Exhibit 13 to 1997 Form 10-K

<TABLE>
<CAPTION>

Financial Highlights

                                                                    For years ended December 31,
(In thousands, except per share data)                            1997           1996        Change
                                                              ----------    ----------     ----------

Operating Results:
<S>                                                            <C>          <C>            <C>
Customer level revenue (1) .................................   $5,550,000   $4,933,000     +     13%
Operating revenue ..........................................    3,961,502    3,458,328     +     15%
Earnings before interest, taxes, depreciation   
    and amortization (EBITDA)...............................      443,788      369,701     +     20%
Operating income ...........................................      343,933      295,218     +     17%
Historical partnership net                                        
    income (before tax benefit of corporate conversion)(2)..      264,076      245,140     +      8% 
Tax benefit recorded relating to change in tax status ......       65,000         --              -
                                                               ----------   ----------
Net Income (2) .............................................      329,076      245,140     +     34%

Pro forma Corporate Information:  (2 and 3)
Net income .................................................   $  163,470   $  150,429     +      9%
   Per Share:
      Basic ................................................   $     0.86        $0.71     +     21%
      Diluted ..............................................   $     0.82        $0.69     +     19%
      Cash distributions ...................................   $    0.46 2/3     $0.44     +      6%

Financial Position:
Total assets ...............................................   $2,475,224   $1,846,841
Long-term debt .............................................    1,247,845      482,315
Shareholders' equity .......................................      524,438      796,767

Share Price Range :
(Traded on the New York Stock Exchange under the symbol SVM)
High price .................................................       $29.50   $    17.75
Low price ..................................................       $16.38   $    12.92
Closing price ..............................................       $29.25   $    17.42

</TABLE>

(1)   Customer level revenue represents the combined  revenues of the Company's 
      direct operations and the estimated revenues of its various independently
      licensed franchisees.

(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 and state income taxes, as its
      taxable income was allocated to the Company's shareholders. As a result of
      the  conversion,  the Company is a taxable entity and is  responsible  for
      such  payments.   Pro  forma  information  is  presented  to  compare  the
      continuing  results  of  operations  as if  the  Company  were  a  taxable
      corporation in 1997 and 1996. The pro forma provision for income taxes has
      been  calculated  assuming  that  the  Company's  effective  tax  rate was
      approximately 40 percent of pretax earnings.  The Company's historical net
      income per share as a Partnership was as follows:
                            
                    Before One-Time Tax Benefit                 Actual
                      1997           1996                1997            1996
                      --------------------               ---------------------
       Basic          $1.39          $1.16               $1.73           $1.16
       Diluted        $1.33          $1.12               $1.66           $1.12

(3)   The Company adopted Statement of Financial  Accounting  Standards No. 128,
      "Earnings  Per Share" which  requires the dual  presentation  of basic and
      diluted  earnings  per  share.  Basic  earnings  per  share  replaces  the
      previously  required  presentation  of primary  earnings per share.  Basic
      earnings  per share are  calculated  based on  190,629  shares in 1997 and
      211,587  shares in 1996 while  diluted  earnings per share are  calculated
      based on 199,760  shares in 1997 and 220,286 shares in 1996. All share and
      per share data  reflect the  three-for-two  share  splits in June 1997 and
      June 1996.


<PAGE>


                             Management Discussion and Analysis of
                          Financial Condition and Results of Operations
                      (All   share  and  per  share  data   reflect   the
                       three-for-two share splits in June 1997 and June 1996)



  The  terms   "Company"  and   "ServiceMaster"   refer  to  the  operations  of
ServiceMaster  Limited Partnership and The ServiceMaster  Company, its successor
corporation.

1997 Compared with 1996
-----------------------

  Revenues  increased  15  percent  to  $4  billion  reflecting  the  effect  of
acquisitions  and growth from base  operations.  Operating  income  increased 17
percent to $344 million,  while margins increased to 8.7 percent of revenue from
8.5 percent in 1996,  reflecting  the  continued  strong growth of higher margin
businesses,  productivity  improvements,  and the  integration  of the  acquired
Barefoot operations. These improvements were offset in part by the impact of the
newly acquired  professional employer organization which has significantly lower
margins than the rest of the Company's businesses. Operating  income  margins 
would have improved 50 basis points  excluding  this acquisition.
  Pro forma  information is presented  which compares the continuing  results of
operations as if the Company were a taxable  corporation  in all years.  On this
basis,  net income  grew 9 percent to $163  million.  Basic  earnings  per share
increased  21 percent to $.86 and diluted  earnings per share were up 19 percent
to $.82.  Earnings  per share  grew at a higher  rate than net income due to the
transaction  with Waste  Management Inc. (WMX) in which the Company  repurchased
WMX's 19 percent ownership  interest in ServiceMaster  (40.7 million shares) for
$626  million on April 1, 1997.  This  transaction  served to increase  interest
expense significantly and reduce shares outstanding.
  Historical  net income was $329  million  including a one-time tax gain of $65
million  realized  upon  reincorporation.  The  resulting  historical  basic and
diluted earnings per share were $1.73 and $1.66,  respectively.  Partnership net
income  excluding this gain increased 8 percent to $264 million.  On this basis,
basic and  diluted  earnings  per share were $1.39 and  $1.33,  increases  of 20
percent and 19 percent, respectively.
  The Consumer  Services business unit achieved a 14 percent increase in revenue
and a 21 percent  increase  in pro forma net income  reflecting  the  successful
integration  of the  Barefoot  business  (which was  acquired in February  1997)
combined  with good  growth from base  operations  and other  acquisitions.  The
TruGreen-ChemLawn operations achieved strong double-digit growth in revenues and
profits  reflecting  the Barefoot  acquisition,  increases in the customer base,
improved branch  efficiencies,  strong sales of ancillary products and favorable
weather conditions  throughout most of the year.  Terminix achieved solid growth
in revenue and profits for the year.  Strong growth in renewals and productivity
improvements  offset  the  effects  of  adverse  weather  conditions  on termite
operations  and  increased  termite  remediation  costs.  American  Home  Shield
achieved very strong double-digit  increases in both revenues and profits,  with
excellent increases in contract renewals and  direct-to-consumer  sales. This is
consistent  with an overall  strategy to expand channels of distribution in this
business which have  historically  been  concentrated in the residential  resale
market.  ServiceMaster  Residential/Commercial  and Merry Maids reported  modest
profit growth and solid revenue  growth for the year,  reflecting the conversion
of certain franchises and distributors to company-owned operations.
  The Management Services business,  which includes  Diversified Health Services
(DHS), achieved 7 percent growth in revenue reflecting the Premier Manufacturing
Support Services  (Premier)  acquisition made last year and, to a lesser degree,
growth in the base business. The base business growth resulted from improvements
in Healthcare (which includes DHS) and Business & Industry, offset by reductions
in Education.  Pro forma net income was flat compared to the prior year. Despite
continuing  competitive  pressures and industry  consolidation in the acute care
market,  the Company  achieved  solid revenue  increases  and improved  customer
retention  in the  Healthcare  market.  Reported  profits  in this  market  were
comparable  to the prior  year.  Within the acute care  sector,  good growth was
realized  from  sales  of  the   Integrated   Service   product  which  provides
comprehensive  service  solutions to clients.  The Company achieved  significant
revenue and profit  increases  in the Business & Industry  market,  largely as a
result of the  successful  integration  of the  Premier  acquisition  and modest
growth in the base  business.  In the  Education  market,  revenues  and profits
declined  due to the  discontinuation  of  certain  large  accounts  and  margin
pressures in certain accounts.
  Revenues  in New  Business  Development  and Parent  increased  significantly,
reflecting the August 1997  acquisition of Certified  Systems,  Inc. (CSI) which
added   approximately   $155  million  in  revenue  and  minimal  profits  after
acquisition  related costs.  CSI is a professional  employer  organization  that
provides   clients  with   administrative   processing   of  payroll,   workers'
compensation  insurance,  health insurance,  unemployment  insurance,  and other
employee  benefit plans.  Pro forma net income reflects the additional  interest
expense incurred relating to the WMX share repurchase.
  On a consolidated basis, cost of services rendered and products sold increased
14 percent and decreased  slightly as a percentage of revenue to 77.2 percent in
1997 from 77.5 percent in 1996. This reflects the changing mix of the enterprise
as Consumer  Services  increased in size relative to the overall business of the
Company.  The Consumer  Services  unit  operates at a higher gross profit margin
than the Management

                               21

<PAGE>

Services business unit, but incurs relatively higher levels of selling and 
administrative  costs. However, much of this reduction in cost of
goods sold was offset by the acquisition of CSI which operates at  significantly
lower gross margins than the Company's  other  businesses.  Without CSI, cost of
goods sold would have been 76.5 percent of revenue in 1997.
  Consolidated selling and administrative expenses increased 16 percent over the
prior year, and as a percentage of revenue,  increased from 13.9 percent in 1996
to 14.1 percent in 1997,  reflecting  the  changing  business mix of the Company
described above.
  Interest expense increased over the prior year primarily due to increased debt
levels  associated  with the  repurchase  of shares  previously  held by WMX and
acquisitions.
  Interest and  investment  income  increased  over the prior year levels due to
growth in, and strong returns from,  the  investment  portfolio at American Home
Shield  as  well  as a gain  associated  with  the  sale  of an  interest  in an
international joint venture.
  Minority  interest  expense  decreased  due  to  the  repurchase  of  minority
ownership interests in subsidiary entities.
  Most operations conducted by the Company and its subsidiary  partnerships have
been exempt from federal  corporate  income tax since 1986. The Internal Revenue
Code  would have  imposed  federal  corporate  tax on the  Company's  operations
beginning in 1998. In  anticipation of this change,  ServiceMaster  shareholders
approved a reincorporating  merger which was completed on December 26, 1997, and
the Company  converted from  partnership  to corporate  form. As a result of the
reincorporation, the Company recognized a step-up in the tax basis of its assets
which will be amortized against taxable income in future years.  Simultaneously,
the Company recorded a book gain representing the difference between the tax and
book basis of the enterprise's  assets and liabilities.  The actual value to the
Company  of the tax  basis  step-up  significantly  exceeds  the  amount  of the
deferred  tax asset.  The Company  believes  that the  step-up  will result in a
reduction  in its cash tax  payments in excess of $25 million per annum over the
ensuing 15 years.


1996 Compared with 1995
-----------------------

  Revenues increased 8 percent to $3.5 billion primarily due to internal growth,
with the effects of  acquisition  activity  at both the  Consumer  Services  and
Management  Services  segments  offsetting the disposition of the Education Food
Service  line in early  1995.  Operating  income  increased  17  percent to $295
million,  while margins  increased to 8.5 percent of revenue from 7.9 percent in
1995,  reflecting  the  combined  effects of the  continued  rapid growth of our
higher margin  business units and the favorable  effects of overhead  leveraging
throughout  the  enterprise.  Both net income and earnings per share reflect the
December  1995  acquisition  of WMX's  minority  ownership  interest in Consumer
Services,  which reduced  minority  interest expense and increased the number of
shares  outstanding by  approximately  41 million (on a post-split  basis).  Pro
forma net income,  restated as if the Company were a taxpaying corporation,  was
$150  million,  a 42 percent  increase over the  comparable  1995 level with pro
forma basic  earnings  per share at $.71,  a 16 percent  increase  and pro forma
diluted  earnings  per  share  at  $.69,  a  17  percent  increase.   Historical
Partnership net income was $245 million, up 43 percent from the prior year while
historical  basic  earnings per share were $1.16,  an increase of 17 percent and
historical diluted earnings per share were $1.12, an 18 percent increase.
  The  Consumer  Services  business  segment  achieved a 13 percent  increase in
revenues  and pro  forma net  income  growth  of 23  percent.  TruGreen-ChemLawn
operations had strong growth in revenues and profits despite unfavorable weather
conditions  throughout the year. Continued strong growth in residential services
and strong commercial sales,  combined with the favorable effects of new service
initiatives,  such as interior plantscaping and home fertilizer delivery, helped
offset  the  weather-related  adversities.  Terminix  achieved  solid  growth in
revenues as a result of increases in pest control sales and termite completions.
Profits also  increased but at a less rapid pace due to changes in the sales mix
and higher production costs. American Home Shield achieved very strong increases
in warranty contracts written, earned revenues and profits. These increases were
primarily the result of strong internal growth, small acquisitions and continued
increases  in  contract  renewals.   The  ServiceMaster   Residential/Commercial
operations  continued to achieve growth in revenues and profits,  reflecting the
continued  repurchase of  distributors,  as well as steady internal growth which
offset a decline in large disaster recovery  projects.  The Merry Maids business
achieved  solid  increases in revenues and profits as a result of strong  growth
from  existing  franchisees,  as well as the expansion of  company-owned  branch
operations.
  The  Management  Services  business  segment,   including  Diversified  Health
Services,  achieved  18 percent  overall  growth in pro forma net income for the
year,  reflecting  significant  transaction-related  fees and gains, strong cost
controls and improved customer  retention,  as well as the elimination of losses
incurred in 1995 from the discontinued Education Food Service business.

                                 22

<PAGE>

Revenues for the traditional businesses grew three percent over the prior year
as improvements in Education and Business & Industry  were  offset  by slight
reductions in Healthcare. Revenues generated from the fourth quarter acquisition
of Premier  offset the effect of the  disposition  of Education  Food Service in
February 1995. The traditional  Healthcare business,  which primarily serves the
acute  care  sector  of the  health  care  market,  recorded  profits  that were
consistent with the prior year level.  Strong cost controls and efficiency gains
offset a slight decline in revenues, reflecting continuing competitive pressures
and industry  consolidations.  Diversified  Health Services continued to achieve
excellent growth in revenues and profits, reflecting strong growth in management
services,  improvements in the  rehabilitation  operations which were started in
1995,  and a significant  increase in  transaction-related  fees and gains.  The
Education  market  experienced  solid revenue  growth with an improved  customer
retention rate.  Profits  decreased as a result of lower margins on a higher mix
of large  school  district  contracts.  The  Business & Industry  unit  achieved
double-digit increases in both revenues and profits, with a substantial increase
in services to the aviation industry.
  Revenues in New Business Development and Parent decreased, reflecting the 1995
sale of a small  business  investment.  Profits  were  improved  reflecting  the
purchase of the WMX minority ownership interest in Consumer Services in exchange
for ServiceMaster shares.
  On a consolidated basis, cost of services rendered and products sold increased
7 percent but continued to decline as a percentage of revenue to 77.5 percent in
1996 from 78.1  percent  in 1995.  This  decrease  as a  percentage  of  revenue
reflects the changing mix of the business as Consumer Services increases in size
in relation to the overall business of the Company.  The Consumer Services units
operate at a higher gross profit margin than the  Management  Services  business
units, but incur relatively higher levels of selling and administrative costs.
  Consolidated selling and administrative  expenses increased 7 percent over the
prior year, but as a percentage of revenue,  decreased from 14.1 percent in 1995
to  13.9  percent  in  1996,   reflecting   good  cost   controls  and  improved
efficiencies.
  Overall  operating  income margins continue to reflect  effective  leveraging
and rapid growth in higher margin  businesses,  improving to 8.5 percent of
revenues compared to 7.9 percent in 1995.
  Interest  income  increased  over  prior  year  levels  due to  growth  in the
investment  portfolio  at American  Home  Shield,  as well as gains  realized on
several  sales of  marketable  securities  during  the  year.  Interest  expense
increased  over the prior  year,  reflecting  increased  borrowings  relating to
acquisitions  and treasury share  purchases.  The decrease in minority  interest
expense primarily reflects the purchase from WMX of the minority interest in the
Consumer Services business segment in December 1995.


1997 Financial Position
-----------------------

  The Company continued to exhibit its excellent cash generating  ability,  with
cash  flows  from  operations  increasing  9 percent  to $372  million  and free
operating  cash  flows  (defined  as cash flows from  operations  less  property
additions)  increasing 9 percent to $326 million.  The Company's  free operating
cash flows represent the cash available for enhancing  shareholder  value (e.g.,
acquisitions,  dividends and share  repurchases)  after  financing the growth of
existing business units.  Cash flows from the operating  segments grew at strong
double  digit rates and were  partially  offset by  increased  interest  expense
relating to the WMX  transaction.  The Company's  free operating cash flows have
consistently exceeded recurring net income as a result of relatively low working
capital  and fixed  asset  requirements,  combined  with the  effects of noncash
charges for depreciation and amortization.
  Cash and marketable  securities totaled approximately $124 million at December
31, 1997. Debt levels  increased  despite strong operating cash flows due to the
repurchase  of WMX's 19  percent  ownership  interest  in the  Company  for $626
million and  acquisitions.  The Company is a party to a number of long-term debt
agreements  which  require  it  to  comply  with  certain  financial  covenants,
including  limitations  on  indebtedness,   restricted  payments,  fixed  charge
coverage  ratios and net worth.  The Company is in compliance with the covenants
related to these debt agreements.  Management believes that funds generated from
operations and other existing  financial  resources will continue to be adequate
to satisfy the ongoing operating needs of the Company. In addition,  the Company
had $450 million of unused commitment on its revolving bank facility at December
31, 1997.
  On February 24, 1997, the Company  completed the  acquisition of Barefoot Inc.
(Barefoot),  the  second  largest  professional  residential  lawn care  service
company  in the United  States.  The  aggregate  value of this  transaction  was
approximately $237 million with the payment consisting of $146 million of shares
and the remainder in cash.
  On August 11, 1997, the Company acquired Certified Systems, Inc. (CSI), one of
the nation's largest professional employer  organizations.  CSI provides clients
with  administrative  processing of payroll,  workers'  compensation  insurance,

                                 23

<PAGE>

health insurance, unemployment insurance and other employee benefit plans.
  Subsequent to year-end,  ServiceMaster acquired Rescue Industries,  Inc. which
operates under the trade name Rescue Rooter. Rescue Rooter is one of the largest
companies in America specializing in plumbing and drain cleaning services.
  On April 1, 1997,  ServiceMaster  repurchased the entire 19 percent  ownership
interest that WMX had held in the Company for  approximately  $626 million.  WMX
had owned 40.7 million restricted shares of ServiceMaster and also had an option
to purchase an additional  2.8 million  shares which was canceled as part of the
transaction. This transaction was immediately additive to earnings per share and
provided significant, incremental tax benefits to the Company.
  In April, the Company also entered into a committed $1 billion  multi-currency
revolving credit agreement, which includes a five-year revolving credit facility
of $750 million and a 364-day  revolving  credit facility of $250 million with a
one-year term loan option (two-year total term).
  On July 28, 1997,  ServiceMaster filed a Form S-3 shelf registration statement
with the Securities and Exchange Commission providing for the sale of up to $950
million in either  unsecured  senior debt  securities  or equity  interests.  On
August 14, 1997, the Company completed a $300 million dual-tranche debt offering
consisting  of $100  million,  6.95  percent  notes due August 15, 2007 and $200
million,  7.45 percent notes due August 15, 2027. On March 2, 1998,  the Company
completed  a $300  million  dual-tranche  offering  of  unsecured  senior  notes
consisting  of $150  million,  7.10  percent  notes  due  March 1, 2018 and $150
million,  7.25  percent  notes  due March 1,  2038.  The net  proceeds  of these
offerings  were used to  refinance  borrowings  under  bank  credit  facilities,
thereby   reducing  the   Company's   exposure  to   short-term   interest  rate
fluctuations.
  Proceeds from future  offerings will be used for general  corporate  purposes,
which may include repayment of debt, repurchase of shares, acquisitions, capital
expenditures  and  working  capital  requirements.  No  decision  has been  made
relating to the potential  future sale of other  securities from the shelf.  Any
future  decisions  will  depend  on  the  Company's  capital  needs  and  market
conditions at the time.
  Because  certain  computer  programs use two digits rather than four to define
the  applicable  year,  many systems may not function  properly  beyond the year
1999.  In addition,  certain  systems are unable to recognize the year 2000 as a
leap  year.  The  Company  has  conducted  a review of its  computer  systems to
identify  those  that  could be  affected  by the  year  2000  problem,  and has
determined  that it will be required to replace or remediate many of its systems
to  facilitate  their  continuing  reliable  operation.  The  Company  currently
believes that expenses  directly related to this effort are not expected to have
a material impact on the results of its operations.
  Although  the Company  believes  that  critical  remediation  efforts  will be
completed  prior to the year 2000,  the  untimely  completion  of these  efforts
could,  in  certain  circumstances,  have  a  material  adverse  effect  on  the
operations  of the  Company.  In  addition,  the  Company  is in the  process of
establishing  whether the  external  parties and systems  with which the Company
interacts  and  external  systems for which the Company has certain  maintenance
responsibilities  are in  compliance  and  whether  non-compliance  could have a
material adverse impact on the Company.
  Accounts  receivable and inventories  increased  reflecting  general  business
growth and the  acquisition of Barefoot.  The increases in prepaid  expenses and
other assets  resulted  from the strong  growth at American  Home Shield,  where
initial direct  contract costs are capitalized and expensed over the life of the
service  contract,  and the  recording  of  deferred  tax assets  related to the
conversion to corporate form.  Intangible assets have grown primarily due to the
acquisition  of  Barefoot,  CSI,  and  other  smaller  companies.  Property  and
equipment  increased  primarily due to acquisitions and general business growth.
The Company does not have any material  capital  commitments at this time. Notes
receivable and other long-term  assets  increased due to the deferred tax assets
discussed above.
  Accounts  payable  and other  accrued  liabilities  increased  due to  general
business growth and the effects of  acquisitions.  Deferred  revenues  increased
primarily as a result of strong growth in warranty contracts written at American
Home Shield and an increase in customer prepayments at TruGreen-ChemLawn.
  At the end of 1997, there were no minority  ownership  interests in subsidiary
entities,  and the  General  Partners'  interests  in the parent  entities  were
eliminated upon reincorporation.
  Total shareholders' equity decreased to $524 million in 1997 from $797 million
at December 31, 1996,  reflecting the repurchase of shares  previously  owned by
WMX and other treasury share repurchases and cash distributions.  This reduction
was  partially  offset by strong  growth in earnings,  shares  issued to acquire
Barefoot,  and the gain recorded related to establishing

                                  24

<PAGE>

the deferred tax assets created upon reincorporation.  The Company continues to
repurchase shares in the open market or in privately negotiated transactions  
pursuant to the authorization previously granted by the Board of Directors.  As
of December 31, 1997, there was $39 million of authorization remaining.
  At year end, the aggregate  market value of the Company's  outstanding  shares
exceeded  $5  billion.  An  investor  who held their  shares for the entire year
realized a total  return on their  investment  of 71 percent in 1997,  exceeding
market averages.  ServiceMaster  shareholders  have also experienced  compounded
total returns exceeding 20 percent annually over the last five-, 10- and 20-year
periods.
  Cash distributions paid directly to shareholders  totaled $89 million, or $.46
2/3 per share,  a 6 percent per share  increase  over the prior year.  The total
amount of cash distributions, including payments made to the shareholders' trust
described below, increased 6 percent to approximately $156 million.
  Several years ago, the Company adopted a pattern of annual
increases in direct  distributions to shareholders for the remaining term of the
Partnership.  In corporate form, the Company expects to continue to increase its
dividend  payment.  The  timing and  amount of future  dividends  will be at the
discretion of the Board of Directors and will depend on, among other things, the
Company's  corporate finance objectives and cash  requirements.  The Company has
announced its intended cash distribution for 1998 of $.49 per share.
  In 1993,  ServiceMaster  established  a trust for the  benefit of  Partnership
shareholders.   Each  year,   the  trust  was   allocated  the  portion  of  the
Partnership's  taxable income which exceeded the level of direct cash dividends,
thereby  reducing  the taxable  income of  partnership  shareholders.  The trust
received  cash payments from the  Partnership  in amounts  sufficient to pay its
income tax obligations on this allocated taxable income. Cash distributions made
to the trust totaled $65 million in 1997 and $50 million in 1996.  The trust was
terminated  upon  reincorporation  and has no residual  resources or obligations
except for its final income tax payment.
  The return to corporate form is not expected to impact the enterprise's future
liquidity and capital  resources  materially.  As a corporation,  the Company is
responsible  for the  payment  of  corporate  federal  and state  income  taxes.
Nonetheless,  the increased cash requirements  related to corporate income taxes
will  be  significantly  offset  by the  elimination  of  cash  payments  to the
Partnership's  shareholder  trust and the annual cash benefit resulting from the
step-up in tax basis in the enterprise's assets realized upon reincorporation.
  In addition,  management  expects that the Company will not be required to pay
federal  income taxes  resulting  from its 1998 earnings until March of 1999. At
that time,  the Company will be  responsible  for its 1998  obligation  and will
begin making estimated payments for its 1999 obligations.
  The following table presents net income before interest,  taxes,  depreciation
and amortization (EBITDA). EBITDA is a commonly-used supplemental measurement of
a  company's  ability  to  generate  cash flow  used by many of  ServiceMaster's
investors  and  lenders.   Many  of  the  Company's   existing   long-term  debt
arrangements  require it to  maintain  specified  levels of  EBITDA.  Management
believes  that EBITDA is another  measure  which  demonstrates  the  exceptional
cash-generating abilities of the Company's businesses.

<TABLE>
<CAPTION>



(In thousands, except percentage data)                    1997          1996         1995         1994         1993
-------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>           <C>          <C>          <C>          <C>      
Net income .......................................   $ 329,076     $ 245,140    $ 172,019    $ 139,883    $ 145,947
Depreciation......................................      45,392        41,658       38,332       32,885       29,674
Amortization......................................      47,670        37,348       27,656       21,323       20,282
Tax benefit relating to change in tax status .....     (65,000)         --           --           --           --
Gain on issuance of subsidiary shares ............        --            --           --           --        (30,200)
                                                     ---------     ---------    ---------    ---------    ---------
Cash income ......................................     357,138       324,146      238,007      194,091      165,703
Interest expense..................................      76,447        38,298       35,855       31,543       32,483
Tax provision (while organized as a partnership ..      10,203         7,257        5,588        2,755        2,146
                                                     ---------     ---------    ---------    ---------    ---------
EBITDA ...........................................   $ 443,788     $ 369,701    $ 279,450    $ 228,389    $ 200,332
                                                     =========     =========    =========    =========    =========
Growth over prior period .........................          20%           32%          22%          14%          15%

</TABLE>


  EBITDA should not be considered an alternative  to net income in measuring the
Company's  performance,  or used as an exclusive measure of cash flow because it
does not consider the impact of working  capital growth,  capital  expenditures,
debt principal  reductions or other sources and uses of cash which are disclosed
in the Consolidated Statements of Cash Flows.

In accordance  with the Private  Securities  Litigation  Reform Act of 1995, the
Company  notes  that  statements  that  look  forward  in  time,  which  include
everything other than historical  information,  involve risks and  uncertainties
that may affect the Company's actual results of operations.  Factors which could
cause actual results to differ materially  include the following (among others):
weather  conditions  adverse  to  certain  of the  Company's  Consumer  Services
businesses,  the entry of additional competitors in any of the markets served by
the Company,  labor  shortages,  consolidation  of  hospitals in the  healthcare
market, the condition of the U.S. economy, and other factors listed from time to
time in the Company's filing with the Securities and Exchange Commission.

                                 25


<PAGE>




Eleven Year Financial Summary

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 and state  income  taxes,  as its taxable  income was
allocated to the  Company's  shareholders.  As a result of the  conversion,  the
Company is a taxable  entity and is  responsible  for such  payments.  Pro forma
information is presented to compare the  continuing  results of operations as if
the Company were a taxable corporation in all years. The pro forma provision for
income taxes has been calculated  assuming that the corporation's  effective tax
rate was approximately 40 percent of pretax earnings.

<TABLE>
<CAPTION>

(In thousands, except per share and percentage data)
                                                             1997          1996          1995
                                                          ----------    ----------    ----------
Operating Results
<S>                                                       <C>           <C>           <C>       
Operating revenue ................................        $3,961,502    $3,458,328    $3,202,504
Cost of services rendered and products sold ......         3,058,160     2,681,008     2,499,700
Selling and administrative expenses ..............           559,409       482,102       450,937
                                                          ----------    ----------    ----------
Operating income (Note 2) ........................           343,933       295,218       251,867
                                                          ----------    ----------    ----------
    Percentage of operating revenu ...............               8.7%          8.5%          7.9%
Non-operating expense ............................            69,654        42,821        74,260
Provision for income taxes .......................            10,203         7,257         5,588
                                                          ----------    ----------    ----------
Partnership net income (before
            corporate conversion-Note 2)                  $  264,076    $  245,140    $  172,019
                                                          ==========    ==========    ========== 
    Percentage of operating revenue ..............               6.7%          7.1%          5.4%
Tax benefit relating to change in tax status .....            65,000           ---           --- 
                                                          ----------    ----------    ---------- 
Net income .......................................        $  329,076    $  245,140    $  172,019
                                                          ==========    ==========    ==========

Pro forma corporate net income ...................        $  163,470    $  150,429    $  105,854
                                                          ==========    ==========    ==========
    Percentage of operating revenue ..............               4.1%          4.3%          3.3%


Pro forma Corporate earnings per share (Notes 1 and 2):
    Basic ........................................        $     0.86    $     0.71    $     0.61
    Diluted ......................................        $     0.82    $     0.69    $     0.59

Shares used to compute basic net income per share            190,629       211,587       173,588
Shares used to compute diluted net income per share          199,760       220,286       182,135

Cash distributions to shareholders ...............        $     0.47    $     0.44    $     0.42

Share price range:
    High price ...................................        $    29.50    $    17.75    $    13.50
    Low price ....................................        $    16.38    $    12.92    $     9.56

Financial Position (at year end)
Current assets ...................................        $  594,084    $  499,334    $  393,239
Current liabilities ..............................           558,177       425,552       372,930
Working capital ..................................            35,907        73,782        20,309
Current ratio ....................................             1.1-1         1.2-1         1.1-1
Total assets .....................................        $2,475,224    $1,846,841    $1,649,890
Non-current liabilities ..........................         1,392,609       607,614       517,603
Minority interest ................................               ---        16,908        12,697
Deferred gain ....................................               ---           ---           ---
Shareholders' equity .............................           524,438       796,767       746,660

Percentage return on weighted average shareholders' equity        43%           32%           46%
Shares outstanding, net of treasury shares and
    share subscriptions ..........................           186,629       213,597       214,227
</TABLE>
<TABLE>
<CAPTION>
Note 1:
Pro forma net income per share is presented above, the Company's historical net income per share as a partnership
for the last five years was as follows:
                                       1997           1996          1995           1994          1993
                                       ----           ----          ----           ----          ----
           <S>                    <C>            <C>           <C>            <C>           <C>      
           EPS:Basic              $    1.73      $    1.16     $    0.99      $    0.82     $    0.68
               Diluted            $    1.66      $    1.12     $    0.95      $    0.80     $    0.67

All share and per share data  reflect the  three-for-two  share  splits in 1997,
1996, 1993 and 1992.
</TABLE>

                                         26

<PAGE>
Eleven Year Financial Summary
(In thousands, except per share and percentage data)
<TABLE>
<CAPTION>

       1994          1993         1992           1991         1990          1989          1988          1987
   ----------    ----------    ----------    ----------    ----------    ----------    ----------    ---------- 
<S><C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>       
   $2,985,207    $2,758,859    $2,488,854    $2,109,941    $1,825,750    $1,609,267    $1,531,276    $1,425,316
    2,356,435     2,192,684     2,021,010     1,762,700     1,545,527     1,387,448     1,327,128     1,228,885
      414,746       393,131       326,477       225,814       177,941       129,035       118,275       116,938
   ----------    ----------    ----------    ----------    ----------    ----------    ----------    ----------
      214,026       173,044       141,367       121,427       102,282        92,784        85,873        79,493
   ----------    ----------    ----------    ----------    ----------    ----------    ----------    ----------
          7.2%          6.3%          5.7%          5.8%          5.6%          5.8%          5.6%          5.6%
       71,388        55,151        45,740        39,860        30,397        24,016        21,247        19,492
        2,755         2,146         1,233         1,426         2,332           721            --            --
   ----------    ----------    ----------    ----------    ----------    ----------    ----------    ----------
   $  139,883    $  115,747    $   94,394    $   80,141    $   69,553    $   68,047    $   64,626    $   60,001
   ==========    ==========    ==========    ==========    ==========    ==========    ==========    ==========
          4.7%          4.2%          3.8%          3.8%          3.8%          4.2%          4.2%          4.2%
          ---           ---           ---           ---           ---           ---           ---           ---   
   ----------    ----------    ----------    ----------    ----------    ----------    ----------    ---------- 
   $  139,883    $  115,747    $   94,394    $   80,141    $   69,553    $   68,047    $   64,626    $   60,001
   ==========    ==========    ==========    ==========    ==========    ==========    ==========    ==========
 
   $   85,012    $   70,264    $   56,994    $   48,614    $   42,843    $   40,986    $   38,517    $   35,761
   ==========    ==========    ==========    ==========    ==========    ==========    ==========    ==========
          2.8%          2.5%          2.3%          2.3%          2.3%          2.5%          2.5%          2.5%

 
   $     0.50    $     0.42    $     0.34    $     0.30    $     0.27     $    0.25    $     0.24    $     0.23
   $     0.48    $     0.40    $     0.33    $     0.30    $     0.27     $    0.25    $     0.24    $     0.22

      170,433       169,279       166,552       160,184       159,820       163,372       160,193       157,540
      177,928       177,487       175,294       168,386       162,025       166,146       163,772       161,610

   $     0.41    $     0.40    $     0.39    $     0.38    $     0.37     $    0.35    $     0.33    $     0.30

   $    12.61    $    13.78    $     8.85    $     7.70    $     4.69     $    4.79    $     5.56    $     6.25
   $     9.56    $     7.83    $     6.52    $     4.33    $     3.90     $    4.17    $     4.40    $     4.32

   $  331,045    $  291,325    $  257,542    $  217,517    $  237,262    $  219,661    $  203,925    $  128,804
      304,395       244,552       206,755       157,458       158,046       135,375        76,908        59,993
       26,650        46,773        50,787        60,059        79,216        84,286       127,017        68,811
        1.1-1         1.2-1         1.2-1         1.4-1         1.5-1         1.6-1         2.7-1         2.1-1
   $1,230,839    $1,122,461    $1,005,531    $  843,660    $  796,935    $  593,693    $  485,492    $  371,104
      483,906       471,177       511,211       376,638       372,052       410,056       346,970       260,267
      135,272       117,513        77,906        78,229        55,636         9,174        10,186         8,660
         --            --            --         109,354       115,195          --            --            --
      307,266       289,219       209,659       121,981        96,006        39,088        51,428        42,184

           47%           46%           54%           74%          130%          139%          135%          166%

      170,946       171,934       170,258       162,351       161,960       153,597       157,977       157,314

</TABLE>
<TABLE>
<CAPTION>

Note 2:
In the above presentation,  the operating results in the years from 1990
through  1993,  have been  stated to exclude  gains on  issuance  of  subsidiary
shares,  restructuring and unusual charges and the change in accounting for post
retirement  benefits.  The results on a basis which  includes these items are as
follows:

                                                        1993          1992        1991         1990
                                                      --------      -------    --------      -------
<S>                                                   <C>           <C>        <C>           <C>    
Operating income.................................     $173,044      $62,432    $121,427      $95,782
Pro forma corporate net income...................      $88,263      $73,486     $52,095      $50,889
EPS:  Basic......................................        $0.52        $0.44       $0.33        $0.32
      Diluted....................................        $0.51        $0.43       $0.32        $0.32

</TABLE>

                                            27


<PAGE>
Notes to the Consolidated Financial Statements

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.   Investments   in
unconsolidated  subsidiaries  representing ownership of at least 20 percent, but
less  than 50  percent,  are  accounted  for under the  equity  method.  Certain
immaterial 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.  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.

Revenues:  Revenues  from lawn care,  termite,  and pest  control  services  are
recognized  as the services are  provided.  Revenues  from  franchised  services
(which in  aggregate  represent  less than 10  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.
  Home warranty  contract fees are recognized as revenues  ratably over the life
of the  contract.  Customers'  coverage  under home  warranty  contracts is on a
"claims made" basis and contract costs are expensed as incurred.
  Revenues from management  services are recognized as services are rendered and
consist of contract fees which reflect the total price of such  services.  Where
the Company  principally  uses people who are  employees  of the  facility,  the
payroll costs for such  employees are charged to the Company by the facility and
are  included  in  "Cost  of  services   rendered  and  products  sold"  in  the
Consolidated Statements of Income. Receivables from the facilities are reflected
in the  Consolidated  Statements  of  Financial  Position at the net amount due,
after deducting from the contract price all amounts chargeable to the Company.
  Revenues from the professional  employer  organization (PEO) are recognized as
the services are  rendered.  Consistent  with PEO  industry  practice,  revenues
include the gross  amount  billed to clients  which  includes  payroll and other
direct costs.

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 three
percent of the inventory value at December 31, 1997. 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 3 to 10 years. Intangible assets
consist  primarily of trade names ($183 million),  covenants not to compete ($34
million)  and  goodwill  ($1.3  billion).   These  assets  are  amortized  on  a
straight-line basis over their estimated useful lives as follows:  trade names -
40 years;  covenants  not to compete - 10 to 20 years;  and goodwill - 40 years.
Long-lived   assets,   including  fixed  assets  and  intangible   assets,   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.  If the
undiscounted  future  cash flows had been less than the  carrying  amount of the
asset, an impairment  loss would have been recognized  based on the asset's fair
value, and the carrying amount of the asset would have been reduced accordingly.

Income  Taxes:  The Company  accounts  for income  taxes under the  Statement of
Financial  Accounting  Standards No. 109,  "Accounting  for Income  Taxes." This
statement utilizes 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:  The Company  adopted  Statement  of  Financial  Accounting
Standards No. 128,  "Earnings Per Share" which requires the dual presentation of
basic and diluted  earnings per share.  Basic  earnings  per share  replaces the
previously  required  presentation of primary earnings per share and is based on
the weighted average number of common shares outstanding during the year. Shares
potentially issuable under option and convertible  debentures which are dilutive
in nature have been considered  outstanding for purposes of the diluted earnings
per share calculation.

                               28


<PAGE>


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,
formerly ServiceMaster Limited Partnership) AND SUBSIDIARIES, as of December 31,
1997 and 1996, and the related consolidated statements of income,  shareholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1997.  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  generally  accepted  auditing
standards.  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, 1997 and 1996, and the
consolidated results of operations and cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.

ARTHUR ANDERSEN LLP
Chicago, Illinois,
January 26, 1998

                                  29

<PAGE>
<TABLE>
<CAPTION>

Statements of Income
(In thousands, except per share data)
                                                                          Years Ended December 31,
                                                                      1997          1996          1995
----------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>            <C>        
Operating Revenue ............................................   $ 3,961,502    $ 3,458,328    $ 3,202,504

Operating Costs and Expenses:
Cost of services rendered and products sold ..................     3,058,160      2,681,008      2,499,700
Selling and administrative expenses ..........................       559,409        482,102        450,937
                                                                 -----------    -----------    -----------

Total operating costs and expenses ...........................     3,617,569      3,163,110      2,950,637
                                                                 -----------    -----------    -----------

Operating Income .............................................       343,933        295,218        251,867

Non-operating Expense (Income):
Interest expense .............................................        76,447         38,298         35,855
Interest and investment income ...............................       (14,304)       (10,183)        (7,310)
Minority interest, including General Partners' 2 percent
 interest which totaled $5,362 in 1997,
  $4,977 in 1996, and $3,505 in 1995 .........................         7,511         14,706         45,715
                                                                  ----------     ----------     ----------
Income before Income Taxes ...................................       274,279        252,397        177,607

Provision for income taxes (1) ...............................        10,203          7,257          5,588
Tax benefit relating to change in tax status .................        65,000            ---            ---
                                                                  ----------     ----------     ----------
Net Income (1) ...............................................   $   329,076    $   245,140    $   172,019
                                                                 ===========    ===========    ===========


Pro forma Information:

Income before Income Taxes ...................................   $   274,279    $   252,397    $   177,607
Corporate provision for income taxes (1)  ....................       110,809        101,968         71,753
                                                                 -----------    -----------    -----------
Net Income ...................................................   $   163,470    $   150,429    $   105,854
                                                                 ===========    ===========    ===========


Basic Net Income Per Share (1 and 2)..........................         $0.86          $0.71          $0.61
Diluted Net Income Per Share (1 and 2)........................         $0.82          $0.69          $0.59

</TABLE>

(1) 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  and state  income  taxes.  Its taxable
income  was  allocated  to  the  Company's  shareholders.  As a  result  of  the
conversion,  the  Company  is a  taxable  entity  and is  responsible  for  such
payments.  Pro forma information is presented to compare the continuing  results
of  operations  as if the Company was a taxable  corporation  in 1997,  1996 and
1995. The pro forma provision for income taxes has been calculated assuming that
the  Company's  effective  tax rate  was  approximately  40  percent  of  pretax
earnings.  The Company's historical net income per share as a Partnership was as
follows:
           Before One-Time Tax Benefit                  Actual
             1997     1996    1995              1997     1996     1995
            ----------------------             ----------------------- 
 Basic      $1.39    $1.16    $.99             $1.73    $1.16     $.99
 Diluted    $1.33    $1.12    $.95             $1.66    $1.12     $.95

(2) The Company  adopted  Statement of Financial  Accounting  Standards No. 128,
"Earnings Per Share" which requires the dual  presentation  of basic and diluted
earnings per share.  Basic earnings per share  replaces the previously  required
presentation  of  primary  earnings  per  share.  Basic  earnings  per share are
calculated  based on 190,629 shares in 1997,  211,587 shares in 1996 and 173,588
in 1995 while diluted  earnings per share are calculated based on 199,760 shares
in 1997,  220,286  shares in 1996 and  182,135 in 1995.  All share and per share
data reflect the three-for-two share splits in June 1997 and June 1996.

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

                                    30
<PAGE>
<TABLE>
<CAPTION>

Statements of Financial Position
(In thousands)
                                                                                        As of December 31,
                                                                                       1997          1996
                                                                                  -----------    -----------
Assets
Current Assets:
<S>                                                                               <C>            <C>        
Cash and cash equivalents .....................................................   $    64,876    $    72,009
Marketable securities .........................................................        59,248         42,404
Receivables, less allowances of $32,221 in 1997 and $26,287 in 1996 ...........       299,138        270,401
Inventories ...................................................................        48,157         43,529
Prepaid expenses and other assets .............................................       122,665         70,991
                                                                                  -----------    -----------
  Total current assets ........................................................       594,084        499,334
                                                                                  -----------    -----------

Property, Plant, and Equipment, at Cost:
Land and buildings ............................................................        46,632         47,536
Equipment .....................................................................       316,021        273,177
                                                                                  -----------    -----------
                                                                                      362,653        320,713
Less:  accumulated depreciation ...............................................       204,383        174,313
                                                                                  -----------    -----------
Net property, plant, and equipment ............................................       158,270        146,400
                                                                                  -----------    -----------

Other Assets:
Intangible assets, primarily trade names and goodwill,
  less accumulated amortization of $218,293 in 1997 and $170,623 in 1996 ......     1,563,309      1,098,466
Notes receivable, long-term securities, and other assets ......................       159,561        102,641
                                                                                  -----------    -----------
   Total Assets ...............................................................   $ 2,475,224    $ 1,846,841
                                                                                  ===========    ===========

Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable ..............................................................   $    84,673    $    66,025
Accrued liabilities:
  Payroll and related expenses ................................................        85,315         69,136
  Insurance and related expenses ..............................................        55,909         43,675
  Other .......................................................................       129,443         92,756
Deferred revenues .............................................................       181,298        138,339
Current portion of long-term obligations ......................................        21,539         15,621
                                                                                  -----------    -----------
  Total current liabilities ...................................................       558,177        425,552
                                                                                  -----------    -----------

Long-Term Debt ................................................................     1,247,845        482,315
Other Long-Term Obligations ...................................................       144,764        125,299

Commitments and Contingencies (see Notes)

Minority and General Partners' Interests
  including General Partners' interest $1,604 in 1996 .........................          --           16,908

Shareholders' Equity
Partnership equity ............................................................          --          862,625
Common stock $0.01 par value, authorized 1 billion shares; issued and
  outstanding 186,629 shares ..................................................         1,866           --
Additional paid - in capital ..................................................       519,424           --
Retained earnings .............................................................        65,000           --
Restricted stock ..............................................................        (4,270)        (5,858)
Treasury stock ................................................................       (57,582)       (60,000)
                                                                                  -----------    -----------
   Total shareholders' equity .................................................       524,438        796,767
                                                                                  -----------    -----------
Total Liabilities and Shareholders' Equity ....................................   $ 2,475,224    $ 1,846,841
                                                                                  ===========    ===========
</TABLE>

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

                                          31
<PAGE>

<TABLE>
<CAPTION>

Statements of Cash Flows
(In thousands)
                                                                          Years Ended December 31,

                                                                        1997        1996         1995
-------------------------------------------------------------------------------------------------------

<S>                                                                 <C>          <C>          <C>      
Cash and Cash Equivalents at January 1...........................   $  72,009    $  23,113    $  14,333

Cash Flows from Operations:
Net Income ......................................................     329,076      245,140      172,019
    Adjustments to reconcile net income to
    net cash provided from operations:
      Depreciation...............................................      45,392       41,658       38,332
      Amortization...............................................      47,670       37,348       27,656
      Deferred tax asset recorded upon reincorporation ..........     (65,000)         ---          ---
    Change in working capital, net of acquisitions:
      Receivables ...............................................      (6,853)     (19,084)     (28,503)
      Inventories and other current assets ......................     (14,210)     (12,666)     (16,209)
      Accounts payable ..........................................       5,603       10,302       10,773
      Deferred revenues .........................................      30,012       17,602       19,691
      Accrued liabilities .......................................         (82)      13,140       24,287
    Minority interest and other, net ............................         281        7,946       49,379
                                                                    ---------    ---------    ---------
Net Cash Provided from Operations ...............................     371,889      341,386      297,425
                                                                    ---------    ---------    ---------

Cash Flows from Investing Activities:
    Property additions ..........................................     (46,232)     (42,952)     (44,624)
    Business acquisitions, net of cash acquired .................    (233,689)     (58,473)     (42,763)
    Net purchases of investment securities ......................     (16,753)     (20,075)      (6,820)
    Payments to sellers of acquired businesses ..................      (4,723)      (3,742)      (2,908)
    Sale of equipment and other assets ..........................       4,134        2,664        2,250
    Notes receivable and financial investments ..................      (3,593)       3,304      (12,250)
    Proceeds from sale of businesses ............................        --          4,526       23,255
                                                                    ---------    ---------    --------- 
Net Cash Used for Investing Activities ..........................    (300,856)    (114,748)     (83,860)
                                                                    ---------    ---------    ---------

Cash Flows from Financing Activities:
    Long-term borrowings, net ...................................     888,528      123,732       96,067
    Payment of borrowings and other obligations .................    (160,155)     (82,857)     (85,945)
    Purchase of ServiceMaster shares ............................    (657,191)     (76,556)     (58,500)
    Distributions to shareholders and shareholders' trust .......    (155,883)    (146,520)    (127,070)
    Proceeds from employee share option plans ...................       6,526        6,835        3,183
    Distributions to holders of minority interests ..............        (542)      (3,074)     (32,794)
    Other .......................................................         551          698          274
                                                                    ---------    ---------    --------- 
Net Cash Used for Financing Activities ..........................     (78,166)    (177,742)    (204,785)
                                                                    ---------    ---------    ---------
Cash Increase (Decrease) During the Year ........................      (7,133)      48,896        8,780
                                                                    ---------    ---------    --------- 
Cash and Cash Equivalents at December 31 ........................   $  64,876    $  72,009    $  23,113
                                                                    =========    =========    =========
</TABLE>


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

                                             32

<PAGE>

<TABLE>
<CAPTION>

Statements of Shareholders' Equity
(In thousands)



                                                         Corporate Equity
                                                 ----------------------------------
                                                           Additional                  Limited
                                                 Common     Paid - in     Retained     Partners'    Treasury   Restricted    Total
                                                  Stock      Capital      Earnings      Equity       Shares      Shares      Equity
-----------------------------------------------------------------------------------------------------------------------------------


<S>                                            <C>        <C>          <C>           <C>           <C>         <C>        <C>      
Balance, December 31, 1994 ....................$    ---   $      ---   $      ---    $  364,673    $ (48,497)  $ (8,910)  $ 307,266


Net income 1995 ...............................     ---          ---          ---       172,019          ---        ---     172,019
Shareholder distributions .....................     ---          ---          ---      (127,070)         ---        ---    (127,070)
Shares issued under option, subscription, and
 grant plans and other (435 shares) ...........     ---          ---          ---        13,965        2,431      1,361      17,757
Treasury shares purchased and related
 costs (4,883 shares)..........................     ---          ---          ---           ---      (58,500)       ---     (58,500)
Shares issued for the acquisition of Consumer
 Services minority interest (40,741 shares) ...     ---          ---          ---       265,227       91,161        ---     356,388
Shares issued for the acquisition of the
 TruGreen-ChemLawn minority interest
 (6,354 shares) and other acquisitions ........     ---          ---          ---        78,800          ---        ---      78,800
                                                -------    ---------    ---------     ---------    ---------   --------    --------

Balance, December 31, 1995 ....................$    ---    $     ---    $     ---    $  767,614    $ (13,405)  $ (7,549)  $ 746,660


Net income 1996 ...............................     ---          ---          ---       245,140          ---        ---     245,140
Shareholder distributions .....................     ---          ---          ---      (146,520)         ---        ---    (146,520)
Shares issued under option, subscription, and
 grant plans and other (2,453 shares) .........     ---          ---          ---        (6,713)       2,506      1,691      (2,516)
Treasury shares purchased and related costs
 (5,157 shares) ...............................     ---          ---          ---           ---      (76,556)       ---     (76,556)
Shares issued for acquisitions ................     ---          ---          ---         3,104       27,455        ---      30,559
                                               --------    ---------    ---------     ---------    ---------    -------    --------

Balance, December 31, 1996 ....................$    ---    $     ---    $     ---    $  862,625    $ (60,000)  $ (5,858)  $ 796,767


Net income 1997 ...............................     ---          ---       65,000       264,076          ---        ---     329,076
Shareholder distributions .....................     ---          ---          ---      (155,883)         ---        ---    (155,883)
Shares issued under option, debentures, and
 grant plans and other (4,319 shares) .........     ---          ---          ---        20,151        3,511      1,588      25,250
Treasury shares repurchased from
 WMX (40,741 shares)...........................     ---          ---          ---      (625,978)         ---        ---    (625,978)
Treasury shares purchased and related
 costs (1,347 shares) .........................     ---          ---          ---           ---      (31,213)       ---     (31,213)
Shares issued for the acquisition of Barefoot,
 Inc. (8,614 shares)and other acquisitions ....     ---          ---          ---       156,299       30,120        ---     186,419
Conversion to corporate form ..................   1,866      519,424          ---      (521,290)         ---        ---         ---
                                               --------    ---------    ---------     ---------    ---------    -------    --------

Balance, December 31, 1997 ....................$  1,866    $ 519,424   $   65,000    $      ---    $ (57,582)  $ (4,270)  $ 524,438
                                               ========    =========   ==========    ==========    =========   ========   =========



All share data  reflect  the  three-for-two  share  splits in June 1997 and June 1996.
</TABLE>


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

                                          33

<PAGE>

Notes to the Consolidated Financial Statements

Business Unit Reporting
  The business of the Company is conducted  through the  ServiceMaster  Consumer
Services,  ServiceMaster  Management Services,  and New Business Development and
Parent  operating  units.  The  Consumer  Services  unit  provides  a variety of
specialty  services to  residential  and  commercial  customers.  The Management
Services  unit provides a variety of  supportive  management  services to health
care,  education  and  commercial  accounts.  Included  in this  segment for all
periods is ServiceMaster  Diversified Health Services, which provides management
services and other  products and services to the long-term care industry and had
previously  been reported in the New Business  Development  and Parent unit. The
New  Business  Development  and  Parent  unit  includes  the  newly  established
ServiceMaster  Employer Services,  which has been grouped with Parent due to the
developmental  status of this  business.  The Employer  Services  unit  provides
clients  with  administrative   processing  of  payroll,  workers'  compensation
insurance, health insurance,  unemployment insurance and other employee benefits
plans. The International operations of the enterprise, which had previously been
reported in the New Business  Development  and Parent  operating  unit,  are now
reflected within the Consumer Services and Management  Services  operating units
for all periods.
  Information regarding the accounting policies used by the Company is described
in the Summary of Significant  Accounting  Policies.  Operating  expenses of the
business units consist primarily of direct costs and a royalty payable to Parent
based on the revenues or profits of the business unit.  Identifiable  assets are
those used in  carrying  out the  operations  of the  business  unit and include
intangible assets directly related to its operations. The Company's headquarters
facility and other  investments are included in the  identifiable  assets of New
Business Development and Parent.
  The following  information is presented on a pro forma basis as if the Company
was a taxable  corporation in all years and corporate  taxes have been allocated
to the segments.  The 1996 and 1995 information reflects changes made during the
year  to  the  royalty  and  interest  expense  allocation  methodology  between
Management  Services and Parent.  The  consolidated  results were  unaffected by
these changes.

<TABLE>
<CAPTION>
                                                                      New Business
                                              Consumer    Management   Development
(In thousands)                                Services     Services    and Parent    Consolidated
                                             ----------   ----------  ------------   -------------
 1997 
<S>                                          <C>          <C>          <C>           <C>       
Operating revenue ........................   $1,662,519   $2,113,598   $  185,385    $3,961,502
                                             ----------   ----------   ----------    ----------   
Operating income .........................      234,714       96,067       13,152       343,933
                                             ----------   ----------   ----------    ---------- 

Non-operating expenses ...................       27,539        5,028       37,087        69,654
Income before income taxes ...............      207,175       91,039      (23,935)      274,279
Corporate provision for income taxes .....       83,699       36,780       (9,670)      110,809
                                             ----------   ----------   ----------    ---------- 
Pro forma corporate net income ...........   $  123,476   $   54,259   $  (14,265)   $  163,470
                                             ==========   ==========   ==========    ========== 

Identifiable assets at December 31, 1997 .   $1,785,932   $  420,185   $  269,107    $2,475,224
Depreciation and amortization expense ....   $   63,261   $   26,120   $    3,681    $   93,062
Capital expenditures .....................   $   19,488   $   25,056   $    1,688    $   46,232

 1996

Operating revenue ........................   $1,461,696   $1,982,687   $   13,945    $3,458,328
                                             ----------   ----------   ----------    ---------- 
Operating income .........................      185,895       97,264       12,059       295,218
                                             ----------   ----------   ----------    ---------- 

Non-operating expenses ...................       14,233        6,249       22,339        42,821
Income before income taxes ...............      171,662       91,015      (10,280)      252,397
Corporate provision for income taxes .....       69,352       36,770       (4,154)      101,968
                                              ---------   ----------   ----------    ---------- 
Pro forma corporate net income ...........   $  102,310   $   54,245   $   (6,126)   $  150,429
                                             ==========   ==========   ==========    ========== 

Identifiable assets at December 31, 1996 .   $1,394,177   $  357,882   $   94,782    $1,846,841
Depreciation and amortization expense ....   $   52,446   $   23,855   $    2,705    $   79,006
Capital expenditures .....................   $   19,915   $   21,676   $    1,361    $   42,952

 1995

Operating revenue ........................   $1,289,835   $1,885,926   $   26,743    $3,202,504
                                             ----------   ----------   ----------    ---------- 
Operating income .........................      155,098       85,390       11,379       251,867
                                             ----------   ----------   ----------    ---------- 

Non-operating expenses ...................       15,751        7,964       50,545        74,260
Income before income taxes ...............      139,347       77,426      (39,166)      177,607
Corporate provision for income taxes .....       56,296       31,280      (15,823)       71,753
                                             ----------   ----------   ----------    ---------- 
Pro forma corporate net income ...........   $   83,051   $   46,146   $  (23,343)   $  105,854
                                             ==========   ==========   ==========    ========== 

Identifiable assets at December 31, 1995     $1,239,599   $  340,194   $   70,097    $1,649,890
Depreciation and amortization expense ....   $   42,205   $   21,492   $    2,291    $   65,988
Capital expenditures .....................   $   18,563   $   20,611   $    5,450    $   44,624

</TABLE>
                                                    34
<PAGE>

Reincorporation
  Most operations of  ServiceMaster  and its subsidiary  partnerships  have been
conducted since 1986 free of federal  corporate income tax. The Internal Revenue
code would have imposed  federal  corporate  tax on  ServiceMaster's  operations
beginning  in 1998.  In  January  1992,  in  anticipation  of this  change,  the
Partnership's  shareholders approved a tax-free plan of reorganization to return
to corporate form.
  The ServiceMaster Company was created as part of this plan. The reorganization
became  effective  December 26, 1997 and was structured as a merger in which The
ServiceMaster  Company became the successor  entity through which the public now
invests in ServiceMaster.  (The term "the Company" or "ServiceMaster" is used to
collectively  refer  to the  Partnership  and  its  successor  corporation,  The
ServiceMaster  Company.) At the time of reincorporation each outstanding limited
partnership  share was converted into one share of $0.01 par value common stock.
No federal income taxes were imposed on the shareholders of the Partnership as a
result of the reincorporation.
  Pro  forma  information  has  been  presented  in the  accompanying  financial
statements  in order to compare the  continuing  results of operations as if the
Company  had been a  taxable  entity  in  1997,  1996 and  1995.  The pro  forma
provision has been calculated assuming that the Company's effective tax rate had
been approximately 40 percent of pretax earnings. Management currently estimates
that the effective tax rate in the years following  reincorporation will also be
approximately 40 percent. This estimate may differ from the actual effective tax
rate following  reincorporation  due to changes in circumstances,  statutory tax
rates, acquisitions, etc.
  Prior to December 26, 1997, The ServiceMaster  Limited Partnership held as its
only asset a 99 percent interest in the profits,  losses,  and  distributions of
The ServiceMaster Company Limited Partnership,  which through subsidiaries owned
and operated  the  ServiceMaster  business.  The  Managing  General  Partner was
ServiceMaster  Management Corporation,  which held a one percent interest in the
income  of  both  Partnerships.   As  a  result  of  the   reorganization,   The
ServiceMaster  Company owns all of the general and limited partnership interests
in the  Partnership.  No payment  or equity  issuance  was made to the  Managing
General Partner in connection with the reorganization  except for the pay out of
any income allocated to its capital account prior to reincorporation.

Income Taxes
  Prior to reincorporation,  the Partnership (a publicly-traded  partnership for
federal and state income tax purposes) was not directly subject to income taxes.
Since  December 31, 1986 most of  ServiceMaster's  income or loss was  allocated
directly to the partners.  However,  the  Partnership  had certain  subsidiaries
which  operated in corporate  form,  including  American  Home Shield,  its home
health care businesses,  and certain international  operations.  These corporate
form  subsidiaries  were subject to normal  federal and state  corporate  income
taxes.  Additionally,  several of the Partnership's subsidiaries were subject to
state  partnership  business taxes and foreign  business and income tax payments
which account for a  significant  portion of the provision for income taxes that
was previously reflected in the Partnership's consolidated income statement.
  As a result of the reincorporating merger, the Company recognized a step-up in
the tax basis of certain  assets,  that will be  amortized  against  the taxable
income of the surviving  enterprise in future years. As the  reincorporation was
structured as a merger of affiliated entities,  it did not have an impact on the
"book basis" of  ServiceMaster's  assets which are reflected in the accompanying
audited financial  statements.  As a result of the reincorporation,  the Company
recorded deferred tax assets that represent the difference  between the book and
tax basis of the  enterprise.  This resulted in the  recognition of deferred tax
assets on the balance  sheet and a  corresponding  $65  million  gain in the tax
benefit line of the income  statement.  The actual benefit to the Company of the
basis  step-up  significantly  exceeds the amount of the gain and is expected to
result in a reduction of cash tax  payments of  exceeding  $25 million per annum
for 15 years.
  The pro forma provision for income taxes estimated at 40 percent differed from
the  amounts  computed by  applying  the U.S.  federal tax rate of 35 percent to
pretax earnings  primarily as a result of state income taxes, net of the federal
tax benefit.
  Deferred  income taxes  reflect the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and the amounts for income tax  purposes.  Management  believes  that,
based upon its lengthy and consistent  history of profitable  operations,  it is
probable  that the net  deferred  tax  assets  will be  realized  on future  tax
returns,  primarily from the generation of future taxable income.  The Company's
deferred  taxes  include the  deferred  taxes  created  upon the  conversion  to


                                 35
<PAGE>

corporate form as well as the deferred taxes of the Company's subsidiaries which
already   operated  in  corporate  form  prior  to  the  Company's   conversion.
Significant components of the Company's deferred tax assets at December 31, 1997
are as follows:

(in thousands)
Deferred tax assets:

  Current:
  Accounts receivable allowance       $  12,000
  Accrued expenses                       21,500

  Long-Term:
  Long-term assets                        5,000
  Insurance expenses                     33,100
                                      ---------
Net deferred tax assets               $  71,600
                                      =========

Acquisitions and Sales
  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.
  On February 24, 1997, the Company  acquired  Barefoot Inc., the second largest
professional  residential lawn care services  company in the United States.  The
Company paid approximately $237 million by issuing 8.6 million shares and paying
$91 million in cash in exchange for all of the Barefoot stock. The excess of the
consideration  paid over the fair value of the Barefoot business of $254 million
was recorded as goodwill which is being amortized on a straight-line  basis over
40 years.
  On  December  31,  1995,  ServiceMaster  completed  a  transaction  with Waste
Management  Inc. (WMX) in which WMX  contributed  its 27.76 percent  interest in
Consumer  Services to  ServiceMaster  and, in exchange  the  Partnership  issued
approximately  40.7  million  unregistered  shares  and an  option  to  purchase
approximately  2.8 million  additional  shares.  This transaction  represented a
negotiated  acceleration of a conversion  right  previously held by WMX that was
first  exercisable  beginning in 1996.  The  unregistered  shares and the option
included  a number of voting and  trading  restrictions,  including  significant
limitations  on open market sales,  with the Company  retaining a right of first
refusal.  The shares  issued to WMX were valued  based upon the  average  market
price of  unrestricted  Company shares at the time the transaction was agreed to
and  announced,   adjusted  to  reflect  the  significant   voting  and  trading
restrictions  on the shares and other  considerations.  The  valuation  of these
shares issued to WMX was  determined  in part based on a review  performed by an
international  investment banking firm. The transaction generated  approximately
$239 million of intangible assets, primarily trade names and goodwill, which are
being amortized on a straight-line basis over 40 years.
  On  April  1,  1997,  the  Partnership  completed  the  repurchase  of all the
restricted shares and the option issued to WMX for $626 million.
 The following schedule represents the unaudited pro forma consolidated results
of operations (after reincorporation tax adjustments) as if the Barefoot
acquisition and the WMX share  repurchase  had taken place at the  beginning 
of each period indicated:

(in thousands, except per share data)

                              1997                 1996
                          -----------           ----------
Operating revenue          $3,962,729           $3,562,242
Operating income             $342,282             $320,479
Net income                   $153,295             $132,680
Basic EPS                       $0.84                $0.74
Diluted EPS                     $0.81                $0.71

  During 1997,  the Company made several  smaller  acquisitions  which  included
Certified  Systems,  Inc.  one of the  nation's  largest  professional  employer
organizations,  Orkin's lawn care and  plantscaping  division and several  other
lawn care and pest control  businesses.  The Company also purchased the minority
interests of Management  and  Diversified  Health  Services for a combination of
cash and Company shares,  totaling approximately $25 million. The aggregate fair
market value of the assets acquired less  liabilities  assumed for these smaller
acquisitions  was  $196  million,   including   approximately  $267  million  of
intangible assets, primarily goodwill.
  During 1996, the Company acquired Premier,  a provider of management  services
to the automotive industry,  and several other smaller companies,  predominately
pest control, lawn care and pharmacy management  businesses.  The aggregate fair
value of assets  acquired less  liabilities  assumed was $91 million,  including
approximately  $96 million of intangible  assets which are being  amortized on a
straight-line basis over 40 years.
  In January 1995,  Consumer  Services acquired the 15 percent minority interest
in  TruGreen-ChemLawn  in exchange for Partnership shares valued at $71 million.
This  consideration  represented  6.4 million shares valued at the quoted market
price of the  shares  at the time of the  transaction.  In  February  1995,  the
Company  sold  80  percent  of the  Education  Food  Service  business  to  DAKA

                                   36
<PAGE>

International,  Inc.  for $20  million.  The gain  realized  on the sale was not
material to the overall results for the year.
  Supplemental cash flow information regarding the Company's  acquisitions is as
follows:

<TABLE>
<CAPTION>

(In thousands)                                              1997          1996           1995
                                                        ----------    ----------     -----------
<S>                                                     <C>           <C>            <C>        
Fair value of assets acquired .......................   $  590,600    $  134,377     $   502,430
Less liabilities assumed ............................     (157,741)      (43,781)        (24,246)
                                                        ----------    ----------     -----------
Net assets acquired..................................      432,859        90,596         478,184
Less shares issued...................................     (186,419)      (30,559)       (435,188)
Less cash acquired...................................      (12,751)       (1,564)           (233)
                                                        ----------    ----------     -----------
Business acquisitions, net of cash acquired..........   $  233,689    $   58,473     $    42,763
                                                        ==========    ==========     ===========    
</TABLE>

Long-Term Debt
  Long-term debt includes the following:
<TABLE>
<CAPTION>

(In thousands, except per share data)                        1997                        1996
                                                    ---------------           ----------------      
Notes Payable:
<S>                                                <C>                       <C>              
6.65%, maturing in 2002 - 2004.....................$         70,000          $          70,000
8.38%, maturing in 1998 - 2001.....................          40,000                     50,000
10.57%, maturing in 1998 - 2000....................          27,000                     36,000
10.81%, maturing in 2000 - 2002....................          55,000                     55,000
7.40%, maturing in 2006............................         125,000                    125,000
6.95%, maturing in 2007............................         100,000                          -
7.45%, maturing in 2027............................         200,000                          -
7.47%, refinanced, refinanced in 1997..............               -                     50,000
9%, convertible at $5.74 per share.................               -                     18,300
6%, subordinated, convertible at $8.30 per share...           3,581                      3,581
Revolving credit facilities .......................         550,000                          -
Other..............................................          98,803                     90,055
Less current portions..............................         (21,539)                   (15,621)
                                                     --------------           ----------------

Total long-term debt...............................$      1,247,845          $         482,315
                                                   ================          =================
</TABLE>
                                                                            
  The Company is party to a number of long-term debt agreements which require it
to  comply  with  certain   financial   covenants,   including   limitations  on
indebtedness,  restricted payments,  fixed charge coverage ratios and net worth.
The Company has been and currently is in compliance  with the covenants  related
to these debt agreements.
  On July 28, 1997,  ServiceMaster filed a Form S-3 shelf registration statement
with the Securities and Exchange Commission providing for the sale of up to $950
million in either  unsecured  senior debt  securities  or equity  interests.  On
August 14, 1997 the Company successfully  completed the issuance of two tranches
of debt.  The first tranche,  $100 million of 6.95 percent notes,  was priced to
yield 6.99 percent and is due August 15, 2007. The second tranche,  $200 million
of 7.45  percent  notes,  was priced to yield 7.47 percent and is due August 15,
2027.  Subsequent to year end, the Company completed a $300 million dual-tranche
offering of unsecured  senior notes  consisting  of $150  million,  7.10 percent
notes due March 1, 2018 and $150 million,  7.25 percent notes due March 1, 2038.
The net proceeds  were used to reduce  borrowings  under bank credit  facilities
thereby   reducing  the   Company's   exposure  to   short-term   interest  rate
fluctuations.  Proceeds from future offerings will be used for general corporate
purposes,   which  may  include   repayment  of  debt,   repurchase  of  shares,
acquisitions, capital expenditures and working capital requirements. No decision
has been made relating to the potential future sale of other securities from the
shelf.  Any future  decisions  will depend on the  Company's  capital  needs and
market conditions at the time.
  In September 1996, the Company  completed a $125 million  private  placement
of debt at an overall  interest rate of 7.40 percent.  Proceeds were used to
pay down the bank revolving credit facility.
  The Company has a $1 billion multi-currency revolving credit agreement,  dated
April 1,  1997,  which  includes a 364 day  revolving  credit  facility  of $250
million  with a  five-year  revolving  credit  facility  of $750  million  and a
one-year term loan option  (two-year total term). The line 


                                37
<PAGE>

of credit can be used for general Company purposes.  The revolving credit 
facility had $450 million of unused commitment as of December 31, 1997.
  Interest paid was $63 million in 1997, $34 million in 1996, and $34 million in
1995. Average rates paid on the revolving credit facilities were 5.98 percent in
1997 and 5.62 percent in 1996. Future scheduled  long-term debt payments are $19
million in 1999,  $37  million in 2000,  $28  million in 2001 and $32 million in
2002. The $19 million of notes payable due in 1998 are expected to be refinanced
by the  long-term  revolving  credit  facility  in 1998  and  therefore  are not
considered current liabilities.
  Based  upon  the  borrowing  rates  currently  available  to the  Company  for
long-term  borrowings  with  similar  terms and  maturities,  the fair  value of
long-term debt is approximately $1.3 billion.
  Future long-term  noncancelable  operating lease payments are $30.1 million in
1998,  $21.7 million in 1999,  $15.1 million in 2000, $8.4 million in 2001, $4.7
million in 2002, and $6.9 million thereafter. Rental expense for 1997, 1996, and
1995 was $83.9 million, $74.8 million, and $65.4 million, respectively.

Employee Benefit Plans
  Contributions  to qualified  profit  sharing  plans were made in the amount of
$8.2 million in 1997, $6.9 million in 1996, and $6.2 million in 1995.  Under the
Employee Share Purchase Plan, the Company contributed $1.1 million in 1997, $1.0
million in 1996, and $0.8 million in 1995. These funds defrayed part of the cost
of the shares purchased by employees.


Cash and Marketable Securities
  Marketable  securities  held at December 31, 1997 and 1996, with a maturity 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.  Marketable
securities  available for current  operations  are  classified as current assets
while  securities  held for  noncurrent  uses are  classified as long-term.  The
Company's  investments  consist  primarily  of  publicly-traded  debt and common
equity  securities.  As of December 31, 1997, the aggregate  market value of the
Company's short- and long-term  investments in equity securities was $87 million
and the  aggregate  cost  basis  was $73  million.  There  has been no  material
participation in derivative trading securities in 1997 or 1996. 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.  Gross gains and
losses on such sales were not material in 1997, 1996 or 1995.
  Interest and dividend  income  received on cash and  marketable  securities 
was $8.3 million,  $8.0 million,  and $6.8 million in 1997,  1996, and 1995,
respectively.

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. In December 1997, ServiceMaster converted
from a publicly  traded limited  partnership  to a  corporation.  At the time of
reincorporation,  each outstanding  limited partnership share was converted into
one  share  of  common  stock on a  tax-free  basis  to the  shareholders.  Upon
reincorporation,  all Limited  Partners'  equity was transferred to common stock
and additional paid in capital.  Earnings after the reincorporation reflect only
the tax benefit attributable to the conversion,  all other earnings for the year
have been  included  in Limited  Partners'  equity.  The shares  underlying  the
obligations and rights relating to the employee option plans were also converted
from partnership shares to corporate stock on a one-for-one basis.
  In 1997,  the Company filed a $950 million shelf  registration  statement with
the  Securities and Exchange  Commission  for the sale of unsecured  senior debt
securities  and equity  interests.  No  decision  has been made  relating to the
potential  sale of  equity  securities  from  the  shelf.  Any  future  decision
regarding  the sale of  securities  from the shelf will depend on the  Company's
capital needs and market  conditions at the time. On April 1, 1997,  the Company
bought WMX's entire ownership  interest in ServiceMaster for approximately  $626
million.  This  transaction  resulted in the Company  acquiring the 40.7 million
Company shares held by WMX and cancelling WMX's option to purchase an additional
2.8 million Company shares.
  As of December 31, 1997 there were  10,464,000  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 

                                    38


<PAGE>

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)
                                 1997          1996
                                 ----          ----
Net Income:
            As reported (1)      $163,470      $150,429
            SFAS 123 pro forma   $160,966      $149,480
Net Income Per Share:
   Basic     As reported (1)         $.86          $.71
             SFAS 123 pro forma      $.84          $.71
   Diluted   As reported (1)         $.82          $.69
             SFAS 123 pro forma      $.81          $.68

(1)  Corporate form

The SFAS 123 pro forma net  income  reflects  options  granted in 1997 and 1996.
Since SFAS 123 does not apply to options  granted  prior to 1995,  the pro forma
disclosure  is not likely to be  indicative  of pro forma  results  which may be
expected in future years.  This primarily  relates to the fact that options vest
over several years and pro forma  compensation cost is recognized as the options
vest.  In addition,  awards may have been  granted in earlier  years which would
have resulted in pro forma compensation cost in 1997.
  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 1997 and 1996: a risk-free  interest rate of 6.3 percent and 5.6
percent,  respectively;  a  volatility  rate  of  21  percent  and  27  percent,
respectively;  a 3.2 percent  distribution  yield, in both years; and an average
expected life of 7 years. The options granted to employees in 1997 and 1996 have
a weighted-average fair value of $4.22 and $3.60,  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.

                                       39
<PAGE>

A summary  of option  and grant  transactions  during  the last  three  years is
summarized below:

<TABLE>
<CAPTION>
                                            Share            Price       Weighted-Average     Share           Price
                                           Options           Range       Exercise Price       Grants          Range
------------------------------------------------------------------------------------------------------------------------
Total exercisable and outstanding 
<S>                                       <C>          <C>                 <C>             <C>         <C>           
  December 31, 1994                       10,565,946   $ 1.09 - 11.45      $  8.22         1,821,977   $    4.30 - 11.33

Transactions  during 1995:
    Granted to employees                        ----             ----         ----            14,625   $   10.17 - 11.95
    Issued to WMX                          2,812,500   $        14.67      $ 14.67               ---                 ---
    Exercised, paid, or vested              (936,002)  $ 1.09 - 11.45      $  6.03          (317,786)  $    4.30 - 11.95
    Terminated or resigned                  (274,170)  $ 1.97 - 11.45      $  5.67           (48,323)  $    4.45 -  4.57
Total exercisable, December 31, 1995       9,355,774   $ 1.09 - 11.45      $  8.19               ---                 ---
Total outstanding, December 31, 1995      12,168,274   $ 1.09 - 14.67      $  9.69         1,470,492   $    4.30 - 11.95

Transactions  during 1996
    Granted to employees                   2,769,750   $13.89 - 16.17      $ 14.11               ---                 ---
    Exercised, paid, or vested            (3,647,097)  $ 1.09 - 11.45      $  8.33          (265,998)  $    4.30 - 11.95
    Terminated or resigned                  (240,183)  $ 4.19 - 11.45      $  5.83               ---                 ---
Total exercisable, December 31, 1996       5,468,494   $ 1.09 - 11.45      $  8.24               ---                 ---
Total outstanding, December 31, 1996      11,050,744   $ 1.09 - 16.17      $ 11.35         1,204,494   $    4.30 - 11.95

Transactions  during 1997
    Granted to employees                   3,530,523   $16.84 - 27.63      $ 17.43               ---                 ---
    Exercised, paid, or vested            (1,261,356)  $ 3.26 - 13.89      $  7.75          (286,973)  $    4.30 - 11.95
    Cancelled, related to WMX             (2,812,500)  $        14.67      $ 14.67               ---                 ---
    Terminated or resigned                  (293,973)  $ 2.96 - 16.83      $ 10.67           (80,117)  $    4.30 - 11.95
Total exercisable, December 31, 1997       4,613,145   $ 1.09 - 16.17      $  9.08               ---                 ---
Total outstanding, December 31, 1997      10,213,438   $ 1.09 - 27.63      $ 12.98           837,404   $    4.30 - 11.95

</TABLE>

<TABLE>
<CAPTION>

Options outstanding at December 31, 1997:
        Range of           Number Outstanding        Remaining        Weighted Average      Number Exercisable     Weighted Average
      Exercise Prices         at 12/31/97              Life            Exercise Price          at 12/31/97          Exercise Price
      ---------------         -----------              ----            --------------        --------------         --------------
<S>                           <C>                    <C>                  <C>                 <C>                        <C>    
$     1.09 -  7.70            1,747,859              5.5 years            $    5.52           1,747,859                  $  5.52
$     9.67 - 14.67            4,696,706              8.5 years            $   12.25           2,812,786                  $ 11.15
$    16.17 - 27.63            3,768,873              9.0 years            $   17.34              52,500                  $ 16.17
-----------------------------------------------------------------------------------------------------------------------------------
$     1.09 - 27.63           10,213,438              8.0 years            $   12.98           4,613,145                  $  9.08
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Earnings Per Share
  The Company adopted the Statement of Financial  Accounting  Standards No. 128,
"Earnings Per Share" which requires the dual  presentation  of basic and diluted
earnings per share.  Basic earnings per share  replaces the previously  required
presentation of primary earnings per share.  The difference  between primary and
basic  earnings per share is that basic  earnings per share includes no dilution
from  options,  debentures  or other  financial  instruments  and is computed by
dividing income available to common  stockholders by the weighted average number
of shares  outstanding for the period.  Diluted  earnings per share reflects the
potential  dilution of  convertible  securities  and options to purchase  common
stock. Diluted earnings per share is comparable to the previously reported fully
diluted earnings per share.
  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 on a pro forma basis.  The  reconciling
items would be identical for actual earnings per share purposes.

<TABLE>
<CAPTION>
                                         For year ended 1997           For year ended 1996             For year ended 1995
                                      --------------------------    -------------------------     ---------------------------
(in thousands, except per share data)  Income    Shares     EPS      Income    Shares     EPS      Income     Shares     EPS
                                      --------  -------    -----    --------  -------   -----     --------   -------   ------
<S>                                   <C>       <C>        <C>      <C>       <C>       <C>       <C>        <C>        <C>  
Pro forma Basic EPS                   $163,470  190,629    $0.86    $150,429  211,587   $0.71     $105,854   173,588    $0.61
                                                           -----                        -----                           -----
Effect of Dilutive Securities,
   net of tax
Options                                           5,556                         5,072                          4,866
9% convertible debenture                   986    3,143                  986    3,195                1,002     3,249
6% convertible debenture                   128      432                  129      432                  129       432
                                      --------  -------             --------  -------             --------   -------

Pro forma Diluted EPS                 $164,584  199,760    $0.82    $151,544  220,286   $0.69     $106,985   182,135    $0.59
                                      ========  =======    =====    ========  =======   =====     ========   =======    =====
</TABLE>
                                               40
<PAGE>

Quarterly Operating Results
Quarterly  operating  results  and  related  growth for the last three  years in
revenues, gross profit, net income, pro forma net income and pro forma 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>
<CAPTION>

(Unaudited, in thousands, except per share data)
                                     Percent Incr.           Percent Incr.
                             1997     '97-'96        1996      '96-'95          1995
---------------------------------------------------------------------------------------
<S>                      <C>            <C>      <C>              <C>        <C>       
Operating Revenue:
First Quarter            $  817,136     10%      $  740,299       5%         $  707,764
Second Quarter            1,010,794     10          916,931       8             852,791
Third Quarter             1,090,114     18          927,227       9             854,383
Fourth Quarter            1,043,458     19          873,871      11             787,566
                         ----------                --------                   ---------
                         $3,961,502     15%      $3,458,328       8%         $3,202,504
Gross Profit:
First Quarter            $  159,991     13%         142,116       6%         $  133,458
Second Quarter              257,260     16          221,505      10             200,728
Third Quarter               257,449     17          219,127      10             199,684
Fourth Quarter              228,642     18          194,572      15             168,934
                         ----------                --------                   ---------
                         $  903,342     16%      $  777,320      11%         $  702,804
Net Income:
First Quarter            $   46,860     16%      $   40,513      40%         $   28,880
Second Quarter               75,707      6           71,264      42              50,160
Third Quarter                75,759     10           68,800      44              47,750
Fourth Quarter              130,750     NA           64,563      43              45,229
                           --------                 -------                    --------
                         $  329,076     34%      $  245,140      43%         $  172,019
Pro forma 
 Corporate Net Income:
First Quarter            $   28,982     15%      $   25,188      44%         $   17,494
Second Quarter               46,707      8           43,326      41              30,655
Third Quarter                46,793     11           42,262      43              29,587
Fourth Quarter               40,988      3           39,653      41              28,118
                            -------                 -------                    --------
                         $  163,470      9%      $  150,429      42%         $  105,854
Pro forma Basic
 Net Income Per Share:
First Quarter            $     0.13      8%      $     0.12      20%         $     0.10
Second Quarter                 0.26     24             0.21      17                0.18
Third Quarter                  0.26     30             0.20      18                0.17
Fourth Quarter                 0.22     16             0.19      19                0.16
                              -----                   -----                        ----
                         $     0.86     21%      $     0.71      16%         $     0.61
Pro forma Diluted
 Net Income Per Share:
First Quarter            $     0.13      8%      $     0.12      20%         $     0.10
Second Quarter                 0.25     25             0.20      18                0.17
Third Quarter                  0.25     32             0.19      19                0.16
Fourth Quarter                 0.21     17             0.18      13                0.16
                              -----                   -----                        ----
                         $     0.82     19%      $     0.69      17%         $     0.59
Cash Distributions 
 Per Share:
First Quarter            $    .11 1/3    6%      $   .10 2/3      7%         $      .10
Second Quarter                .11 1/3    6           .10 2/3      0                 .10 2/3
Third Quarter                 .12        6           .11 1/3      6                 .10 2/3
Fourth Quarter                .12        6           .11 1/3      6                 .10 2/3
                          -----------               --------                        -------
                         $    .46 2/3    6%      $   .44          5%                .42
Price Per Share:
First Quarter            $18.50 - 16.38          $14.89 - 12.92              $ 11.11 -  9.56
Second Quarter            23.88 - 18.13           15.67 - 13.75                12.11 - 10.50
Third Quarter             29.50 - 22.75           16.50 - 14.33                12.83 - 11.78
Fourth Quarter            29.25 - 21.00           17.75 - 15.83                13.50 - 12.28

</TABLE>


All share and per share data reflect the three-for-two share splits in June 1997
and June 1996.

                                     41