to general business growth and
acquisitions  as well as  increased  investments.  These  costs  decreased  as a
percentage of revenue to 19.0 percent from 19.2 percent in 1999.

Interest  expense  increased  from 1999,  primarily due to increased debt levels
associated with  acquisitions and share  repurchases and higher rates.  Interest
and  investment  income  increased  over the prior year levels due to additional
gains realized on financial investments and marketable securities.

Minority  interest and other  expense/income  includes income resulting from the
allocation of losses totaling $14 million related to ServiceMaster  Home Service
Center to the Company's  minority partner.  The tax provision  reflects a higher
effective tax rate compared to 1999,  primarily due to the  non-deductibility of
goodwill from acquisitions completed in 1999.

CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated  financial statements requires management to
make  certain  estimates  and  assumptions  required  under  generally  accepted
accounting  principles  which  may  differ  from the  actual  results.  The more
significant  areas  requiring  the use of  management  estimates  relate  to the
allowance for receivables, accruals for self-insured retention limits related to
medical,  workers  compensation,  auto  and  general  liability  insurance,  the
possible  outcomes  of  outstanding   litigation,   and  the  useful  lives  for
depreciation and amortization expense.

The allowance for receivables is developed  based on several  factors  including
overall customer credit quality,  historical  write-off  experience and specific
account  analysis that project the ultimate  collectibility  of the account.  As
such,  these  factors may change over time  causing the reserve  level to adjust
accordingly.

                                       5
<PAGE>


The Company is partially  self-insured for auto and general  liability,  workers
compensation,  and certain employee health benefits. The related liabilities for
these risks are included in the accompanying  consolidated financial statements.
The Company's  policy is to accrue amounts equal to the  actuarially  determined
liabilities,  which are  based on  historical  information  along  with  certain
assumptions  about  future  events.  Changes  in  assumptions  related  to legal
actions,  medical  costs,  and  changes in actual  experience  could cause these
estimates to change in the near term.

Goodwill,  tangible (fixed) and intangible assets are amortized and depreciated,
on a straight-line  basis,  over their estimated  useful lives.  These lives are
based on the Company's previous experience for similar assets, the potential for
market  obsolescence  and  other   industry/business   data.  The  Company  also
periodically  reviews the assets for impairment and a loss would be recorded if,
and when,  the Company  determines  that the book value of the asset exceeds its
true value to the  Company.  Changes in the  estimated  useful lives or in asset
values  could  cause the  Company  to adjust  its book  value or future  expense
accordingly.

2001 FINANCIAL POSITION AND CASH FLOWS

CASH FLOWS

Cash flows provided from discontinued  operations have been eliminated from cash
from  operations  and  are  reported  in  one  line  in  the  "Cash  Flows  from
Discontinued  Operations" section. Net cash provided from continuing  operations
of $363  million was $50  million  higher than 2000.  The  significant  increase
reflects  lower working  capital usage which  provided $33 million in cash flow.
This result was due to strong working capital  management,  reflecting  improved
receivable  collections  and growth in customer  prepayments at the Terminix and
American Home Shield companies.

Property  additions  declined  $17  million,  reflecting  reduced  purchases  in
TruGreen and a lower level of investments in  technology.  Future  additions are
expected  to be  slightly  higher  to  support  business  growth.  Cash used for
acquisitions  declined to $58 million from $152 million  reflecting the use of a
convertible  security  instead of cash to purchase  Allied Bruce at Terminix and
the reduction or  curtailment of  acquisitions  at other  companies.  Management
anticipates  continuing  tuck-in  activity at  Terminix  and the return of small
acquisitions in select TruGreen markets.


CASH AND DEBT LEVELS
Cash and marketable  securities  totaled  approximately $483 million at December
31, 2001 (compared with $114 million at December 31, 2000)  reflecting a portion
of the proceeds  from the sale of  Management  Services.  Debt levels  decreased
primarily  reflecting  the use of  proceeds  from the  sales  of the  Management
Services  and  European  pest  control  businesses  and  strong  cash flows from
operations.  In 2001 the Company  reduced its total debt by over $677 million to
$1.1 billion.

Approximately  $360 million in "excess cash" remains on the balance sheet at the
end of 2001. There is $117 million of expected payments relating to taxes on the
transactions  and  other  items  relating  to  discontinued  operations  and the
charges.  The  remainder is available  for the  repayment of debt,  which should
occur in the first half of 2002. Based on that assumption,  the debt level would
decline to approximately $900 million, one-half the level at the end of 2000.

The Company is party to a number of debt agreements which require it to maintain
certain  financial and other  covenants,  including  limitations on indebtedness
(debt cannot exceed 3.5 times EBITDA) and interest  coverage ratio (EBITDA needs
to  exceed  four  times   interest   expense).   In  addition,   under   certain
circumstances,  the agreements may limit the Company's  ability to pay dividends
and repurchase shares of common stock.  These limitations are not expected to be
a factor in the Company's future dividend and share repurchase plans. Failure by
the Company to maintain these covenants could result in the  acceleration of the
maturity of the debt. At December 31, 2001,  the Company is in  compliance  with
the  covenants  related  to these  debt  agreements  and based on its  operating
outlook for 2002, expects to be able to maintain compliance in the future.

The Company does not have any debt agreements that contain put rights or provide
for acceleration of the debt as a result of a change in credit rating.  However,
the Company has a number of debt agreements which contain standard ratings-based
"pricing  grids" where the interest rate payable under the agreement  changes as
the  Company's  credit  rating  changes.  While the  Company  does not  expect a
negative change in credit ratings, the impact on interest expense resulting from
changes in credit ratings is not expected to be material to the Company.

Management  believes that funds  generated  from  operations  and other existing
resources will continue to be adequate to satisfy  ongoing working capital needs
of the Company.  Late in 2001,  the Company  syndicated  a three-year  revolving
credit  facility for $490  million,  which will expire in December  2004.  As of
December 31, 2001, the Company had issued  approximately  $66 million of letters
of credit under the facility and had unused  commitments of  approximately  $424
million.  The Company also has $550 million of senior  unsecured debt and equity
securities   available  for  issuance  under  an  effective  shelf  registration
statement.

In 2001,  the  Company  entered  into an  agreement  to  ultimately  sell,  on a
revolving basis,  certain  receivables to unrelated third party  purchasers.  At
year end  there  are no  receivables  outstanding  that  had been  sold to third
parties.  The agreement is a 364-day facility that is renewable at the option of
the  purchasers.  The Company may sell up to $65 million of its  receivables  to
these  purchasers  in the  future and  therefore  has  immediate  access to cash
proceeds from these sales. The Company also maintains operating lease facilities
with  banks  totaling  $95  million  which  provide  for  the   acquisition  and
development of properties to be leased by the Company. There is a residual value
guarantee of these  properties  up to 82 percent of the fair market value of the
properties.  At December 31, 2001 there was  approximately  $87.5 million funded
under these  facilities.  In the fourth quarter of 2001, the Company  recorded a
$17 million provision to accrue for guarantees relating to the residual value of
certain  properties.  Of the $95  million  facilities,  $80  million  expires in
October 2004 and $15 million expires in January 2008.

The  majority of the  Company's  fleet is leased  through  cancelable  operating
leases.  There are residual value guarantees  (ranging from 70% to 87% depending
on the agreement) on these  vehicles,  which  historically  have not resulted in
significant  net  payments  to the  lessors.  At  December  31,  2001  there was
approximately $260 million of residual value relating to the Company's fleet.

The following table presents the Company's obligations and commitments:

(In millions)     Total    < 1 Yr   2-3Yrs  4-5Yrs   >5Yrs
-----------------------------------------------------------------
Debt balances     $1,141   $35      $86     $273     $747
Non-cancelable
  operating
  leases(1)          272    76       86       55       55
-----------------------------------------------------------------
Total amount      $1,413  $111     $172     $328     $802
=================================================================

(1)  In 2002,  there is  approximately  $17 million of net payments  relating to
     specific  properties under the operating leases described above.  There are
     no net  payments  expected  (nor  reflected  in the table)  relating to the
     operating leases of the Company's fleet.


                                       6
<PAGE>


As of December 31, 2001, the Company had approximately $66 million of letters of
credit issued under its bank credit  facility and  approximately  $93 million of
annually  renewable surety bonds outstanding that primarily support  obligations
the Company has under insurance  programs.  If the surety bonds are not renewed,
the Company expects to replace them with letters of credit issued under its bank
credit facility.


DISCONTINUED OPERATIONS
The  assets and  liabilities  related to the  discontinued  companies  have been
classified  in separate  captions on the  Consolidated  Statements  of Financial
Position.  This includes the assets and liabilities  specifically related to the
Management Services segment, the Company's former headquarters building, and the
CSI, LandCare  Construction,  and Terminix Europe (excluding the United Kingdom)
businesses.  As discussed  previously,  these  operations have been sold and the
Company is in the process of completely  exiting these businesses.  The decrease
in assets of the discontinued  operations reflects asset sales and the writedown
of impaired  assets.  The decline in liabilities  from  discontinued  operations
represents  the  elimination of accruals in the sold  businesses.  The remaining
liability represents the obligations related to the exit of these businesses and
reserves  for  longer-term  insurance  tails  and  litigation  exposures.  (This
represents after-tax cash payments of $45 million, expected to be paid primarily
in 2002  which  should be  partially  offset by  approximately  $20  million  of
after-tax cash collections from the remaining assets).

CONTINUING OPERATIONS
Accounts  receivable is slightly below the level last year  reflecting  improved
collections and days sales  outstanding at several  companies.  Prepaid expenses
and other assets increased due to the increased  volume of contracts  written at
Terminix and American Home Shield. The Company capitalizes sales commissions and
other direct  contract  acquisition  costs relating to termite  baiting and pest
contracts,  as  well  as  home  warranty  agreements.   Property  and  equipment
decreased,  reflecting  general  business  growth  offset  by fewer  large-scale
technology projects.  The Company does not have any material capital commitments
at this time.

Deferred  revenue  increased  reflecting  strong  growth in  warranty  contracts
written at American  Home  Shield,  increases in customer  prepayments  for pest
control  services,  as well as the deferred  royalty revenue  resulting from the
sale of Management Services.

The current tax asset  reflects  primarily  the expected  future tax  deductions
related to the cash charges recorded in the fourth quarter of 2001. The increase
in  the  long-term  deferred  tax  liability  primarily  reflects  the  sale  of
Management Services.  The tax basis of this business exceeded its book basis and
the related deferred tax asset was eliminated with the sale of the business. The
deferred tax  liability  reflects  the basis  differences  primarily  related to
intangible assets. In 2002, the Company is required to adopt SFAS 142, "Goodwill
and  Other  Intangible  Assets",  which  eliminates  the  requirement  to record
goodwill amortization expense in the financial  statements.  The majority of the
Company's  goodwill   amortization  expense  is  deductible  for  tax  purposes,
providing the Company an annual tax benefit of approximately $50 million for the
next ten years and diminishing thereafter.  This annual tax benefit is reflected
in the  Statements  of  Financial  Position as an increase in the  deferred  tax
liability.  In the  Statements of Cash Flows,  the adoption of SFAS 142 (and the
related  elimination of amortization  expense for financial  statement purposes)
will result in a reclassification of approximately $20 million into the deferred
tax expense line as the tax deduction from  amortization will be eliminated from
the income statement.

As noted in the 2001  Comparison  with 2000 Section of this report,  the Company
recorded a fourth quarter charge to writedown $350 million of goodwill  relating
to  the  landscaping   operations  and  the  remaining   European  pest  control
operations.  Goodwill  had not been  previously  allocated  between the LandCare
construction and maintenance businesses. The writedown represents the impairment
for the entire  landscaping  operations.  In  addition,  as part of the  charge,
approximately  $37 million of liabilities  remain on the balance sheet (in other
current liabilities) relating to property guarantees, severance arrangements and
other items.  (This  represents  $22 million of after-tax cash payments of which
the majority is expected to be paid in 2002.)

In  December   2001,  the  Company   acquired  the  minority   interest  in  the
ServiceMaster  Home Service  Center (SMHSC) held by Kleiner  Perkins  Caufield &
Byers.  The SMHSC was merged into a  wholly-owned  subsidiary of  ServiceMaster.
Pursuant  to this  merger,  ServiceMaster  purchased  shares  of SMHSC  owned by
employees  of the Company and  converted  options to purchase  SMHSC shares into
incentive  options to purchase  ServiceMaster  stock. A valuation opinion from a
third party firm was obtained relating to the purchase price of the shares. Also
in  2001,  and in  connection  with the sale  and  disposition  of the  TruGreen
LandCare Construction operations, the Company repurchased the shares of TruGreen
that were  previously  purchased by employees  earlier in the year. The purchase
and sale prices of the shares were identical.  The Company continues to maintain
minority  investors  in the  combined  ARS/AMS  entity  as well as in  Terminix.
Members of management  acquired,  at fair market value, equity interests in ARS.
The Company and the equity investors have respective  options to acquire or sell
the minority  interests in the future at a price based on fair market value.  At
Terminix, the minority ownership reflects an interest issued to the prior owners
of the Allied Bruce Terminix Companies in connection with that acquisition. This
equity security is exchangeable into eight million  ServiceMaster common shares.
The ServiceMaster  shares are included in the shares used for the calculation of
diluted earnings per share.

Total  shareholders'  equity increased five percent to $1.2 billion,  reflecting
earnings  offset by  shareholders  dividends.  Cash  dividends  paid directly to
shareholders totaled $119 million, or $.40 per share, compared to $.38 per share
in the prior year. The total amount of cash distributions increased four percent
from the prior year, reflecting the per share increase.

In January 2002,  the Company paid a cash dividend for the first quarter of $.10
per share. In February 2002, the Company declared a second quarter cash dividend
of $.10 per share  payable  on April 30,  2002.  The timing and amount of future
dividend  increases will be at the discretion of the Board of Directors and will
depend on, among other things,  the Company's capital  structure  objectives and
cash requirements.  In July 2000, the Board of Directors authorized $350 million
for share  repurchases.  In that same year, the Company purchased  approximately
$136 million of its shares.  In 2001, there were no material share  repurchases.
Decisions  relating to any future share  repurchases  will take various  factors
into consideration such as the Company's commitment to maintain investment grade
credit ratings and other strategic investment opportunities.


THE COMPANY  NOTES THAT  STATEMENTS  THAT LOOK  FORWARD IN TIME,  WHICH  INCLUDE
EVERYTHING OTHER THAN HISTORICAL  INFORMATION,  INVOLVE RISKS AND  UNCERTAINTIES
THAT  AFFECT THE  COMPANY'S  RESULTS OF  OPERATIONS.  FACTORS  WHICH COULD CAUSE
ACTUAL  RESULTS  TO DIFFER  MATERIALLY  FROM  THOSE  EXPRESSED  OR  IMPLIED IN A
FORWARD-LOOKING   STATEMENT  INCLUDE  THE  FOLLOWING  (AMONG  OTHERS):   WEATHER
CONDITIONS ADVERSE TO CERTAIN OF THE COMPANY'S CONSUMER AND COMMERCIAL  SERVICES
BUSINESSES;  THE ENTRY OF ADDITIONAL COMPETITORS IN ANY OF THE MARKETS SERVED BY
THE  COMPANY;  LABOR  SHORTAGES;  UNEXPECTED  CHANGES IN  OPERATING  COSTS;  THE
CONDITION  OF THE U.S.  ECONOMY;  THE COST AND  LENGTH OF TIME  ASSOCIATED  WITH
INTEGRATING  OR WINDING DOWN  BUSINESSES  AND OTHER FACTORS  LISTED FROM TIME TO
TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.



                                       7
<PAGE>

<TABLE>
Eleven Year Financial Summary
(All share and per share data reflect the three-for-two share splits in 1998, 1997, 1996, 1993, and 1992)

(In thousands, except per share data)                                    2001            2000            1999              1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>              <C>              <C>
Operating Results:
Operating revenue ..............................................   $  3,601,429    $  3,485,517     $  3,128,635     $  2,233,658
Operating income ...............................................        (87,445)        333,742          279,752          310,094
Operating income before charge for impaired assets
  and other items (1) ..........................................        309,298         333,742          365,252          310,094
  Percentage of operating revenue ..............................            8.6%            9.6%            11.7%            13.9%
Non-operating expense (income) .................................        113,928          98,592           86,981           77,644
Provision for income taxes .....................................        (29,594)         98,354           80,073           94,647
                                                                   ----------------------------------------------------------------
Net income from continuing operations ..........................       (171,779)        136,796          112,698          137,803

  Net income before net non-recurring items ....................        113,761         136,796          163,656          137,803
  Charges and other, net (1) ...................................       (285,540)            -            (50,958)             -
                                                                   ----------------------------------------------------------------
  Continuing operations - reported .............................       (171,779)        136,796          112,698          137,803

Discontinued operations, net ...................................        330,234          48,192           60,865           52,179
Extraordinary loss, net of income taxes ........................         (3,422)            -                -                -
Cumulative effect of accounting change, net of income taxes (1)             -           (11,161)             -                -
                                                                   ----------------------------------------------------------------
Net income (pro forma corporate form prior to 1998) (2) ........   $    155,033    $    173,827     $    173,563     $    189,982

Earnings per share (pro forma corporate form prior to 1998): (2)
  Basic ........................................................   $       0.52    $       0.57     $       0.56     $       0.66
  Diluted ......................................................           0.51            0.57             0.55             0.64

   Continuing operations before net non-recurring items (1) ....           0.38            0.45             0.52             0.46
   Charges and other, net (1) ..................................          (0.92)            -              (0.16)              -
                                                                   ----------------------------------------------------------------
    Continuing operations - reported ...........................   $      (0.54)   $       0.45     $       0.36     $       0.46

   Discontinued operations, net ................................           1.06            0.16             0.19             0.18
   Extraordinary loss ..........................................          (0.01)            -                -                -
   Cumulative effect of accounting change (1) ..................            -             (0.04)             -                -
                                                                   ----------------------------------------------------------------
   Reported earnings per share .................................   $       0.51    $       0.57     $       0.55     $       0.64

Shares used to compute basic net income per share ..............        298,659         302,487          307,637          289,315
Shares used to compute diluted net income per share ............        311,408         305,518          314,406          298,887
Shares outstanding, net of treasury shares .....................        300,531         298,474          307,530          298,030

Cash distributions per share ...................................   $       0.40    $       0.38     $       0.36     $       0.33
Share price range:
   High price ..................................................   $      14.20    $      14.94     $      22.00     $      25.50
   Low price ...................................................   $       9.84    $       8.25     $      10.13     $      16.00
Financial Position (at year end):
Current assets .................................................   $  1,150,658    $    776,110     $    751,401     $    492,633
Current liabilities ............................................        814,401         677,426          712,313          610,837
Working capital ................................................        336,257          98,684           39,088         (118,204)
Current ratio ..................................................        1.4 - 1         1.1 - 1          1.1 - 1           .8 - 1
Total assets ...................................................   $  3,674,739    $  3,979,834     $  3,870,215     $  2,914,851
Total liabilities ..............................................      2,351,101       2,812,313        2,661,565        1,958,365
Total debt outstanding .........................................      1,140,677       1,818,117        1,769,298        1,127,783
Minority interest/deferred gain ................................        102,677           5,933            2,934              -
Shareholders' equity ...........................................      1,220,961       1,161,588        1,205,716          956,486
Percentage return on weighted-average shareholders' equity .....             13%             14%              15%              25%

</TABLE>







                                       8
<PAGE>




















<TABLE>

(In thousands, except per share data)                                   1997            1996             1995             1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>              <C>              <C>
Operating Results:
Operating revenue ..............................................   $  1,813,685    $  1,558,245     $  1,374,835     $  1,149,678
Operating income ...............................................        252,792         204,967          162,094          135,254
Operating income before charge for impaired assets
  and other items (1) ..........................................        252,792         204,967          162,094          135,254
  Percentage of operating revenue ..............................           13.9%           13.2%            11.8%            11.8%
Non-operating expense (income) .................................         69,654          42,821           74,260           71,388
Provision for income taxes .....................................         74,728          66,249           36,223           26,486
                                                                   ----------------------------------------------------------------
Net income from continuing operations ..........................        108,410          95,897           51,611           37,380

  Net income before net non-recurring items ....................        108,410          95,897           51,611           37,380
  Charges and other, net (1) ...................................            -               -                -                -
                                                                   ----------------------------------------------------------------
  Continuing operations - reported .............................        108,410          95,897           51,611           37,380

Discontinued operations, net ...................................         55,060          54,532           54,243           47,632
Extraordinary loss, net of income taxes ........................            -               -                -                -
Cumulative effect of accounting change, net of income taxes (1)             -               -                -                -
                                                                   ----------------------------------------------------------------
Net income (pro forma corporate form prior to 1998) (2) ........   $    163,470    $    150,429     $    105,854     $     85,012

Earnings per share (pro forma corporate form prior to 1998): (2)
  Basic ........................................................   $       0.57    $       0.47     $       0.41     $       0.33
  Diluted ......................................................           0.55            0.46             0.39             0.32

   Continuing operations before net non-recurring items (1) ....           0.36            0.29             0.19             0.14
   Charges and other, net (1) ..................................            -               -                -                -
                                                                   ----------------------------------------------------------------
    Continuing operations - reported ...........................   $       0.36    $       0.29     $       0.19     $       0.14

   Discontinued operations, net ................................           0.19            0.17             0.20             0.18
   Extraordinary loss ..........................................            -               -                -                -
   Cumulative effect of accounting change (1) ..................            -               -                -                -
                                                                   ----------------------------------------------------------------
   Reported earnings per share .................................   $       0.55    $       0.46     $       0.39     $       0.32

Shares used to compute basic net income per share ..............        285,944         317,381          260,382          255,650
Shares used to compute diluted net income per share ............        299,640         330,429          273,203          266,892
Shares outstanding, net of treasury shares .....................        279,944         320,396          321,341          256,419

Cash distributions per share ...................................   $       0.31    $       0.29     $       0.28     $       0.27
Share price range:
   High price ..................................................   $      19.67    $      11.83     $       9.00     $       8.41
   Low price ...................................................   $      10.92    $       8.61     $       6.37     $       6.37
Financial Position (at year end):
Current assets .................................................   $    418,470    $    342,406     $    236,733     $    177,266
Current liabilities ............................................        427,250         325,798          279,409          216,503
Working capital ................................................         (8,780)         16,608          (42,676)         (39,237)
Current ratio ..................................................        1.0 - 1         1.1 - 1           .8 - 1           .8 - 1
Total assets ...................................................   $  2,475,224    $  1,846,841     $  1,649,890     $  1,230,839
Total liabilities ..............................................      1,950,786       1,033,166          890,533          788,301
Total debt outstanding .........................................      1,269,384         497,936          425,334          394,738
Minority interest/deferred gain ................................            -            16,908           12,697          135,272
Shareholders' equity ...........................................        524,438         796,767          746,660          307,266
Percentage return on weighted-average shareholders' equity .....             26%             19%              24%              28%

</TABLE>











                                       9
<PAGE>























<TABLE>

(In thousands, except per share data)                                    1993            1992             1991
-------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>             <C>              <C>
Operating Results:
Operating revenue ..............................................   $    987,030    $    825,244     $    546,081
Operating income ...............................................         88,660         (18,287)          42,395
Operating income before charge for impaired assets
  and other items (1) ..........................................         88,660          60,648           42,395
  Percentage of operating revenue ..............................            9.0%            7.3%             7.8%
Non-operating expense (income) .................................         24,952         (68,367)          34,020
Provision for income taxes .....................................         26,470          20,931            4,068
                                                                   ------------------------------------------------
Net income from continuing operations ..........................         37,238          29,149            4,307

  Net income before net non-recurring items ....................         19,238           8,187              826
  Charges and other, net (1) ...................................         18,000          20,962            3,481
                                                                   ------------------------------------------------
  Continuing operations - reported .............................         37,238          29,149            4,307

Discontinued operations, net ...................................         51,025          48,807           47,788
Extraordinary loss, net of income taxes ........................             -               -                -
Cumulative effect of accounting change, net of income taxes (1)              -           (4,470)              -
                                                                   ------------------------------------------------
Net income (pro forma corporate form prior to 1998) (2) ........   $     88,263    $     73,486     $     52,095

Earnings per share (pro forma corporate form prior to 1998): (2)
  Basic ........................................................   $       0.35    $       0.29     $       0.22
  Diluted ......................................................           0.34            0.28             0.21

   Continuing operations before net non-recurring items (1) ....           0.08            0.03             0.01
   Charges and other, net (1) ..................................           0.07            0.08             0.01
                                                                   ------------------------------------------------
    Continuing operations - reported ...........................   $       0.15    $       0.11     $       0.02

   Discontinued operations, net ................................           0.19            0.19             0.19
   Extraordinary loss ..........................................             -               -                -
   Cumulative effect of accounting change (1) ..................             -            (0.02)              -
                                                                   ------------------------------------------------
   Reported earnings per share .................................   $       0.34    $       0.28     $       0.21

Shares used to compute basic net income per share ..............        253,919         249,828          240,276
Shares used to compute diluted net income per share ............        266,231         262,941          252,579
Shares outstanding, net of treasury shares .....................        257,901         255,386          243,527

Cash distributions per share ...................................   $       0.26    $       0.26     $       0.25
Share price range:
   High price ..................................................   $       9.19    $       5.90     $       5.13
   Low price ...................................................   $       5.22    $       4.35     $       2.89
Financial Position (at year end):
Current assets .................................................   $    148,419    $    146,064     $    113,546
Current liabilities ............................................        179,659         147,085          105,565
Working capital ................................................        (31,240)         (1,021)           7,981
Current ratio ..................................................         .8 - 1         1.0 - 1          1.1 - 1
Total assets ...................................................   $  1,122,461    $  1,005,531     $    843,660
Total liabilities ..............................................        715,729         717,966          534,096
Total debt outstanding .........................................        389,121         430,095          340,883
Minority interest/deferred gain ................................        117,513          77,906          187,583
Shareholders' equity ...........................................        289,219         209,659          121,981
Percentage return on weighted-average shareholders' equity .....             35%             42%              48%
</TABLE>


(1)  In the fourth quarter of 2001, the Company's Board of Directors  approved a
     series of  actions  related to the  strategic  review of its  portfolio  of
     businesses that commenced  earlier in the year.  These actions included the
     sale in November 2001 of the Company's Management Services business (with a
     related pretax gain of $640 million, $384 million after-tax) as well as the
     decision  to exit  certain  non-strategic  and  underperforming  businesses
     including TruGreen LandCare  Construction and Certified  Systems,  Inc., as
     well  as  certain  other  operations.  These  operations  are  included  in
     "Discontinued  operations"  in all  periods.  The Company  also  recorded a
     pretax  charge of $397  million  ($286  million  after-tax)  in the  fourth
     quarter of 2001,  related  primarily to goodwill and asset  impairments  as
     well as  other  items.  See  the  Management  Discussion  and  Analysis  of
     Financial  Position  and  Results of  Operations  for a  discussion  of the
     components of discontinued operations and of the charge for impaired assets
     and other items.

     In 2000, the Company  changed its method of accounting for revenue from its
     termite baiting contracts.  The cumulative effect of this accounting change
     as of January 1, 2000 was $11.1 million ($18.9 million pretax).  The impact
     of adopting the new accounting method compared to the previous  methodology
     was not material in 2000.  The pro forma impact of  retroactively  applying
     this  accounting  change  in 1999,  1998,  and 1997 was to  reduce  diluted
     earnings per share by $0.02, $0.01, and $0.01, respectively.

     In 1999,  the Company  realized a pretax gain of $50 million  ($30  million
     after-tax)  relating  to the sales of certain  businesses,  and  recorded a
     pretax charge of $136 million ($81 million after-tax)  relating to impaired
     assets and other items in its Diversified Health Services business.  In the
     years  1991  through  1993,  the  Company  recorded  gains on  issuance  of
     subsidiary shares,  restructuring  charges,  and a change in accounting for
     post-retirement benefits.

(2)  The Company  converted  from  partnership  to corporate  form in a tax-free
     exchange for  shareholders  on December 26, 1997.  Prior to the conversion,
     the  partnership  was not  subject to federal  income  taxes as its taxable
     income was  allocated  to the  partnership's  partners.  As a result of the
     conversion,  the Company has been a taxable entity and has been responsible
     for such payments. The results shown above for the years ended December 31,
     1997 and  before  have  been  restated  to  adjust  the  actual  historical
     partnership   information   to  a  pro  forma  basis  that   assumes   that
     reincorporation  had  occurred as of the  beginning  of that year.  The pro
     forma  provision  for income taxes has been  calculated  assuming  that the
     Company's  effective tax rate had been  approximately  40 percent of pretax
     earnings.  Actual historical net income per share as a partnership for 1997
     was $264,076  and basic and diluted  earnings per share were $.92 and $.89,
     respectively.  Including the one-time tax gain related to  reincorporation,
     1997 net income was $329,076 and basic and diluted  earnings per share were
     $1.15 and $1.10, respectively.


                                       10
<PAGE>


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF  CONSOLIDATION:  The  consolidated  financial  statements  include  the
accounts of ServiceMaster  and its  majority-owned  subsidiary  partnerships and
corporations, collectively referred to as the Company. Intercompany transactions
and balances have been eliminated in consolidation.  Certain immaterial 2000 and
1999 amounts have been reclassified to conform with the 2001 presentation.

CRITICAL  ACCOUNTING  POLICIES:  The preparation of the  consolidated  financial
statements  requires  management  to  make  certain  estimates  and  assumptions
required under generally  accepted  accounting  principles which may differ from
the actual results.  The more significant  areas requiring the use of management
estimates  relate to the allowance for  receivables,  accruals for  self-insured
retention  limits  related to medical,  workers  compensation,  auto and general
liability insurance,  the possible outcomes of outstanding  litigation,  and the
useful lives for depreciation and amortization expense.

The allowance for receivables is developed  based on several  factors  including
overall customer credit quality,  historical  write-off  experience and specific
account  analysis that project the ultimate  collectibility  of the account.  As
such,  these  factors may change over time  causing the reserve  level to adjust
accordingly.

The Company is partially  self-insured for auto and general  liability,  workers
compensation,  and certain employee health benefits. The related liabilities for
these risks are included in the accompanying  consolidated financial statements.
The Company's  policy is to accrue amounts equal to the  actuarially  determined
liabilities,  which are  based on  historical  information  along  with  certain
assumptions  about  future  events.  Changes  in  assumptions  related  to legal
actions,  medical  costs,  and  changes in actual  experience  could cause these
estimates to change in the near term.

Goodwill,  tangible (fixed) and intangible assets are amortized and depreciated,
on a straight-line  basis,  over their estimated  useful lives.  These lives are
based on the Company's previous experience for similar assets, the potential for
market  obsolescence  and  other   industry/business   data.  The  Company  also
periodically  reviews the assets for impairment and a loss would be recorded if,
and when,  the Company  determines  that the book value of the asset exceeds the
true value to the  Company.  Changes in the  estimated  useful lives or in asset
values  could  cause the  Company  to adjust  its book  value or future  expense
accordingly.

REVENUES:  Revenues from lawn care, pest control,  heating/air  conditioning and
plumbing  services are  recognized as the services are  provided.  Revenues from
landscaping  services are recognized based upon agreed monthly contract payments
or when services are performed for non-contractual  arrangements.  Revenues from
the Company's commercial installation contracts, primarily relating to HVAC, are
recognized  on the  percentage  of  completion  method in the ratio  that  total
incurred  costs  bear to total  estimated  costs.  Fees from home  warranty  and
termite  baiting  contracts  are  recognized  as  revenues  over the life of the
contract while the service costs are expensed as incurred.  Franchised  services
revenues  (which  in  aggregate   represents   approximately  three  percent  of
consolidated  totals) consist of initial  franchise fees received from the sales
of licenses, sales of products to franchisees, and continuing monthly fees based
upon franchise revenue.

INVENTORY  VALUATION:  Inventories  are  valued at the lower of cost  (first-in,
first-out basis) or market. Inventory costs include material, labor, and factory
overhead and related  handling  costs.  Raw  materials  represent  less than two
percent of the inventory value at December 31, 2001. The remaining  inventory is
finished goods to be used on the customers' premises or sold to franchisees.

DEPRECIATION AND AMORTIZATION:  Buildings and equipment used in the business are
stated at cost and  depreciated  over their  estimated  useful  lives  using the
straight-line  method for financial  reporting  purposes.  The estimated  useful
lives  for  building  and  improvements  range  from 10 to 40  years,  while the
estimated  useful lives for  equipment  range from three to 10 years.  Leasehold
improvements  relating to leased  facilities are depreciated  over the remaining
life of the lease. Technology equipment as well as software and development have
an estimated  useful life of three to seven  years.  Intangible  assets  consist
primarily of goodwill ($1.9  billion),  trade names ($240 million) and covenants
not to compete ($75 million).  As required by Accounting  Principles Board (APB)
No.  17,  these  assets  were  amortized  on a  straight-line  basis  over their
estimated  useful  lives,  not to exceed 40 years.  As  discussed  in the "Newly
Issued  Accounting  Statements  and  Positions"  note,  Statement  of  Financial
Accounting  Standards  No. 142 requires  that for fiscal years  beginning  after
December 31, 2001,  existing  goodwill will no longer be subject to amortization
and intangible  assets with indefinite  useful lives will not be amortized until
their useful lives are determined to be no longer indefinite.

The Company's  long-lived  assets,  including fixed assets and intangible assets
(other than goodwill),  are periodically reviewed to determine recoverability by
comparing their carrying values to the  undiscounted  future cash flows expected
to be realized from their use. No recovery problems have been indicated by these
comparisons.  Based on the reviews,  when the undiscounted future cash flows are
less than the carrying  amount of the asset,  an  impairment  loss is recognized
based on the asset's fair value, and the carrying amount of the asset is reduced
accordingly.

The Company's policy for assessing enterprise-level goodwill impairment utilizes
a discounted  cash flow  methodology,  in which the present  value of the future
expected cash flows of a business are compared to its book value.  To the extent
the book value of a business  exceeds the discounted  cash flows,  an impairment
loss would be  recorded.  As discussed in the  "Portfolio  Review and  Strategic
Actions" footnote, in the course of completing its portfolio review, the Company
recorded  impairment charges related to the goodwill of TruGreen  LandCare,  and
the United Kingdom Terminix operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK:
The  carrying  amounts  of cash  and  cash  equivalents,  receivables,  accounts
payable,  and accrued  liabilities  approximate  fair value because of the short
maturity of these  instruments.  The carrying  amounts of long-term  receivables
approximate  fair  value  as the  effective  rates  for  these  instruments  are
comparable to market rates at year-end.  The carrying amount of investments also
approximate fair value as unrealized  gains and losses on investments  accounted
for at market  value are  reported  net-of-tax  as a  component  of  accumulated
comprehensive  income  (loss) until the  investment  is sold,  at which time the
realized  gain or loss is included in income.  The carrying  amount of long-term
debt is  approximately  $1.1 billion and $1.75  billion and the  estimated  fair
value  is $1.1  billion  and  $1.5  billion  at  December  31,  2001  and  2000,
respectively.  The estimated  fair value of debt is based upon  borrowing  rates
currently  available to the Company for long-term  borrowings with similar terms
and maturities.

The  Company  does  not hold or  issue  financial  instruments  for  trading  or
speculative   purposes.   The  Company  has  entered  into  specific   financial
arrangements  in the normal course of business to manage  certain  market risks,
with a policy of matching  positions  and  limiting  the terms of  contracts  to
relatively short durations.  The effect of financial instrument  transactions is
not material to the Company's results of operations.

Financial  instruments,  which  potentially  subject the Company to credit risk,
consist principally of investments and accounts receivable.  Investments consist
primarily of publicly-traded debt and common equity securities. The Company


                                       11
<PAGE>

has not  experienced  any material  loss on its  investments.  Concentration  of
credit risk with respect to the  receivables are limited due to the large number
of customers and the dispersion across geographical areas. The Company maintains
an  allowance  for losses  based upon the  expected  collectibility  of accounts
receivable.

INCOME  TAXES:  The Company  accounts  for income  taxes under the  Statement of
Financial  Accounting  Standards No. 109,  "Accounting  for Income  Taxes." This
statement uses an asset and liability  approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax  consequences of
events that have been  recognized in the Company's  financial  statements or tax
returns.  Deferred income taxes are provided to reflect the differences  between
the tax bases of  assets  and  liabilities  and their  reported  amounts  in the
financial statements.

EARNINGS PER SHARE:  Basic  earnings per share is based on the  weighted-average
number of common shares outstanding during the year. The weighted average common
shares for the diluted  earnings per share  calculation  include the incremental
effect  related to  outstanding  options  whose market price is in excess of the
exercise price.  Shares potentially  issuable under convertible  securities have
been  considered  outstanding  for  purposes of the diluted  earnings  per share
calculation.

CHANGE IN ACCOUNTING  PRINCIPLE:  In December  1999, the Staff of the Securities
and Exchange  Commission issued Staff Accounting Bulletin (SAB) No. 101 "Revenue
Recognition,"  which provides additional guidance in applying generally accepted
accounting  principles  for revenue  recognition  in financial  statements.  The
Company's  interpretation of the requirements of SAB No. 101 resulted in changes
during 2000 to the  Company's  accounting  policies for revenue  recognition  on
sales of its termite  baiting  contracts.  Prior to the adoption of SAB No. 101,
the Company  recognized  approximately 80% of the termite baiting revenue at the
time of the sale and  installation of the baiting  station,  while the remaining
20% of the revenue was  recognized  over the life of the  contract as  follow-up
inspections  of the  stations  were  performed.  As a result of SAB No. 101, the
Company's  policy is to  recognize  revenue  over the life of the  contract.  In
addition,  sales  commissions  and other direct contract  acquisition  costs are
deferred and amortized on a straight-line basis over the life of the contract.

The change in method of accounting for termite  baiting  contracts was effective
January 1, 2000. The cumulative  effect of the accounting  change, as of January
1, 2000,  resulted  in a non-cash  charge  that  reduced net income for the year
ended December 31, 2000 by $11.1 million, ($18.9 million pretax). The cumulative
after-tax effect on both basic and diluted earnings per share was a reduction of
$.04. The impact of adopting the new accounting  method compared to the previous
methodology  was not  material  in 2000.  The pro  forma  impact in 1999 of this
change was to reduce diluted earnings per share by $.02.

NEWLY ISSUED ACCOUNTING STATEMENTS AND POSITIONS:
In June 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 141, "Business  Combinations" (SFAS 141) and
No. 142,  "Goodwill and Other  Intangible  Assets" (SFAS 142). SFAS 141 requires
all business  combinations  initiated  after June 30, 2001,  to be accounted for
using the purchase  method.  SFAS 142 requires  that for fiscal years  beginning
after  December  31,  2001  existing  goodwill  will no  longer  be  subject  to
amortization  and  intangible  assets with  indefinite  useful lives will not be
amortized  until their useful lives are  determined to be no longer  indefinite.
Goodwill  and  intangible  assets that are not subject to  amortization  will be
subject  to  at  least  an  annual  assessment  for  impairment  by  applying  a
fair-value-based test. Given the Company's policy of assessing  enterprise-level
goodwill,  which utilizes a discounted cash flow  methodology,  the Company does
not expect the adoption of SFAS 142 to have a material  impact to the  Company's
financial  statements.  The elimination of  amortization  expense under SFAS 142
would have  resulted in increases to diluted  earnings per share of $.14,  $.13,
and $.11 in 2001, 2000, and 1999, respectively.

In August 2001, the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived  Assets" (SFAS 144) which amends certain  requirements of
the previously issued pronouncement on asset impairment,  Statement of Financial
Accounting  Standards No. 121. SFAS 144 expands the definition of a discontinued
operation as previously  defined by Accounting  Principles Board Opinion No. 30.
This  statement  is  required  to be adopted for fiscal  years  beginning  after
December 15, 2001,  however early  application of this statement is permissible.
The Company  adopted SFAS 144 effective  January 1, 2001 and has  classified the
results of certain business units that it has sold or is winding-down, including
Management Services, TruGreen LandCare Construction, Certified Systems Inc., and
the sold Terminix Europe entities as discontinued operations in the accompanying
consolidated financial statements.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of The ServiceMaster Company

We have audited the accompanying  consolidated  statements of financial position
of THE SERVICEMASTER COMPANY (organized under the laws of the State of Delaware)
AND SUBSIDIARIES, as of December 31, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

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

As explained in the Summary of Significant  Accounting  Policies  section of the
Notes to the Consolidated  Financial Statements,  effective January 1, 2000, the
Company changed certain of its accounting  principles for revenue recognition as
a  result  of the  adoption  of  Staff  Accounting  Bulletin  No.  101  "Revenue
Recognition",  and effective January 1, 2001, the Company changed its accounting
principles for discontinued  operations and impairment of long-lived assets as a
result of the adoption of Statement of Financial  Accounting  Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".

   ARTHUR ANDERSEN LLP
   Chicago, Illinois
   January 24, 2002


                                       12
<PAGE>


Statements of Income
(In thousands, except per share data)
<TABLE>


For years ended December 31,                                            2001          2000           1999
--------------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>            <C>
OPERATING REVENUE .............................................   $ 3,601,429    $ 3,485,517    $ 3,128,635
Operating Costs and Expenses:
Cost of services rendered and products sold ...................     2,546,207      2,489,151      2,163,458
Selling and administrative expenses ...........................       745,924        662,624        599,925
Charge for impaired assets and other items (1) ................       396,743            -           85,500
--------------------------------------------------------------------------------------------------------------
Total operating costs and expenses ............................     3,688,874      3,151,775      2,848,883
--------------------------------------------------------------------------------------------------------------
OPERATING INCOME ..............................................       (87,445)       333,742        279,752

NON-OPERATING EXPENSE (INCOME):
Interest expense ..............................................       125,057        136,831        108,955
Interest and investment income ................................       (16,786)       (25,002)       (21,974)
Minority interest and other expense (income), net .............         5,657        (13,237)           -
--------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Taxes .........      (201,373)       235,150        192,771
Provision for income taxes ....................................       (29,594)        98,354         80,073
--------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Extraordinary
  Items and Cumulative Effect of Accounting Change ............      (171,779)       136,796        112,698
Discontinued operations, net (1) ..............................       330,234         48,192         60,865
Extraordinary loss, net of income taxes (2) ...................        (3,422)           -              -
Cumulative effect of accounting change, net of income taxes (3)           -          (11,161)           -
--------------------------------------------------------------------------------------------------------------
NET INCOME ....................................................   $   155,033    $   173,827    $   173,563
==============================================================================================================
BASIC EARNINGS PER SHARE:
  Income from continuing operations before extraordinary
   items and cumulative effect of accounting change ...........   $     (0.58)   $      0.45    $      0.37
  Discontinued operations, net (1) ............................          1.11           0.16           0.19
  Extraordinary loss (2) ......................................         (0.01)           -              -
  Cumulative effect of accounting change (3) ..................           -            (0.04)           -
--------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE ......................................   $      0.52    $      0.57    $      0.56
==============================================================================================================
DILUTED EARNINGS PER SHARE:
  Income from continuing operations before extraordinary
   items and cumulative effect of accounting change ...........   $     (0.54)   $      0.45    $      0.36
  Discontinued operations, net (1) ............................          1.06           0.16           0.19
  Extraordinary loss (2) ......................................         (0.01)           -              -
  Cumulative effect of accounting change (3) ..................           -            (0.04)           -
--------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE ....................................   $      0.51    $      0.57    $      0.55
==============================================================================================================
</TABLE>


(1)  In the fourth quarter of 2001, the Company's Board of Directors  approved a
     series of  actions  related to the  strategic  review of its  portfolio  of
     businesses  that commenced  earlier in the year. The outcome of this review
     included the sale in November  2001 of the  Company's  Management  Services
     business  (with  a  related  pretax  gain  of $640  million,  $384  million
     after-tax)   as  well  as  the   decision   to   exit   non-strategic   and
     underperforming  businesses  including  TruGreen LandCare  Construction and
     Certified  Systems,  Inc.,  as  well as  certain  other  operations.  These
     operations are recorded in  "Discontinued  operations"  in all periods.  In
     2001, net income from discontinued operations consisted of; income from the
     Management Services segment ($34 million), net loss from other discontinued
     operations  ($7 million),  and the gain on the sale of Management  Services
     net of losses from the  disposition of other entities ($303  million).  The
     Company  also  recorded  a pretax  charge of $397  million  ($286  million,
     after-tax) in the fourth quarter of 2001, related primarily to goodwill and
     asset impairments as well as other items.

     In 1999,  the Company  realized a pretax gain of $50 million  ($30  million
     after-tax) relating to the sales of its Premier automotive business and its
     remaining  15 percent  interest in  ServiceMaster  Energy  Management,  and
     recorded a pretax charge of $136 million ($81 million  after-tax)  relating
     to impairment and other items in the Diversified Health Services business.


(2)  In 2001,  the  Company  completed  a  number  of  transactions  in which it
     purchased a portion of its public debt securities.  In addition, during the
     fourth quarter of 2001, the Company  prepaid some of its  longer-term  debt
     with some of the proceeds  from the  Management  Services sale and incurred
     fees related to "make-whole"  provisions on the debt repaid. The net impact
     of  these   transactions  was  a  net  extraordinary   loss  on  the  early
     extinguishment of debt of $3.4 million ($5.8 million pretax).

(3)  In 2000, the Company  changed its method of accounting for revenue from its
     termite baiting contracts.  The cumulative effect of this accounting change
     as of January 1, 2000,  was $11.1  million,  ($18.9  million  pretax).  The
     impact of adopting  the new  accounting  method  compared  to the  previous
     methodology  was not material in 2000. The pro forma impact in 1999 of this
     change was to reduce diluted earnings per share by $0.02.

(4)  Basic  earnings per share is  calculated  based on 298,659  shares in 2001,
     302,487 shares in 2000, and 307,637 shares in 1999,  while diluted earnings
     per share is calculated based on 311,408 shares in 2001,  305,518 shares in
     2000 and  314,406  shares in 1999.  In 2001,  the  calculation  of  diluted
     earnings per share includes the impact of convertible  securities.  See the
     "Earnings Per Share" section in the footnotes to the consolidated financial
     statements  for the impact of the  convertible  securities  to the  diluted
     earnings per share calculation.


See  accompanying  Summary of Significant  Accounting  Policies and Notes to the
Consolidated Financial Statements.

                                       12
<PAGE>

Statements of Financial Position
(In thousands)
<TABLE>

As of December 31,                                                              2001            2000
-------------------------------------------------------------------------------------------------------
<S>                                                                         <C>            <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ...............................................   $   421,550    $    57,948
Marketable securities ...................................................        61,561         56,531
Receivables, less allowance of $ 27,951 in 2001 and $30,031 in 2000 .....       366,284        368,822
Inventories .............................................................        71,336         69,935
Prepaid expenses and other assets .......................................       169,327        140,334
Deferred taxes and tax receivables ......................................        60,600         82,540
-------------------------------------------------------------------------------------------------------
Total current assets ....................................................     1,150,658        776,110
-------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Land and buildings ......................................................        41,059         38,027
Equipment and other .....................................................       432,592        439,100
-------------------------------------------------------------------------------------------------------
                                                                                473,651        477,127
Less: accumulated depreciation ..........................................       284,679        266,636
-------------------------------------------------------------------------------------------------------
Net property, plant, and equipment ......................................       188,972        210,491
-------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Intangible assets, primarily trade names and goodwill, net of accumulated
 amortization of $441,130 in 2001 and $395,321 in 2000 ..................     2,167,723      2,360,394
Assets of discontinued operations .......................................        33,398        500,517
Notes receivable, long-term securities, and other assets ................       133,988        132,322
-------------------------------------------------------------------------------------------------------
 TOTAL ASSETS ...........................................................   $ 3,674,739    $ 3,979,834
=======================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY:

CURRENT LIABILITIES:
Accounts payable ........................................................   $   123,800    $   128,442
Accrued liabilities:
 Payroll and related expenses ...........................................        83,973         79,444
 Insurance and related expenses .........................................        40,019         19,002
 Income taxes payable ...................................................        24,243          1,235
 Other ..................................................................       133,291         89,518
Deferred revenues .......................................................       373,916        298,425
Current portion of long-term debt .......................................        35,159         61,360
-------------------------------------------------------------------------------------------------------
 Total current liabilities ..............................................       814,401        677,426
-------------------------------------------------------------------------------------------------------
LONG-TERM DEBT ..........................................................     1,105,518      1,756,757
LONG-TERM LIABILITIES:
Deferred tax liability ..................................................       263,000        127,350
Liabilities from discontinued operations ................................        75,159        189,505
Other long-term obligations .............................................        93,023         61,275
-------------------------------------------------------------------------------------------------------
 Total long-term liabilities ............................................       431,182        378,130
-------------------------------------------------------------------------------------------------------
MINORITY INTEREST .......................................................       102,677          5,933
COMMITMENTS AND CONTINGENCIES (see Notes)
SHAREHOLDERS' EQUITY:
Common Stock $0.01 par value, authorized 1 billion shares; issued and
 outstanding of 300,531 shares in 2001 and 298,474 shares in 2000 .......         3,005          2,985
Additional paid-in capital ..............................................     1,037,969      1,030,399
Retained earnings .......................................................       337,232        301,207
Accumulated other comprehensive income ..................................        (1,888)        (2,832)
Restricted stock ........................................................        (1,285)        (1,829)
Treasury stock ..........................................................      (154,072)      (168,342)
-------------------------------------------------------------------------------------------------------
 Total shareholders' equity .............................................     1,220,961      1,161,588
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..............................   $ 3,674,739    $ 3,979,834
=======================================================================================================
</TABLE>


See  accompanying  Summary of Significant  Accounting  Policies and Notes to the
Consolidated Financial Statements.


                                       13
<PAGE>

Statements of Shareholders' Equity
(In thousands)
<TABLE>

                                                    Additional                 Accumulated
                                        Common       Paid-in       Retained   Comprehensive     Treasury     Restricted
                                         Stock       Capital       Earnings       Income          Stock         Stock   Total Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>           <C>           <C>           <C>            <C>          <C>
Balance, December 31, 1998 .........  $   2,980   $   788,124   $   179,840   $   3,911     $   (14,986)   $   (3,383)  $   956,486
------------------------------------------------------------------------------------------------------------------------------------
Net Income 1999 ....................                                173,563                                                 173,563
Other comprehensive income,
 net of tax:
 Unrealized gains on securities,
  net of reclassification adjustment                                             (3,730)                                     (3,730)
 Foreign currency translation
  ($1,424 tax expense) .............                                             (2,002)                                     (2,002)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income .........                                173,563     ( 5,732)                                    167,831

Shareholder dividends ..............                               (111,702)                                               (111,702)
Shares issued under options,
  debentures, grant plans and
  other (1,979 shares) .............         20         5,076                                    13,630           806        19,532
Treasury shares purchased and
  related costs (7,049 shares) .....        (70)                                                (92,976)                    (93,046)
Shares issued for acquisitions
  (14,570 shares) ..................        145       240,368                                    26,102                     266,615
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 .........  $   3,075   $ 1,033,568   $   241,701   $  (1,821)    $   (68,230)   $   (2,577)  $ 1,205,716
------------------------------------------------------------------------------------------------------------------------------------
Net Income 2000 ....................                                173,827                                                 173,827
Other comprehensive income,
 net of tax:
 Unrealized gains on securities,
  net of reclassification adjustment                                              2,845                                       2,845
 Foreign currency translation
  ($2,741 tax expense) .............                                             (3,856)                                     (3,856)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income .........                                173,827      (1,011)                                    172,816

Shareholder dividends ..............                               (114,321)                                               (114,321)
Shares issued under options,
 debentures, grant plans and
 other (2,099 shares) ..............         21        (1,655)                                   18,866           748        17,980
Treasury shares purchased and
 related costs (12,637 shares) .....       (126)                                               (135,507)                   (135,633)
Shares issued for acquisitions
 (1,482 shares) ....................         15        (1,514)                                   16,529                      15,030
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 .........  $   2,985   $ 1,030,399   $   301,207   $  (2,832)    $  (168,342)   $   (1,829)  $ 1,161,588
------------------------------------------------------------------------------------------------------------------------------------
Net Income 2001 ....................                                155,033                                                 155,033
Other comprehensive income,
  net of tax:
 Unrealized gains on securities,
  net of reclassification adjustment                                             (5,617)                                     (5,617)
 Foreign currency translation
  ($4,579 tax expense) .............                                              6,561                                       6,561
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income .........                                155,033         944                                     155,977

Shareholder dividends ..............                               (119,008)                                               (119,008)
Shares issued under options,
 debentures, grant plans and
 other (2,142 shares) ..............         21         7,570                                    15,577           544        23,712
Treasury shares purchased and
 related costs (124 shares) ........         (1)                                                 (1,307)                     (1,308)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 .........  $   3,005   $ 1,037,969   $   337,232   $  (1,888)    $  (154,072)   $   (1,285)  $ 1,220,961
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>

Disclosure of reclassification amounts (net of tax) relating to comprehensive income:

                                                       2001          2000         1999
-----------------------------------------------------------------------------------------
<S>                                                <C>          <C>            <C>
Unrealized holding gains arising in period         $    920     $   12,100     $    555
Less: gains realized                                 (6,537)        (9,255)      (4,285)
-----------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities        $ (5,617)    $    2,845     $ (3,730)
-----------------------------------------------------------------------------------------
</TABLE>

See  accompanying  Summary of Significant  Accounting  Policies and Notes to the
Consolidated Financial Statements.

                                       14
<PAGE>


Statements of Cash Flows
(In thousands)
<TABLE>


For years ended December 31,                                                      2001          2000        1999
-------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1 .....................................   $  57,948    $  62,022    $  69,535
CASH FLOWS FROM OPERATIONS:
NET INCOME .................................................................     155,033      173,827      173,563
   Adjustments to reconcile net income to net cash provided from operations:
   Income from discontinued operations .....................................    (330,234)     (48,192)     (60,865)
   Charge for impaired assets and other items, net of tax ..................     285,540          -         50,958
   Extraordinary loss ......................................................       3,422          -            -
   Cumulative effect of accounting change ..................................         -         11,161          -
   Depreciation expense ....................................................      55,161       55,620       44,844
   Amortization expense ....................................................      71,776       67,566       59,218
   Deferred 1998 tax payment ...............................................         -            -        (78,500)
   Tax refund from prior years payments ....................................      51,000       39,000          -
   Deferred income tax expense .............................................      38,667       49,616       54,842
Change in working capital, net of acquisitions:
   Receivables .............................................................       5,169       (5,521)     (47,144)
   Inventories and other current assets ....................................     (29,507)      (3,051)     (30,249)
   Accounts payable ........................................................      (7,472)     (12,927)         248
   Deferred revenues .......................................................      39,688       16,018       27,204
   Accrued liabilities .....................................................      23,880      (27,435)     (19,842)
   Other, net ..............................................................       1,237       (1,967)         144
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATIONS ..........................................     363,360      313,715      174,421
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Property additions .....................................................     (40,380)     (57,028)     (56,250)
    Sale of equipment and other assets .....................................      10,253       14,233        7,819
    Business acquisitions, net of cash acquired ............................     (58,268)    (152,306)    (510,512)
    Proceeds from business sales and minority interests ....................       7,713       44,784        2,868
    Notes receivable, financial investments and securities .................     (14,566)     (20,853)     (31,831)
-------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES .....................................     (95,248)    (171,170)    (587,906)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net borrowings (payments) ..............................................    (724,184)       4,546      474,580
    Shareholders' dividends ................................................    (119,008)    (114,321)    (111,702)
    Purchase of ServiceMaster stock ........................................      (1,308)    (135,633)     (93,046)
    Other, net .............................................................      13,428       12,769       19,260
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES .....................    (831,072)    (232,639)     289,092
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
    Proceeds from sale of Management Services ..............................     775,779          -            -
    Proceeds from sale of European businesses ..............................      90,387          -            -
    Cash from discontinued operations ......................................      60,396       86,020      116,880
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM DISCONTINUED OPERATIONS .............................     926,562       86,020      116,880
-------------------------------------------------------------------------------------------------------------------
CASH INCREASE (DECREASE) DURING THE YEAR ...................................     363,602       (4,074)      (7,513)
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 ...................................   $ 421,550    $  57,948    $  62,022
-------------------------------------------------------------------------------------------------------------------
</TABLE>


See  accompanying  Summary of Significant  Accounting  Policies and Notes to the
Consolidated Financial Statements.


                                       15
<PAGE>

BUSINESS SEGMENT REPORTING
The  business of the Company is  primarily  conducted  through  three  operating
segments:   TruGreen,   Terminix,  and  Home  Maintenance  and  Improvement.  In
accordance with Statement of Financial  Accounting Standards No. 131 (SFAS 131),
the  Company's  reportable  segments  are  strategic  business  units that offer
different  services.  The TruGreen segment  provides  residential and commercial
lawn care and  landscaping  services  through  TruGreen  ChemLawn  and  TruGreen
LandCare  companies.   As  a  result  of  the  decision  to  exit  the  LandCare
Construction  business,  the  results  of this  operation  are now  included  in
discontinued operations.  The Terminix segment provides termite and pest control
services to residential and commercial U.S. customers.  The Home Maintenance and
Improvement segment includes American Residential  Services,  (ARS) and American
Mechanical  Services (AMS) that provide heating,  ventilation,  air conditioning
(HVAC) and plumbing services as well as American Home Shield which provides home
warranties to consumers  that covers HVAC,  plumbing and other  appliances.  The
segment also  includes the two  franchise  operations,  ServiceMaster  Clean and
Merry Maids, which provide disaster restoration and cleaning services.

The Other Operations  segment includes entities that are managed separately from
the three major units and aggregated together in accordance with SFAS 131 due to
their size or developmental  nature.  This segment includes  ServiceMaster  Home
Service Center  (formerly  WeServeHomes.com),  an initiative  that has developed
valuable  marketing,  call center and technology  competencies  and has built an
infrastructure  that  allows  customers  the  ability  to  purchase  all  of the
Company's   services   through  a  single  point  of  contact;   the   Company's
international  operations which include the retained Terminix  operations in the
United Kingdom and Ireland; the Company's headquarters  operations;  and certain
operations that the Company divested prior to 2001.

Information  regarding the accounting  policies used by the Company is described
in  the  Summary  of  Significant   Accounting  Policies.  The  Company  derives
substantially  all of its revenues from customers in the United States with less
than three  percent  generated  in foreign  markets.  Operating  expenses of the
business units consist primarily of direct costs.  Identifiable assets are those
used in carrying out the operations of the business unit and include  intangible
assets directly related to its operations.



<TABLE>


(In thousands)                                              2001     % Change        2000      % Change        1999
----------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>      <C>               <C>     <C>
OPERATING REVENUE:
TruGreen .........................................    $ 1,374,382        0%     $ 1,371,002       12%     $ 1,219,732
Terminix .........................................        839,163       16          725,083        9          666,076
Home Maintenance and Improvement .................      1,312,578        8        1,211,674       34          903,970
Other Operations .................................         75,306      (58)         177,758      (48)         338,857
----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE ..........................    $ 3,601,429        3%     $ 3,485,517       11%     $ 3,128,635
======================================================================================================================
OPERATING INCOME:
TruGreen .........................................    $   143,306      (14%)    $   165,697      (22%)    $   212,736
Terminix .........................................        104,061       22           85,407       18           72,104
Home Maintenance and Improvement .................        112,415        6          105,588       19           88,393
Other Operations .................................       (447,227)     N/A          (22,950)     N/A          (93,481)
Other Operations,
 EXCLUDING NON-RECURRING ITEMS (1) ...............        (50,484)     N/A          (22,950)     N/A           (7,981)
----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME ...........................    $   (87,445)     N/A      $   333,742       19%     $   279,752
======================================================================================================================
TOTAL OPERATING INCOME,
 EXCLUDING NON-RECURRING ITEMS (1) ...............    $   309,298       (7%)    $   333,742       (9%)    $   365,252
CAPITAL EMPLOYED:
TruGreen .........................................    $ 1,036,392       (6%)    $ 1,104,551        8%     $ 1,027,201
Terminix .........................................        603,903       15          526,440        1          519,740
Home Maintenance and Improvement .................        672,207        6          636,019        7          592,718
Other and Discontinued Operations ................        151,813      N/A          718,628      (14)         838,289
----------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL EMPLOYED ...........................    $ 2,464,315      (17%)    $ 2,985,638        0%     $ 2,977,948
======================================================================================================================
IDENTIFIABLE ASSETS:
TruGreen .........................................    $ 1,088,345       (9%)    $ 1,199,626        3%     $ 1,161,050
Terminix .........................................        832,916       20          695,358        6          654,577
Home Maintenance and Improvement .................      1,054,101        7          983,145        9          904,826
Other and Discontinued Operations ................        699,377      N/A        1,101,705       (4)       1,149,762
----------------------------------------------------------------------------------------------------------------------
TOTAL IDENTIFIABLE ASSETS ........................    $ 3,674,739       (8%)    $ 3,979,834        3%     $ 3,870,215
======================================================================================================================
DEPRECIATION AND AMORTIZATION EXPENSE:
TruGreen .........................................    $    53,089        2%     $    52,187       33%     $    39,246
Terminix .........................................         30,390        8           28,135        5           26,856
Home Maintenance and Improvement .................         30,246        5           28,902       27           22,814
Other Operations .................................         13,212       (5)          13,962       (8)          15,146
----------------------------------------------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION EXPENSE ......    $   126,937        3%     $   123,186       18%     $   104,062
======================================================================================================================
CAPITAL EXPENDITURES:
TruGreen .........................................    $     4,679      (80%)    $    23,792       10%     $    21,667
Terminix .........................................         10,427       47            7,075       23            5,768
Home Maintenance and Improvement .................         16,784       16           14,517       (7)          15,612
Other Operations .................................          8,490      (27)          11,644      (12)          13,203
----------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES .......................    $    40,380      (29%)    $    57,028        1%     $    56,250
======================================================================================================================
</TABLE>


1)  In the fourth quarter of 2001, the Company's Board of Directors  approved a
     series of  actions  related to the  strategic  review of its  portfolio  of
     businesses  that commenced  earlier in the year. The outcome of this review
     included the sale in November  2001 of the  Company's  Management  Services
     business as well as the decision to exit non-strategic and  underperforming
     businesses including TruGreen LandCare  Construction and Certified Systems,
     Inc., as well as certain other  operations.  These operations are reflected
     as  "Discontinued  operations"  in the  Statements  of  Income  and are not
     included in the continuing  operations  information  reflected in the table
     above.  The Company  also  recorded a pretax  charge of $397 million in the
     fourth quarter of 2001, related primarily to goodwill and asset impairments
     as well as other items. In 1999, the Other Operations  segment included the
     $50  million  pretax gain  related to the sales of the  Premier  automotive
     business and the Company's  remaining 15 percent  interest in ServiceMaster
     Energy  Management,  and the $136  million  pretax  charge  related  to the
     Diversified Health Services operation,  which included  write-downs for the
     impairment of assets.


                                       16
<PAGE>

PORTFOLIO REVIEW AND STRATEGIC ACTIONS
In the fourth  quarter  of 2001,  the  Company's  Board of  Directors,  at their
October 3, 2001 meeting,  approved a series of strategic  actions which were the
culmination of an extensive  portfolio  review process that was initiated in the
first  quarter.  These  strategic  actions  included  the sale of the  Company's
Management  Services business and the exit of non-strategic and  underperforming
businesses including TruGreen LandCare  Construction and Certified Systems Inc.,
as well as certain other small operations.  The goal of the portfolio review was
to increase  shareholder  value by creating a focused and aligned  company  that
provides the greatest  return and growth  potential.  The Company  determined it
could best achieve these goals with a portfolio of businesses  which support the
business  strategy to become  America's Home Service Company and have attractive
cash flow and return  characteristics.  In addition, the Company believed it was
critical to strengthen its balance sheet through the reduction of debt,  thereby
providing   it  with   financial   flexibility   to  invest  in  future   growth
opportunities.

DISCONTINUED OPERATIONS
On October 3, 2001 the  Company's  Board of  Directors  approved an agreement to
sell the  Management  Services  business to ARAMARK  Corporation  (ARAMARK)  for
approximately $800 million.  The Management Services business provided a variety
of supportive management services to institutional  healthcare,  education,  and
commercial facilities.  The all-cash transaction closed on November 30, 2001 and
the Company recorded an after-tax  accounting gain of $384 million, or $1.23 per
diluted share from this sale. As part of the sale of  Management  Services,  the
Company also agreed to sell to ARAMARK its  headquarters  facilities  located in
Downers  Grove,  Illinois and agreed to allow  ARAMARK to use the  ServiceMaster
name for a period  of time in  related  markets.  Deferred  royalty  income  was
recorded  upon  the sale of this  business  and  provisions  for  legal  claims,
severance  and other smaller items were  established  for the remaining  Company
obligations.  From the proceeds of this  transaction,  the Company has remaining
approximately  $7 million of after-tax  cash  payments  which are expected to be
made in 2002 along with $70  million  of taxes  resulting  from the sale of this
business.

On October 3, 2001 the  Company's  Board of Directors  also approved the exit of
non-strategic  and  underperforming   businesses   including  TruGreen  LandCare
Construction  and Certified  Systems Inc. (the Company's  professional  employer
organization),  as well as certain other small operations.  The Company sold its
TruGreen  LandCare  Construction  operations to Environmental  Industries,  Inc.
(EII) in certain  markets and entered into an  agreement  with EII to manage the
backlog  of  commercial  landscaping  construction  contracts  in the  remaining
markets.  The  Company  expects  the  wind-down  of the  contract  backlog to be
completed by mid-year 2002. In connection with the exit of the TruGreen LandCare
Construction  business,  certain assets including accounts  receivable and fixed
assets were  written  down to their net  realizable  value and  provisions  were
recorded  for  transaction  fees,  severance,   increased  health  and  workers'
compensation  insurance costs, and lease termination costs. In addition,  due to
revised cost estimates,  the Company also recorded an adjustment relating to its
construction   contracts  that  were  accounted  for  under  the  percentage  of
completion  methodology.  With the  decision  to exit the  business,  management
expects that it will have less leverage with customers in collecting outstanding
receivables,  and the write-down of accounts  receivable reflects this estimated
reduced  collectibility.   The  provision  for  increased  health  and  workers'
compensation  insurance costs is in addition to the provisions recorded prior to
the  decision to exit the  business.  This  additional  provision  reflects  the
increased insurance claim activity expected as a result of exiting the business.
The  total  impact of the  aforementioned  items was $62  million,  pretax  ($37
million,  after-tax) and was included in the loss recorded on the disposition of
the TruGreen LandCare Construction operations.

In the fourth quarter of 2001, the Company sold all of the customer contracts of
Certified  Systems  Inc.  (CSI) to AMS Staff  Leasing,  N.A.,  Inc.  The Company
expects to complete the  wind-down  of CSI's  remaining  operations  by mid-year
2002.  The Company  recorded a loss on  disposition  of the CSI  business of $64
million, pretax ($40 million, after-tax), which included the charge for impaired
goodwill ($46 million pretax),  provisions for legal claims,  transaction  fees,
severance,  and increased health and workers' compensation  insurance costs. The
provision for increased health and workers'  compensation  insurance costs is in
addition to the adequate  provisions  recorded prior to the decision to exit the
business.

As of December 31, 2001,  there remains  approximately  $38 million of after-tax
payments to be made related to Landcare  Construction  and CSI,  which should be
offset by  approximately  $20 million of  after-tax  cash  collections  from the
remaining assets.

On October 30, 2001, the Company closed the sale of certain  subsidiaries of its
European  pest control and property  services  operations  for $101  million.The
consideration  consisted  of $94  million  of cash and the  transfer  of certain
liabilities to the acquirer and $7 million in seller  financing.  The net impact
of this transaction was not material to the  consolidated  statements of income.
The Company continues to provide pest control services in the United Kingdom and
Ireland.

Reported "Discontinued operations" include the operating results of the sold and
discontinued  businesses  noted  above  as well as the  gain  from  the  sale of
Management Services,  net of losses from the disposition of other entities.  The
operating  results and  financial  position of  discontinued  operations  are as
follows:

(In thousands,except per share data)

Operating Results:                   2001         2000         1999
----------------------------------------------------------------------
Operating revenue               $2,209,134   $2,485,098   $2,574,900
Income from
    discontinued
    operations before
    income taxes                    46,066       83,157      103,422
Provision for income taxes          19,429       34,965       42,557
----------------------------------------------------------------------
Income from
    discontinued operations         26,637       48,192       60,865
Gain on sale of
    Management Services,
    net of losses from
    disposition of other
    entities (net of taxes of
    $  204,996)                    303,597            -            -
----------------------------------------------------------------------
Income from
    discontinued
    operations                  $  330,234   $   48,192   $   60,865
=======================================================================
Diluted income
    per share from
    discontinued
    operations                  $     1.06   $     0.16   $     0.19
=======================================================================


Financial Position:                               2001         2000
-----------------------------------------------------------------------
Current assets                               $   27,880   $  223,130
Property, plant and equipment                     4,232       95,493
Long-term assets                                  1,286      181,894
-----------------------------------------------------------------------
Total assets                                 $   33,398   $  500,517
=======================================================================
Current liabilities                          $   62,071   $  150,055
Long-term liabilities                            13,088       39,450
-----------------------------------------------------------------------
Total liabilities                            $   75,159   $  189,505
=======================================================================


                                       17
<PAGE>

CHARGE FOR IMPAIRED ASSETS AND OTHER ITEMS
In the fourth quarter of 2001, the Company recorded a pretax charge for asset
impairments and other items totaling $397 million. The table below details the
components of the charge:

                                Write-down        Accrual
                             of Assets to Net    for Cash       Total
(In thousands)               Realizable Value    Payments       Charge
-------------------------------------------------------------------------
Goodwill                         $350,000            -         $350,000
Residual value
 guarantees                           -           17,000         17,000
Severance
 arrangements
 for former executives
 and terminated
 employees                            -           15,000         15,000
Transaction fees                      -            3,000          3,000
Asset impairments                   7,000            -            7,000
Other items                           -            5,000          5,000
-------------------------------------------------------------------------
Total Charge                     $357,000       $ 40,000       $397,000
=========================================================================
2001 Cash Payments                              $  4,000
=========================================================================

Goodwill  and  other  asset  impairments   reflect  the  write-down  of  certain
long-lived assets. The Company's policy for assessing  enterprise-level goodwill
impairment  utilizes a  discounted  cash flow  methodology.  Upon the  Company's
decision  to exit the  TruGreen  LandCare  Construction  business,  the  Company
assessed the future expected cash flows of the TruGreen  LandCare  operations to
determine  whether the goodwill of TruGreen  LandCare had become impaired.  As a
result of this  assessment,  the Company  recorded an impairment  charge of $300
million  related to the goodwill of the TruGreen  LandCare  business.  A similar
assessment  was performed  with respect to the  remaining  European pest control
businesses, and a goodwill impairment charge of $50 million was recorded related
to these  operations.  The Company has reviewed  the  impairment  provisions  of
Statement  of  Financial  Accounting  Standards  No.  142,  "Goodwill  and Other
Intangible  Assets" and, based on this  assessment,  the Company does not expect
any further impairment charges upon adoption of this statement in 2002.

On October 3, 2001 the  Company's  Board of  Directors  approved the sale of the
Company's ownership interest in five assisted living facilities,  as well as the
building  that served as the  headquarters  for  managing  the  assisted  living
facilities.   These   properties   were  financed   through  a  synthetic  lease
arrangement,  whereby the  Company  has  guaranteed  the  residual  value of the
properties.  With the decision to sell the facilities,  in the fourth quarter of
2001 the Company  received bids for the sale of the assisted  living  facilities
and  market-value  appraisals  for the  headquarters  building.  Included in the
charge is a provision for the residual value  guarantee that is in excess of the
market value of the properties.

The severance  costs included in the charge  primarily  relate to several senior
employees that were  terminated in the fourth quarter of 2001. Two of the senior
executives  have  longer-term   arrangements  and  the  amounts  owed  to  these
individuals  were accrued as they will have  substantially  reduced  involvement
with the Company.

PRIOR YEAR DISPOSITIONS AND CHARGES
In September 2000, the Company completed the sales of two non-core business. The
Company's  interior  plant care  business  was sold for $44 million in cash.  In
addition, the Company sold its Diversified Health Services unit, a business that
manages long-term care facilities.  Neither transaction had a material impact on
the Company's operating results.


In 1999, the Company completed a strategic review and assessment of the services
that  comprised the  Diversified  Health  Services  operation,  considering  the
industry-wide  changes in reimbursement  and compliance  policies as well as the
resulting  financial  difficulties  of a number of its  customers.  Based on the
review of the business and the credit risks involved,  the Company substantially
reduced the scope of the services it offered.  As a result of this  review,  the
Company recorded a pre-tax charge of $136 million ($81 million after-tax) in the
second  quarter of 1999  relating  to  Diversified  Health  Services,  primarily
related to goodwill and asset impairments. Approximately $11 million (after-tax)
of reserves were established in 1999 which were appropriately used in 2000.

In 1999, the Company sold its Premier  business unit for $76 million,  resulting
in a pretax gain of approximately $42 million ($25 million  after-tax).  Premier
provided cleaning services in the automotive industry. Also in 1999, the Company
sold its  remaining  15% interest in a strategic  venture with Texas  Utilities,
resulting in a pretax gain of $8 million ($5 million after-tax).

REINCORPORATION
Most operations of ServiceMaster and its subsidiary  partnerships were conducted
from 1986 through 1997 in partnership  form,  free of federal  corporate  income
tax. Had ServiceMaster  remained a partnership,  the Internal Revenue Code would
have imposed a federal  corporate tax on ServiceMaster  operations  beginning in
1998. In anticipation of this change, the shareholders  approved a tax-free plan
of  reorganization  to return to corporate  form.  No federal  income taxes were
imposed on the shareholders.  As a result of the  reincorporation  at the end of
1997,  the  Company  recognized  a step-up  in the tax  basis of its  intangible
assets. These assets are amortized over 15 years with the associated book assets
assuming a 40 year life.

INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to the  Company's  effective  income tax rate for  continuing  operations  is as
follows:

                             2001    2000     1999
----------------------------------------------------
Tax at U.S.
 federal statutory rate    (35.0%)   35.0%   35.0%
State and local
 income taxes,
 net of U.S.
 federal benefit            (0.9%)    4.0%    4.0%
Impairment of
 non-deductible
 goodwill                   19.1%     -       -
Non-deductible
 amortization
 expense                     1.6%     1.4%    1.4%
Other                        0.5%     1.4%    1.1%
----------------------------------------------------
Effective rate             (14.7%)   41.8%   41.5%
====================================================

The effective tax rate for discontinued  operations was 40.5%,  42.0%, and 41.1%
for 2001, 2000, and 1999,  respectively.  The difference between these rates and
the federal  statutory  tax rate of 35%  reflects  state  taxes,  net of federal
benefit, and permanent items, primarily amortization expense.

                                       18
<PAGE>

Income tax expense from continuing operations is as follows:

(In thousands)                    2001
                 ----------------------------------
                   Current     Deferred      Total
---------------------------------------------------
U.S. federal      $ 25,045    $(51,878)   $(26,833)
State and local      6,459      (9,220)     (2,761)
---------------------------------------------------
                  $ 31,054    $(61,098)   $(29,594)
===================================================

                                  2000
                  ---------------------------------
                   Current     Deferred      Total
---------------------------------------------------
U.S. federal      $ 22,356    $ 62,368    $ 84,724
State and local      2,863      10,767      13,630
---------------------------------------------------
                  $ 25,219    $ 73,135    $ 98,354
===================================================

                                  1999
                  ---------------------------------
                   Current     Deferred      Total
---------------------------------------------------
U.S. federal      $ 29,857    $ 39,853    $ 69,710
State and local      3,425       6,938      10,363
---------------------------------------------------
                  $ 33,282    $ 46,791    $ 80,073
===================================================

Deferred income tax expense  results from timing  differences in the recognition
of income and expense for income tax and financial reporting purposes.  Deferred
income tax balances reflect the net tax effects of temporary differences between
the carrying  amounts of assets and  liabilities  for  financial  reporting  and
income tax  purposes.  Management  believes  that,  based upon its  lengthy  and
consistent  history of profitable  operations,  it is probable that its deferred
tax assets will be realized on future tax returns, primarily from the generation
of future taxable income.  Significant  components of the Company's deferred tax
balances are as follows:

(In thousands)                      2001        2000
-------------------------------------------------------
Deferred tax assets (liabilities):
Current:
 Prepaid expenses and other      $(23,200)   $(21,500)
 Accounts receivable allowance     12,550      15,100
 Accrued insurance and
  related expenses                 11,750       7,600
 Other accrued expenses            54,100      26,350
-------------------------------------------------------
  Total current asset              55,200      27,550
-------------------------------------------------------
 Long-Term:
 Long-term assets (1)            (274,100)   (130,800)
 Insurance expenses                26,700      20,400
 Other long-term obligations      (15,600)    (16,950)
-------------------------------------------------------
  Total long term liability      (263,000)   (127,350)
-------------------------------------------------------
 Net deferred tax liability     $(207,800)   $(99,800)
=======================================================

(1)  The deferred tax liability  relates  primarily to the difference in the tax
     versus book basis of intangible  assets.  This liability does not represent
     expected future cash payments until a business unit of the Company is sold.

The Company  received a $1 million net tax refund in 2001. Total tax payments in
2000 and 1999 net of refunds,  were $38 million and $177 million,  respectively.
The 1999 tax  payments  included  $79 million for 1998  federal  taxes that were
deferred into 1999.

The  increase  in the  current  deferred  tax asset  reflects  the impact of the
expected  future tax  deductions  related to the cash  charges  recorded  in the
fourth  quarter of 2001.  The increase in the  long-term  deferred tax liability
primarily  reflects  the  sale of  Management  Services.  The tax  basis of this
business  exceeded  its book  basis  and the  related  deferred  tax  asset  was
eliminated  with the sale of the business.  The deferred tax liability  reflects
the basis  differences  primarily  related to intangible  assets.  In 2002,  the
Company is required to adopt SFAS 142,  "Goodwill and Other Intangible  Assets",
which eliminates the requirement to record goodwill  amortization expense in the
financial  statements.  The  majority  of the  Company's  goodwill  amortization
expense is  deductible  for tax  purposes,  providing  the Company an annual tax
benefit of  approximately  $50  million  for the next ten years and  diminishing
thereafter.  This annual tax benefit is reflected in the Statements of Financial
Position as an increase in the deferred tax liability. In the Statements of Cash
Flows,  the adoption of SFAS 142 (and the related  elimination  of  amortization
expense for financial  statement  purposes) will result in a reclassification of
approximately  $20  million  into  the  deferred  tax  expense  line  as the tax
deduction from amortization will be eliminated from the income statement.

ACQUISITIONS
Acquisitions have been accounted for using the purchase method and, accordingly,
the results of operations of the acquired  businesses  have been included in the
Company's  consolidated  financial  statements since their dates of acquisition.
The assets and  liabilities of these  businesses  were recorded in the financial
statements at their estimated fair market values as of the acquisition dates.

CURRENT YEAR
In January 2001, the Company acquired the Allied Bruce Terminix  Companies,  the
Company's largest Terminix franchise and the fourth largest pest control company
in the United States. The total consideration consisted of an equity interest in
the Terminix subsidiary valued at $100 million, which is exchangeable into eight
million ServiceMaster common shares, and longer-term cash payments due over nine
years totaling $25 million.  The excess of the consideration  paid over the fair
value of the  tangible  assets  acquired  was $125  million and was  recorded as
enterprise goodwill.

During 2001, the Company acquired several small companies, primarily in the pest
control and heating/air  conditioning and plumbing businesses.  The net purchase
price  of these  acquisitions  was $64  million.  All of  these  companies  were
acquired  before  June 30,  2001  (the date  that  SFAS 141  became  effective).
Approximately $59 million of enterprise  goodwill was recorded relating to these
acquisitions.

In August 2001,  the Company  acquired  certain assets of Sears Termite and Pest
Control,  Inc., a company that  provides  pest control  services and  protection
against  termite  damage  to  residential  customers  located  primarily  in the
Southeast.  The  acquisition  of the Sears  Termite  and Pest  Control  business
enhances  the  Company's  Terminix  business  in  the  markets  being  acquired,
especially  in the states of Florida,  Georgia  and Texas,  where both Sears and
Terminix have a strong presence. The cash paid after assuming the liabilities to
remediate   the  premises   owned  by  current   customers   was  not  material.
Approximately  $54 million was  recorded  as  intangible  assets with $6 million
assigned to customer  lists and trade name usage  which will be  amortized  over
three to seven years.

PRIOR YEARS
During 2000, the Company  acquired many small  companies,  primarily in the lawn
care,  heating/air  conditioning  and  plumbing,  pest  control and  landscaping
businesses. The net purchase price was $214 million, of which approximately $162
million was recorded as enterprise goodwill.

During 1999, the Company completed two significant acquisitions.  In March 1999,
the Company  acquired  LandCare USA  (LandCare)  which,  when  combined with the
existing  landscape  operations of the Company,  created the largest  commercial
landscaping  company in the United States.  In April 1999, the Company  acquired
American  Residential  Services  (ARS),  establishing  the Company as one of the
nation's  leading  providers  of  heating,  ventilation,  and  air  conditioning
services.  The net purchase price in the LandCare and ARS acquisitions were $331
million and $292 million,  respectively.  The excess of the  consideration  paid
over  the  fair  value of the  tangible  assets  relating  to  LandCare  and ARS
businesses was $251 million and $225 million,  respectively,  which was recorded
as goodwill that is being amortized over 40 years.

                                       19
<PAGE>


Also during 1999, the Company acquired many smaller companies,  primarily in the
landscaping,  lawn care and pest control businesses.  The net purchase price for
these  acquisitions was $315 million.  The excess of the consideration paid over
the fair value of the tangible assets acquired was $278 million and was recorded
as enterprise goodwill.

Supplemental  cash flow information  regarding the Company's  acquisitions is as
follows:

(In thousands)                   2001         2000        1999
-------------------------------------------------------------------
Purchase price              $  249,438   $  253,669   $1,078,105
Less liabilities
 assumed                       (52,806)     (40,149)    (140,477)
-------------------------------------------------------------------
Net purchase price          $  196,632   $  213,520   $  937,628
-------------------------------------------------------------------
Net cash paid
 for acquisitions           $   58,268   $  152,306   $  510,512
Shares issued                     --         15,030      266,615
Seller financed debt            38,364       46,184      160,501
Minority ownership
 in Terminix                   100,000         --           --
-------------------------------------------------------------------
Payment for
 acquisitions               $  196,632   $  213,520   $  937,628
===================================================================

COMMITMENTS AND CONTINGENCIES
The Company carries  insurance  policies on insurable risks which it believes to
be appropriate.  The Company generally has self-insured retention limits and has
obtained  fully insured  layers of coverage  above such  self-insured  retention
limits.  Accruals  for self  insurance  losses are made  based on the  Company's
claims experience and actuarial assumptions. The Company has certain liabilities
with respect to existing or potential claims,  lawsuits,  and other proceedings.
The Company accrues for these  liabilities when it is probable that future costs
will be incurred and such costs can be reasonably estimated.

In June 1996,  Ray D.  Martin,  a former  salesman  employed by  ServiceMaster's
Management  Services unit, filed a lawsuit in Fulton County,  Georgia,  claiming
that the Company had not paid him the full amount of commissions  due to him. In
January,  2002 the  Company  announced  that this case had been  settled  out of
court.  The  total  compensatory  damages  and fees paid by the  Company  in the
settlement were under $1 million.

The  Company  believes  that  other  legal  proceedings  and  currently  pending
litigation  arising in the ordinary  course of business will not have a material
effect on the consolidated financial statements.

EMPLOYEE BENEFIT PLANS
Contributions   to  qualified   profit   sharing  and   non-qualified   deferred
compensation plans were made in the amount of $8.9 million in 2001, $9.3 million
in 2000 and $8.4 million in 1999.  Under the Employee  Share  Purchase Plan, the
Company  contributed $.8 million in 2001, $.8 million in 2000 and $.7 million in
1999.  These  funds  defrayed  part  of the  cost  of the  shares  purchased  by
employees.

MINORITY INTEREST OWNERSHIP AND RELATED PARTIES
In  December   2001,  the  Company   acquired  the  minority   interest  in  the
ServiceMaster  Home Service  Center (SMHSC) held by Kleiner  Perkins  Caufield &
Byers.  The SMHSC was merged into a  wholly-owned  subsidiary of  ServiceMaster.
Pursuant  to this  merger,  ServiceMaster  purchased  shares  of SMHSC  owned by
employees  of the Company and  converted  options to purchase  SMHSC shares into
incentive  options to purchase  ServiceMaster  stock. A valuation opinion from a
third party firm was obtained relating to the purchase price of the shares. Also
in  2001,  and in  connection  with the sale  and  disposition  of the  TruGreen
LandCare Construction operations, the Company repurchased the shares of TruGreen
that were  previously  purchased  by the  employees  earlier  in the  year.  The
purchase and sale prices of the shares were identical.

The Company  continues to maintain  minority  investors in the combined  ARS/AMS
entity as well as in Terminix.  Members of management  acquired,  at fair market
value,  equity  interests  in ARS.  The  Company and the equity  investors  have
respective  options to acquire or sell the minority interests in the future at a
price  based on fair  market  value.  The future  acquisition  of this  minority
interest will be recorded as additional purchase cost at the time of payment. At
Terminix, the minority ownership reflects an interest issued to the prior owners
of the Allied Bruce Terminix Companies in connection with that acquisition. This
equity security is exchangeable into eight million  ServiceMaster common shares.
The ServiceMaster  shares are included in the shares used for the calculation of
diluted earnings per share.

In January  2001,  Jonathan P. Ward,  President and Chief  Executive  Officer of
ServiceMaster,  purchased from  ServiceMaster a 5.50% convertible  debenture due
January 9, 2011, with a face value of $1.1 million.  ServiceMaster  financed the
purchase of the  debenture  with a 5.50% full recourse loan due January 9, 2011.
In May 2001, Mr. Ward purchased a second 5.50% convertible debenture due May 10,
2011,  with a face  value of $1.1  million.  ServiceMaster  financed  50% of the
purchase price of this second  debenture with a 5.50% full recourse loan due May
10, 2011. Each debenture becomes convertible into 20,000 shares of ServiceMaster
common stock on December 31 on each of the years 2001 through 2005.

LONG-TERM DEBT

Long-term debt includes the following:

(In thousands)                                    2001             2000
-------------------------------------------------------------------------
 Notes Payable:
  8.38%, maturing in 2001                   $      --        $    10,000
  10.81%, maturing in 2001-2002                    --             36,700
  6.65%, maturing in 2002-2004                     --             70,000
  8.45%, maturing in 2005                       250,000          250,000
  7.40%, maturing in 2006                          --            125,000
  6.95%, maturing in 2007                       100,000          100,000
  7.88%, maturing in 2009                       193,000          250,000
  7.10%, maturing in 2018                       149,000          149,000
  7.45%, maturing in 2027                       195,000          200,000
  7.25%, maturing in 2038                        88,150          150,000
Revolving credit facilities                       --             248,615
International borrowings                         36,519           90,979
Other                                           129,008          137,823
Less current portion                            (35,159)         (61,360)
--------------------------------------------------------------------------
Total long-term debt                        $ 1,105,518      $ 1,756,757
==========================================================================

The Company is party to a number of debt agreements which require it to maintain
certain  financial and other  covenants,  including  limitations on indebtedness
(debt cannot exceed 3.5 times earnings before interest, taxes, depreciation, and
amortization  (EBITDA)) and interest coverage ratio (EBITDA needs to exceed four
times  interest  expense).  In  addition,   under  certain  circumstances,   the
agreements  may limit the  Company's  ability to pay  dividends  and  repurchase
shares of common stock. These limitations are not expected to be a factor in the
Company's future dividend and share repurchase plans.  Failure by the Company to
maintain these covenants could result in the acceleration of the maturity of the
debt.  At December 31, 2001,  the Company is in  compliance  with the  covenants
related to these debt  agreements  and based on its operating  outlook for 2002,
expects to be able to maintain compliance in the future.

                                       20
<PAGE>


The Company does not have any debt agreements that contain put rights or provide
for acceleration of the debt as a result of a change in credit rating.  However,
the Company has a number of debt agreements which contain standard ratings-based
"pricing  grids" where the interest rate payable under the agreement  changes as
the  Company's  credit  rating  changes.  While the  Company  does not  expect a
negative change in credit ratings, the impact on interest expense resulting from
changes in credit ratings is not expected to be material to the Company.

Since August  1997,  ServiceMaster  has issued $1.1  billion of  unsecured  debt
securities  pursuant  to  registration  statements  filed  with  Securities  and
Exchange  Commission.  As of year-end,  ServiceMaster had $550 million of senior
unsecured debt securities and equity  interests  available for issuance under an
effective shelf registration statement.

In the fourth quarter of 2001, the Company repaid prior to maturity,  its 10.81%
notes  maturing  2001-2002,  6.65% notes  maturing  2002-2004 and its 7.4% notes
maturing in 2006. In connection  with the early  retirement of these notes,  the
Company paid pretax "make-whole"  premiums of $17 million.  In addition,  during
2001, the Company repurchased,  prior to maturity,  approximately $123.9 million
of its public debt and recognized a pretax gain of approximately $11 million.

The Company  has a  committed  revolving  bank  credit  facility  for up to $490
million  maturing in December 2004. The facility can be used for general Company
purposes.  As of December 31,  2001,  the Company had issued  approximately  $66
million of letters of credit under the facility  and had unused  commitments  of
approximately  $424  million.  At the  Company's  current  credit  ratings,  the
interest  rate  under the new  facility  is LIBOR  plus 125 to 150 basis  points
depending upon usage.  This bank facility replaced a $750 million bank revolving
credit  facility that was due to mature in April 2002. The interest rate payable
under the new facility increased  approximately 80 to 105 basis points depending
upon the level of usage under the facility  compared to the interest  rate under
the previous facility.

As of December 31, 2001, the Company had approximately $66 million of letters of
credit issued under its bank credit  facility and  approximately  $93 million of
surety bonds  outstanding  that primarily  support  obligations  the Company has
under  insurance  programs.  The Company  expects  that the surety bonds will be
renewed  annually.  If the surety bonds are not renewed,  the Company expects to
replace them with letters of credit issued under its bank credit facility.

The Company is exposed to interest rate  fluctuations on its floating rate debt.
As of  year-end,  the Company  had  approximately  $37 million in floating  rate
borrowings.  The Company has, from time to time, entered into interest rate swap
or similar  arrangements to mitigate its exposure to interest rate fluctuations,
and does not, as a matter of policy, enter into hedging contracts for trading or
speculative  purposes.  As of December  31,  2001,  no interest  rate swaps were
outstanding.

Cash interest  payments were $128 million in 2001, $131 million in 2000, and $97
million in 1999.  Average rates paid on the revolving  credit  facility were 5.0
percent in 2001, 6.6 percent in 2000, and 5.5 percent in 1999.  Future scheduled
long-term debt payments are $35.2 million in 2002 (average rate of 3.8 percent),
$52.1  million in 2003  (average  rate of 4.6  percent),  $33.6  million in 2004
(average  rate of 5.6  percent),  $262.8  million in 2005  (average  rate of 8.3
percent) and $9.7 million in 2006 (average rate of 4.7 percent).

The Company leases certain property and equipment under various  operating lease
arrangements.  Most of the property  leases  provide that the Company pay taxes,
insurance  and  maintenance  applicable  to the leased  premises.  As leases for
existing locations expire, the Company would normally expect to renew the leases
or substitute another location and lease.

The  majority of the  Company's  fleet is leased  through  cancelable  operating
leases.  There are residual value guarantees  (ranging from 70% to 87% depending
on the agreement) on these  vehicles,  which  historically  have not resulted in
significant net payments to the lessors.  There are no net payments reflected in
the future  minimum lease  obligation as the leases are cancelable and there are
no expected net payments  due under the  guarantees.  At December 31, 2001 there
was  approximately  $260  million of residual  value  relating to the  Company's
fleet.

Rental expense for 2001,  2000 and 1999 was $162 million,  $150 million and $129
million,  respectively.  Future long-term noncancelable operating lease payments
are $75.7 million in 2002,  $47.6 million in 2003,  $38.7 million in 2004, $30.0
million in 2005, $25.0 million in 2006 and $55.2 million thereafter.

The Company maintains operating lease facilities with banks totaling $95 million
which provide for the  acquisition and development of properties to be leased by
the Company.  The Company has  guaranteed  the residual  value of the properties
under the lease up to 82 percent of the fair market value at the commencement of
the lease.  At December 31, 2001,  approximately  $87.5 million was funded under
these facilities.

In the fourth quarter of 2001, the Company  recorded a $17 million  provision to
accrue for guarantees relating to the residual value of certain properties.  The
Company  expects to make net  payments  in 2002 of $17  million.  The  remaining
amount is not required to be paid, and  therefore,  has not been included in the
future payments listed above. Of the $95 million facilities, $80 million expires
in October 2004 and $15 million expires in January 2008.

CASH AND MARKETABLE SECURITIES
Cash, money market funds and certificates of deposits,  with maturities of three
months or less,  are included in the  Statements of Financial  Position  caption
"Cash and Cash Equivalents."  Marketable  securities are designated as available
for sale and recorded at current market value,  with unrealized gains and losses
reported  in  a  separate  component  of  shareholders'  equity.  The  Company's
investments  consist  primarily  of  publicly-traded   debt  and  common  equity
securities.

As of December 31, 2001, the aggregate  market value of the Company's short- and
long-term  investments in debt and equity  securities was $116.9 million and the
aggregate cost basis was $115.4 million.

Interest and dividend income received on cash and marketable securities was $9.7
million, $10.0 million, and $9.0 million, in 2001, 2000, and 1999, respectively.
Gains  and  losses  on  sales  of  investments,  as  determined  on  a  specific
identification  basis, are included in investment  income in the period they are
realized.

ACCOUNTS RECEIVABLE SALES
At the end of the first quarter of 2001,  the Company  entered into an agreement
which provides for the ongoing  revolving sale of a designated  pool of accounts
receivable  of TruGreen  and  Terminix.  At  December  31,  2001,  there were no
receivables  that  had been  sold to third  parties.  The  Company  may sell its
receivables  under this agreement in the future and,  therefore,  have immediate
access to cash from these sales.


                                       21
<PAGE>


Under this agreement,  the Company sells, on a revolving  basis,  certain of its
accounts   receivable   to   a   wholly-owned,   bankruptcy-remote   subsidiary,
ServiceMaster  Funding  Company  LLC  which has  entered  into an  agreement  to
transfer,  on a revolving basis, an undivided percentage ownership interest in a
pool of accounts  receivable to unrelated third party purchasers.  ServiceMaster
Funding  Company LLC  retains an  undivided  percentage  interest in the pool of
accounts  receivable and bad debt losses for the entire pool are allocated first
to this retained interest.  The agreement is a 364-day facility renewable at the
option of the purchasers.

As of December 31, 2001, $1.783 billion of net accounts receivable had been sold
to ServiceMaster Funding Company LLC.  ServiceMaster Funding Company LLC in turn
sold an undivided interest to Falcon Asset Securitization Corporation under this
agreement.   Approximately   $1.707  billion  of  these  receivables  have  been
collected.  The  amount of the  retained  interest  in the  receivables  was $76
million as of December 31, 2001 and is classified as accounts  receivable in the
Consolidated  Statements  of  Financial  Position.  The  above  amounts  include
receivables from the sold Management Services segment,  which were approximately
one-third of the receivables sold.


The retained interest in the accounts  receivable sold is valued at the carrying
amount of the retained  accounts  receivable  net of applicable  loss  reserves,
which approximates fair value. Management monitors the change in the outstanding
retained  interest and makes  adjustments to its carrying amount based on actual
and projected  losses.  Any changes in interest  rates would only have a minimal
impact on the value of the residual interest due to the short-term nature of the
receivables.

The Company, as agent for the purchaser,  retains servicing responsibilities for
the sold receivables. The fees received by the Company for these services during
the quarter and twelve  months  ended  December  31,  2001,  were at fair market
value,  therefore, no related assets or liabilities have been recorded. The loss
on the Company's sale of receivables  totaled $3.2 million for the twelve months
ended December 31, 2001 and is included in "Minority  interest and other expense
(income), net" in the Consolidated Statements of Income.

COMPREHENSIVE INCOME
Comprehensive  Income,  which  encompasses  net  income,   unrealized  gains  on
marketable  securities,  and the  effect  of  foreign  currency  translation  is
disclosed in the Statement of Shareholders' Equity.

(In thousands)                           2001            2000             1999
--------------------------------------------------------------------------------
Unrealized holding
 gains (losses)
 arising in period                      $ 1,562         $20,578         $ 1,026
Tax expense                                 642           8,478             471
--------------------------------------------------------------------------------
Net of tax amount                       $   920         $12,100         $   555
--------------------------------------------------------------------------------
Gains realized                          $ 8,080         $15,713         $ 7,239
Tax expense                               1,543           6,458           2,954
--------------------------------------------------------------------------------
Net of tax amount                       $ 6,537         $ 9,255         $ 4,285
================================================================================

Accumulated  comprehensive  income  included  the  following  components  as  of
December 31:

(In thousands)                           2001            2000             1999
--------------------------------------------------------------------------------
Unrealized gain
 on securities                          $ 1,251         $ 6,868         $ 4,023
Foreign currency
 translation                             (3,139)         (9,700)         (5,844)
--------------------------------------------------------------------------------
Total                                   $(1,888)        $(2,832)        $(1,821)
================================================================================

SHAREHOLDERS' EQUITY
The Company has  authorized  one billion shares of common stock with a par value
of $.01 and 11  million  shares  of  preferred  stock.  There  were no shares of
preferred stock issued or outstanding.

The Company has an  effective  shelf  registration  statement to issue shares of
common stock in connection with future,  unidentified acquisitions.  This filing
allows  the  Company  to issue  registered  shares  much more  efficiently  when
acquiring  privately-held  companies.  The Company  plans to use the shares over
time  in  connection   with   purchases  of  small   acquisitions.   There  were
approximately 4.6 million shares available for issuance at year end.

As of December 31, 2001,  there were 34.4 million  Company shares  available for
issuance upon the exercise of employee  options  outstanding  and future grants.
Share  options are issued at a price not less than the fair market  value on the
grant date and expire  within ten years of the grant date.  Certain  options may
permit the holder to pay the option  exercise price by tendering  Company shares
that have been owned by the holder without  restriction for an extended  period.
Share  grants  carry a  vesting  period  and are  restricted  as to the  sale or
transfer of the shares.

The Company  accounts for employee  share  options under  Accounting  Principles
Board Opinion 25, as permitted under generally accepted  accounting  principles.
Accordingly,  no  compensation  cost has  been  recognized  in the  accompanying
financial  statements related to these options.  Had compensation cost for these
plans  been  determined   consistent  with  Statement  of  Financial  Accounting
Standards  No.  123  (SFAS  123),  which is an  accounting  alternative  that is
permitted, but not required, pro forma net income and net income per share would
reflect the following:

(In thousands,except per share data)        2001         2000           1999
-------------------------------------------------------------------------------
Net Income:
 As reported                         $  155,033     $  173,827      $  173,563
 SFAS 123
  pro forma                             147,423        165,657         166,601
Net Income Per Share:
Basic:
 As reported                         $      .52     $      .57      $      .56
 SFAS 123
  pro forma                                 .49            .55             .54
Diluted:
 As reported                         $      .51     $      .57      $      .55
 SFAS 123
   pro forma                                .49            .54             .53
-------------------------------------------------------------------------------

The SFAS 123 pro forma net income  reflects  options  granted in 2001,  2000 and
1999.  Had awards been  granted in earlier  years that carried  similar  vesting
requirements as the current  options,  then the pro forma  compensation  expense
presented would have been higher. Consequently,  the pro forma disclosure is not
indicative of pro forma results which may be expected in future years.

The fair value of each  option is  estimated  on the date of grant  based on the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions in 2001, 2000 and 1999: risk-free interest rates of 4.8 percent, 6.1
percent  and 5.4  percent,  respectively;  volatility  rates of 31  percent,  29
percent and 25 percent,  respectively;  distribution yields of 3.7 percent,  4.1
percent and 2.5  percent,  respectively;  and average  expected  lives of 6 to 7
years.   The  options   granted  to  employees  in  2001,  2000  and  1999  have
weighted-average  fair values of $2.41, $2.19, and $4.15,  respectively and vest
ratably over five years.  The Company has  estimated  the value of these options
assuming a single weighted-average expected life for the entire award.

                                       22
<PAGE>

Options and grant transactions during the last three years are summarized below:
<TABLE>


                                                      Share              Price         Weighted Avg.      Share             Price
                                                     Options             Range        Exercise Price     Grants             Range
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>            <C>                    <C>           <C>         <C>
Total exercisable, December 31, 1998                7,269,279     $   0.73 - 22.33       $    7.51         -                  -
Total outstanding, December 31, 1998               16,912,726     $   0.73 - 22.77       $   10.89     962,730     $     2.86 - 7.96
------------------------------------------------------------------------------------------------------------------------------------
Transactions during 1999
  Granted to employees                              6,599,732     $  11.50 - 21.16       $   15.55         -                  -
  Assumed in acquisitions                           1,779,395     $   6.48 - 45.79       $   19.02         -                  -
  Exercised, paid, or vested                       (1,355,345)    $   0.73 - 18.26       $    7.61    (248,900)    $     2.86 - 7.96
  Terminated or resigned                             (435,069)    $   0.73 - 45.79       $   19.32         -                  -
------------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 1999               10,006,644     $   2.24 - 45.79       $   10.37         -                  -
Total outstanding, December 31, 1999               23,501,439     $   2.24 - 45.79       $   12.85     713,830     $     2.86 - 7.96
====================================================================================================================================
Transactions during 2000
  Granted to employees                              4,326,164     $   8.48 - 12.55       $    9.75          -                 -
  Exercised, paid, or vested                         (591,517)    $   2.24 - 14.55       $    5.04     (231,474)   $     2.86 - 7.96
  Terminated or resigned                             (966,857)    $   2.25 - 37.61       $   17.32          -                 -
------------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2000               11,985,121     $   2.25 - 45.79       $   11.57          -                 -
Total outstanding, December 31, 2000               26,269,229     $   2.25 - 45.79       $   12.43       482,356   $     2.86 - 7.96
====================================================================================================================================
Transactions during 2001
  Granted to employees                              5,184,141     $   9.10 - 12.52       $   10.63          -                 -
  Exercised, paid, or vested                         (864,418)    $   2.25 - 11.41       $    6.52      (171,518)  $     2.86 - 7.96
  Terminated or resigned                           (1,438,226)    $   2.25 - 45.79       $   15.39          -                 -
------------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2001(1)            15,069,894     $   2.25 - 45.79       $   12.02          -                 -
Total outstanding, December 31, 2001(1)            29,150,726     $   2.25 - 45.79       $   12.14     310,838     $     2.86 - 7.96
====================================================================================================================================
</TABLE>

(1)  Excludes the impact from  acquisition-related  options with exercise prices
     significantly in excess of market.


Options outstanding at December 31, 2001:
<TABLE>

                            Number                         Weighted-          Number-         Weighted-
        Range of         Outstanding       Remaining        Average         Exercisable        Average
     Exercise Prices     at 12/31/01         Life        Exercise Price     at 12/31/01     Exercise Price
-----------------------------------------------------------------------------------------------------------
<S>                      <C>               <C>            <C>                <C>             <C>
 $   2.25  -  6.44        1,556,712        2.0 Years      $    5.91          1,556,712       $    5.91
     7.30  - 10.78       11,725,421        5.0 Years           9.54          4,933,564            9.05
     10.92 - 15.94        9,132,249        7.0 Years          11.69          5,005,523           11.82
     16.12 - 22.33        6,481,218        7.0 Years          18.18          3,342,741           18.22
     27.20 - 45.79          255,126        5.0 Years          32.00            231,354           31.28
-----------------------------------------------------------------------------------------------------------
 $    2.25 - 45.79       29,150,726        6.0 Years      $   12.14         15,069,894       $   12.02
===========================================================================================================
</TABLE>

EARNINGS PER SHARE
Basic  earnings  per share is computed by dividing  income  available  to common
stockholders  by the  weighted-average  number  of  shares  outstanding  for the
period.  The weighted  average common shares for the diluted  earnings per share
calculation includes the incremental effect related to outstanding options whose
market price is in excess of the exercise  price.  Shares  potentially  issuable
under  convertible  securities have been considered  outstanding for purposes of
the diluted earnings per share  calculations.  In computing diluted earnings per
share, the after-tax interest expense related to convertible debentures is added
back to net income in the numerator, while the diluted shares in the denominator
include the shares  issuable upon  conversion of the  debentures.

The following  chart  reconciles  both the numerator and the  denominator of the
basic earnings per share computation to the numerator and the denominator of the
diluted earnings per share computation.





In thousands, except per share data)
<TABLE>

                              For year ended 2001            For year ended 2000              For year ended 1999
                          --------------------------------------------------------------------------------------------
                            Income     Shares    EPS       Income     Shares    EPS       Income      Shares     EPS
----------------------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>      <C>       <C>         <C>      <C>       <C>          <C>       <C>
Basic EPS                 $ 155,033   298,659  $ 0.52    $ 173,827   302,487  $ 0.57    $ 173,563    307,637   $ 0.56
Effect of Dilutive
 Securities, net of tax:
  Options                               4,585                          3,031                           6,769
  Convertible
   debentures                 4,773     8,164                    -         -                    -          -
----------------------------------------------------------------------------------------------------------------------
Diluted EPS               $ 159,806   311,408  $ 0.51    $ 173,827   305,518  $ 0.57    $ 173,563    314,406   $ 0.55
======================================================================================================================

</TABLE>

                                       23
<PAGE>



QUARTERLY OPERATING RESULTS
Quarterly  operating  results  and  related  growth for the last three  years in
revenues,  gross profit,  net income, and basic and diluted net income per share
are shown in the table below.  For interim  accounting  purposes,  certain costs
directly  associated  with the  generation  of lawn care  revenues are initially
deferred and recognized as expense as the related revenues are recognized.  Full
year results are not affected.

Certain  amounts from prior periods have been  reclassified  to conform with the
current presentation.




<TABLE>

                                                                 Percent Incr.                Percent Incr.
(Unaudited, in thousands, except per share data)      2001        '01 - '00          2000      '00 - '99           1999
--------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                  <C>       <C>                <C>       <C>
OPERATING REVENUE:
First Quarter ........................           $   735,721           1%       $   729,050        48%       $     492,911
Second Quarter .......................             1,030,176           4            990,758        10              902,132
Third Quarter ........................               997,798           3            971,465         4              932,346
Fourth Quarter .......................               837,734           5            794,244        (1)             801,246
---------------------------------------------------------------------------------------------------------------------------
                                                 $ 3,601,429           3%       $ 3,485,517        11%       $   3,128,635
===========================================================================================================================
GROSS PROFIT:
First Quarter ........................           $   194,793           7%       $   182,463        24%       $     146,599
Second Quarter .......................               333,104           5            317,360         4              304,034
Third Quarter ........................               308,343           3            300,013         2              294,171
Fourth Quarter .......................               218,982          11            196,530       (11)             220,373
---------------------------------------------------------------------------------------------------------------------------
                                                 $ 1,055,222           6%       $   996,366         3%       $     965,177
===========================================================================================================================
NET INCOME:
First Quarter (1) ....................           $    29,227          17%       $    24,893       (30%)      $      35,609
Second Quarter .......................                50,713         (24)            66,315       N/A               18,035
Third Quarter ........................                46,123          (9)            50,786       (24)              66,637
Fourth Quarter .......................                28,970          (9)            31,833       (40)              53,282
---------------------------------------------------------------------------------------------------------------------------
                                                 $   155,033         (11%)      $   173,827         0%       $     173,563
===========================================================================================================================
BASIC NET INCOME PER SHARE:
First Quarter (1) ....................           $      0.10          25%       $      0.08       (33%)      $        0.12
Second Quarter .......................                  0.17         (23)              0.22       N/A                 0.06
Third Quarter ........................                  0.15         (12)              0.17       (19)                0.21
Fourth Quarter .......................                  0.10          (9)              0.11       (35)                0.17
---------------------------------------------------------------------------------------------------------------------------
                                                 $      0.52          (9%)      $      0.57         2%       $        0.56
===========================================================================================================================
DILUTED NET INCOME PER SHARE:
First Quarter (1) ....................           $      0.10          25%       $      0.08       (33%)      $        0.12
Second Quarter .......................                  0.17         (19)              0.21       N/A                 0.06
Third Quarter ........................                  0.15         (12)              0.17       (19)                0.21
Fourth Quarter .......................                  0.10          (9)              0.11       (35)                0.17
---------------------------------------------------------------------------------------------------------------------------
                                                 $      0.51         (11%)      $      0.57         4%       $        0.55
===========================================================================================================================
CASH DIVIDENDS PER SHARE:
First Quarter ........................           $      0.10          11%       $      0.09         0%       $        0.09
Second Quarter .......................                  0.10          11               0.09         0                 0.09
Third Quarter ........................                  0.10           0               0.10        11                 0.09
Fourth Quarter .......................                  0.10           0               0.10        11                 0.09
---------------------------------------------------------------------------------------------------------------------------
                                                 $      0.40           5%       $      0.38         6%       $        0.36
===========================================================================================================================
PRICE PER SHARE:
First Quarter.........................        $ 12.00 - 9.95                $ 14.94 - 10.69                $ 22.00 - 17.50
Second Quarter........................          12.00 - 9.84                  13.75 - 10.63                  20.94 - 17.31
Third Quarter.........................          12.84 - 9.95                  11.50 -  8.38                  18.56 - 14.00
Fourth Quarter........................          14.20 -10.06                  11.50 -  8.25                  16.25 - 10.13
---------------------------------------------------------------------------------------------------------------------------
(1) 2000 has been restated for cumulative adjustment relating to the change in accounting for termite baiting contracts.
</TABLE>



                                       24
<PAGE>