UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, D.C. 20549FORM 10-K x
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
  EXCHANGE ACT OF 1934For
  the fiscal year ended December 31, 2005ORo
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
  EXCHANGE ACT OF 1934  Commission
  File Number 1-14762THE SERVICEMASTER COMPANY(Exact
  name of registrant as specified in its charter)  Delaware
  
  36-3858106(State
  or other jurisdiction of
  incorporation or organization)
  
  (I.R.S.
  Employer
  Identification No.)  3250 Lacey Road, Suite 600, Downers Grove,
  Illinois 60515(Address
  of principal executive offices, including zip code)(630) 663-2000(Registrants
  telephone number, including area code)Securities
  registered pursuant to Section 12(b) of the Act:  Title of each class
  
  Name
  of each exchange which registeredCommon
  Stock, $0.01 par value per share
  
  New
  York Stock Exchange Securities registered pursuant to Section
12(g) of the Act: None Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes x
     No o Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes  o
     No  x Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes  x
     No  o Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of the Form 10-K or any amendment to this Form 10-K.   o Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer in Rule 12b-2 of
the Exchange Act. Large
  accelerated filer  x
  Accelerated
  filer  o
  Non-accelerated
  filer  o Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes  o
     No  x The aggregate market value of
shares of common stock held by non-affiliates of the registrant as of June 30,
2005 was $3,838,410,329 The number of shares of the
registrants common stock outstanding as of February 21, 2006 was 292,775,000 DOCUMENTS INCORPORATED BY
REFERENCE Certain parts of the
registrants Definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders are incorporated into Part III of this Form 10-K.    THE SERVICEMASTER COMPANY
ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART IItem 1.
  
  Business
  3Item 1A.
  
  Risk Factors
  7Item 1B.
  
  Unresolved Staff Comments
  8Item 2.
  
  Properties
  8Item 3.
  
  Legal Proceedings
  8Item 4.
  
  Submission of Matters to a
  Vote of Security Holders
  8PART IIItem 5.
  
  Market for Registrants
  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
  Securities
  8Item 6.
  
  Selected Financial Data
  10Item 7.
  
  Managements Discussion and
  Analysis of Financial Condition and Results of Operations
  11Item 7A.
  
  Quantitative and
  Qualitative Disclosures about Market Risk
  21Item 8.
  
  Financial Statements and
  Supplementary Data
  23Item 9.
  
  Changes in and
  Disagreements with Accountants on Accounting and Financial Disclosure
  43Item 9A.
  
  Controls and Procedures
  43Item 9B.
  
  Other Information
  43PART IIIItem 10.
  
  Directors and Executive
  Officers of the Registrant
  44Item 11.
  
  Executive Compensation
  45Item 12.
  
  Security Ownership of
  Certain Beneficial Owners and Management and Related Stockholder Matters
  45Item 13.
  
  Certain Relationships and
  Related Transactions
  45Item 14.
  
  Principal Accounting Fees
  and Services
  45PART IVItem 15.
  
  Exhibits and Financial
  Statement Schedules
  45Signatures
  
  47Exhibit Index
  
  50PART I

ITEM 1. BUSINESS

The
ServiceMaster Company (ServiceMaster) is a national company serving both
residential and commercial customers. Its services include lawn care, landscape
maintenance, termite and pest control, home warranty, home inspection, disaster
restoration, cleaning, furniture repair, plumbing, drain cleaning, electrical,
heating, and air conditioning. As of December 31, 2005, ServiceMaster provided
these services through a network of over 5,500 company-owned locations and franchise
licenses operating under the following leading brands: TruGreen ChemLawn,
TruGreen LandCare, Terminix, ARS Service Express, Rescue Rooter, American
Mechanical Services, American Home Shield, AmeriSpec, Merry Maids,
ServiceMaster Clean and Furniture Medic. Incorporated in Delaware in 1991,
ServiceMaster is the successor to various entities dating back to 1947.

ServiceMaster is organized
into five principal operating segments: TruGreen ChemLawn, TruGreen LandCare;
Terminix; American Home Shield; and Other Operations. All ServiceMaster subsidiaries
are wholly owned, except for The Terminix International Company L.P., in which
Allied Bruce-Terminix Companies, Inc. is a Class B limited partner. The
financial information for each operating segment for 2005, 2004 and 2003 is
contained in Part II, Item 8 of this Form 10-K.

CHANGE IN SEGMENT REPORTING

The Company intends to sell
its American Residential Services (ARS) and American Mechanical Services (AMS)
companies so it can concentrate resources on its main growth businesses. The
Company has retained an investment banking firm to serve as its financial
advisor in this process. The ARS/AMS operations provide heating, ventilation,
air conditioning (HVAC), plumbing and electrical installation and repair
services and were previously disclosed as the Companys ARS/AMS segment.
Because the Company intends to sell these companies, the results of these
operations are reported within the financial statement caption businesses held
pending sale and discontinued operations for all periods.

The Company has expanded its
business segment reporting to allow for better ongoing visibility into the
components of the business. The operations that previously were reported in the
TruGreen segment have been further broken out into the TruGreen ChemLawn
segment and the TruGreen LandCare segment. TruGreen LandCare is an important
part of the Companys continuing operations and separately presenting the
segment results for the TruGreen LandCare operations recognizes the importance
of this business to the future growth of the enterprise while also enhancing
overall disclosure. All previously reported segment financial information
reflects the aforementioned changes in segment reporting.

SERVICES

The
following table shows the percentage of ServiceMasters consolidated revenue
from continuing operations derived from each of ServiceMasters operating
segments in the years indicated:

Segment
  
  

  2005
  
  2004
  
  2003TruGreen
  ChemLawn
  
  
  32
  %
  
  32
  %
  
  31
  %TruGreen
  LandCare
  
  
  14
  %
  
  14
  %
  
  15
  %Terminix
  
  
  33
  %
  
  33
  %
  
  33
  %American
  Home Shield
  
  
  16
  %
  
  16
  %
  
  16
  %Other
  Operations
  
  
  5
  %
  
  5
  %
  
  5
  %TruGreen ChemLawn Segment

The TruGreen ChemLawn segment
provides lawn care services primarily under the TruGreen ChemLawn brand name. Revenues derived from the TruGreen
ChemLawn
segment constituted 32%, 32% and 31% of the revenue from continuing operations
of the consolidated ServiceMaster enterprise in 2005, 2004 and 2003,
respectively. The TruGreen ChemLawn business is seasonal in nature.
Weather conditions, such as a drought, affect the demand for lawn care services
and may result in a decrease in revenues or an increase in costs.

TruGreen ChemLawn is a
leading provider of lawn care services in the United States serving both
residential and commercial customers. As of December 31, 2005, TruGreen
ChemLawn provided these services in 46 states and the District of Columbia
through 208 company-owned locations and 52 franchised locations. As of December
31, 2005, TruGreen ChemLawn also provided lawn care services through a subsidiary
in Canada and had entered into licensing arrangements to provide these services
in eight other countries, primarily in the Middle East.

TruGreen LandCare Segment

The TruGreen LandCare segment
provides landscape maintenance services primarily under the TruGreen LandCare
brand name. Revenues derived from the
TruGreen LandCare segment constituted 14%, 14% and 15% of the revenue from
continuing operations of the consolidated ServiceMaster enterprise in 2005,
2004 and 2003, respectively. The TruGreen LandCare business is seasonal
in nature. Weather conditions, such as a drought, affect the demand for
landscape maintenance services and may result in a decrease in revenues or an
increase in costs.

TruGreen LandCare is a
leading provider of landscape maintenance services in the United States serving
primarily commercial customers. As of December 31, 2005, TruGreen LandCare
provided these services in 42 states and the District of Columbia through 102
company-owned locations and had no international operations.

Terminix Segment

The Terminix segment provides
termite and pest control services primarily under the Terminix brand name. Revenues derived from the Terminix
segment
constituted 33% of the revenue from continuing operations of the consolidated
ServiceMaster enterprise in each of 2005, 2004 and 2003. The Terminix
business is seasonal in nature. The termite swarm season, which generally
occurs in early spring but varies by region depending on climate, leads to the
highest demand for termite control services and therefore the highest level of
revenues. Similarly, increased pest activity in the warmer months leads to the
highest demand for pest control services and therefore the highest level of
revenues.

3

Terminix is a leading
provider of termite and pest control services in the United States serving both
residential and commercial customers. As of December 31, 2005, Terminix
provided these services in 47 states and the District of Columbia through 364
company-owned locations and 133 franchised locations. As of December 31, 2005,
Terminix also provided termite and pest control services through a subsidiary
in Mexico and had entered into licensing arrangements to provide these services
in 37 other countries, primarily in the Caribbean and the Middle East.

American Home Shield Segment

The American Home Shield
segment provides home warranty contracts for systems and appliances primarily
under the American Home Shield brand name and home inspection services
primarily under the AmeriSpec brand name. Revenues
derived from the American Home Shield segment constituted 16% of the revenue
from continuing operations of the consolidated ServiceMaster enterprise in each
of 2005, 2004 and 2003. The American Home Shield and AmeriSpec
businesses are seasonal in nature. Sales volume in the American Home Shield
segment depends, in part, on the number of home resale closings, which
historically has been highest in the spring and summer months. American Home
Shields costs related to service call volume is highest in the summer months,
especially during periods of unseasonably warm temperatures.

American
Home Shield. American
Home Shield is a leading provider of home warranty contracts for systems and
appliances in the United States. It provides residential customers with
contracts to repair or replace electrical, plumbing, central heating and
central air conditioning systems, hot water heaters and appliances that break
down due to normal wear and tear and administers those contracts through
independent repair contractors and American Residential Services. As of
December 31, 2005, American Home Shield issued and administered home warranty
contracts in 49 states and the District of Columbia and had no international
operations.

AmeriSpec. AmeriSpec is a leading
provider
of home inspection services in the United States serving residential customers.
As of December 31, 2005, AmeriSpec provided these services in 47 states and the
District of Columbia through two company-owned locations and 224 franchised
locations, and AmeriSpec also provided home inspection services through a
subsidiary in Canada.

Other Operations Segment

The Other Operations segment
provides residential and commercial disaster restoration and cleaning services
primarily under the ServiceMaster and ServiceMaster Clean brand names, domestic
house cleaning services primarily under the Merry Maids brand name and on-site
furniture repair and restoration services primarily under the Furniture Medic
brand name. The Other Operations segment also includes ServiceMasters
headquarters functions. Revenues derived
from the Other Operations segment constituted 5% of the revenue from continuing
operations of the consolidated ServiceMaster enterprise in each of 2005, 2004
and 2003.

ServiceMaster Clean. ServiceMaster Clean
is a
leading franchisor in the residential and commercial cleaning field in the
United States. As of December 31, 2005, ServiceMaster Clean provided these
services in all 50 states and the District of Columbia through 3,189 franchise
licenses. As of December 31, 2005, ServiceMaster Clean also provided disaster
restoration and cleaning services through subsidiaries in Canada, Ireland, the
United Kingdom and Spain and had entered into licensing arrangements to provide
these services in 18 other countries, primarily in Asia and the Middle East.

Merry Maids. Merry Maids is a leading
provider of domestic house cleaning services in the United States. As of
December 31, 2005, these services were provided in 48 states and the District
of Columbia through 63 company-owned locations and 781 franchise licenses. As
of December 31, 2005, Merry Maids also provided domestic house cleaning
services through subsidiaries in Canada, Denmark, Ireland and the United
Kingdom and had entered into licensing arrangements to provide these services
in eight other countries, primarily in Asia.

Furniture Medic. Furniture Medic is a
leading provider of on-site furniture repair and restoration services in the
United States serving residential customers. As of December 31, 2005, Furniture
Medic provided these services in 49 states and the District of Columbia through
354 franchise licenses. As of December 31, 2005, Furniture Medic also provided
on-site furniture repair and restoration services through subsidiaries in
Canada and the United Kingdom and had entered into licensing arrangements to
provide these services in France and Saudi Arabia.

Businesses Held Pending Sale

American Residential Services
and American Mechanical Services provide plumbing, drain cleaning, heating,
ventilation, air conditioning and electrical services primarily under the ARS
Service Express, American Mechanical Services and Rescue Rooter brand names.
The American Residential Services and American Mechanical Services businesses are seasonal
in nature, with the greatest activity occurring in May through August during
the peak air conditioning season.

American
Residential Services.
American Residential Services, which includes the businesses of ARS Service
Express and Rescue Rooter, is a leading provider of plumbing, drain cleaning,
heating, ventilation, air conditioning and electrical services in the United
States serving residential customers. As of December 31, 2005, American
Residential Services provided these services in 25 states and the District of
Columbia through 61 company-owned locations and had no international
operations.

American Mechanical Services. American
Mechanical Services is a leading provider of heating, ventilation, air
conditioning and electrical services in the United States serving commercial
customers. As of December 31, 2005, American Mechanical Services

4

provided these services in 7
states and the District of Columbia through 20 company-owned locations and had
no international operations.

MARKETING AND DISTRIBUTION

ServiceMaster markets its
services primarily through yellow pages advertisements, direct mail, television
and radio advertising, print advertisements, door-to-door solicitation and
telemarketing. Additionally, American Home Shield markets its home service
contracts through participating real estate brokerage offices in conjunction
with the resale of single-family residences and through financial institutions
and insurance agencies.

HEADQUARTER FUNCTIONS

The
Business Support Center coordinates administration of payroll, benefits, risk
management, travel and certain procurement services for ServiceMasters
internal operations.
Various administrative support departments also provide personnel,
communications, marketing, government and public relations, administrative,
accounting, financial, tax, human resources, information technology and legal
services. The Business Support Center is headquartered in Downers Grove,
Illinois and has additional personnel located in Memphis, Tennessee.

PATENTS, TRADEMARKS AND LICENSES

ServiceMaster
holds various service marks, trademarks and trade names that it deems
particularly important to the advertising and franchising activities conducted
by each of its operating segments. These marks are registered in the United
States and over 113 other countries and are renewed at each registration
expiration date.

FRANCHISES

Franchises
are important to TruGreen ChemLawn, Terminix, ServiceMaster Clean, Merry Maids,
AmeriSpec and Furniture Medic businesses. Total franchise fees (initial and
recurring) represented 3.4%, 3.3% and 3.2% of consolidated revenue in 2005,
2004 and 2003, respectively. Related franchise operating expenses were 2.1%,
2.1% and 2.0% of consolidated operating expenses in 2005, 2004 and 2003, respectively.
Total franchise fee profits comprised 10.5%, 10.3% and 10.9% of consolidated
operating income (excluding the impairment charge in 2003) before headquarter
overhead in 2005, 2004 and 2003, respectively. Franchise agreements made in the
course of these businesses are generally for a term of five years.
ServiceMaster renews the majority of its franchise agreements prior to their
expiration.

COMPETITION

ServiceMaster competes with
many other companies in the sale of its services, franchises and products. The
principal methods of competition in ServiceMasters businesses include quality
of service, name recognition, pricing, customer satisfaction and reputation.
Competition in all of the Companys markets is strong.

Lawn Care Services. Competition in the
market for lawn care services comes mainly from local, independently owned
firms and from homeowners who care for their own lawns.

Landscape Maintenance
Services. Competition
in the market for landscape maintenance services comes mainly from small,
owner-operated companies operating in a limited geographic market and, to a
lesser degree, from a few large companies operating in multiple markets, and
from property owners who perform their own landscaping services.

Termite and Pest Control
Services. Competition
in the market for termite and pest control services comes mainly from thousands
of regional and local, independently owned firms, from homeowners who treat
their own termite and pest control problems and from Orkin, Inc., a subsidiary
of Rollins, Inc., which operates on a national basis.

Home Warranty Contracts for Systems and
Appliances. Competition
in the market for home warranty contracts for systems and appliances comes
mainly from regional providers of home warranties. Several competitors are
initiating expansion efforts into additional states.

Home Inspection Services. Competition in
the market for home inspection services comes mainly from regional and local,
independently owned firms.

Disaster Restoration and Cleaning
Services. Competition
in the market for disaster restoration and cleaning services comes mainly from
local, independently owned firms and a few national professional cleaning
companies.

House Cleaning Services. Competition in
the
market for house cleaning services comes mainly from local, independently owned
firms and a few national companies.

Furniture Repair Services. Competition in
the market for furniture repair services comes mainly from local, independent
contractors.

Electrical, Heating, Ventilation and Air
Conditioning.
Competition in the market for electrical, heating, ventilation and air
conditioning services comes mainly from regional and local, independently owned
firms throughout the United States and a few national companies.

Plumbing and Drain Cleaning Services.
Competition in the market for plumbing and drain cleaning services comes mainly
from regional and local, independently owned firms throughout the United States
and a few national companies.

MAJOR CUSTOMERS

ServiceMaster has no single
customer that accounts for more than 10% of its consolidated operating revenue.
Additionally, no operating segment has a single customer that accounts for more
than 10% of its operating revenue. None of ServiceMasters operating segments
is dependent on a single customer or a few customers, the loss of which would
have a material adverse effect on the segment.

5

REGULATORY COMPLIANCE

Government Regulations

ServiceMasters operating
segments are subject to various federal, state and local laws and regulations,
compliance with which increases ServiceMasters operating costs, limits or
restricts the services provided by ServiceMasters operating segments or the
methods by which ServiceMasters operating segments sell those services or
conduct their respective businesses, or subjects ServiceMaster and its
operating segments to the possibility of regulatory actions or proceedings.

These federal and state laws
include laws relating to consumer protection, wage and hour regulations, permit
and license requirements, workers safety (e.g., the Occupational Safety and Health
Act), environmental regulations and employee benefits (e.g., the Consolidated
Omnibus Budget Reconciliation Act of 1985 and the Employee Retirement Income
Security Act of 1974). The TruGreen ChemLawn, TruGreen LandCare, Terminix,
American Residential Services and American Mechanical Services businesses must
also meet the Department of Transportation and Federal Motor Carrier Safety
Administration requirements with respect to their fleets of vehicles. American
Home Shield is regulated by the Department of Insurance in certain states and
the Real Estate Commission in Texas.

Consumer Protection and Telemarketing
Matters

ServiceMaster is subject to
numerous federal and state laws and regulations designed to protect consumers,
including laws governing consumer privacy and fraud, the collection and use of
consumer data, telemarketing and other forms of solicitation. Noncompliance with
these laws and regulations can subject ServiceMaster to fines or various forms
of civil or criminal prosecution, any of which could have an adverse effect on
its financial condition, results of operations and cash flows.

The telemarketing rules adopted
by the Federal Communications Commission pursuant to the Federal Telephone
Consumer Protection Act and the Federal Telemarketing Sales Rule issued by the
Federal Trade Commission govern ServiceMasters telephone sales practices. In
addition, many states have adopted statutes and regulations targeted at direct
telephone sales activities. The implementation of do-not-call lists requires
TruGreen ChemLawn, and, to a lesser extent,
ServiceMasters other operating segments, to seek additional marketing methods
and channels.

Franchise Matters

TruGreen ChemLawn, Terminix,
ServiceMaster Clean, Merry Maids, AmeriSpec and Furniture Medic are subject to
various federal and state laws and regulations governing franchise sales and
marketing and franchise trade practices generally, including applicable rules
and regulations of the Federal Trade Commission. These laws and regulations
generally require disclosure of business information in connection with the
sale of franchises. Certain state regulations also affect the ability of the
franchisor to revoke or refuse to renew a franchise. ServiceMaster seeks to
comply with regulatory requirements and deal with franchisees in good faith.
From time to time, ServiceMaster and one or more franchisees may become
involved in a dispute regarding the franchise relationship, including, among
other things, payment of royalties, location of branches, advertising, purchase
of products by franchisees, compliance with ServiceMaster standards and
franchise renewal criteria. There can be no assurance that compliance problems
will not be encountered from time to time or that material disputes with one or
more franchisees will not arise.

Environmental Matters

ServiceMasters
businesses are subject to various federal, state and local laws and regulations
regarding environmental matters. Terminix, TruGreen ChemLawn and TruGreen
LandCare are regulated under many federal and state environmental laws,
including the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the
Federal Environmental Pesticide Control Act of 1972, the Federal Insecticide,
Fungicide and Rodenticide Act of 1947, the Resource Conservation and Recovery
Act of 1976, the Emergency Planning and Community Right-to-Know Act of 1986,
the Oil Pollution Act of 1990 and the Clean Water Act of 1977. American
Residential Services and American Mechanical Services are also regulated under
many federal and state environmental laws, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Resource Conservation and Recovery Act of
1976, the Emergency Planning and Community Right-to-Know Act of 1986, the Clean
Water Act of 1977 and the Clean Air Act of 1970. ServiceMaster cannot predict
the effect on its operations of possible future environmental legislation or
regulations. During 2005, there were no material capital expenditures for
environmental control facilities, and no such material expenditures are
anticipated in 2006.

EMPLOYEES

On
December 31, 2005, ServiceMaster had a total of approximately 39,000 employees.

AVAILABLE INFORMATION

ServiceMaster
maintains a website at http://www.svm.com that includes a hyperlink to a
website maintained by a third-party where ServiceMasters Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports are available without charge as soon as reasonably
practicable following the time that they are filed with or furnished to the
Securities and Exchange Commission. A copy of each of ServiceMasters Corporate
Governance Principles, Audit and Finance Committee Charter, Compensation and
Leadership Development Committee Charter, Governance and Nominating Committee
Charter, Financial Code of Ethics and Code of Conduct is posted on
ServiceMasters website at http://www.svm.com under Corporate Governance and
is available in print to any shareholder who requests it by writing to the Corporate
Secretary at the following address: The ServiceMaster Company, 3250 Lacey Road,
Suite 600, Downers Grove, Illinois 60515.

6

ITEM 1A. RISK FACTORS

This Form 10-K contains or
incorporates by reference statements concerning future results and other
matters that may be deemed to be forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. ServiceMaster
intends that these forward-looking statements, which look forward in time and
include everything other than historical information, be subject to the safe
harbors created by that legislation. ServiceMaster notes that these
forward-looking statements involve risks and uncertainties that could affect
its results of operations, financial condition or cash flows. Factors that
could cause actual results to differ materially from those expressed or implied
in a forward-looking statement include the following, among others:

Weather conditions and seasonality affect the demand for
ServiceMasters services.

The demand for
ServiceMasters services is affected by weather conditions. The business of
ServiceMaster is also affected by the seasonal nature of its lawn care and
landscape maintenance services; termite and pest control services; home
warranty and home inspection services; plumbing, drain cleaning, heating,
ventilation, air conditioning and electrical services; and disaster restoration
services. For example, droughts can affect the demand for lawn care and
landscape maintenance services; extreme weather conditions could result in
increased service calls in the home warranty business; cooler temperatures
could impede the development of the termite swarm and lead to lower termite
swarm activity; and mild weather conditions could result in lower demand for
plumbing, heating and air conditioning services.

Competition could reduce ServiceMasters market
share and
hurt its financial performance.

ServiceMaster operates in highly competitive markets.
Changes in
the source and intensity of competition in the markets served by ServiceMaster
impact the demand for its services and may result in additional pricing
pressures. For example, the entry of national home-improvement retailers into
ServiceMasters service lines may impact its financial performance. The
principal methods of competition in ServiceMasters businesses include quality
of service, name recognition, pricing, customer satisfaction and reputation. No
assurance can be given that ServiceMaster will be able to compete successfully
against current or future competitors and that the competitive pressures that
ServiceMaster faces will not result in reduced market share and negatively
impact its financial performance.

ServiceMasters future success depends on its
ability to
attract and retain trained workers.

ServiceMasters
future success and financial performance depends substantially on its ability
to attract and retain trained workers. ServiceMasters ability to expand its
operations is in part impacted by its ability to increase its labor force. In
the event of a labor shortage, ServiceMaster could experience difficulty in
delivering its services in a high-quality or timely manner and could be forced
to increase wages in order to attract and retain trained employees, which would
result in higher operating costs.

Increases in operating costs affect ServiceMasters
financial
performance.

ServiceMasters financial
performance is affected by factor costs, such as labor, health care, vehicle,
fuel, self-insurance, and insurance premiums. In particular, ServiceMasters financial
performance is affected by increases in operating costs, such as the increased
fuel costs experienced in 2005.

Changes in the types or mix of service offerings affect
ServiceMasters financial performance.

ServiceMasters financial
performance is affected by changes in the types or mix of service offerings.
For example, offering both liquid and bait termite services requires additional
equipment and training and results in different pricing and post-sale
monitoring activities.

Changes in laws and regulations applicable to
ServiceMasters
businesses affect ServiceMasters financial performance.

ServiceMasters businesses
are subject to various federal, state and local laws and regulations. These
federal and state laws include laws relating to consumer protection, wage and
hour restrictions, permit and licensing requirements, workers safety,
environmental regulations, employee benefits and telemarketing. It is difficult
to predict the future impact of the broad and expanding legislative and regulatory
requirements affecting ServiceMasters businesses. The laws and regulations
applicable to ServiceMasters businesses will likely change in the future and
affect ServiceMasters operations and financial performance. In addition, if
ServiceMaster were to fail to comply with any applicable law or regulation,
ServiceMaster could be subject to fines or penalties that may affect how a
business is operated.

Future acquisitions affect ServiceMasters financial
performance.

ServiceMaster plans to
continue to pursue opportunities to expand through acquisitions. Acquisition
activity includes small roll-up acquisitions in existing service lines and
may include new business acquisitions. ServiceMasters ability to continue to
make acquisitions at reasonable prices and to integrate the acquired businesses
are important factors in ServiceMasters future growth. ServiceMaster cannot
assure that it will be able to manage or integrate acquired businesses
successfully. Any inability on ServiceMasters part to consolidate and manage
growth from acquired businesses could have an adverse effect on ServiceMasters
financial performance.

Changes in general economic conditions affect the demand
for
ServiceMasters services.

Changes
in general economic conditions affect the demand for ServiceMasters services.
Unfavorable general economic conditions, including, but not limited to, changes
in interest rates, fuel and oil prices, and unemployment rates could reduce
consumer spending levels and, in turn, reduce the demand for ServiceMasters
services.

7

ServiceMaster is subject to a
number of risks that might cause ServiceMasters actual results to differ
materially from its expressed or implied forecasts, targets or projections,
including:


  Litigation against
  ServiceMaster, particularly any class action litigation;
  Unanticipated changes in
  senior management;
  Legislation or other
  governmental action that detrimentally impacts ServiceMaster;
  Unexpected outcome of any
  Internal Revenue Service audit;
  New accounting
  pronouncements or changes in accounting policies; and
  Impairment of goodwill or
  other intangible assets.ITEM 1B. UNRESOLVED STAFF
COMMENTS

Not
applicable.

ITEM 2. PROPERTIES

BUSINESS SUPPORT CENTER

ServiceMaster leases approximately
66,000 square feet of office space to accommodate personnel from the Business
Support Center in Downers Grove, Illinois. The lease expires at the end of
2012, but ServiceMaster has an option to terminate the lease as of December 31,
2007 by giving written notice to the lessor by June 30, 2006. Additionally,
ServiceMaster leases warehouse space in Naperville, Illinois. ServiceMaster
also leases office space in Memphis, Tennessee as described below to
accommodate Memphis-based personnel from the Business Support Center.
ServiceMaster believes that these office facilities and warehouse are suitable
and adequate to support the Business Support Centers current needs in the
Chicagoland and Memphis areas.

OPERATING COMPANIES

The headquarters for TruGreen
ChemLawn, TruGreen LandCare, Terminix, American Residential Services and Rescue
Rooter are located in leased premises at 860 Ridge Lake Boulevard, Memphis,
Tennessee. The headquarters for American Home Shield and AmeriSpec are located
in leased premises at 889 Ridge Lake Boulevard, Memphis, Tennessee. The
headquarters for ServiceMaster Clean, Merry Maids and Furniture Medic and a
training facility are located in leased premises at 3839 Forest Hill Irene
Road, Memphis, Tennessee. The headquarters for American Mechanical Services is
located in leased premises at 8039 Laurel Lakes Court, Laurel, Maryland. In
addition, ServiceMaster leases space for a call center located at 6399
ShelbyView Drive, Memphis, Tennessee; offices located at 850 and 855 Ridge Lake
Boulevard, Memphis, Tennessee; a training facility located at 1650 Shelby Oaks
Drive North, Memphis, Tennessee; and a warehouse located at 1575 Two Place,
Memphis, Tennessee. ServiceMaster believes that the headquarters, call center
facility, offices, training facilities and warehouse are suitable and adequate
to support the current needs of its operating companies in the Memphis and
Laurel areas.

ServiceMasters operating
companies own and lease a variety of facilities principally in the United
States for branch and service center operations and for office, storage, call
center and data processing space. The following chart identifies the number of
owned and leased facilities for each operating company. ServiceMaster believes
that these facilities, when considered with the headquarters, call center
facility, offices, training facilities and warehouses described above are
suitable and adequate to support the current needs of its business.

Operating
  Company
  
  OwnedFacilities
  
  LeasedFacilitiesTruGreen
  ChemLawn
  
  
  5
  
  
  290TruGreen LandCare
  
  
  2
  
  
  181Terminix
  
  
  11
  
  
  455American Home Shield
  
  
  1
  
  
  5ServiceMaster Clean
  
  
  0
  
  
  9Merry Maids
  
  
  0
  
  
  63American Residential
  Services
  
  
  4
  
  
  76American Mechanical
  Services
  
  
  1
  
  
  19ITEM 3. LEGAL PROCEEDINGS

In the
ordinary course of conducting its business activities, ServiceMaster becomes
involved in judicial, administrative and regulatory proceedings involving both
private parties and governmental authorities. As of February 28, 2006 these
proceedings included general and commercial liability actions and a small
number of environmental proceedings. ServiceMaster does not expect any of these
proceedings to have a material adverse effect on its financial condition,
results of operations or cash flows.

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

During the fourth quarter of
the fiscal year covered by this Form 10-K, no matters were submitted to a vote
of security holders.

PART II

ITEM 5. MARKET FOR REGISTRANTS
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

ServiceMasters common stock
is traded on the New York Stock Exchange under the symbol SVM. At February
21, 2006, ServiceMasters common stock was held of record by approximately
41,000 persons. ServiceMaster estimates that approximately 36,000 persons held
shares of its common stock in the names of nominees as of that date.

8

Quarterly Cash Dividends and Price Per Share
Data

The following tables set
forth the cash dividends and quarterly prices of ServiceMasters common stock,
as reported on the New York Stock Exchange Composite Transactions:

Cash Dividends Per Share:
  
  2005
  
  
  % Chg
  2004
  
  
  % Chg
  2003First Quarter
  
  $
  0.11
  
  
  5
  %
  $
  0.105
  
  
  0
  %
  $
  0.105Second Quarter
  
  
  0.11
  
  
  5
  
  
  0.105
  
  
  0
  
  
  0.105Third Quarter
  
  
  0.11
  
  
  0
  
  
  0.11
  
  
  5
  
  
  0.105Fourth Quarter
  
  
  0.11
  
  
  0
  
  
  0.11
  
  
  5
  
  
  0.105$
  0.44
  
  
  2
  %
  $
  0.43
  
  
  2
  %
  $
  0.422005
  
  2004
  
  2003Price Per Share:
  
  High
  
  Low
  
  High
  
  Low
  
  High
  
  LowFirst Quarter
  
  $
  13.90
  
  $
  12.74
  
  $
  12.05
  
  $
  10.65
  
  $
  11.41
  
  $
  8.95Second Quarter
  
  
  13.90
  
  
  12.50
  
  
  12.50
  
  
  11.35
  
  
  10.95
  
  
  8.97Third Quarter
  
  
  13.93
  
  
  13.10
  
  
  13.25
  
  
  11.12
  
  
  10.73
  
  
  9.35Fourth Quarter
  
  
  14.28
  
  
  11.69
  
  
  13.87
  
  
  12.30
  
  
  12.10
  
  
  10.20In February 2006,
ServiceMasters Board of Directors authorized $250 million for share
repurchases. This authorization replaces the unused portion ($30 million at
December 31, 2005) from the previous authorization granted in July 2000. As
presented in the following table, there were no share repurchases of
ServiceMasters common stock for the three months ended December 31, 2005 under
its share repurchase authorization. Decisions relating to any future share
repurchases will depend on various factors such as ServiceMasters commitment
to maintain investment grade credit ratings and other strategic investment
opportunities.

ISSUER PURCHASES OF EQUITY
SECURITIES

Period
  
  Total
  Number
  of Shares
  Purchased
  
  Average
  Price
  Paid per
  Share
  
  Total
  Number
  of Shares
  Purchased
  as
  Part of
  Publicly
  Announced
  Plan
  
  Approximate
  Dollar Value
  of Shares that 
  May Yet Be
  Purchased
  Under the
  PlanOctober 1-31, 2005
  
  
  
  
  $
  
  
  
  
  
  $
  30,000,000November 1-30, 2005
  
  
  
  
  $
  
  
  
  
  
  $
  30,000,000December 1-31, 2005
  
  
  
  
  $
  
  
  
  
  
  $
  30,000,000
  (1)Total
  
  
  
  
  $
  
  
  
  (1)
  In February 2006,
  ServiceMasters Board of Directors authorized $250 million for share
  repurchases. This authorization replaces this $30 million that remains as of
  December 31, 2005 from the previous authorization granted in July 2000.9

ITEM 6. SELECTED FINANCIAL
DATA

Five-Year Financial
Summary

(In thousands, except per share
data)
  
  2005
  
  2004
  
  2003
  
  2002
  
  2001Operating Results:Operating revenue
  
  $
  3,239,478
  
  $
  3,068,068
  
  $
  2,895,028
  
  $
  2,781,829
  
  $
  2,656,634Operating income (loss)(1)
  
  
  340,083
  
  
  324,308
  
  
  110,655
  
  
  315,357
  
  
  (72,252
  )Percentage of
  operating revenue
  
  
  10.5
  %
  
  10.6
  %
  
  3.8
  %
  
  11.3
  %
  
  (2.7
  %)Non-operating expense
  
  
  45,385
  
  
  53,464
  
  
  58,394
  
  
  93,152
  
  
  127,527Provision (benefit) for income taxes (2)
  
  
  114,137
  
  
  (45,779
  )
  
  54,716
  
  
  76,949
  
  
  (3,923
  )Income
(loss) from continuing operations (2)
  
  
  180,561
  
  
  316,623
  
  
  (2,455
  )
  
  145,256
  
  
  (195,856
  )Income
(loss) from businesses held pending  sale and discontinued operations, net of income taxes (1, 2,
3)
  
  
  18,364
  
  
  14,604
  
  
  (222,232
  )
  
  11,738
  
  
  312,240Net
income (loss)
  
  $
  198,925
  
  $
  331,227
  
  $
  (224,687
  )
  $
  156,994
  
  $
  116,384Earnings
(loss) per share:Basic
  
  $
  0.68
  
  $
  1.14
  
  $
  (0.76
  )
  $
  0.52
  
  $
  0.39Diluted: (1,
  2, 3)Income
  (loss) from continuing operations
  
  $
  0.61
  
  $
  1.06
  
  $
  (0.01
  )
  $
  0.47
  
  $
  (0.66
  )Income
  (loss) from businesses held pending sale and discontinued operations
  
  
  0.06
  
  
  0.05
  
  
  (0.75
  )
  
  0.04
  
  
  1.05Diluted
  earnings (loss) per share
  
  $
  0.67
  
  $
  1.11
  
  $
  (0.76
  )
  $
  0.51
  
  $
  0.39Shares
used to compute basic earnings per share
  
  
  291,251
  
  
  290,514
  
  
  295,610
  
  
  300,383
  
  
  298,659Shares
used to compute diluted earnings per share
  
  
  296,807
  
  
  303,568
  
  
  295,610
  
  
  305,912
  
  
  298,659Shares
outstanding, net of treasury shares
  
  
  290,896
  
  
  290,524
  
  
  292,868
  
  
  298,253
  
  
  300,531Cash
dividends per share
  
  $
  0.44
  
  $
  0.43
  
  $
  0.42
  
  $
  0.41
  
  $
  0.40Share
price range:High
  price
  
  $
  14.28
  
  $
  13.87
  
  $
  12.10
  
  $
  15.50
  
  $
  14.20Low price
  
  $
  11.69
  
  $
  10.65
  
  $
  8.95
  
  $
  8.89
  
  $
  9.84Financial Position:Total
assets (1)
  
  $
  3,028,870
  
  $
  3,140,202
  
  $
  2,956,426
  
  $
  3,414,938
  
  $
  3,621,245Total
liabilities
  
  
  1,874,230
  
  
  2,048,667
  
  
  2,039,600
  
  
  2,095,929
  
  
  2,311,381Total
debt outstanding
  
  
  658,150
  
  
  805,088
  
  
  819,271
  
  
  835,475
  
  
  1,155,193Minority
interest
  
  
  100,000
  
  
  100,000
  
  
  100,309
  
  
  100,309
  
  
  102,677Shareholders equity (1, 2)
  
  
  1,054,640
  
  
  991,535
  
  
  816,517
  
  
  1,218,700
  
  
  1,207,187(1)
  In accordance with SFAS 142, the Companys goodwill
and intangible
  assets that are not amortized are subject to at least an annual assessment
  for impairment by applying a fair-value based test. In the third quarter of
  2003, the Company recorded a non-cash impairment charge associated with the
  goodwill and intangible assets at its TruGreen LandCare business unit. This
  charge, which is included in the results of continuing operations for 2003,
  totaled $189 million pre-tax, $156 million after-tax, and $0.53 per diluted
  share. Also in the third quarter of 2003, the Company recorded a non-cash
  impairment charge associated with the goodwill and intangible assets at its
  American Residential Services (ARS) and American Mechanical Services (AMS)
  operations. The Company is currently holding these operations for sale,
  accordingly, the financial results for the ARS and AMS operations, as well as
  the impairment charge related to these operations ($292 million pre-tax, $227
  million after-tax), are classified within the financial statement caption
  businesses held pending sale and discontinued operations for all periods.
  See the Goodwill and Intangible Assets note in the Notes to Consolidated
  Financial Statements. In the fourth quarter of 2001, the Company recorded in
  continuing operations a pre-tax charge of $345 million ($279 million,
  after-tax) or $.94 per diluted share related primarily to goodwill and asset
  impairments as well as other items.(2)
  In January 2005, the Company announced that it had reached
a
  comprehensive agreement with the Internal Revenue Service regarding its
  examination of the Companys federal income taxes through the year 2002. As a
  result of this agreement, the Company recorded a non-cash reduction in its
  2004 tax provision, thereby increasing net income by approximately $159
  million. Approximately $150 million related to continuing operations ($.49
  per diluted share) and $9 million related to businesses held pending sale and
  discontinued operations ($.03 per diluted share). See the Income Taxes note
  in the Notes to the Consolidated Financial Statements.(3)
  The Company
  intends to sell its American Residential Services (ARS) and American
  Mechanical Services (AMS) companies so that it can concentrate resources on its
  main growth companies. These operations were previously disclosed as the
  Companys ARS/AMS segment. Because the Company intends to sell these
  companies, the results of these operations are classified within the
  financial statement caption businesses held pending sale and discontinued
  operations in all periods. See the Management Discussion and Analysis of
  Financial Position and Results of Operations for a discussion of the
  components of businesses held pending sale and discontinued operations.10

Item 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Consolidated
Review of 2005 and Outlook for 2006

2005 was an encouraging year for ServiceMaster (the Company)
as it reported revenue and earnings per share in line with managements
expectations. It was also a year where every one of the Companys business
segments achieved growth in revenue and two of the Companys core businesses,
Terminix and TruGreen ChemLawn, each surpassed $1 billion in revenue for the
first time. In 2005, the Company overcame significant challenges including
record high fuel prices, steadily rising interest rates, unusual weather
aberrations, including the hurricanes, and continued expansion in telemarketing
restrictions. The Company overcame these obstacles by focusing on what it could
control, like safety, customer satisfaction, and sales force and geographic
expansion.

In 2006, the Company will be
implementing three significant changes to its business portfolio. (1) The
Company intends to sell American Residential Services (ARS) and American
Mechanical Services (AMS). These are businesses, in large markets, with strong
management teams. These companies are making good progress on key initiatives
that will make them even better in the future. But there were two fundamental
issues that led the Company to the difficult decision to sell these operations.
First, is the Companys need to have fewer priorities, so that it can pursue
them with greater intensity. Second, the Company concluded that ARS and AMS
businesses are not compatible with the Companys overall business model. ARS
and AMS are not built around the kind of repeat business experienced in the
Companys other operations, and hence the ARS and AMS operations are more
cyclical and weather dependent. These two businesses also operate at much lower
margins, and they would require meaningful time and capital to establish widely
recognized national brands such as those the Company enjoys in each of its
other businesses.

(2) In February 2006, the Company
announced an agreement to acquire InStar Services Group, Inc. InStar is a
leading direct provider of commercial disaster response and reconstruction
services in the United States with 2005 revenues of approximately $130 million. InStar
provides a continuum of services, from planning prior to an event, to emergency
response following the event and ultimately including cleaning, recovery and
reconstruction. InStar has been growing rapidly and is expected to grow at a
much faster rate than the businesses held pending sale. InStar has solid profit
margins and operates in an extremely large market with a tremendous opportunity
to gain a larger share. The Company believes there is a great strategic fit in
combining the capabilities of InStar with the Companys existing disaster
restoration business within ServiceMaster Clean. ServiceMaster Cleans disaster
restoration business already totals over $500 million in customer level revenue
through its franchisee network and has been growing at double digit rates for
more than five years. The Company expects the InStar acquisition, after
interest and amortization costs, to be accretive in the $.01 per share range
for the period in 2006 following the acquisition.

(3) The Company has launched Project
Accelerate, an internal, multi-phase reengineering project designed to improve
the effectiveness and efficiency of all functional support areas. Upon
completion, Project Accelerate will result in an organization that is better
aligned to respond faster to the marketplace, its customers, and provide better
day-to-day support for front line associates who are in the homes and
businesses of customers every day. This project is consistent with the Companys
goal of becoming systematically stronger and is expected to have a positive
financial impact on the enterprise. The reduction in direct support costs,
combined with more effective purchasing of outside services and other cost
reductions, is targeted to produce annualized gross savings in the range of $50
to $75 million, and net savings of $25 million to $35 million after
reinvestments into the business and the impact of factor cost increases. Those
savings should begin to be realized in 2006, and reach end state (on an
annualized run rate basis) in 2007. Excluding the effects of one-time severance
and implementation costs, the amounts of which the Company will be determining
over the course of the first quarter 2006, the Company estimates the 2006
savings from Project Accelerate in the $0.02 per share range, helping the
Company to offset rising factor costs and contribute to continued strong
bottom-line growth.

Going forward, the Company will be comprised of
leading service brands that collectively have strong cash flow, solid revenue
growth potential, greater operating margins and stronger returns on invested
capital. The Company believes that its improved portfolio, combined with solid
execution of its business strategies, will enable it to deliver mid to
high-single digit revenue growth and low double-digit earnings growth in 2006.
From a base of earnings from continuing operations of $0.61, the Companys
earnings per share target for 2006 is $0.69. Based on the actions the Company
is taking in 2006, the Companys target is to achieve high single digit revenue
growth and earnings per share growth in the mid-teen level during 2007 and
beyond, with cash from operations growing and continuing to substantially
exceed net income.

2005 Compared with 2004

Revenue from continuing
operations for 2005 was $3.2 billion, a six percent increase over 2004. Most of
the revenue growth was organic, with every business segment achieving increases
over 2004 levels.

The Company reported income
from continuing operations in 2005 of $181 million and income from businesses
held pending sale and discontinued operations of $18 million. Total net income
was $199 million in 2005 compared with $331 million in 2004. The 2004 total
included a $159 million nonrecurring reduction in the tax provision and
corresponding increase in net income resulting from the agreement with the IRS.
Diluted earnings per share were $.67 in 2005 compared with $1.11 in 2004.

Diluted earnings per share
from continuing operations were $.61 in 2005 compared with $1.06 in 2004. As
more fully discussed below, the diluted earnings per share from continuing
operations for 2004 include a $.49 per share ($150 million) non-cash reduction
in the tax provision resulting from the Companys agreement with the IRS.

11

Operating income for 2005
increased five percent to $340 million, compared with $324 million in 2004. The
increase in operating income primarily reflects solid profit growth at Terminix
supported by improved labor and material cost efficiencies, improved
profitability in the TruGreen LandCare operations, and reduced safety-related
costs throughout the enterprise. These factors were offset in part by higher
fuel costs, increased claim costs at American Home Shield due to hotter weather
conditions, a $10 million unfavorable adjustment recorded by Terminix to
correct the estimation of prior year damage claim reserves, a $4 million gain
that TruGreen ChemLawn realized in the third quarter of 2004 from the sale of a
support facility, as well as the first time inclusion of approximately $3
million of seasonal operating losses in the Canadian operations acquired by
TruGreen ChemLawn in April 2004.

As previously disclosed, the
Company has experienced both positive and negative trending in some of its key
factor costs. The Companys large fleet continues to be negatively impacted by
significant increases in oil prices, which have also adversely impacted
fertilizer costs at TruGreen ChemLawn. Although the Company hedges
approximately two-thirds of its estimated annual fuel usage, even net of the
hedges, fuel costs of continuing operations increased approximately $13 million
in 2005. Oil prices remain high, and the Company currently estimates that its
continuing operations will absorb approximately $.02 per share of incremental
fuel costs in 2006. As previously discussed, GPS and routing and scheduling
technologies that the Company has been implementing will tighten routes and
reduce drive time and fuel consumption. Health care costs continue to
experience strong inflationary pressures, and this is expected to continue. The
Company will also be making an additional investment in employee health care
benefits of approximately $.01 per share in 2006, as part of its efforts to
further enhance its position as an employer of choice.

On the positive side, the
Company continues to experience very favorable results from its efforts to
reduce safety-related costs, which include workers compensation, auto and
general liability claims. In 2005, the Company achieved a four percent
reduction in vehicle collisions and a double digit decline in lost employee
work day cases. Total costs from continuing operations, including the income
statement effects of favorable trending of prior year claims, were down almost
$10 million for the year. The Company has set a goal of $12 to $15 million of
additional savings from continuing operations over the next two to three years.

Tax Agreement

In January 2005, the Company
reached a comprehensive agreement with the Internal Revenue Service (IRS)
regarding its examination of the Companys federal income taxes through the
year 2002. As a result of this agreement, the Company recorded in its 2004
financial statements certain deferred tax assets which had previously not been
recorded due to uncertainties associated with the complexity of the matters under
review and the extended period of time effectively covered by the examination.
This resulted in a non-cash reduction in the Companys 2004 income tax
provision, thereby increasing 2004 consolidated net income by approximately
$159 million ($150 million, or $.49 per diluted share, related to continuing
operations and $9 million, or $.03 per diluted share, related to businesses
held pending sale and discontinued operations). Related to the IRS agreement,
the Company realized tax savings of $25 million in 2004, made tax payments in
early 2005 totaling $131 million and realized a $45 million reduction in
estimated tax payments in the third and fourth quarters of 2005. Additionally,
this agreement resulted in a deferred tax annuity totaling $57 million that will
be realized through 2016.

Operating and
Non-Operating Expenses

Cost of services rendered and
products sold increased five percent compared to the prior year and decreased
as a percentage of revenue to 62.1 percent in 2005 from 62.6 percent in 2004.
This decrease reflects improved labor and materials management at TruGreen
LandCare and improvements in safety-related costs throughout the enterprise.
Selling and administrative expenses increased eight percent and increased as a
percentage of revenue to 27.2 percent from 26.7 percent in 2004. The increase
in selling and administrative expenses primarily reflects investments to
increase market penetration and improve customer retention and other strategic
initiatives.

Net interest expense
decreased $8 million from 2004, primarily reflecting lower interest expense
resulting from the repayment of fixed rate debt in April 2005, as well as
higher investment income experienced on the American Home Shield investment
portfolio. It is important to note that investment returns are an integral part
of the business model at American Home Shield, and there will always be some
market-based variability in the timing and amount of investment returns
realized from year to year.

The effective tax rate for
continuing operations was a 39 percent tax expense in 2005 and a 17 percent tax
benefit in 2004. The comparison of the effective tax rate is impacted by the
Companys agreement with the IRS which resulted in a $150 million non-cash
reduction in the 2004 income tax provision for continuing operations. The
Company expects that its effective tax rate for 2006 will approximate 39
percent.

Segment Review
(2005 vs 2004)

The segment reviews should be
read in conjunction with the required footnote disclosures presented in the
Notes to the Consolidated Financial Statements. This disclosure provides a
reconciliation of segment operating income to income from continuing operations
before income taxes, with net non-operating expenses as the only reconciling
item. The Companys segment reviews include discussions of capital employed,
which is a non-U.S. GAAP measure that is defined as the segments total assets
less liabilities, exclusive of debt balances. The Company believes this
information is useful to investors in helping them compute return on capital
measures and therefore better understand the performance of the Companys
segments. The Notes to the Consolidated Financial Statements also include a
reconciliation of segment capital employed to its most comparable U.S. GAAP
measure.

12

Key Performance IndicatorsAs of December 31,
  
  2005
  
  2004TruGreen
  ChemLawn -Growth in
Full Program Contracts
  
  
  1
  %
  
  8
  %Customer
Retention Rate
  
  
  61.2
  %
  
  62.2
  %Terminix -Growth in
Pest Control Customers
  
  
  3
  %
  
  7
  %Pest
Control Customer Retention Rate
  
  
  77.2
  %
  
  78.1
  %Growth in
Termite Customers
  
  
  0
  %
  
  0
  %Termite
Customer Retention Rate
  
  
  87.2
  %
  
  87.9
  %American
  Home Shield -Growth in
Warranty Contracts
  
  
  6
  %
  
  5
  %Customer
Retention Rate
  
  
  57.4
  %
  
  55.2
  %TruGreen ChemLawn
Segment

The TruGreen ChemLawn
segment, which includes lawn care services, reported revenue in excess of $1
billion for the first time in its history. A four percent increase in revenue
to $1.02 billion from $981 million in 2004, was achieved in spite of continued
declines in telemarketing sales and challenging weather conditions throughout
much of the country. Summer drought conditions dominated several key regions,
adversely impacting both production and customer retention. Although weather
can periodically impact its business in the short-term, the Company believes
that its own actions over the medium and long-term will have a much greater
impact on the business.

The four percent growth in
revenue was supported by a two percent improvement in price realization, growth
in supplemental residential (e.g., seeding and aeration) and commercial
services, as well as a one percent increase in customer counts. Management is
encouraged by TruGreen ChemLawns efforts to improve price realization. This
improvement resulted from disciplined efforts to reduce discounting on new
sales and strategically targeted price increases to the existing customer base.
Unit sales increased approximately one percent from last years levels, as the
Company continues to successfully diversify its sales channels through
increased emphasis on neighborhood selling, direct mail and other efforts.
Expansion of these new sales channels have helped offset continued declines in
telemarketing sales, which have been adversely impacted by do-not-call
restrictions. Sales from neighborhood programs more than tripled to almost
300,000 customers in 2005, while sales from direct mail efforts increased 14
percent. In 2006, the Company expects that the proportion of non-telemarketing
sales to total sales will continue to grow. The shift away from telemarketing
sales impacts the relative timing of customer sales. As the Company continues
to develop these new channels, the timing of customer sales will be more
concentrated and trend more heavily toward the early part of the second
quarter, versus the historical first quarter period where telemarketing was
more heavily concentrated.

TruGreen ChemLawns total
customer retention rate decreased 100 basis points in 2005, reflecting a sharp
drop in the Canadian operations and a nominal decrease in the U.S. The Company
believes the circumstances in Canada are unique, and included the combination
of five acquired brands into one at the beginning of this year, as well as
tightened application regulations in certain markets. Despite the decrease in
2005, overall retention rates have increased 350 basis points over the last
four years taken as a whole, and the Company is targeting, and anticipating,
meaningful additional improvement in the future. To capture that opportunity,
the Company has taken comprehensive steps to improve customer communication and
problem resolution procedures, expand quality assurance processes, and provide
focused incentives at all levels.

Operating income totaled $172
million in 2005 compared to $176 million in 2004. The operating income
comparison was adversely impacted by the $4 million pre-tax gain in 2004 from
the sale of a support facility. Incremental profits from increased revenues and
reduced safety-related costs were offset primarily by the impacts of higher
fuel and fertilizer costs and the first time absorption of approximately $3
million of first quarter seasonal losses in the Canadian operations which were
acquired in April 2004.

Capital employed in the
TruGreen ChemLawn segment increased two percent, primarily reflecting the
impact of acquisitions.

TruGreen LandCare
Segment

The TruGreen LandCare
segment, which includes landscape maintenance services, reported a three
percent increase in revenue to $453 million from $439 million in 2004 and
operating income of $4 million compared to an operating loss of ($4) million in
2004.

Base contract maintenance
revenue increased two percent despite a modest decline in customer retention.
Improving customer retention is a top operational priority. Management believes
it also represents a significant and achievable opportunity, with current rates
at least 10 full percentage points below the Companys long term expectations.
The Company believes that improvements in retention will be driven by improved
procedures related to customer communications, landscape inspections, and
problem resolution, combined with more selective targeting of sales prospects.

Enhancement revenue (e.g.,
add-on services such as seasonal flower plantings, mulching, etc.), which
represents approximately one-third of LandCares revenue, grew six percent and
was favorably impacted by more consistent focus throughout the country, as well
as hurricane-related work. The Company believes the investments that it has
made in this business, including the development of a systematically stronger
and larger sales organization that is better qualified, trained and equipped,
will position it well to realize the substantial growth potential in this
business.

Operating results improved by
almost $9 million. The increase in profit was due to improved labor management
techniques, including quicker implementation of reductions in seasonal
workforce in the fourth quarter, improvements in safety-related costs and the
impact of approximately $1.5 million of branch shut down costs incurred in
2004. These profit gains were offset in part by higher fuel prices.

Capital employed in the
TruGreen LandCare segment increased one percent.

13

Terminix Segment

The Terminix segment, which
includes termite and pest control services, achieved a milestone in 2005 by
surpassing $1 billion in revenue. Revenue increased six percent to $1.1 billion
from $997 million in 2004 while operating income increased 10 percent to $146
million compared to $133 million in 2004.

Strong growth in revenue from
initial termite applications (termite completions) resulted from a solid
increase in renewable unit sales. The unit growth was achieved despite a
relatively weak termite swarm season, and reflected benefits derived from
investments to increase market penetration, which included 25 branch splits,
and the expansion of the sales force in under-penetrated territories. The mix
of termite completion sales moved from approximately 45 percent bait and 55
percent liquid at the end of 2004 to approximately 30 percent bait and 70
percent liquid at the end of 2005. A relatively modest additional shift is
expected to occur in 2006. The Company was encouraged by its ability to
maintain pricing of both liquid and bait services, despite the introduction in
2005 of a new, lower cost liquid perimeter treatment technique.

Solid growth in termite
renewal revenues reflected the impact of improved pricing, offset in part by a
slight decline in customer retention. Solid growth in pest control revenue
primarily reflected the impact of acquisitions, offset in part by a modest
decline in retention.

Two positive developments
meaningfully impacted Terminixs 2005 results. In March, the Company introduced
a new bait option which utilizes an active termiticide from day one, and
provides meaningful labor and material cost advantages over the prior bait
offering. Labor efficiencies were also realized in the liquid option as a
result of the new perimeter treatment technique. These efficiencies, along
with solid revenue growth, enabled operating income to grow 10 percent, despite
higher factor costs and the effects of adjustments to prior year damage claim
reserves. In 2005, Terminix recorded a $10 million unfavorable correction in
estimating prior years termite damage claim reserves. New termite damage
claims continue to trend favorably. In addition, as previously disclosed,
Terminix recorded an unrelated $8 million favorable but non recurring
adjustment in 2004.

Capital employed in the
Terminix segment increased three percent, primarily reflecting the impact of
acquisitions.

American Home
Shield Segment

The American Home Shield
segment, which provides home warranties to consumers that cover HVAC, plumbing
and other systems and appliances, reported an eight percent increase in revenue
to $529 million from $487 million in 2004, and operating income of $71 million
compared to $72 million in 2004, a decrease of one percent.

New warranty contract sales,
which are reported as earned revenue over the subsequent twelve-month contract
period, increased seven percent in 2005. A solid increase in customer renewals,
which are American Home Shields largest source of revenue, was supported by a
larger base of renewable customers and an overall improved customer retention
rate. The improvement in retention reflects a favorable mix in customers
renewing as well as a reduced level of non-renewal contracts due to mortgage
refinancings. American Home Shields second largest channel, real estate sales,
showed some improvement in the second half of the year, but were adversely
impacted throughout the year by weaker home re-sales. Consumer sales, American
Home Shields fastest growing channel, experienced strong double-digit growth driven
by expanded and more successful targeted direct mail programs.

Operating income declined
modestly as incremental profits from increased revenue levels were more than
offset by higher claim costs associated with summer weather that was much
hotter than the generally mild conditions that prevailed in 2004. This led to a
three percent increase in the rate of service requests, as well as a higher
cost per claim, which had a combined adverse impact on operating income of
approximately $15 million. In addition, the Company made planned investments in
initiatives to increase market penetration and further improve customer
retention, both of which should enhance long-term growth. The operating income
comparison to last year was positively impacted by a $5.5 million cumulative
negative adjustment to deferred revenue and operating income that was reported
in the third quarter of 2004.

Capital employed increased 24
percent primarily reflecting a higher level of cash and marketable securities
due to growth in the business and improved market performance. Capital employed
at American Home Shield which totaled $208 million and $168 million at December
31, 2005 and 2004, respectively, includes approximately $283 million and $258
million of cash, short-term and long-term securities at those dates. The
investment income and realized gains/losses on these assets are reported as
non-operating income/expense.

Other Operations
Segment

The Other Operations segment
includes the Companys ServiceMaster Clean and Merry Maids operations as well
as its headquarters functions. Revenue in this segment increased eight percent
to $177 million in 2005 compared with $164 million in 2004. On a combined
basis, the ServiceMaster Clean and Merry Maids franchise operations reported
revenue growth of eight percent and a strong increase in operating income.
ServiceMaster Clean reported continued strong growth in disaster restoration
services along with improved momentum in commercial cleaning. Merry Maids
continued to experience strong internal revenue growth in its branch
operations, along with improving branch profit margins. The overall segment
operating loss for 2005 was ($53) million compared with ($52) million in 2004.
Favorable trending of prior year insurance claims, as well as a strong increase
in profits from the franchise businesses, were offset by increases in costs of
certain strategic investments.

Total initial and recurring
franchise fees represented 3.4 percent and 3.3 percent of consolidated revenue
in 2005 and 2004, respectively and direct franchise operating expenses were 2.1
percent in both 2005 and 2004. Total franchise fee profits comprised 10.5
percent and 10.3 percent of consolidated operating income before headquarter
overhead in 2005 and 2004, respectively. The portion of total franchise fee
profits related to initial fees received from the sales of franchises was not
material to the Companys consolidated financial statements for all periods.

14

Capital employed in the Other
Operations segment decreased reflecting lower cash balances as the Company used
existing cash resources as well as cash generated from operations during 2005
to fund the tax payments related to the IRS agreement and the repayment of $137
million of public debt that matured in April 2005.

Businesses Held
Pending Sale and Discontinued Operations

The Company intends to sell
its American Residential Services (ARS) and American Mechanical Services (AMS)
companies so it can concentrate resources on its main growth businesses. The
Company has retained an investment banking firm to serve as its financial
advisor in this process. The ARS/AMS operations provide heating, ventilation,
air conditioning (HVAC), plumbing and electrical installation and repair
services and were previously disclosed as the Companys ARS/AMS segment.
Because the Company intends to sell these companies, their operating results
are reported within the financial statement caption businesses held pending
sale and discontinued operations for all periods. Revenues from the combined
ARS and AMS businesses increased 11 percent in 2005. Operating income net of
taxes increased by approximately $6 million in 2005, as sharp improvements in
volume and mix of replacement sales and more favorable weather conditions
offset lower profits from commercial installation projects.

Net income from previously
discontinued operations totaled $5 million in 2005, primarily reflecting the
favorable conclusion of certain obligations related to international pest
control businesses sold in prior years.

In 2004, as a result of the
comprehensive IRS agreement discussed previously, the Company recognized a
non-cash reduction in the tax provision related to discontinued operations,
thereby increasing net income reported under that caption by $9 million.

Included in the 2003 loss of businesses held pending sale and discontinued operations
was an impairment charge ($292 million pre-tax, $227 million after-tax)
associated with the goodwill and intangible assets of the ARS and AMS
operations.

The components of income
(loss), net of income taxes of businesses held pending sale and discontinued
operations for 2005, 2004 and 2003 are as follows:

(In
  thousands)
  
  
  2005
  
  
  2004
  
  
  2003ARS/AMS operating
income
  
  $
  11,695
  
  $
  5,534
  
  $
  10,023Headquarter support and
insurance costs
  previously allocated to ARS/AMS
  
  
  10,294
  
  
  6,714
  
  
  4,879ARS/AMS operating income
before previously
  allocated expenses
  
  
  21,989
  
  
  12,248
  
  
  14,902Provision for income
taxes
  
  
  8,687
  
  
  4,814
  
  
  7,467ARS/AMS operating income,
net of tax
  
  
  13,302
  
  
  7,434
  
  
  7,435Reduction in tax provision
related to IRS
  agreement
  
  
  
  
  
  9,465
  
  
  Impairment charge, net of
tax
  
  
  
  
  
  
  
  
  (226,955
  )Other discontinued
operations, net of tax
  
  
  5,062
  
  
  (2,295
  )
  
  (2,712
  )Income (loss) from
businesses held pending sale and
  discontinued operations
  
  $
  18,364
  
  $
  14,604
  
  $
  (222,232
  )2004 Compared with 2003

Revenue from continuing
operations for 2004 was $3.1 billion, a six percent increase over 2003, with
approximately five percent of the growth derived from internal sources.

The Company reported income
from continuing operations in 2004 of $317 million and income from businesses
held pending sale and discontinued operations of $15 million. Total net income
of $331 million in 2004 compared with a net loss of ($225) million in 2003.
Diluted earnings per share were $1.11 in 2004 and a loss of ($.76) in 2003.

Diluted earnings per share
from continuing operations were $1.06 in 2004 compared with a loss of ($.01) in
2003. As more fully discussed below, the diluted earnings per share from
continuing operations for 2004 included a $.49 per share ($150 million)
non-cash reduction in the tax provision and the 2003 amount included a non-cash
goodwill and intangible assets impairment charge of $0.53 per diluted share
($189 million pre-tax, $156 million after-tax). Operating income for 2004 was
$324 million, compared with $111 million in 2003. The 2003 results include the
$189 million non-cash impairment charge.

The increase in operating
income in 2004 reflects the impact of the 2003 impairment charge, strong profit
growth at American Home Shield and TruGreen ChemLawn, a reduced level of operating
loss in TruGreen LandCare and improved profits at ServiceMaster Clean and
Terminix, as well as a $4 million gain that TruGreen ChemLawn realized in the
third quarter of 2004 from the sale of a support facility.

2003 Impairment Charge

In the third quarter of 2003,
the Company recorded a non-cash impairment charge associated with the goodwill
and intangible assets at its TruGreen LandCare business unit. This charge,
which is included in the results of continuing operations for 2003, totaled
$189 million pre-tax, $156 million after-tax, and $0.53 per diluted share. Also
in the third quarter of 2003, the Company recorded a non-cash impairment charge
associated with the goodwill and intangible assets at its ARS and AMS
operations. The Company is currently holding these operations for sale,
accordingly, the financial results for the ARS and AMS operations, as well as
the impairment charge related to these operations ($292 million pre-tax, $227
million after-tax), have been reclassified to businesses held pending sale and
discontinued operations for all periods.

Operating and
Non-Operating Expenses

Cost of services rendered and
products sold increased four percent compared to the prior year and decreased
as a percentage of revenue to 62.6 percent in 2004 from 63.5 percent in 2003.
Selling and administrative expenses increased nine percent and increased as a
percentage of revenue to 26.7 percent from 26.0 percent in 2003. The increase
in selling and administrative expenses primarily reflects an increased level of
variable incentive compensation expense at the headquarters level and increased
investments in the sales force, particularly at Terminix and American Home
Shield.

Net interest expense
decreased $5 million from 2003, primarily reflecting the favorable impact of
interest rate swap agreements entered into at the end of 2003 and early 2004,
and a slightly higher level of investment income from

15

securities in the American
Home Shield investment portfolio. It is important to note that investment
returns are an integral part of the business model at American Home Shield, and
there will always be some market-based variability in the timing and amount of
investment returns realized from year to year.

The comparison of the
effective tax rate is impacted by the 2004 reduction in the tax provision
related to the Companys agreement with the IRS, as well as the impairment
charge recorded in 2003. The effective tax rate for continuing operations
reflects a benefit of 17 percent in 2004 and a 105 percent tax expense in 2003.
As previously discussed, the agreement with the IRS resulted in a $150 million
non-cash reduction in the 2004 income tax provision for continuing operations.
The impairment charge reported in continuing operations for 2003 included a
portion of goodwill that was not deductible for tax purposes, resulting in a
tax benefit of $33 million, or only approximately 17 percent of the pre-tax
impairment charge of $189 million.

Segment Review
(2004 vs. 2003)

Key Performance IndicatorsAs of December 31,
  
  
  2004
  
  2003TruGreen
  ChemLawn -Growth in
Full Program Contracts
  
  
  8
  %
  
  4
  %Customer
Retention Rate
  
  
  62.2
  %
  
  59.5
  %Terminix -Growth in
Pest Control Customers
  
  
  7
  %
  
  2
  %Pest
Control Customer Retention Rate
  
  
  78.1
  %
  
  77.1
  %Growth in
Termite Customers
  
  
  0
  %
  
  -2
  %Termite
Customer Retention Rate
  
  
  87.9
  %
  
  88.1
  %American
  Home Shield -Growth in
Warranty Contracts
  
  
  5
  %
  
  5
  %Customer
Retention Rate
  
  
  55.2
  %
  
  55.1
  %TruGreen ChemLawn
Segment

The TruGreen ChemLawn segment
reported revenue of $981 million in 2004, eight percent above 2003. Operating
income was $176 million in 2004 compared to $162 million in 2003. Included in
the 2004 results was a $4 million pre-tax gain from the sale of a support
facility.

The growth in revenue was
supported by an eight percent increase in customer counts, with five percent of
that growth from organic sources and three percent from acquisitions. The
organic customer count growth reflected continued significant improvement in
customer retention, partially offset by a modest decline in new sales. The
customer retention improvement of 270 basis points in 2004 was geographically
broad-based, resulting from programs implemented to improve customer communications
and problem resolution, initiatives to produce more visible results, focused
incentive compensation structures at all levels, and more favorable weather
conditions. Since 2001, the retention rate has improved by 450 basis points,
reflecting managements concerted focus on customer satisfaction.

Management is encouraged with
the progress TruGreen ChemLawn has made in diversifying its marketing model,
further reducing its reliance on telemarketing. Overall, new sales in 2004 were
down less than two percent, reflecting a decline in telemarketing sales as a
result of new restrictions, including implementation of the National Do Not
Call registry, offset by a substantial increase in sales from new channels such
as neighborhood sales efforts and direct mail. In April 2004, TruGreen ChemLawn
acquired the assets of Greenspace Services Limited (Greenspace), Canadas
largest professional lawn care service company.

Operating income increased
nine percent, with approximately three percent of the increase related to the
$4 million gain realized from the sale of a support facility in the third
quarter. Operating income margins improved slightly, reflecting the impact of
the support facility gain, partially offset by increased fuel and chemical
costs as well as increased variable incentive compensation costs.

Capital employed increased
two percent, reflecting acquisitions, offset in part by improved working
capital management.

TruGreen LandCare
Segment

The TruGreen LandCare segment
reported revenue of $439 million in 2004, comparable to 2003 levels. The
segment reported an operating loss of ($4) million, compared with an operating
loss of ($196) million in 2003. During the third quarter of 2003, the Company
recorded a non-cash impairment charge of $189 million pre-tax, relating to
goodwill and intangible assets of its TruGreen LandCare operations. For a
further discussion of the impairment charge see the Goodwill and Intangible
Assets section in the Notes to Consolidated Financial Statements. The increase
in segment operating income reflects the impact of the 2003 impairment charge
as well as a reduced level of operating losses experienced in 2004.

Revenue was consistent with
2003 levels, reflecting a stronger volume of enhancement sales (e.g., add-on
services such as seasonal flower plantings, mulching, etc.) and a comparable
level of base contract maintenance revenue, offset by the effects of branch
consolidations and closures that were completed in late 2003 and early 2004.
Excluding the impact of branch consolidations, revenue increased two percent.
The growth in enhancement revenue reflects the impact of focused sales efforts
and an improving economy. The level of operating loss improved, reflecting the
favorable grow-over effects of the 2003 impairment charge, an increased level
of enhancement sales, and an improvement in materials expense. These items were
offset in part by a weather-related reduction in high-margin snow removal
revenue and higher variable incentive compensation and fuel costs.

Capital employed decreased 23
percent, reflecting improved working capital management supported by a program
to reduce underutilized equipment.

Terminix Segment

The Terminix segment reported
a five percent increase in revenue to $997 million from $945 million in 2003
and operating income of $133 million compared to $131 million, a one percent
increase.

Entering 2004, Terminix was
making significant changes to its operating model with the implementation of a
dual service offering for termites and the migration in pest control from

16

monthly to quarterly service
frequency. With the improved efficacy of liquid termite treatments, the Company
began providing consumers with the choice of receiving termite services through
baiting systems or liquid treatments. As previously disclosed, with this
enhanced termite offering, the Company anticipated and did experience a shift
in the mix of its termite customer base from bait to liquid. While the
estimated lifetime values of these two types of offerings are comparable, the earnings
cycles are different with liquid customers having less first year revenues and
profits but more profitability in subsequent years. By offering consumers a
choice in treatments, Terminix was able to increase the average price realized
for each of the two treatment alternatives, thus helping to offset the adverse,
short-term revenue and profit impacts of the mix shift. The mix of new termite
sales (termite completions), which represent about a quarter of Terminixs
total revenue, moved from approximately 80 percent bait and 20 percent liquid
at the end of 2003 to approximately 45 percent bait and 55 percent liquid at
the end of 2004. As a result, overall termite completion revenue increased only
modestly in 2004, even though the Company achieved solid double-digit unit
growth in sales and improved price realization for each treatment alternative
viewed discreetly.

Termite renewal revenues
experienced strong growth, supported by improved pricing. Pest control revenue
increased modestly as high single-digit growth in customer counts, attributable
in part to a 100 basis point improvement in retention, was partially offset by
the unfavorable impact to revenues from the increased number of customers
receiving quarterly service visits versus monthly service visits. The Company
believes this shift has had a positive impact on improving customer
satisfaction and has already caused and should continue to lead to improved
labor efficiencies.

Operating income grew
modestly as the projected termite mix shift did have a negative effect on first
year gross profit. Operating income was also adversely impacted by higher
insurance, fuel, and bad debt costs, as well as the costs associated with a
procedural change in the branches to ensure that termite renewal reinspections
occur before the actual renewal payments are due. In 2004, the Company recorded
a final adjustment to reflect positive trending in damage claim costs
associated with the Sears termite customer base acquired several years ago.
This resulted in an $8 million reduction in expense in 2004, compared with a
$13 million reduction in 2003. In the fourth quarter of 2003, Terminix
corrected its method of recognizing renewal revenue from certain customers who
have prepaid. A cumulative adjustment was recorded reducing fourth quarter 2003
revenue by $9 million and operating income by $7 million.

Capital employed in the
Terminix segment increased six percent, primarily reflecting acquisitions.

American Home
Shield Segment

The American Home Shield
segment reported an eight percent increase in revenue to $487 million from $450
million in 2003, and operating income growth of 24 percent to $72 million
compared to $58 million in 2003.

Renewal sales, which are
American Home Shields largest source of revenue, experienced solid growth,
reflecting managements specific programs to improve satisfaction and
retention. Real estate sales, which are the second-largest channel, had slight
growth with volume negatively impacted by strong declines in home listings in
high warranty usage states like California and Texas. And consumer sales, which
are the smallest but fastest-growing channel, experienced very strong
double-digit growth, reflecting an increased level of direct-mail
solicitations. American Home Shields total new contract sales in the fourth
quarter increased three percent, a rate less than the full year growth rate of
six percent due in part to the relative timing of direct mail solicitations.

Operating income increased,
reflecting the effects of revenue growth and continued very strong controls
over claim costs. Partially offsetting these factors were continuing
investments to increase market penetration and customer retention. In 2005,
American Home Shield is planning to continue its efforts to expand sales in
less established real estate markets by expanding its sales force, improving
training, and reducing the span of control of sales force supervisors. These
efforts are intended to drive a replication of the results of high performing
account executives. Management is also focusing on continuing to improve
customer satisfaction and retention through enhanced customer communications.

In the third quarter of 2004,
American Home Shield recorded a cumulative, non-cash negative adjustment to
revenue and operating income of approximately $5.5 million related to the
conversion from a historically manual deferred revenue calculation to an
automated computation. In the fourth quarter of 2003, American Home Shield
recorded a cumulative adjustment of a comparable amount related to a correction
in its method of recognizing revenue from customers who have prepaid.

Capital employed increased 25
percent reflecting a higher level of cash and marketable securities due to the
growth in the business and improved market performance. The calculation of
capital employed for the American Home Shield segment includes approximately
$258 million and $221 million of cash, short-term and long-term securities at
December 31, 2004 and 2003, respectively. The interest and realized
gains/losses on these investments are reported as non-operating income/expense.

Other Operations
Segment

The Other Operations segment
reported an eight percent increase in revenue to $164 million in 2004 compared
with $152 million in 2003. On a combined basis, the ServiceMaster Clean and
Merry Maids franchise operations reported revenue growth of 10 percent and a
solid increase in operating income. ServiceMaster Clean continued to experience
strong growth in disaster restoration services. At Merry Maids, a better
economy and improved sales processes have driven steady increases in internal
revenue growth in both the branch and franchise operations. The segments
operating loss increased over the prior year, primarily reflecting a higher
level of variable incentive compensation expense at the headquarters level,
partially offset by increased profits in the franchise operations.

Total initial and recurring
franchise fees represented 3.3 percent and 3.2 percent of consolidated revenue
in 2004 and 2003, respectively and direct franchise operating expenses were 2.1
percent and 2.0 percent of consolidated operating expenses in 2004 and 2003,
respectively. Total franchise fee

17

profits comprised 10.3
percent and 10.9 percent of consolidated operating income (excluding the
impairment charge in 2003) before headquarter overhead in 2004 and 2003,
respectively. The portion of total franchise fee profits related to initial
fees received from the sales of franchises was not material to the Companys
consolidated financial statements for all periods.

Capital employed in the Other
Operations segment increased primarily reflecting the deferred tax assets
recorded at the conclusion of the IRS review.

2005 Financial Position and Liquidity Cash
Flows from Operating Activities

Net cash provided from
operating activities was $243 million in 2005, compared to $370 million in
2004. This decrease primarily reflects the tax payment impacts resulting from
the IRS agreement. Related to this agreement, the Company realized tax savings
of $25 million in 2004, made tax payments in early 2005 totaling $131 million
and realized a $45 million reduction in estimated tax payments in the third and
fourth quarters of 2005. Additionally, this agreement resulted in a deferred
tax annuity totaling $57 million that will be realized through 2016. Excluding
the impact of the IRS agreement, cash provided by operating activities totaled
$329 million in 2005, approximately 80 percent higher than net income from
continuing operations, and $345 million in 2004. This 2004 amount was favorably
impacted by a non-sustainable reduction in payments of incentive compensation
in 2004 related to the 2003 year totaling approximately $20 million.

Three factors contribute to
the Companys strength in its annual cash provided from operating activities: a
solid earnings base, businesses that need relatively little working capital to
fund growth in their operations, and significant annual deferred taxes. The
Company receives a significant annual cash tax benefit due to a large base of
amortizable intangible assets which exist for income tax reporting purposes,
but not for book purposes. A significant portion of these assets arose in
connection with the 1997 conversion from a limited partnership to a
corporation. The 2004 agreement with the IRS affirmed the previously identified
step-up in the tax basis of the Companys assets which occurred upon
reincorporation. The amortization of the tax basis will result in approximately
$57 million of average annual cash tax benefits through 2012 for which no
corresponding income statement benefit is recorded. The Company estimates that
the divestitures of ARS and AMS will result in a reduction of approximately $4
million in the average annual cash tax benefits, however, the cash tax benefits
in the year of divestiture will increase such that the aggregate tax benefits
are unchanged.

Cash
Flows from Investing Activities

Capital
expenditures, which include recurring capital needs and information technology
projects, were slightly below prior year levels. In 2006, the Company expects
capital expenditures to total approximately $45 million. The Company has no
material capital commitments at this time.

Acquisitions
in 2005 totaled $51 million, compared with $59 million in 2004. The decrease in
acquisitions primarily reflects TruGreen ChemLawns 2004 purchase of
Greenspace. In 2006, the Company expects to continue to expand its tuck-in
acquisition program at both Terminix and TruGreen ChemLawn, with overall
acquisitions at these two units higher than the 2005 level.

Cash
Flows from Financing Activities

Cash
dividends paid to shareholders in 2005 amounted to $.44 per share, a 2.3
percent increase over 2004. This was the 35th consecutive year of annual growth
in dividends for the Company. Cash dividends paid in 2005 totaled $128 million,
a two percent increase over 2004, reflecting the per share increase, partially
offset by the impact of share repurchases. In February 2006, the Company
announced the declaration of a cash dividend of $.11 per share payable on February
28, 2006 to shareholders of record on February 17, 2006. The Company expects to
continue to increase its per share dividend payment although, as previously
disclosed, at a rate lower than its corresponding growth in profits. The timing
and amount of future dividend increases are at the discretion of the Board of
Directors and will depend on, among other things, the Companys capital
structure objectives and cash requirements.

In February 2006,
ServiceMasters Board of Directors authorized $250 million for share
repurchases. This authorization replaces the unused portion ($30 million at
December 31, 2005) from the previous authorization granted in July 2000. In 2005, the Company repurchased $52 million of
its shares at an average price of approximately $13.61 per share. The Company
anticipates share repurchases in 2006 to be in the $80 to $100 million range.
The actual level of future share repurchases will depend on various factors
such as the Companys commitment to maintain investment grade credit ratings
and other strategic investment opportunities.

Liquidity

Cash and
short and long-term marketable securities totaled approximately $367 million at
December 31, 2005, compared with approximately $496 million at December 31,
2004. The Company used existing resources and cash generated from operations
during 2005 to fund the previously disclosed tax payments related to the IRS
agreement, as well as the repayment of $137 million of public debt that matured
in April 2005. Approximately $348 million of the cash and short and long-term
marketable securities balance is effectively required to support regulatory
requirements at American Home Shield and for other purposes. Total debt at
December 31, 2005 was $658 million, approximately $147 million below the amount
at December 31, 2004 and the lowest level since 1997. Approximately 55 percent
of the Companys debt matures beyond five years and 42 percent beyond fifteen
years. The Companys next significant debt maturity is not until 2007.

Management
believes that funds generated from operating activities and other existing
resources provide it with significant financial flexibility which will continue
to be adequate to satisfy its ongoing working capital needs. The Company
maintains a revolving credit facility of $500 million. In May 2005, this
agreement was amended to extend the maturity date to May 2010 and reduce by 50
basis points the interest rate payable under the facility. At December 31,
2005, the Company had no borrowings outstanding under this facility and had
issued approximately $142 million of letters of credit, resulting in unused
commitments of approximately $358 million. The Company also has $550 million of
senior unsecured debt and equity securities

18

available
for issuance under an effective shelf registration statement. In addition, the
Company has an arrangement enabling it to sell, on a revolving basis, certain
receivables to unrelated third party purchasers. The agreement is a 364-day
facility that is renewable at the option of the purchasers. The Company may
sell up to $70 million of its receivables to these purchasers in the future and
therefore would have immediate access to cash proceeds from these sales. The
amount of the eligible receivables varies during the year based on seasonality
of the business that will at times limit the amount available to the Company.
During 2005, there were no receivables sold to third parties under this
agreement.

The
Company is party to a number of debt agreements which require it to maintain
certain financial and other covenants, including limitations on indebtedness
(debt cannot exceed 3.25 times EBITDA, as defined) and interest coverage ratio
(EBITDA needs to exceed four times interest expense). In addition, under
certain circumstances, the agreements may limit the Companys ability to pay
dividends and repurchase shares of common stock. These limitations are not
expected to be an inhibiting factor in the Companys future dividend and share
repurchase plans. Failure by the Company to maintain these covenants could
result in the acceleration of the maturity of the debt. At December 31, 2005,
and throughout the year, the Company was in compliance with the covenants and,
based on its operating outlook for 2006, expects to be able to maintain
compliance in the future. The Company does not have any debt agreements that
contain put rights or provide for acceleration of maturity as a result of a
change in credit rating.

The
Company maintains operating lease facilities with banks totaling $68 million
which provide for the acquisition and development of branch properties to be
leased by the Company. At December 31, 2005, there was approximately $68
million funded under these facilities. Approximately $15 million of these
leases have been included on the balance sheet as assets with related debt as
of December 31, 2005 and 2004. The remaining funded balances are treated as
operating leases. Approximately $15 million of the available facility expires
in January 2008 and the remaining $53 million expires in September 2009. The
Company has guaranteed the residual value of the properties under the leases up
to 82 percent of the fair market value at the commencement of the lease. At
December 31, 2005, the Companys residual value guarantee related to the leased
assets totaled $56 million for which the Company has recorded the estimated
fair value of this guarantee (approximately $0.9 million) in the Consolidated
Statements of Financial Position.

The
majority of the Companys fleet and some equipment is leased through operating
leases. The lease terms are non-cancelable for the first twelve month term, and
then are month-to-month, cancelable at the Companys option. There are residual
value guarantees (ranging from 70 percent to 87 percent depending on the
agreement) on these vehicles and equipment, which historically have not
resulted in significant net payments to the lessors. At December 31, 2005,
there were approximately $259 million of residual value guarantees relating to
the Companys fleet and equipment leases. The fair value of the assets under
the leases is expected to fully mitigate the Companys obligations under the
agreements. At December 31, 2005 the Company has recorded the estimated fair
value of this guarantee (approximately $0.4 million) in the Consolidated
Statements of Financial Position.

The
following table presents the Companys contractual obligations and commitments:

(In millions)
  
  
  Total
  
  
  < 1 Yr
  
  
  2-3 Yrs
  
  
  4-5 Yrs
  
  
  > 5 YrsDebt balances*
  
  $
  658
  
  $
  19
  
  $
  88
  
  $
  192
  
  $
  359Non-cancelable
  operating leases
  
  
  277
  
  
  80
  
  
  113
  
  
  58
  
  
  26Purchase
obligations:Telecommunications
  
  
  57
  
  
  26
  
  
  31
  
  
  
  
  
  Supply agreements and
other
  
  
  45
  
  
  27
  
  
  16
  
  
  2
  
  
  Other long-term
liabilities:*Insurance claims
  
  
  211
  
  
  93
  
  
  65
  
  
  18
  
  
  35Businesses held pending sale
and
  discontinued  operations
  
  
  16
  
  
  6
  
  
  6
  
  
  2
  
  
  2Other
  
  
  39
  
  
  2
  
  
  6
  
  
  5
  
  
  26Total Amount
  
  $
  1,303
  
  $
  253
  
  $
  325
  
  $
  277
  
  $
  448*      These items are
reported in the Consolidated Statements of Financial Position

Not
included in the table above are deferred income tax liabilities and the related
interest payments on the Companys long-term debt. Deferred income tax liabilities
totaled $113 million and are discussed in the Notes to the Consolidated
Financial Statements. The majority of the Companys debt is fixed rate debt.
Therefore, the Company has calculated the expected interest payments on debt
outstanding as of December 31, 2005 to be approximately $49 million, $47
million, $43 million, $37 million, $27 million and $445 million in 2006, 2007,
2008, 2009, 2010, and thereafter, respectively.

Financial
Position - Continuing Operations

Receivables
increased from prior year levels, reflecting a higher amount of credit sales at
American Home Shield and an increased level of fourth quarter snow-removal
receivables at TruGreen LandCare. Inventory levels increased reflecting a new
vendor relationship at Terminix, as well as general business growth. Deferred
customer acquisition costs were consistent with prior year levels. The Company
capitalizes sales commissions and other direct contract acquisition costs
relating to termite baiting and pest contracts, as well as home warranty agreements.
These costs vary with and are directly related to a new sale. Property and
equipment declined slightly. The Company does not have any material capital
commitments at this time.

The
increase in accounts payable reflects a lengthening of payment terms resulting
from improvements in the Companys processes. The decrease in income taxes
payable at December 31, 2005 primarily reflects the February 2005 federal tax
payment related to the IRS agreement. Deferred revenue increased, reflecting
growth in warranty contracts written at American Home Shield, partially offset
by lower levels of deferred revenue at Terminix associated with the new termite
bait product and the increased mix of liquid applications.

The
Company has minority investors in Terminix. This minority ownership reflects an
interest issued to the former owners of the Allied Bruce Terminix Companies in

19

connection
with the acquisition of that entity. At any time, the former owners may convert
this equity security into eight million ServiceMaster common shares. The
ServiceMaster shares are included in the shares used for the calculation of
diluted earnings per share whenever their inclusion has a dilutive impact.
Subsequent to December 31, 2005, ServiceMaster has the ability to require conversion
of the security into ServiceMaster common shares, provided the closing share
price of ServiceMasters common stock averages at least $15 per share for 40
consecutive trading days.

Total
shareholders equity was $1.1 billion and $992 million at December 31, 2005 and
2004, respectively. The increase primarily reflects operating profits in the
business offset in part by cash dividend payments and share repurchases.

Under federal tax rules,
dividends are considered taxable only when paid out of current or accumulated
earnings and profits as defined under federal tax laws. As a result of its
December 1997 reincorporation, the Company only began generating corporate
earnings and profits for tax purposes in 1998. Since 1998, earnings and profits
for tax purposes have been reduced by dividend payments, amortization of
intangible assets for tax reporting, deductions relating to business closures
and the timing of certain other tax-related items. The Company currently
expects that approximately 60 percent of its 2006 dividends on common stock
will be taxable as dividend income for federal income tax purposes. This is
lower than the previously disclosed taxability percentage for 2005 dividends of
87 percent, primarily due to one-time effects of the pending dispositions. The
2006 estimate is subject to change, based on the outcome of future events. Any
portion of the dividend that is not taxable would be treated as a return of
capital and would generally be applied to reduce the cost basis of the shares.
The Company expects that the taxable portion of its dividend will rebound
sharply in 2007, and grow to be fully taxable over the succeeding few years.

Financial
Position  Businesses Held Pending Sale and Discontinued Operations

The
assets and liabilities related to businesses held pending sale and discontinued
businesses have been classified in a separate caption on the Consolidated
Statements of Financial Position. Assets from the businesses held pending sale
and discontinued operations have increased, reflecting growth in receivables at
the American Residential Services (ARS) and American Mechanical Services (AMS)
businesses. The increase in liabilities from businesses held pending sale and
discontinued operations represents increases in payables and other current
liabilities at the ARS and AMS businesses, partially offset by reductions
associated with the favorable conclusion of certain obligations related to the
previously sold international pest control operations. The remaining
liabilities primarily represent payables and other current liabilities at the
businesses held pending sale and obligations related to long-term
self-insurance claims.

Critical Accounting Policies and Estimates

The
preparation of the financial statements requires management to make certain
estimates and assumptions required under generally accepted accounting
principles which may differ from actual results. The more significant areas
requiring the use of management estimates relate to the allowance for
receivables, accruals for self-insured retention limits related to medical,
workers compensation, auto and general liability insurance claims, accruals
for home warranty claims, the possible outcomes of outstanding litigation,
accruals for income tax liabilities as well as deferred tax accounts, the
deferral and amortization of customer acquisition costs, useful lives for
depreciation and amortization expense and the valuation of tangible and
intangible assets.

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

The Company carries insurance
policies on insurable risks at levels which it believes to be appropriate,
including workers compensation, auto and general liability risks. The Company
has self-insured retention limits and insured layers of excess insurance
coverage above those limits. Accruals for self-insurance losses and warranty
claims in the American Home Shield business are made based on the Companys
claims experience and actuarial projections. Current activity could differ
causing a change in estimates. The Company has certain liabilities with respect
to existing or potential claims, lawsuits, and other proceedings. The Company
accrues for these liabilities when it is probable that future costs will be
incurred and such costs can be reasonably estimated. Any resulting adjustments,
which could be material, are recorded in the period identified.

The Company records deferred
income tax balances based on the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and income tax purposes. There are significant amortizable intangible
assets for tax reporting purposes (not for financial reporting purposes) which
arose as a result of the Companys reincorporation from partnership to
corporate form in 1997. The Company records its deferred tax items based on the
estimated value of the tax basis. The Company adjusts tax estimates when
required to reflect changes based on factors such as changes in tax laws,
results of tax authority reviews and statutory limitations.

Fixed
assets, and intangible assets with finite lives, are depreciated and amortized
on a straight-line basis over their estimated useful lives. These lives are
based on the Companys previous experience for similar assets, potential market
obsolescence, and other industry and business data. The Company also
periodically reviews the assets for impairment and a loss would be recorded if
and when the Company determined that the book value of the asset exceeded its
fair value. Changes in the estimated useful lives or in asset values would
cause the Company to adjust its book value or future expense accordingly.

The
Company reviews its goodwill and trade names at least once a year for
impairment. An impairment loss would be recorded if and when the Company
determines that the expected present value of the future cash flows deemed to
be derived from the asset is less than its corresponding book value. As
permitted under SFAS 142, the Company carries forward a reporting units
valuation from the most recent valuation under the following conditions: the
assets and

20

liabilities
of the reporting unit have not changed significantly since the most recent fair
value calculation, the most recent fair value calculation resulted in an amount
that exceeded the carrying amount of the reporting unit by a substantial
margin, and based on the facts and circumstances of events that have occurred
since the last fair value determination, the likelihood that a current fair
value calculation would result in an impairment would be remote. For the 2005
goodwill and trade name impairment review, the Company carried forward the
valuations for all reporting units except ARS. A valuation analysis performed
for ARS indicated no impairment issue.

Revenue from lawn care, pest
control, liquid and fumigation termite applications, as well as heating/air
conditioning and plumbing services are recognized as the services are provided.
Revenue from landscaping services are recognized as they are earned based upon
monthly contract arrangements or when services are performed for
non-contractual arrangements. Revenue from the Companys commercial
installation contracts, primarily relating to HVAC and electrical installations
are recognized on the percentage of completion method in the ratio that total
incurred costs bear to total estimated costs. The Company eradicates termites
through the use of baiting stations, as well as through non-baiting methods
(e.g., fumigation or liquid treatments). Termite services using baiting
stations, as well as home warranty services, frequently are sold through annual
contracts for a one-time, upfront payment. Direct costs of these contracts
(service costs for termite contracts and claim costs for warranty contracts)
are expensed as incurred. The Company recognizes revenue over the life of these
contracts in proportion to the expected direct costs. Revenue from trade name
licensing arrangements is recognized when earned. Franchised revenue consists
principally of monthly fee revenue, which is recognized when the related
customer level revenue is reported by the franchisee and collectibility is
assured. Franchise revenue also includes initial fees resulting from the sale
of franchises. These fees are fixed and are recognized as revenue when
collectibility is assured and all material services or conditions relating to
the sale have been substantially performed.

Customer acquisition costs,
which are incremental and direct costs of obtaining a customer, are deferred
and amortized over the life of the related contract in proportion to revenue
recognized. These costs include sales commissions and direct selling costs
which can be shown to have resulted in a successful sale.

Newly Issued Accounting Statements and
Positions

In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) 123 (revised 2004), Share-Based Payment (SFAS
123(R)). This Statement replaces SFAS 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees. SFAS 123(R) requires that stock options and share grants be
recorded at fair value and this value is recognized as compensation expense
over the vesting period. The Statement requires that compensation expense be
recorded for newly issued awards as well as the unvested portion of previously
issued awards that remain outstanding as of the effective date of this
Statement. The provisions of this Statement become effective beginning with the
Companys 2006 fiscal year (January 1, 2006). The Company had previously
disclosed that it had expected to restate prior periods as if this Statement
were in effect for all periods. As permitted by this Statement, the Company
will instead prospectively apply the provisions of this Statement effective
January 1, 2006. The Company currently estimates that the adoption of this
Statement will reduce earnings per share in 2006 by approximately $.01.

Item 7A.
Quantitative and Qualitative Disclosures about Market Risk

The
economy and its impact on discretionary consumer spending, labor wages, fuel
prices, home re-sales, unemployment rates, insurance costs and medical
inflation rates could be significant to future operating earnings.

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

In
December 2003 and January 2004, the Company entered into interest rate swap
agreements with a total notional amount of $165 million. Under the terms of
these agreements, the Company pays a floating rate of interest (based on a
specified spread over six-month LIBOR) on the notional amount and the Company
receives a fixed rate of interest at 7.88 percent on the notional amount. The
impact of these swap transactions was to convert $165 million of the Companys
debt from a fixed rate of 7.88 percent to a variable rate based on LIBOR (7.5
percent average rate during 2005).

The Company generally
maintains the majority of its debt at fixed rates. After considering the effect
of the interest rate swap agreements, approximately 74 percent of total
recorded debt at December 31, 2005 was at a fixed rate.

The
following table summarizes information about the Companys fixed rate debt as
of December 31, 2005 (after considering the effect of the interest rate swap
agreements), including the principal cash payments and related weighted-average
interest rates by expected maturity dates. The fair value of the Companys
fixed rate debt was approximately $491 million at December 31, 2005.

Expected
  Maturity Date(In millions)
  
  2006
  
  2007
  
  2008
  
  2009
  
  2010
  
  Thereafter
  
  TotalFixed
  rate  debt
  
  $
  19
  
  $
  61
  
  $
  12
  
  $
  25
  
  $
  8
  
  $
  359
  
  $
  484Avg.
  rate
  
  
  5.7
  %
  
  7.1
  %
  
  7.1
  %
  
  7.8
  %
  
  7.9
  %
  
  7.5
  %
  
  7.4
  %With respect to other
obligations, the payments on the approximately $68 million of funding
outstanding under the Companys real estate operating lease facilities as well
as its fleet and equipment operating leases (approximately $259 million in
residual value guarantee) are tied to floating interest rates. The Companys
exposure to interest expense based on floating rates is partially offset by
floating rate investment income earned on cash and marketable securities. The
Company believes its overall exposure to

21

interest rate fluctuations is
not material to its overall results of operations.

The
Company has several debt and lease agreements where the interest rate or rent
payable under the agreements automatically adjusts based on changes in the
Companys credit ratings. While the Company is not currently expecting a change
in its credit ratings, based on amounts outstanding at December 31, 2005, a one
rating category improvement in the Companys credit ratings would reduce annual
expense by approximately $0.4 million. A one rating category reduction in the
Companys credit ratings would increase annual expense by approximately $0.7
million.

22

Item 8. Financial Statements and Supplementary Data

Managements Report on Internal Control over Financial
Reporting.The
management of The ServiceMaster Company (The Company) is responsible for
establishing and maintaining adequate internal control over financial
reporting. The Companys internal control over financial reporting is designed
to provide reasonable assurance to the Companys management and board of
directors regarding the preparation and fair presentation of published
financial statements.

All internal control
systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.

Management assessed the
effectiveness of the Companys internal control over financial reporting as of
December 31, 2005. In making this assessment, it used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control
 Integrated Framework. Based on our assessment we believe that, as
of December 31, 2005, the Companys internal control over financial reporting
is effective based on those criteria.

Deloitte & Touche LLP,
the Companys auditors, have issued an attestation report on our managements
assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2005. This attestation report is included below.

Report
of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of The
ServiceMaster Company

We have audited managements assessment, included in
the accompanying Managements Report on Internal Control over Financial
Reporting, that The ServiceMaster Company and subsidiaries (the Company)
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based
on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.

A companys internal control over financial reporting
is a process designed by, or under the supervision of, the companys principal
executive and principal financial officers, or persons performing similar
functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of the inherent limitations of internal
control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error
or fraud may not be prevented or detected on a timely basis. Also, projections
of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that the
Company maintained effective internal control over financial reporting as of
December 31, 2005, is fairly stated, in all material respects, based on the
criteria established in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on the criteria
established in Internal Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended December 31,
2005 of the Company and our report dated February 27, 2006 expressed an
unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP
Chicago, Illinois
February 27, 2006

23

Consolidated Statements of Operations
(In thousands, except per share data)

For years ended December
31,

2005

2004

2003Operating
  Revenue

$
3,239,478

$
3,068,068

$
2,895,028Operating
  Costs and Expenses:Cost of services rendered and
products sold


2,011,978


1,919,220


1,837,592Selling and
  administrative expenses


881,963


818,534


752,036Amortization expense


5,454


6,006


5,875Charge for
  impaired assets and other items (1)








188,870Total operating costs and
expenses


2,899,395


2,743,760


2,784,373Operating
  Income


340,083


324,308


110,655Non-operating
  Expense (Income)Interest expense


56,999


60,708


65,255Interest and
  investment income


(19,832
)

(15,469
)

(15,012
)Minority interest
  and other expense, net


8,218


8,225


8,151Income
  from Continuing Operations before Income Taxes


294,698


270,844


52,261Provision
  (benefit) for income taxes (2)


114,137


(45,779
)

54,716Income
  (Loss) from Continuing Operations (2)


180,561


316,623


(2,455
)Income (loss)
  from businesses held pending sale and discontinued operations, net of income
  taxes (1, 2, 3)


18,364


14,604


(222,232
)Net
  Income (Loss)

$
198,925

$
331,227

$
(224,687
)Basic
  Earnings (Loss) Per Share:Income (loss)
  from continuing operations

$
0.62

$
1.09

$
(0.01
)Income (loss)
  from businesses held pending sale and discontinued operations (3)


0.06


0.05


(0.75
)Basic
  Earnings (Loss) Per Share

$
0.68

$
1.14

$
(0.76
)Diluted
  Earnings (Loss) Per Share:(1, 2, 3)Income (loss)
  from continuing operations

$
0.61

$
1.06

$
(0.01
)Income (loss)
  from businesses held pending sale and discontinued operations


0.06


0.05


(0.75
)Diluted Earnings
  (Loss) Per Share

$
0.67

$
1.11

$
(0.76
)(1)
In accordance with SFAS 142, the Companys goodwill
  and intangible assets that are not amortized are subject to at least an
  annual assessment for impairment by applying a fair-value based test. In the
  third quarter of 2003, the Company recorded a non-cash impairment charge
  associated with the goodwill and intangible assets at its TruGreen LandCare
  business unit. This charge, which is included in the results of continuing
  operations for 2003, totaled $189 million pre-tax, $156 million after-tax,
  and $0.53 per diluted share. Also in the third quarter of 2003, the Company
  recorded a non-cash impairment charge associated with the goodwill and
  intangible assets at its American Residential Services (ARS) and American
  Mechanical Services (AMS) operations. The Company is currently holding these operations
  for sale. Accordingly, the financial results for the ARS and AMS operations,
  as well as the impairment charge related to these operations ($292 million
  pre-tax, $227 million after-tax), are classified with the financial statement
  caption businesses held pending sale and discontinued operations for all
  periods. See the Goodwill and Intangible Assets note in the Notes to
  Consolidated Financial Statements.(2)
In January 2005, the Company announced that it had
  reached a comprehensive agreement with the Internal Revenue Service regarding
  its examination of the Companys federal income taxes through the year 2002.
  As a result of this agreement, the Company recorded a non-cash reduction in
  its 2004 tax provision, thereby increasing net income by approximately $159
  million. Approximately $150 million related to continuing operations ($.49
  per diluted share) and $9 million related to businesses held pending sale and
  discontinued operations ($.03 per diluted share). See the Income Taxes note
  in the Notes to the Consolidated Financial Statements.(3)
The Company intends to sell its American Residential
  Services (ARS) and American Mechanical Services (AMS) companies so it can
  concentrate resources on its main growth businesses. These operations were
  previously disclosed as the Companys ARS/AMS segment. Because the Company
  intends to sell these companies, the results of these operations are
  classified within the financial statement caption businesses held pending
  sale and discontinued operations in all periods. See the Management
  Discussion and Analysis of Financial Position and Results of Operations for a
  discussion of the components of businesses held for sale and discontinued
  operations.See accompanying Notes to the Consolidated Financial
Statements.

24

Consolidated Statements of
  Financial Position(In thousands, except per share data)As of December 31,

2005

2004Assets:Current
  Assets:Cash and cash
  equivalents

$
114,508

$
256,626Marketable
  securities


104,807


103,681Receivables,
  less allowances of $17,702 and $21,739, respectively


309,567


279,685Inventories


60,331


51,248Prepaid expenses
  and other assets


23,948


24,657Deferred
  customer acquisition costs


40,402


41,574Deferred taxes


35,050


108,780Assets of
  businesses held pending sale and discontinued operations


135,100


112,501Total Current
  Assets


823,713


978,752Property
  and Equipment:At cost


364,503


339,426Less:
  accumulated depreciation


(202,676
)

(176,503
)Net Property and
  Equipment


161,827


162,923Other
  Assets:Goodwill


1,548,070


1,511,873Intangible
  assets, primarily trade names, net


230,343


220,795Notes receivable


30,941


35,411Long-term
  marketable securities


147,332


135,824Other assets


9,304


14,227Assets of
  businesses held pending sale and discontinued operations


77,340


80,397Total
  Assets

$
3,028,870

$
3,140,202Liabilities
  and Shareholders Equity:Current
  Liabilities:Accounts payable

$
91,625

$
55,631Accrued
  liabilities:Payroll and
  related expenses


103,028


98,426Self-insured
  claims and related expenses


93,047


83,075Income taxes
  payable


30,730


152,841Other


87,984


93,799Deferred revenue


432,741


429,512Liabilities of
  businesses held pending sale and discontinued operations


97,294


91,396Current portion
  of long-term debt


19,222


23,247Total Current
  Liabilities


955,671


1,027,927Long-Term
  Debt


638,928


781,841Long-Term
  Liabilities:Deferred
taxes


113,300


88,100Liabilities of
  businesses held pending sale and discontinued operations


10,130


9,615Other long-term
  obligations


156,201


141,184Total Long-Term
  Liabilities


279,631


238,899Minority
  Interest


100,000


100,000Commitments
  and Contingencies (See Note)Shareholders
  Equity:Common stock
  $0.01 par value, authorized 1,000,000 shares; issued321,338 and 318,559,
  respectively


3,213


3,186Additional
  paid-in capital


1,117,388


1,083,057Retained
  earnings


282,993


212,116Accumulated
  other comprehensive income


7,197


10,804Restricted stock
  (unearned compensation)


(14,438
)

(12,857
)Treasury stock


(341,713
)

(304,771
)Total
Shareholders
  Equity


1,054,640


991,535Total
  Liabilities and Shareholders Equity

$
3,028,870

$
3,140,202See accompanying Notes to the Consolidated Financial Statements

25

Consolidated Statements of Shareholders Equity
(In thousands)

Common
  Stock

Additional
  Paid-in
  Capital

Retained
  Earnings

Accumulated
  Comprehensive
  Income (Loss)

Restricted
  Stock

Treasury
  Stock

Total
  EquityBalance December 31,
2002

$
3,160

$
1,054,272

$
355,893

$
(849
)
$
(1,988
)
$
(191,788
)
$
1,218,700Net loss 2003








(224,687
)










(224,687
)Other
  comprehensive income, net of tax:Net unrealized
  gain on securities, net of reclassification adjustment (1)











7,022








7,022Foreign currency
  translation











1,759








1,759Total
  comprehensive income (loss)








(224,687
)

8,781








(215,906
)Shareholders
  dividends








(124,841
)










(124,841
)Shares issued
  under options, grant plans, and other (2,700 shares)


13


7,368








(2,380
)

19,144


24,145Treasury shares
  purchased (8,084 shares)

















(85,581
)

(85,581
)Balance
  December 31, 2003

$
3,173

$
1,061,640

$
6,365

$
7,932

$
(4,368
)
$
(258,225
)
$
816,517Net income 2004








331,227











331,227Other
  comprehensive income, net of tax:Net unrealized
  gain on securities, net of reclassification adjustment (1)











826








826Foreign currency
translation











2,046








2,046Total
  comprehensive income








331,227


2,872








334,099Shareholders
  dividends








(125,476
)










(125,476
)Shares issued
  under options, grant plans, and other (2,711 shares)


13


21,273








(8,489
)

13,937


26,734Treasury shares
  purchased (5,353 shares)

















(63,814
)

(63,814
)Shares issued for
  acquisitions (297 shares)





144











3,331


3,475Balance
  December 31, 2004

$
3,186

$
1,083,057

$
212,116

$
10,804

$
(12,857
)
$
(304,771
)
$
991,535Net income 2005








198,925











198,925Other
  comprehensive income, net of tax:Net unrealized
  loss on securities, net of reclassification adjustment (1)











(2,188
)







(2,188
)Foreign currency
translation











(1,419
)







(1,419
)Total
  comprehensive income (loss)








198,925


(3,607
)







195,318Shareholders
  dividends








(128,048
)










(128,048
)Shares issued
  under options, grant plans, and other (4,076 shares)


27


34,277








(1,581
)

13,516


46,239Treasury shares
  purchased (3,791 shares)

















(51,595
)

(51,595
)Shares issued for
  acquisitions (88 shares)





54











1,137


1,191Balance
  December 31, 2005

$
3,213

$
1,117,388

$
282,993

$
7,197

$
(14,438
)
$
(341,713
)
$
1,054,640(1)Disclosure of reclassification amounts (net of
  tax) relating to comprehensive income:2005

2004

2003Unrealized holding gains
  arising in period

$
2,749

$
4,647

$
9,335Less: Gains realized


(4,937
)

(3,821
)

(2,313
)Net unrealized gains
  (losses) on securities

$
(2,188
)
$
826

$
7,022See accompanying Notes to the Consolidated Financial Statements.

26

Consolidated Statements of Cash
  Flows(In
thousands)For years
  ended December 31,
  
  2005
  
  2004
  
  2003Cash and
Cash Equivalents at
  January 1
  
  $
  256,626
  
  $
  228,161
  
  $
  227,177Cash
Flows from Operating
  Activities:Net
Income (Loss)
  
  
  198,925
  
  
  331,227
  
  
  (224,687
  )Adjustments
to reconcile net income (loss) to net
  cash provided from operating activities:(Income)
loss from businesses held pending sale and
  discontinued operations
  
  
  (18,364
  )
  
  (14,604
  )
  
  222,232Non-cash
reduction in continuing operations tax
  expense
  
  
  
  
  
  (149,722
  )
  
  Non-cash
charge for impaired assets and other
  items, net of tax
  
  
  
  
  
  
  
  
  156,200Depreciation expense
  
  
  44,313
  
  
  42,680
  
  
  41,464Amortization expense
  
  
  5,454
  
  
  6,006
  
  
  5,875Change in
working capital, net of acquisitions:Change in
tax accounts:Deferred
income taxes
  
  
  60,941
  
  
  66,639
  
  
  65,256Resolution
of income tax audits
  
  
  (86,356
  )
  
  25,000
  
  
  Receivables
  
  
  (29,439
  )
  
  (12,765
  )
  
  (14,096
  )Inventories
and other current assets
  
  
  (3,743
  )
  
  4,692
  
  
  3,519Accounts
payable
  
  
  36,741
  
  
  (3,436
  )
  
  (6,778
  )Deferred
revenue
  
  
  1,540
  
  
  14,339
  
  
  22,947Accrued
liabilities
  
  
  17,848
  
  
  51,285
  
  
  (4,014
  )Other,
net
  
  
  14,848
  
  
  8,716
  
  
  1,113Net Cash
Provided from Operating
  Activities
  
  
  242,708
  
  
  370,057
  
  
  269,031Cash Flows
from Investing Activities:Property
additions
  
  
  (41,771
  )
  
  (45,346
  )
  
  (33,083
  )Sale of
equipment and other assets
  
  
  2,838
  
  
  6,606
  
  
  10,498Business
acquisitions, net of cash acquired
  
  
  (33,719
  )
  
  (40,184
  )
  
  (28,875
  )Proceeds
from business sales
  
  
  
  
  
  
  
  
  21,106Notes
receivable, financial investments and securities
  
  
  (8,371
  )
  
  (45,580
  )
  
  (23,499
  )Net Cash
Used for Investing
  Activities
  
  
  (81,023
  )
  
  (124,504
  )
  
  (53,853
  )Cash
Flows from Financing
  Activities:Borrowings
of debt
  
  
  730,287
  
  
  1,000
  
  
  99,123Payments of
debt
  
  
  (894,102
  )
  
  (38,042
  )
  
  (130,339
  )Shareholders dividends
  
  
  (128,048
  )
  
  (125,476
  )
  
  (124,841
  )Purchase of
ServiceMaster stock
  
  
  (52,324
  )
  
  (63,085
  )
  
  (85,581
  )Other,
net
  
  
  29,518
  
  
  16,631
  
  
  16,330Net Cash
Used for Financing
  Activities
  
  
  (314,669
  )
  
  (208,972
  )
  
  (225,308
  )Cash
Flows from Businesses Held
  Pending Sale and Discontinued Operations:Cash
provided from (used for) operating activities
  of businesses held pending sale and discontinued operations
  
  
  14,181
  
  
  (1,189
  )
  
  16,662Cash used
for investing activities of businesses
  held pending sale and discontinued operations
  
  
  (3,315
  )
  
  (6,927
  )
  
  (5,548
  )Net Cash
Provided from (Used
  for) Businesses Held Pending Sale and Discontinued Operations
  
  
  10,866
  
  
  (8,116
  )
  
  11,114Cash
Increase (Decrease) During
  the Year
  
  
  (142,118
  )
  
  28,465
  
  
  984Cash and
Cash Equivalents at
  December 31
  
  $
  114,508
  
  $
  256,626
  
  $
  228,161See accompanying Notes to
the Consolidated Financial Statements.

27

Notes To The Consolidated Financial
Statements

Significant Accounting Policies

Summary: 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 2005, the Company reported its gross debt borrowings and payments in the Consolidated
Statements of Cash Flows. Historically, the Company netted debt borrowings and payments. The 2004 and 2003 information has been changed
to conform to the 2005 presentation.

The
preparation of the consolidated financial statements requires management to
make certain estimates and assumptions required under generally accepted
accounting principles (GAAP) which may differ from actual results. The more
significant areas requiring the use of management estimates relate to the
allowance for receivables, accruals for self-insured retention limits related
to medical, workers compensation, auto and general liability insurance claims,
accruals for home warranty and termite damage claims, the possible outcomes of
outstanding litigation, accruals for income tax liabilities as well as deferred
tax accounts, the deferral and amortization of customer acquisition costs,
useful lives for depreciation and amortization expense, and the valuation of
tangible and intangible assets.

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

The
Company carries insurance policies on insurable risks at levels which it
believes to be appropriate, including workers compensation, auto and general
liability risks. The Company has self-insured retention limits and insured
layers of excess insurance coverage above those limits. Accruals for
self-insurance losses and warranty claims in the American Home Shield business
are made based on the Companys claims experience and actuarial projections.
Current activity could differ causing a change in estimates. The Company has
certain liabilities with respect to existing or potential claims, lawsuits, and
other proceedings. The Company accrues for these liabilities when it is
probable that future costs will be incurred and such costs can be reasonably
estimated. Any resulting adjustments, which could be material, are recorded in
the period the adjustments are identified.

The Company records deferred
income tax balances based on the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and income tax purposes. There are significant amortizable intangible
assets for tax reporting purposes (not for financial reporting purposes) which
arose as a result of the Companys reincorporation from partnership to
corporate form in 1997. The Company records its deferred tax items based on the
estimated value of the tax basis. The Company adjusts tax estimates when
required to reflect changes based on factors such as changes in tax laws,
results of tax authority reviews and statutory limitations.

Fixed
assets and intangible assets with finite lives are depreciated and amortized on
a straight-line basis over their estimated useful lives. These lives are based
on the Companys previous experience for similar assets, the potential for
market obsolescence and other industry and business data. An impairment loss
would be recognized if and when the undiscounted future cash flows derived from
the asset are less than its carrying amount. Changes in the estimated useful
lives or in the asset values could cause the Company to adjust its book value
or future expense accordingly.

The Company does not amortize
its goodwill or indefinite-lived intangible assets. The Company tests these
assets for impairment, at a minimum, on an annual basis (October 1st)
by applying a fair-value based test. An impairment loss would be recorded if
and when the Company determines that the expected present value of the future
cash flows is less than the book value. As permitted under SFAS 142, the
Company carries forward a reporting units valuation from the most recent
valuation under the following conditions: the assets and liabilities of the
reporting unit have not changed significantly since the most recent fair value
calculation, the most recent fair value calculation resulted in an amount that
exceeded the carrying amount of the reporting unit by a substantial margin, and
based on the facts and circumstances of events that have occurred since the
last fair value determination, the likelihood that a current fair value
calculation would result in an impairment would be remote.

Revenue: Revenue from lawn care,
pest control, liquid and fumigation termite applications are recognized as the
services are provided. Revenue from landscaping services are recognized as they
are earned based upon monthly contract arrangements or when services are
performed for non-contractual arrangements. The Company eradicates termites
through the use of baiting stations, as well as through non-baiting methods
(e.g., fumigation or liquid treatments). Termite services using baiting
stations, as well as home warranty services, are frequently sold through annual
contracts for a one-time, upfront payment. Direct costs of these contracts
(service costs for termite contracts and claim costs for warranty contracts)
are expensed as incurred. The Company recognizes revenue over the life of these
contracts in proportion to the expected direct costs. Revenue from trade name
licensing arrangements is recognized when earned. Franchised revenue (which in
the aggregate represents approximately three percent of consolidated revenue)
consists principally of continuing monthly fees based upon the franchisees
customer level revenue. Monthly fee revenue is recognized when the related
customer level revenue is reported by the franchisee and collectibility is
assured. Franchised revenue also includes initial fees resulting from the sale of
a franchise. These fees are fixed and are recognized as revenue when
collectibility is assured and all material services or conditions relating to
the sale have been substantially performed. Total franchise fee profits
(excluding trade name licensing) comprised 10.5, 10.3 and 10.9 percent of
consolidated operating income (excluding the impairment charge in 2003) before
headquarter overhead in 2005, 2004 and 2003, respectively.

The
Company had $433 million and $430 million of deferred revenue at December 31,
2005 and 2004, respectively, which consist primarily of payments received for
annual contracts relating to home warranty, termite baiting, pest control and
lawn care services. The revenue related to these services is recognized over
the contractual period as the direct costs emerge, such as when the services
are performed or claims are incurred.

Deferred
Customer Acquisition Costs:Customer acquisition costs, which are incremental and direct costs of

28

Notes To The Consolidated Financial
Statements

obtaining
a customer, are deferred and amortized over the life of the related contract in
proportion to revenue recognized. These costs include sales commissions and
direct selling costs which can be shown to have resulted in a successful sale.

Interim
Reporting: TruGreen ChemLawn has significant seasonality in its
business. In the winter and early spring, this business sells a series of lawn
applications to customers which are rendered primarily in March through October
(the production season). This business incurs incremental selling expenses at
the beginning of the year that directly relate to successful sales for which
the revenues are recognized in later quarters. On an interim basis, TruGreen
ChemLawn defers these incremental selling expenses, pre-season advertising
costs and annual repairs and maintenance procedures that are performed in the
first quarter. These costs are deferred and recognized in proportion to the
revenue over the production season, and are not deferred beyond the calendar
year-end. Other business segments of the Company also defer, on an interim
basis, advertising costs incurred early in the year. These costs are deferred
and recognized approximately in proportion to revenue over the balance of the
year, and are not deferred beyond the calendar year-end.

Advertising: As discussed in the Interim
Reporting note above, certain pre-season advertising costs are deferred and
recognized approximately in proportion to the revenue over the year. Certain
other advertising costs are expensed when the advertising occurs. The cost of
direct-response advertising at Terminix, consisting primarily of direct-mail
promotions, is capitalized and amortized over its expected period of future
benefits, which is the one-year contract life.

Inventory
Valuation: Inventories are valued at the lower of cost (primarily
on a weighted average cost basis) or market. The inventory primarily represents
finished goods to be used on the customers premises or sold to franchisees.

Property
and Equipment, Intangible Assets and Goodwill: Buildings and equipment
used in the business are stated at cost and depreciated over their estimated
useful lives using the straight-line method for financial reporting purposes.
The estimated useful lives for building and improvements range from 10 to 40
years, while the estimated useful lives for equipment range from three to 10
years. Leasehold improvements relating to leased facilities are depreciated
over the remaining life of the lease. Technology equipment as well as software
and development have an estimated useful life of three to seven years.
Intangible assets consist primarily of goodwill ($1.5 billion), trade names
($215 million) and other intangible assets ($15 million).

As
required by SFAS 142, goodwill is not subject to amortization and intangible
assets with indefinite useful lives are not amortized until their useful lives
are determined to no longer be indefinite. Goodwill and intangible assets that
are not subject to amortization are subject to an assessment for impairment by
applying a fair-value based test on an annual basis or more frequently if
circumstances indicate a potential impairment. As permitted under SFAS 142, the
Company carries forward a reporting units valuation from the most recent
valuation under the following conditions; the assets and liabilities of the
reporting unit have not changed significantly since the most recent fair value
calculation, the most recent fair value calculation resulted in an amount that
exceeded the carrying amount of the reporting unit by a substantial margin, and
based on the facts and circumstances of events that have occurred since the
last fair value determination, the likelihood that a current fair value
calculation would result in an impairment would be remote. For the 2005
goodwill and trade name impairment review, the Company carried forward the
valuations for all reporting units except ARS. A valuation analysis performed
for ARS indicated no impairment.

As
required by SFAS 144 Accounting for the Impairment or Disposal of Long-Lived
Assets, the Companys long-lived assets, including fixed assets and intangible
assets (other than goodwill), are tested for recoverability whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. Based on these reviews, when the undiscounted future cash flows
derived from using the asset are less than the carrying amount of the asset, an
impairment loss is recognized based on the assets fair value, and the carrying
amount of the asset is reduced accordingly.

Fair
Value of Financial Instruments and Credit Risk: The carrying amounts of
receivables, accounts payable, and accrued liabilities approximate fair value
because of the short maturity of these instruments. The carrying amounts of
long-term notes receivables approximate fair value as the effective interest
rates for these instruments are comparable to market rates at year-end. The
carrying amount of current and long-term marketable securities also approximate
fair value, with unrealized gains and losses reported net-of-tax as a component
of accumulated comprehensive income (loss). The carrying amount of total debt
is $658 million and $805 million and the estimated fair value is approximately
$666 million and $875 million at December 31, 2005 and 2004, respectively. The
estimated fair value of debt is based upon borrowing rates currently available
to the Company for long-term borrowings with similar terms and maturities.

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

In
accordance with SFAS 133 Accounting for Derivative Instruments and Hedging
Activities, the Companys interest rate swap agreements are classified as fair
value hedges and, as such, gains and losses on the swaps as well as the gains
and losses on the related hedged items are recognized in current earnings.

Derivative
financial instruments, which potentially subject the Company to financial and
credit risk, consist principally of investments and receivables. Investments
consist primarily of publicly traded debt and common equity securities. The
Company periodically reviews its portfolio of investments to

29

Notes To The Consolidated Financial
Statements

determine
whether there has been an other than temporary decline in the value of the
investments from factors such as deterioration in the financial condition of
the issuer or the market(s) in which it competes. Receivables have little
concentration of credit risk due to the large number of customers with
relatively small balances and their dispersion across geographical areas. The
Company maintains an allowance for losses based upon the expected collectibility
of receivables.

Income
Taxes: The Company accounts for income taxes under SFAS 109, Accounting for
Income Taxes. This Statement uses an asset and liability approach for the
expected future tax consequences of events that have been recognized in the
Companys financial statements or tax returns. Deferred income taxes are
provided to reflect the differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements.

Earnings
Per Share: Basic earnings per share is based on the
weighted-average number of common shares outstanding during the year. The
weighted average number of common shares used in the diluted earnings per share
calculation include the incremental effect related to outstanding options and
stock appreciation rights (SARS) whose market price is in excess of the grant
price. Shares potentially issuable under convertible securities have been
considered outstanding for purposes of the diluted earnings per share
calculations. In computing diluted earnings per share, the after-tax interest
expense related to convertible securities is added back to net income in the
numerator, while the number of shares used in the denominator include the
shares issuable upon conversion of the securities.

Stock-Based
Compensation: Beginning in 2003, the Company has been accounting
for employee stock options as compensation expense in accordance with SFAS 123,
Accounting for Stock-Based Compensation. SFAS 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB
Statement No. 123, provides alternative methods of transitioning to the
fair-value based method of accounting for employee stock options as
compensation expense. The Company is using the prospective method of SFAS 148
and is expensing the fair value of new employee option grants awarded
subsequent to 2002.

Prior to
2003, the Company had accounted for employee share options under the intrinsic
method of Accounting Principles Board Opinion 25. Compensation expense determined
under the fair-value based method of SFAS 123 relating to newly issued awards
as well as the unvested portion of the previously issued awards would have
resulted in proforma reported net income and net earnings per share as follows:

(In thousands, except per share data)
  
  2005
  
  2004
  
  2003Net income
(loss) as reported
  
  $
  198,925
  
  $
  331,227
  
  $
  (224,687
  )Add back:
Stock-based compensation expense included
  in reported net income, net of related tax effects
  
  
  2,280
  
  
  1,729
  
  
  609Deduct:
Stock-based compensation expense determined
  under fair-value method, net of related tax effects
  
  
  (5,742
  )
  
  (6,346
  )
  
  (6,179
  )Proforma
net income (loss)
  
  $
  195,463
  
  $
  326,610
  
  $
  (230,257
  )Basic
Earnings Per Share:As
reported
  
  $
  0.68
  
  $
  1.14
  
  $
  (0.76
  )Proforma
  
  
  0.67
  
  
  1.12
  
  
  (0.78
  )Diluted
Earnings Per Share:As
reported
  
  $
  0.67
  
  $
  1.11
  
  $
  (0.76
  )Proforma
  
  
  0.66
  
  
  1.09
  
  
  (0.78
  )See the Shareholders Equity note to the Consolidated
Financial Statements for a description of the assumptions used to compute the
above stock based compensation expense.

Newly
Issued Accounting Statements and Positions: In December 2004, the FASB issued SFAS 123
(revised 2004), Share-Based Payment (SFAS 123(R)). This Statement replaces
SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires that
stock options and share grants be recorded at fair value and this value is
recognized as compensation expense over the vesting period. The Statement
requires that compensation expense be recorded for newly issued awards as well
as the unvested portion of previously issued awards that remain outstanding as
of the effective date of this Statement. The provisions of this Statement
become effective beginning with the Companys 2006 fiscal year (January 1,
2006). The Company had previously disclosed that it had expected to restate
prior periods as if this Statement were in effect for all periods. As permitted
by this Statement, the Company will instead prospectively apply the provisions
of this Statement effective January 1, 2006. The Company currently estimates
that the adoption of this Statement will reduce earnings per share in 2006 by
approximately $.01.

Recently
Adopted Accounting Principles: The Company adopted the
provisions of FASB Interpretation 47, Accounting for Conditional Asset
Retirement Obligations (FIN 47), an interpretation of FASB Statement 143 Accounting
for Asset Retirement Obligations (SFAS 143). FIN 47 clarifies that an entity is
required to recognize a liability for a conditional asset retirement obligation
when incurred if the fair value of the obligation can be reasonably estimated.
This interpretation further clarified the term conditional asset retirement
obligation, as used in SFAS 143, as a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within control of the
entity. FIN 47 is effective for companies no later than the end of their first
fiscal year ending after December 15, 2005. The adoption of FIN 47 did not have
a significant impact on the Company.

30

Notes To The Consolidated Financial
Statements

Business Segment Reporting

The business of the Company
is conducted through five operating segments: TruGreen ChemLawn, TruGreen
LandCare, Terminix, American Home Shield and Other Operations. The Company
intends to sell its American Residential Services (ARS) and American Mechanical
Services (AMS) companies so it can concentrate resources on its main growth
businesses. The Company has retained an investment banking firm to serve as its
financial advisor in this process. The ARS/AMS operations provide heating,
ventilation, air conditioning (HVAC), plumbing and electrical installation and
repair services and were previously disclosed as the Companys ARS/AMS segment.
Because the Company intends to sell these businesses, their operating results
are reported within the financial statement caption businesses held pending
sale and discontinued operations for all periods presented.

The Company has also expanded
its business segment reporting to allow for better ongoing visibility into the
components of the business. The companies that previously were reported within
the TruGreen segment have been further broken out into the TruGreen ChemLawn
segment and the TruGreen LandCare segment. TruGreen LandCare is an important
part of the Companys continuing operations and presenting its results as a
separate segment recognizes the importance of this business to the continued
growth of the enterprise while also enhancing overall disclosure. All
previously reported segment financial information reflects the aforementioned
changes in segment reporting.

In accordance with Statement
of Financial Accounting Standards 131, Disclosures About Segments of an
Enterprise and Related Information, the Companys reportable segments are
strategic business units that offer different services. The TruGreen ChemLawn
segment provides residential and commercial lawn care services. The TruGreen
LandCare segment provides landscaping services to commercial customers. The
Terminix segment provides termite and pest control services to residential and
commercial customers. The American Home Shield segment provides home warranties
to consumers that cover HVAC, plumbing and other home systems and appliances.
This segment also includes home inspection services provided by AmeriSpec. The
Other Operations segment includes the franchised and company-owned operations
of ServiceMaster Clean, Furniture Medic and Merry Maids, which provide disaster
restoration, commercial cleaning, carpet and upholstery cleaning, furniture
repair and maid services. This segment also includes the Companys headquarters
operations, which provide various technology, marketing, finance, legal and
other support services to the business units.

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

Segment
information for the years ended December 31, 2005, 2004, and 2003 is presented
below.

31

Notes to
the Consolidated Financial Statements

Business Segment
Table

(In thousands)

2005

% Change

2004

% Change

2003Operating Revenue:TruGreen
ChemLawn

$
1,024,641

4
%

$
980,816

8
%

$
908,351TruGreen
LandCare


453,323

3



438,833

0



439,049Terminix


1,056,285

6



996,900

5



945,258American Home
  Shield


528,687

8



487,395

8



450,264Other
Operations


176,542

8



164,124

8



152,106Total Operating
  Revenue

$
3,239,478

6
%

$
3,068,068

6
%

$
2,895,028Operating Income
  (Loss):(1, 2)TruGreen
ChemLawn

$
171,758

(2
%)

$
175,666

9
%

$
161,767TruGreen
LandCare
  (2)


4,317

N/M



(4,482
)
N/M



(195,784
)TruGreen
LandCare without impairment
  charge (2)


4,317

N/M



(4,482
)
35
%


(6,914
)Terminix


145,568

10



132,827

1



131,044American Home
  Shield


70,959

(1
)


71,986

24



58,154Other
Operations


(52,519
)
(2
)


(51,689
)
(16
)


(44,526
)Total Operating
  Income

$
340,083

5
%

$
324,308

N/M


$
110,655Capital Employed:
  (3)TruGreen
ChemLawn

$
812,873

2
%

$
795,254

2
%

$
777,880TruGreen
LandCare


33,900

1



33,720

(23
)


43,532Terminix


652,230

3



631,370

6



596,535American Home
  Shield


207,864

24



168,223

25



134,372American Home
Shield without cash and
  marketable securities (3)


(75,026
)
16



(89,561
)
(3
)


(86,574
)Other
Operations


105,923

(60
)


268,056

46



183,778Total Capital
  Employed

$
1,812,790

(4
%)

$
1,896,623

9
%

$
1,736,097Identifiable
  Assets:TruGreen
ChemLawn

$
885,153

2
%

$
870,209

6
%

$
821,121TruGreen
LandCare


92,694

6



87,474

(4
)


90,837Terminix


862,270

2



843,272

3



822,407American Home
  Shield


530,486

12



474,326

12



422,765Other
Operations


658,267

(24
)


864,921

8



799,296Total Identifiable
  Assets

$
3,028,870

(4
%)

$
3,140,202

6
%

$
2,956,426Depreciation &
  Amortization Expense:TruGreen
ChemLawn

$
12,611

2
%

$
12,383

21
%

$
10,263TruGreen
LandCare


8,411

(17
)


10,163

(19
)


12,501Terminix


11,778

3



11,441

11



10,328American Home
  Shield


8,492

8



7,860

15



6,829Other
Operations


8,475

24



6,839

(8
)


7,418Total Depreciation
  & Amortization Expense

$
49,767

2
%

$
48,686

3
%

$
47,339Capital
  Expenditures:TruGreen
ChemLawn

$
11,724

51
%

$
7,756

(5
%)

$
8,192TruGreen
LandCare


3,659

(29
)


5,132

(15
)


6,005Terminix


11,417

2



11,202

117



5,169American Home
  Shield


5,343

(3
)


5,490

(17
)


6,619Other
Operations


9,628

(39
)


15,766

122



7,098Total Capital
  Expenditures

$
41,771

(8
%)

$
45,346

37
%

$
33,083N/M = Not meaningful
(1)
Presented below is a reconciliation of segment
  operating income to income from continuing operations before income taxes.(In thousands)

2005



2004



2003Segment Operating
  Income

$
340,083




$
324,308




$
110,655Non-operating expense (income):Interest
expense


56,999





60,708





65,255Interest and
  investment income


(19,832
)




(15,469
)




(15,012
)Minority
interest
  and other expense, net


8,218





8,225





8,151Income from Continuing Operations before Income Taxes

$
294,698




$
270,844




$
52,261(2)
In the third quarter of 2003, the Company recorded in
  continuing operations a non-cash, pre-tax impairment charge of $189 million
  related to the goodwill and intangible assets of its TruGreen LandCare
  operations.  In order to facilitate
  comparisons of ongoing operating performance of continuing operations, the
  Company also has presented the TruGreen LandCare segment results after
  adjusting for the impact of the impairment charge.(3)
Capital employed is a non-U.S. GAAP measure that is
  defined as the segments total assets less liabilities, exclusive of debt
  balances.  The Company believes this
  information is useful to investors in helping them compute return on capital
  measures and therefore better understand the performance of the Companys
  business segments.  The calculation of
  capital employed for the American Home Shield segment includes approximately
  $283 million, $258 million and $221 million of cash and marketable securities
  at December 31, 2005, 2004 and 2003, respectively.  The investment income and realized gains/losses on these assets
  are reported below operating income in non-operating income/expense.  In order to facilitate the comparison of
  return on invested capital for the American Home Shield segment, the Company
  has also presented capital employed for this segment excluding cash and
  marketable securities.  The negative
  capital employed balances primarily result from deferred revenue and amounts
  payable to subcontractors.  Presented
  below is a reconciliation of total segment capital employed to the most
  comparable U.S. GAAP measure.(In thousands)

2005



2004



2003Total Assets

$
3,028,870




$
3,140,202




$
2,956,426Less:Current
  liabilities, excluding current portion of long-term debt


936,449





1,004,680





784,459Long-term
  liabilities


279,631





238,899





435,870Total Capital Employed

$
1,812,790




$
1,896,623




$
1,736,09732

Notes to
the Consolidated Financial Statements

The combined franchise operations of
ServiceMaster Clean and Merry Maids
comprised approximately 5% of the consolidated revenue in 2005, 2004, and
2003.  These operations comprised
approximately 11%, 11%, and 12% of consolidated operating income (excluding the
2003 impairment charge) before headquarter overhead for 2005, 2004, and 2003,
respectively.

The following table summarizes the segment goodwill that
is not amortized.  See the Acquisitions
note and the Goodwill and Intangible Assets note in the Notes to Consolidated
Financial Statements for information relating to goodwill acquired and amounts
impaired, respectively.

(In thousands)

2005

2004

2003TruGreen ChemLawn

$
700,029

$
681,954

$
652,534Terminix


661,166


643,567


622,351American Home
  Shield(1)


85,526


72,085


72,085Other Operations


101,349


114,267


113,065Total

$
1,548,070

$
1,511,873

$
1,460,035(1)In the second quarter of 2005,
approximately $13 million of enterprise goodwill was reclassified to the American
Home Shield segment from the Other Operations segment.

Goodwill
and Intangible Assets

In
accordance with SFAS 142, Goodwill and Other Intangible Assets, the Company
discontinued the amortization of goodwill and indefinite lived intangible
assets effective January 1, 2002.
Goodwill and intangible assets that are not amortized are subject to
assessment for impairment by applying a fair-value based test on an annual
basis or more frequently if circumstances indicate a potential impairment.  The Company completed its annual assessment
of impairment as of October 1.

In
the third quarter of 2003, the Company recorded a non-cash impairment charge
associated with the goodwill and intangible assets at its TruGreen LandCare
business unit.  This charge, which is
included in the results of continuing operations for 2003, totaled $189 million
pre-tax, $156 million after-tax, and $0.53 per diluted share.  The impairment charge reported in continuing
operations included a portion of goodwill that was not deductible for tax
purposes, resulting in a tax benefit of $33 million, or only approximately 17
percent of the pre-tax impairment charge of $189 million.  Also in the third quarter of 2003, the
Company recorded a non-cash impairment charge associated with the goodwill and
intangible assets at its ARS and AMS operations.  These businesses are now being held pending sale, accordingly,
the financial results for the ARS and AMS operations, as well as the impairment
charge related to these operations ($292 million pre-tax, $227 million
after-tax), have been classified to the financial statement caption businesses
held pending sale and discontinued operations for all periods.

In April 2004, TruGreen ChemLawn acquired the assets of
Greenspace Limited, Canadas largest professional lawn care service
company.  Intangible assets recorded
were less than $16 million.  The balance
of goodwill and intangible assets that were added during 2004 relate to tuck-in
acquisitions completed by Terminix and TruGreen ChemLawn.

The increase in goodwill and intangible assets in 2005
relates to tuck-in acquisitions completed throughout the year by Terminix and
TruGreen ChemLawn, as well as the acquisition of a distributorship by
ServiceMaster Clean in the third quarter.

The table below summarizes the goodwill and intangible
asset balances:

(In thousands)


2005


2004


2003Goodwill
(1)

$
1,548,070

$
1,511,873

$
1,460,035Trade names(1)


215,493


204,793


204,793Other intangible
  assets


49,981


45,679


35,323Accumulated
  amortization


(35,131
)

(29,677
)

(23,671
)Net other
  intangibles


14,850


16,002


11,652Total

$
1,778,413

$
1,732,668

$
1,676,480(1)Not subject to
amortization.

(2) Amortization expense of $5 million,
$6 million and $6 million was recorded in 2005, 2004 and 2003,
respectively.  Annual amortization
expense of $5 million in 2005 is expected to decline over the next five years.

Income Taxes

In
January 2005, the Company reached a comprehensive agreement with the IRS
regarding its examination of the Companys federal income taxes through the
year 2002.  As previously disclosed, the
Company had not been audited by the IRS during the period in which it operated
as a master limited partnership (1987 through 1997) or in subsequent
years.  Consequently, the examination
covered numerous significant matters, including the tax consequences resulting
from the Companys reincorporation in 1997, and the sale of its large
Management Services segment in November 2001.
Pursuant to the agreement, the Company paid taxes and interest
(primarily in February 2005) to the IRS and various states in the amount of
$131 million ($112 million of increased taxes and $19 million of
interest).  These payments represented
only one part of a four part agreement with the IRS, which also included: tax
savings of $25 million that were realized in 2004; a reduction of $45 million
in the estimated tax payments made during the second half of 2005 and a
deferred tax asset totaling $57 million that will be realized through 2016.

As
a result of this agreement, certain deferred tax assets, primarily related to
intangible assets, which had previously not been recorded due to uncertainties
associated with the complexity of the matters under review and the extended
period of time effectively covered by the IRS examination were recorded.  This resulted in a non-cash reduction in the
Companys 2004 income tax provision, thereby increasing 2004 consolidated net
income by approximately $159 million ($150 million related to continuing
operations and $9 million related to businesses held pending sale and
discontinued operations).

In
February 2006, the IRS concluded the 2003 and 2004 audits of the Companys tax
returns.  There were no material
adjustments or payments resulting from these audits.  In the first quarter of 2006, the IRS commenced the audit of the
Companys tax return for 2005.  As with
any review of this

33

Notes to the Consolidated Financial Statements

nature,
the ultimate outcome of this IRS examination is not known at this time.

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

2005

2004

2003Tax at U.S. federal statutory rate


35.0
%

35.0
%

35.0
%State and local income taxes net of U.S. federal
  benefit


3.3


3.6


6.5Adjustment relating to the IRS agreement





(55.3
)

Tax credits


(1.0
)

(0.7
)

(2.2
)Impairment of non-deductible goodwill








71.8Other


1.4


0.5


(6.4
)Effective rate


38.7
%

(16.9
%)

104.7
%The effective tax rate for businesses held pending sale
and discontinued operations was tax expense of 39.5% in 2005 and tax benefits
of 72.7% and 21.0% in 2004 and 2003, respectively.  In 2005, the difference between these rates and the federal
statutory tax rate of 35% reflects state taxes, net of federal benefit, and
permanent items.

Income tax expense from continuing operations is as
follows:

(In thousands)

2005Current

Deferred

TotalU.S. federal

$
12,393

$
87,813

$
100,206State and local


1,723


12,208


13,931$
14,116

$
100,021

$
114,1372004Current

Deferred

TotalU.S. federal

$
129,943

$
(155,901
)
$
(25,958
)State and local


10,429


(30,250
)

(19,821
)$
140,372

$
(186,151
)
$
(45,779
)2003Current

Deferred

TotalU.S. federal

$
(35,646
)
$
84,767

$
49,121State and local


(4,060
)

9,655


5,595$
(39,706
)
$
94,422

$
54,716Deferred
income tax expense results from timing differences in the recognition of income
and expense for income tax and financial reporting purposes.  Deferred income tax balances reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes.  The deferred tax asset primarily reflects
the impact of future tax deductions related to the Companys accruals and net
operating losses.  Management believes
that, based upon its history of profitable operations, it is probable that its
deferred tax assets will be realized, primarily from the generation of future taxable
income.  The deferred tax liability is
primarily attributable to the basis differences related to intangible
assets.  The Company records its
deferred tax items based on the estimated value of the tax basis.

In
2002, the Company adopted SFAS 142 which eliminated the requirement to record
in the financial statements amortization expense related to goodwill and
intangible assets with indefinite lives.
The Company is able to continue to amortize the intangible assets for
tax purposes which will yield an average annual tax benefit of approximately
$57 million through 2012.  Subsequent to
2012, the benefit from the step-up in tax basis that resulted from
reincorporation will be fully amortized.
The Company estimates that the divestitures of ARS and AMS will result
in a reduction of approximately $4 million in the average annual cash tax
benefits, however, the cash tax benefits in the year of divestiture will
increase such that the aggregate tax benefits are unchanged.  Accounting standards require that the
Company recognize deferred taxes relating to the differences between the
financial reporting and tax basis of the assets.  As the annual tax benefit from the amortization expense is
realized, the deferred tax liability increases, reflecting the declining tax
basis compared to the non-amortized book basis.  Significant components of the Companys deferred tax balances are
as follows:

(In thousands)

2005

2004Deferred tax assets
(liabilities):Current:Prepaid
expenses

$
(14,000
)
$
(11,300
)Receivables
allowances


12,750


15,700Accrued
insurance expenses


11,500


22,900Net operating
loss and tax credit
  carryforwards


2,800


40,640Other accrued
expenses


22,000


40,840Total current
asset


35,050


108,780Long-Term:Intangible
assets(1)


(146,200
)

(88,500
)Accrued
insurance expenses


6,000


3,600Net operating
loss and tax credit
  carryforwards


22,500


10,100Other
long-term obligations


4,400


(13,300
)Total
long-term liability


(113,300
)

(88,100
)Net deferred tax asset
(liability)

$
(78,250
)
$
20,680(1)The deferred tax liability relates primarily to the
difference in the tax
versus book basis of intangible assets.
The majority of this liability will not actually be paid until a
business unit of the Company is sold.

At
December 31, 2005, the Company had tax effected federal and state net operating
loss carryforwards of approximately $21 million, expiring at various dates up
to 2025.  The Company also had federal
and state tax credit carryforwards of approximately $4 million which expire at
various dates up to 2024.

In 2005, cash paid for income taxes were $146 million,
including a net payment of $86 million to the IRS and various states pursuant
to the Companys agreement with the IRS.
In 2004, total tax payments were $13 million.  In 2003, the Company received net tax refunds of $1 million.

Acquisitions

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

34

Notes to the Consolidated Financial Statements

Current Year

Throughout 2005, the Company completed several small
tuck-in acquisitions, primarily in the pest control and lawn care
businesses.  Additionally, in the third
quarter of 2005, ServiceMaster Clean acquired a distributorship.  The net purchase price of the 2005
acquisitions was $51 million.  The
Company recorded goodwill of approximately $36 million and other intangible
assets of $15 million related to the 2005 acquisitions.  The impact of these acquisitions was not
material to the Companys Consolidated Financial Statements.

In February 2006, the Company announced an agreement to
acquire InStar Services Group, Inc.
Instar is a leading direct provider of commercial disaster response and
reconstruction services in the United States with 2005 revenues of
approximately $130 million.  Instar
provides a continuum of services, from planning prior to an event, to emergency
response following the event and continuing service through cleaning, recovery
and reconstruction.  The InStar
acquisition is not significant to the Companys consolidated financial
statements, therefore proforma financial information has not been presented.

Prior Years

During 2004, the Company acquired the assets of
Greenspace Services Limited, Canadas largest professional lawn care service
company.  In addition, the Company
acquired several small companies, primarily in the pest control and lawn care
businesses.  The net purchase price of
the 2004 acquisitions was $59 million.
The Company recorded goodwill of approximately $52 million and other
intangible assets of $10 million related to the 2004 acquisitions.

During 2003, the Company acquired several small
companies, primarily in the lawn care business.  The net purchase price of these acquisitions was $38
million.  The Company recorded goodwill
of $38 million and other intangible assets of $4 million related to these
acquisitions.

Cash Flow Information for Acquisitions

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

(In thousands)

2005

2004

2003Purchase price

$
53,692

$
66,841

$
44,667Less liabilities assumed


(2,425
)

(7,851
)

(6,315
)Net purchase price

$
51,267

$
58,990

$
38,352Net cash paid for acquisitions

$
33,719

$
40,184

$
28,875Value of shares issued


1,191


3,475


Seller financed debt


16,357


15,331


9,477Payment for acquisitions

$
51,267

$
58,990

$
38,352Businesses
Held Pending Sale and Discontinued Operations

Current Year

The
Company intends to sell its American Residential Services (ARS) and American
Mechanical Services (AMS) companies so it can concentrate resources on its main
growth businesses.  The Company has
retained an investment banking firm to serve as its financial advisor in this
process.  The ARS/AMS operations provide
heating, ventilation, air conditioning (HVAC), plumbing and electrical
installation and repair services and were previously disclosed as the Companys
ARS/AMS segment.  Because the Company
intends to sell these companies, the results of these operations are reported
within the financial statement caption businesses held pending sale and
discontinued operations for all periods.

2003 Dispositions

During the third quarter of 2003, the Company sold
substantially all of the assets and related operational obligations of Trees,
Inc., the utility line clearing operations of TruGreen LandCare, to an
independent subsidiary of Asplundh Subsidiary Holdings, Inc., for approximately
$20 million in cash.  The impact of the
sale was not material to the Companys Consolidated Financial Statements for
2003.

Financial Information for Businesses Held Pending Sale and
Discontinued Operations

Reported Businesses held pending sale and
discontinued operations for all periods
presented include the operating results of the businesses sold, discontinued,
and held for sale noted above.  The
operating results and financial position of businesses held pending sale
and discontinued operations are as follows:

(In thousands, except per share data)Operating Results:

2005

2004

2003Operating revenue

$
764,888

$
691,552

$
738,615ARS/AMS operating
  income


11,695


5,534


10,023Headquarter
  support and insurance costs previously allocated to ARS/AMS


10,294


6,714


4,879Favorable
  conclusion of certain obligations related to international pest control
  operations


11,000





Impairment charge








(291,800
)Other discontinued
  operations


(2,634
)

(3,793
)

(4,482
)Provision
  (benefit) for income taxes (1)


11,991


(6,149
)

(59,148
)Income (loss) from
  businesses held pending sale and discontinued operations

$
18,364

$
14,604

$
(222,232
)Diluted income
  (loss) from businesses held pending sale and discontinued operations

$
0.06

$
0.05

$
(0.75
)(1)
2004 includes a $9 million non-cash reduction in the
  tax provision of businesses  held
  pending sale and discontinued operations related to a comprehensive agreement
  with the IRS regarding its examination of the Companys federal income taxes
  through the year 2002.Financial Position:

2005

2004Current assets

$
135,100

$
112,501Long-term assets


77,340


80,397Total assets

$
212,440

$
192,898Current liabilities

$
97,294

$
91,396Long-term liabilities


10,130


9,615Total liabilities

$
107,424

$
101,011The table below summarizes the activity during the twelve
months ended December 31, 2005 for the remaining liabilities from the
discontinued operations, with $11 million of the decrease during the year
reflecting the favorable conclusion of certain obligations related to the
previously sold international pest control operations.  The remaining obligations primarily relate
to long-term self-insurance claims.  The
Company believes that the remaining reserves continue to be adequate and
reasonable.

35

Notes to the Consolidated Financial Statements


(In thousands)





Balance at
  Dec. 31,
  2004





Cash
  Payments
  or Other





Income/
  (Expense)




Balance at
  Dec. 31,
  2005Remaining liabilities
  of discontinued operations:LandCare Construction

$
4,492

$
2,365

$
(985
)
$
3,112LandCare utility
  line clearing business


6,616


2,843


535


3,238Certified Systems,
  Inc. and other


8,485


1,325


(2,526
)

9,686International Businesses
  (1)


11,000





11,000


(1)The 2005 activity reflects the favorable conclusion of certain
obligations related to the previously sold       international pest control
operations.

Commitments and Contingencies

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

Rental expense for 2005, 2004 and 2003 was $163 million,
$147 million and $135 million, respectively.
Future long-term non-cancelable operating lease payments are
approximately $80 million in 2006, $64 million in 2007, $49 million in 2008,
$37 million in 2009, $21 million in 2010, and $26 million in 2011 and
thereafter.

The majority of the Companys fleet and some equipment
are leased through operating leases.
Lease terms are non-cancelable for the first twelve month term and then
are month-to-month leases, cancelable at the Companys option.  There are residual value guarantees (ranging
from 70 percent to 87 percent depending on the agreement) on these vehicles and
equipment, which historically have not resulted in significant net payments to
the lessors.  There are no net payments
reflected in the future minimum lease obligation as the leases are cancelable
and there are no expected net payments due under the guarantees.  At December 31, 2005 there was approximately
$259 million of residual value guarantee relating to the Companys fleet and
equipment leases.  The fair value of the
assets under the leases is expected to fully mitigate the Companys obligations
under the agreements.

The Company maintains operating lease facilities with
banks totaling $68 million which provide for the financing of branch properties
to be leased by the Company.  At
December 31, 2005, approximately $68 million was funded under these
facilities.  Approximately $15 million
of these leases have been included on the balance sheet as assets with related
debt as of December 31, 2005.  The
balance of the funded amount is treated as operating leases.  Approximately $15 million of the total
facility expires in January 2008 and $53 million expires in September
2009.  The Company has guaranteed the
residual value of the properties under the leases up to 82 percent of the fair
market value at the commencement of the lease.
At December 31, 2005, the Companys residual value guarantee related to
the leased assets totaled $56 million for which the Company has recorded the
estimated fair value of this guarantee (approximately $0.9 million) in the
Consolidated Statements of Financial Position.

In the normal course of business, the Company
periodically enters into agreements that incorporate indemnification
provisions.  While the maximum amount
which the Company may be exposed under such agreements cannot be estimated, the
Company does not expect these guarantees and indemnifications to have a
material adverse effect on its Consolidated Financial Statements.

The Company carries insurance policies on insurable risks
at levels which it believes to be appropriate, including workers compensation,
auto and general liability risks.  The Company
has self-insured retention limits and insured layers of excess insurance
coverage above such self-insured retention limits.  Accruals for self-insurance losses, termite damage claims in the
Terminix business and warranty claims in the American Home Shield business are
made based on the Companys claims experience and actuarial assumptions.  In 2005, Terminix recorded a $10 million
unfavorable correction in estimating prior years termite damage claim
reserves.  At December 31, 2005, these
accruals totaled $211 million, with $93 million included in Self-insured
claims and related expenses and $118 million included in Other long-term
obligations in the accompanying Consolidated Statements of Financial Position.
The Company has certain liabilities with respect to existing or potential
claims, lawsuits, and other proceedings.
The Company accrues for these liabilities when it is probable that
future costs will be incurred and such costs can be reasonably estimated.

In the ordinary course of conducting its business
activities, the Company becomes involved in judicial, administrative and
regulatory proceedings involving both private parties and governmental
authorities.  These proceedings include
general and commercial liability actions and a small number of environmental
proceedings.  The Company does not
expect any of these proceedings to have a material adverse effect on its
Consolidated Financial Statements.

Employee Benefit Plans

Discretionary contributions to qualified profit sharing
and non-qualified deferred compensation plans were made in the amount of $9.9
million for 2005, $9.3 million for 2004 and $4.6 million for 2003.  Under the Employee Share Purchase Plan, the
Company contributed $.8 million in 2005, 2004 and 2003.  These funds defrayed part of the cost of the
shares purchased by employees.

Minority Interest Ownership and Related Parties

The Company continues to have minority investors in Terminix.  This minority
ownership reflects an interest
issued to the prior owners of the Allied Bruce Terminix Companies in connection
with the acquisition of that entity.  At
any time, the former owners may convert this equity security into eight million
ServiceMaster common shares.  The
ServiceMaster shares are included in the shares used in the calculation of
diluted earnings per share, when their inclusion has a dilutive impact.  Subsequent to December 31, 2005,
ServiceMaster has the ability to require conversion of the security into
ServiceMaster common shares, provided the closing share price of ServiceMasters
common stock averages at least $15 per share for 40 consecutive trading days.

36

Notes to
the Consolidated Financial Statements

Long-Term
Debt

Long-term debt includes the following:(In thousands)

2005

20048.45% maturing in 2005

$


$
137,4996.95% maturing in 2007


49,225


49,2257.88% maturing in 2009


179,000


179,0007.10% maturing in 2018


79,473


79,4737.45% maturing in 2027


195,000


195,0007.25% maturing in 2038


82,650


82,650Other


72,802


82,241Less current portion


(19,222
)

(23,247
)Total long-term debt

$
638,928

$
781,841The Company is party to a number of debt agreements
which require it to maintain certain financial and other covenants, including
limitations on indebtedness (debt cannot exceed 3.25 times earnings before
interest, taxes, depreciation, and amortization (EBITDA)) and a minimum
interest coverage ratio (EBITDA needs to exceed four times interest
expense).  In addition, under certain
circumstances, the agreements may limit the Companys ability to pay dividends
and repurchase shares of common stock.
These limitations are not expected to be an inhibiting factor in the
Companys future dividend and share repurchase plans.  Failure by the Company to maintain these covenants could result
in the acceleration of the maturity of the debt.  Throughout 2005, the Company was in compliance with the covenants
related to these debt agreements and, based on its operating outlook for 2006,
expects to be able to maintain compliance in the future.

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

Since August 1997, ServiceMaster has issued $1.1
billion of unsecured debt securities pursuant to registration statements filed
with the Securities and Exchange Commission.
As of December 31, 2005, ServiceMaster had $550 million of senior
unsecured debt securities and equity interests available for issuance under an
effective shelf registration statement.

The Company has a committed revolving bank credit
facility for up to $500 million that expires in May 2010.  The facility can be used for general Company
purposes.  As of December 31, 2005, the
Company had issued approximately $142 million of letters of credit under the
facility and had unused commitments of approximately $358 million.  There were no borrowings outstanding at that
date.  At the Companys current credit
ratings, the interest rate under the facility is LIBOR plus 75 basis
points.

In December 2003 and January 2004, the Company entered
into interest rate swap agreements with a total notional amount of $165
million.  Under the terms of these
agreements, the Company pays a floating rate of interest (based on a specified
spread over six-month LIBOR) on the notional amount and the Company receives a
fixed rate of  interest at 7.88 percent
on the notional amount.  The impact of
these swap transactions was to convert $165 million of the Companys debt from
fixed rate at 7.88 percent to a variable rate based on LIBOR.  In accordance with SFAS 133 Accounting for
Derivative Instruments and Hedging Activities, the Companys interest rate
swap agreements are classified as fair value hedges and, as such, gains and
losses on the swaps as well as the gains and losses on the related hedged items
are recognized in current earnings.

Cash interest payments were $57 million in 2005, $60
million in 2004 and $61 million in 2003.
Future scheduled long-term debt payments are $19 million in 2006
(average rate of 5.7 percent), $61 million in 2007 (average rate of 7.1 percent),
$27 million in 2008 (average rate of 6.2 percent), $184 million in 2009
(average rate of 8.1 percent) and $8 million in 2010 (average rate of 7.9
percent).  In April 2005, $137 million
of the Companys public debt matured and was paid.  The Companys next significant debt maturity is not until 2007.

Cash and
Marketable Securities

Cash, money market funds and certificates of deposits,
with maturities of three months or less, are included in the Statements of
Financial Position caption Cash and Cash Equivalents.  Marketable securities are designated as
available for sale and recorded at current market value, with unrealized gains
and losses reported in a separate component of shareholders equity.  As of December 31, 2005 and 2004, the
Companys investments consist primarily of domestic publicly traded debt of
$108 million and $109 million, respectively and common equity securities of
$144 million and $131 million, respectively.

The aggregate market value of the Companys short-term
and long-term investments in debt and equity securities was $252 million and
$240 million and the aggregate cost basis was $246 million and $226 million at
December 31, 2005 and 2004, respectively.

Interest and dividend income received on cash and
marketable securities was $20 million, $15 million, and $13 million, in 2005,
2004, and 2003, respectively.  Gains and
losses on sales of investments, as determined on a specific identification
basis, are included in investment income in the period they are realized.  The Company periodically reviews its
portfolio of investments to determine whether there has been an other than
temporary decline in the value of the investments from factors such as
deterioration in the financial condition of the issuer or the market(s) in
which it competes.  The unrealized gains
in the investment portfolio were approximately $13 million and $16 million as
of December 31, 2005 and 2004, respectively.
Unrealized losses were approximately $7 million and $2 million as of
December 31, 2005 and 2004, respectively.
The portion of these unrealized losses older than one year at December
31 was less than $1 million for both 2005 and 2004.  The aggregate fair value of the investments with unrealized
losses totaled $133 million and $96 million at December 31, 2005 and 2004,
respectively, and consist primarily of corporate bonds and common equity
securities.

Receivable
Sales

The Company has an agreement to provide for the
ongoing revolving sale of a designated pool of accounts receivable of TruGreen
ChemLawn and Terminix to a wholly-owned, bankruptcy-remote subsidiary,
ServiceMaster Funding LLC.

37

Notes to
the Consolidated Financial Statements

ServiceMaster Funding LLC has entered into an
agreement to transfer, on a revolving basis, an undivided percentage ownership
interest in a pool of accounts receivable to unrelated third party
purchasers.  ServiceMaster Funding LLC
retains an undivided percentage interest in the pool of accounts receivable and
bad debt losses for the entire pool are allocated first to this retained
interest.  During 2005, 2004 and 2003,
there were no receivables sold to third parties under this agreement.  However, the Company may sell its
receivables in the future which would provide an alternative funding source.  The agreement is a 364-day facility that is
renewable at the option of the purchasers.
The Company may sell up to $70 million of its receivables to these
purchasers and therefore has immediate access to cash proceeds from these
sales.  The amount of the eligible
receivables varies during the year based on seasonality of the business and
will at times limit the amount available to the Company.

Comprehensive
Income

Comprehensive income, which encompasses net income,
unrealized gains on marketable securities, and the effect of foreign currency
translation is disclosed in the Statements of Shareholders Equity.

Other Comprehensive Income(In thousands)

2005

2004

2003Net unrealized holding
  gains arising in period

$
4,582

$
7,745

$
15,559Tax expense


1,833


3,098


6,224Net of tax amount

$
2,749

$
4,647

$
9,335Net gains realized

$
8,228

$
6,370

$
3,855Tax expense


3,291


2,549


1,542Net of tax amount

$
4,937

$
3,821

$
2,313Accumulated comprehensive income included the following components as
of December 31:

(In thousands)

2005

2004

2003Net unrealized gains on
  securities, net of tax

$
4,624

$
6,812

$
5,986Foreign currency
  translation


2,573


3,992


1,946Total

$
7,197

$
10,804

$
7,932Shareholders
Equity

The Company has authorized one billion shares of
common stock with par value of $.01.  In
February 2006, the Company announced the declaration of a cash dividend of $.11
per share payable on February 28, 2006 to shareholders of record on February
17, 2006.

The Company has an effective shelf registration
statement to issue shares of common stock in connection with future,
unidentified acquisitions.  This
registration statement allows the Company to issue registered shares much more
efficiently when acquiring privately held companies.  The Company plans to use the shares over time in connection with
purchases of small acquisitions.  There
were approximately 4.3 million shares available for issuance under this
registration statement at December 31, 2005.

As of December 31, 2005, there were 32 million Company
shares available for issuance upon the exercise of employee  stock options outstanding and future
grants.  Stock 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 and
restricted stock awards carry a vesting period and are restricted as to the
sale or transfer of the shares.
Restricted stock awards are non-transferable and subject to forfeiture
if the holder does not remain continuously employed by the Company during the
vesting period, or if the restricted stock is subject to performance measures,
if those performance measures are not attained.  The Company includes the vested and unvested portions of the
restricted stock awards in shares outstanding in the denominator of its
earnings per share calculations.

In December 2004, the FASB issued SFAS 123 (revised
2004), Share-Based Payment (SFAS 123(R)).
SFAS 123(R) replaces SFAS 123, Accounting for Stock-Based Compensation
(SFAS 123), and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees.  SFAS 123(R) requires that
stock options and share grants be recorded at fair value and this value is
recognized as compensation expense over the vesting period.  The Statement requires that compensation
expense be recorded for newly issued awards as well as the unvested portion of
previously issued awards that remain outstanding as of the adoption of this
Statement.    The requirements of SFAS
123(R) become effective beginning with the Companys 2006 fiscal year (January
1, 2006).  The Company had previously
disclosed that it had expected to restate prior periods as if the Statement
were in effect for all periods.  As
permitted by this Statement, the Company will instead prospectively apply the
provisions of this Statement effective January 1, 2006.

In the first quarter of 2003, the Company adopted SFAS
123 and has been expensing the fair value of new employee option grants awarded
subsequent to 2002 using the prospective method as described in SFAS 148, Accounting
for Stock-Based Compensation  Transition and Disclosure, an amendment of FASB
Statement No. 123.

Beginning in 2005, the fair value of each option award
was estimated on the date of the grant using a lattice-based option valuation
model.  Prior to 2005, the Company used
the Black-Scholes option pricing model. This change was made in order to
provide a better estimate of fair value, as the lattice-based model reflects
the impact of stock price changes on exercise behavior, and changes in
volatility and interest rates.

Under the lattice-based model, expected volatilities
are based on a term structure of implied volatilities from traded options on
the Companys stock and historical volatility of the Companys stock.  The Company uses historical data to estimate
option exercise and employee termination within the valuation model.  The expected term of options granted is
derived from the output of the option valuation model and represents the period
of time that options granted are expected to be outstanding. The range of
risk-free rates for periods within the contractual life of the options is based
on the U.S. Treasury forward curve rate and uses a term structure.

38

Notes to
the Consolidated Financial Statements

The lattice-based model used the following assumption
for options awarded in 2005: range of expected volatility 27.66 percent to
47.56 percent; weighted-average volatility of 28.24 percent; expected life (in
years) of 6; dividend yield of 3.41 percent; risk-free rate in the range of
2.98 percent to 4.65 percent; and the weighted-average risk-free rate of 4.06
percent.

For awards valued using the Black-Scholes option
pricing model, the computation of fair value was based on the
following weighted-average assumptions in 2004 and 2003: risk-free rates of 3.7 percent and 3.6 percent,
respectively; dividend yields of 4.0 percent and 4.2 percent, respectively; share price volatility of 30.6 percent
 and 30.8 percent, respectively;
and average expected lives of six to seven years. The Company has estimated the value of
these options assuming a single weighted-average expected life for the entire award.

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

Stock

Price

Weighted
  Avg.

Share
  Grants/

PriceOptions

Range
  (1)

Exercise
  Price

Restricted
  Stock

RangeTotal
  exercisable, December 31, 2002


18,089,830

$
2.25  77.56


$
13.05








Total
  outstanding, December 31, 2002


31,813,339

$
2.25  77.56


$
12.64




232,887


$
2.86  13.80Transactions
  during 2003Granted to
  employees


2,432,674

$
8.40  11.21


$
9.91




364,419


$
9.50  11.97Exercised or
  vested


(1,296,101
)
$
6.44  11.50


$
7.70




(56,092
)

$
2.86  13.80Terminated or
  resigned


(1,240,146
)
$
2.25  37.40


$
13.49




(3,514
)

$
9.95Total
  exercisable, December 31, 2003


20,346,581

$
6.44  77.56


$
13.16








Total
  outstanding, December 31, 2003


31,709,766

$
6.44  77.56


$
12.60




537,700


$
3.03 - 13.80Transactions
  during 2004Granted to
  employees


2,049,680

$
8.63  13.06


$
10.79




988,309


$
10.7312.86Exercised or
  vested


(1,250,434
)
$
6.44  11.50


$
8.20




(109,827
)

$
3.03  13.80Terminated or
  resigned


(545,085
)
$
6.44  37.40


$
12.57




(16,491
)

$
9.95  11.17Total
  exercisable, December 31, 2004


22,573,344

$
8.40  77.56


$
13.26








Total
  outstanding, December 31, 2004


31,963,927

$
8.40  77.56


$
12.66




1,399,691


$
3.82  13.80Transactions
  during 2005Granted to
  employees


2,103,103

$
12.14  13.72


$
13.43




598,723


$
12.5613.82Exercised or
  vested


(2,385,142
)
$
8.75  13.83


$
9.90




(270,695
)

$
3.8213.80Terminated or
  resigned


(2,173,615
)
$
8.75  37.40


$
12.26




(144,842
)

$
9.9513.42Total
  exercisable, December 31, 2005


22,057,309

$
8.40  77.56


$
13.33








Total
  outstanding, December 31, 2005


29,508,273

$
8.40  77.56


$
12.96




1,582,877


$
5.5313.82(1)
The options priced at $77.56 are options assumed by
  the Company as a result of business acquisitions.Options outstanding at December 31, 2005:

Weighted
  AverageNumber

Remaining

Weighted

Number

WeightedRange
  of

Outstanding

Contractual

Average

Exercisable

AverageExercise
  Prices

at
  12/31/05

Term

Exercise
  Price

at
  12/31/05

Exercise
  Price$8.40  10.78


11,290,694



4 Years



$
10.00



7,869,386


$
9.86$10.80  15.94


12,351,967



4 Years



$
12.50



8,322,311


$
12.15$16.12  22.33


5,522,211



3 Years



$
18.18



5,522,211


$
18.18$27.20  77.56


343,401



1 Year



$
43.25



343,401


$
43.25$8.40  77.56


29,508,273



3.9 Years



$
12.96



22,057,309


$
13.33Earnings
Per Share

Basic earnings per share is computed by dividing
income available to common stockholders by the weighted-average number of
shares outstanding for the period.  The
weighted average common shares for the diluted earnings per share calculation
includes the incremental effect related to outstanding options and stock
appreciation rights (SARS) whose market price is in excess of the grant
price.  Shares potentially issuable
under convertible securities have been considered outstanding for purposes of
the diluted earnings per share calculations.
In computing diluted earnings per share, the after-tax interest expense
related to convertible securities is added back to net income in the numerator,
while the diluted shares in the denominator include the shares issuable upon
conversion of the securities.  Due to
the losses incurred in 2003, the denominator does not include the effects of
options as it would result in a less dilutive computation.  As a result, 2003 diluted earnings per share
are the same as basic earnings per share.
Had the Company recognized income from continuing operations in 2003,
incremental shares attributable to the assumed exercise of outstanding options
would have increased diluted shares outstanding by 3.9 million shares.  Shares potentially issuable under
convertible securities have not been considered outstanding for 2005 and 2003
as their inclusion results in a less dilutive computation.  Had the inclusion of convertible securities
not resulted in a less dilutive computation in both 2005 and 2003, incremental
shares attributable to the assumed conversion of the securities would have
increased shares outstanding by 8.0 million shares and the after-tax interest
expense related to the convertible securities that would have been added to net
income in the numerator would have been $4.9 million and $4.8 million,
respectively.

The following table reconciles both the numerator and
the denominator of the basic earnings per share from continuing

39

Notes to
the Consolidated Financial Statements

operations computation to the numerator and the  denominator of the diluted
earnings per
share from  continuing operations
computation.

(In thousands, except per share data)

For year ended 2005

For year ended 2004

For year ended 2003Continuing
  Operations:

Income

Shares

EPS

Income

Shares

EPS

Loss

Shares

EPSBasic
EPS

$
180,561


291,251


$
0.62


$
316,623


290,514


$
1.09


$
(2,455
)

295,610


$
(0.01
)Effect of
Dilutive Securities:Options &
SARS





5,556










5,054










Convertible
securities













4,712


8,000










Diluted
EPS

$
180,561


296,807


$
0.61


$
321,335


303,568


$
1.06


$
(2,455
)

295,610


$
(0.01
)40

Report
of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of The
ServiceMaster Company

We have audited the accompanying consolidated
statements of financial position of The ServiceMaster Company and subsidiaries
(the Company) as of December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2005.  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 the
standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes
assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position of the
ServiceMaster Company and subsidiaries as of December 31, 2005 and 2004, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

We have also audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over financial reporting as of
December 31, 2005, based on the criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 27, 2006 expressed an unqualified opinion on managements
assessment of the effectiveness of the Companys internal control over
financial reporting and an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.

/s/ Deloitte & Touche LLP 
Chicago, Illinois 
February 27, 2006

41

Quarterly Operating Results (Unaudited)

Quarterly operating results
and related growth for the last three years in revenue, gross profit, income
from continuing operations, income from businesses held pending sale and
discontinued operations and earnings per share are shown in the table
below.  As discussed in the Interim
Reporting section in the Significant Accounting Policies, for interim
accounting purposes, TruGreen ChemLawn and other business segments of the
Company incur pre-season advertising costs.
In addition, TruGreen ChemLawn incurs costs related to annual repairs
and maintenance procedures that are performed in the first quarter. These costs
are deferred and recognized as expense in proportion to revenue over the
balance of the year.  Full year results
are not affected.

(In
  thousands, except per share data)


2005

Chg


2004

Chg


2003Continuing
Operations:Operating Revenue:First Quarter

$
623,760

3
%

$
602,907

7
%

$
560,910Second Quarter


970,627

7



909,019

6



858,493Third Quarter


925,492

6



872,770

4



836,725Fourth Quarter


719,599

5



683,372

7



638,900$
3,239,478

6
%

$
3,068,068

6
%

$
2,895,028Gross Profit:First Quarter

$
209,889

6
%

$
197,547

10
%

$
180,261Second Quarter


400,303

9



367,430

5



350,058Third Quarter


362,573

6



342,071

6



323,416Fourth Quarter


254,735

5



241,800

19



203,701$
1,227,500

7
%

$
1,148,848

9
%

$
1,057,436Income (Loss) from Continuing
Operations:(1)First Quarter

$
11,036

(14
%)

$
12,761

178
%

$
4,592Second Quarter


75,391

9



69,267

8



63,842Third Quarter
(3)


70,172

9



64,267

N/M



(93,719
)Fourth Quarter
(2)


23,962

N/M



170,328

N/M



22,830$
180,561

N/M


$
316,623

N/M


$
(2,455
)Basic Earnings (Loss) Per
Share:(1)First Quarter

$
0.04


%

$
0.04

100
%

$
0.02Second Quarter


0.26

8



0.24

9



0.22Third Quarter
(3)


0.24

9



0.22

N/M



(0.32
)Fourth Quarter
(2)


0.08

N/M



0.59

N/M



0.08$
0.62

N/M


$
1.09

N/M


$
(0.01
)Diluted Earnings (Loss) Per
Share:(1)First Quarter

$
0.04


%

$
0.04

100
%

$
0.02Second Quarter


0.25

9



0.23

10



0.21Third Quarter
(3)


0.23

5



0.22

N/M



(0.32
)Fourth Quarter
(2)


0.08

N/M



0.56

N/M



0.08$
0.61

N/M


$
1.06

N/M


$
(0.01
)Businesses Held Pending
Sale
  and Discontinued Operations:(1)Income (Loss) from Businesses
Held Pending Sale
  and Discontinued Operations:First Quarter

$
(464
)
70
%

$
(1,562
)
N/M


$
83Second Quarter


4,410

291



1,129

(34
%)


1,708Third Quarter
(3)


11,415

230



3,457

N/M



(224,247
)Fourth Quarter
(2)


3,003

N/M



11,580

N/M



224$
18,364

N/M


$
14,604

N/M


$
(222,232
)Diluted Earnings (Loss) Per
Share:First Quarter

$


100
%

$
(0.01
)
N/M


$
Second Quarter


0.01

N/M





100
%


0.01Third Quarter
(3)


0.04

300



0.01

N/M



(0.76
)Fourth Quarter
(2)


0.01

N/M



0.04

N/M



$
0.06

N/M


$
0.05

N/M


$
(0.75
)N/M = Not meaningful(1)
The
  Company intends to sell its American Residential Services (ARS) and American
  Mechanical Services (AMS) companies so that it can concentrate resources on
  its main growth businesses.  These
  operations were previously disclosed as the Companys ARS/AMS segment.  Because the Company intends to sell these
  companies, the results of these operations are classified within the
  financial statement caption businesses held pending sale and discontinued
  operations in all periods.  See the
  Management Discussion and Analysis of Financial Position and Results of
  Operations for a discussion of the components of businesses held pending sale
  and discontinued operations.(2)
In
  January 2005, the Company announced that it had reached a comprehensive
  agreement with the Internal Revenue Service regarding its examination of the
  Companys federal income taxes through the year 2002.  As a result of this agreement, the Company
  recorded a non-cash reduction in its fourth quarter and full year 2004 tax
  provision, thereby increasing net income by approximately $159 million.  Approximately $150 million related to
  continuing operations ($.49 per diluted share) and $9 million related to
  businesses held pending sale and discontinued operations ($.03 per diluted
  share).  See the Income Taxes note
  in the Notes to the Consolidated Financial Statements.(3)
In
  accordance with SFAS 142, the Companys goodwill and intangible assets that
  are not amortized are subject to at least an annual assessment for impairment
  by applying a fair-value based test.  In
  the third quarter of 2003, the Company recorded a non-cash impairment charge
  associated with the goodwill and intangible assets at its TruGreen LandCare
  business unit.  This charge, which is
  included in the results of continuing operations for 2003, totaled $189
  million pre-tax, $156 million after-tax, and $.53 per diluted share.  Also in the third quarter of 2003, the
  Company recorded a non-cash impairment charge associated with the goodwill
  and intangible assets at its American Residential Services (ARS) and American
  Mechanical Services (AMS) operations.
  The Company is currently holding these operations for sale,
  accordingly, the financial results for the ARS and AMS operations, as well as
  the impairment charge related to these operations ($292 million pre-tax, $227
  million after-tax), are classified as businesses held pending sale and
  discontinued operations for all periods.
  See the Goodwill and Intangible Assets note in the Notes to
  Consolidated Financial Statements.42

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

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Effectiveness of
Disclosure Controls and Procedures.
ServiceMasters Chairman and Chief Executive Officer, Jonathan P. Ward, and
ServiceMasters President and Chief Financial Officer, Ernest J. Mrozek, have
evaluated ServiceMasters disclosure controls and procedures as of the end of
the period covered by this Form 10-K.
ServiceMasters disclosure controls and procedures include a roll-up of
financial and non-financial reporting that is consolidated in the principal
executive office of ServiceMaster in Downers Grove, Illinois.  The reporting process is designed to ensure
that information required to be disclosed by ServiceMaster in the reports that
it files with or submits to the Securities and Exchange Commission is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.  Messrs. Ward and Mrozek have concluded that both the design and
operation of ServiceMasters disclosure controls and procedures are
effective.

See Managements Report on
Internal Control over Financial Reporting in Item 8.

Changes in
Internal Control over Financial Reporting.No change in ServiceMasters internal control over
financial reporting occurred during the fourth quarter of 2005 that has
materially affected, or is reasonably likely to materially affect,
ServiceMasters internal control over financial reporting.

Management Certifications.In June 2005, the
Company submitted to the New York Stock Exchange the Annual CEO Certification
required by Section 303A.12(a) of the New York Stock Exchange Listed Company
Manual.  The Company has also filed, as
exhibits to its Annual Report on Form 10-K for the year ended December 31,
2005, the certifications of its Chief Executive Officer and Chief Financial
Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

ITEM 9B.  OTHER INFORMATION

None.

43

PART III

ITEM 10.  DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The
information contained in ServiceMasters Definitive Proxy Statement for the
2006 Annual Meeting of Shareholders under the heading Item 1  Election of
Directors is incorporated by reference in this Form 10-K.

EXECUTIVE OFFICERS OF SERVICEMASTER

The
names and ages of the executive officers of ServiceMaster as of February 28,
2006, together with certain biographical information, are as follows:

Name

Age

Present Positions
First Becamean OfficerJonathan
  P. Ward

51

Chairman
  and Chief Executive Officer
2001Ernest J. Mrozek

52

President and Chief
  Financial Officer
1987Steven C. Preston

45

Executive Vice President
1997Richard A. Ascolese

52

President, TruGreen LandCare
1997Steven B. Bono

53

Senior Vice President,
  Corporate Communications
2001Scott J. Cromie

49

Group President and Chief
  Executive Officer, American Home Shield
1990Mitchell T. Engel

53

Chief Marketing Officer
2002Lisa V. Goettel

42

Senior Vice President,
  Human Resources
2002James A. Goetz

48

Senior Vice President and
  Chief Information Officer
2000Katrina L. Helmkamp

40

President, Terminix
  International
2005Michael M. Isakson

52

President and Chief
  Operating Officer, ServiceMaster Clean & Furniture Medic
1992Jim L. Kaput

45

Senior Vice President and
  General Counsel
2000Dennis R. Sutton

51

President and Chief
  Operating Officer, TruGreen ChemLawn
1994Mr.
Ward is also a director of ServiceMaster.
For biographical information with respect to Mr. Ward, see Item 1 
Election of Directors in ServiceMasters Definitive Proxy Statement for the
2006 Annual Meeting of Shareholders.

Ernest
J. Mrozek is President and Chief Financial Officer.  He served as President and Chief Operating Officer from April
2002 to January 2004.  He served as
President of ServiceMaster Consumer and Commercial Services from November 1998
to April 2002.

Steven
C. Preston is Executive Vice President.
He served as Executive Vice President and Chief Financial Officer from
July 1998 to January 2004.

Richard A. Ascolese
has served as President,
TruGreen LandCare since September 2005.
He served as Chief Operating Officer, TruGreen LandCare from November
2004 to September 2005.  Mr. Ascolese
served as Executive Vice President of American Home Shield from January 1997 to
November 2004.

Steven B. Bono has
served as Senior Vice
President, Corporate Communications since July 2001.  He was on sabbatical from May 2000 to July 2001.

Scott
J. Cromie is Group President and Chief Executive Officer of American Home
Shield.  From October 1996 to February
2006 he served as President and Chief Operating Officer of American Home
Shield.

Mitchell
T. Engel is Chief Marketing Officer.  He
served as Principal of Engel Marketing Services from April 1998 to April   2002.

Lisa
V. Goettel has served as Senior Vice President, Human Resources since December
2004.  From June 2002 to December 2004,
Ms. Goettel served as Vice President, Human Resources of The TruGreen
Companies.  She served as a human
resources consultant from May 2001 to May 2002.  Ms. Goettel served as Vice President, Human Resources of World
Duty Free in Ridgefield, Connecticut from December 1996 to April 2001.

James
A. Goetz is Senior Vice President and Chief Information Officer.  He served as Chief Information Officer of
The ServiceMaster Home Service Center L.L.C. from September 2000 to January
2002.

44

Katrina
L. Helmkamp has served as President, Terminix International since January
2005.  She served as Vice President of
Boston Consulting Group in Chicago, Illinois from January 1999 to December
2004.

Michael
M. Isakson is President and Chief Operating Officer of ServiceMaster Clean and
Furniture Medic.  He served as President
of ServiceMaster Clean from August 1995 to April 2001.

Jim
L. Kaput has served as Senior Vice President and General Counsel of
ServiceMaster since April 2000.

Dennis
R. Sutton has served as President and Chief Operating Officer, TruGreen
ChemLawn since July 2005.  He served as
Interim President and Chief Operating Officer, TruGreen ChemLawn from November
2004 to July 2005.  Mr. Sutton served as
Senior Vice President, TruGreen ChemLawn from July 2004 to November 2004.  He served as Division Vice President,
TruGreen ChemLawn from August 1994 to July 2004.

FINANCIAL CODE OF ETHICS

ServiceMaster has a Financial
Code of Ethics which applies to ServiceMasters Chief Executive Officer, Chief
Financial Officer, Controller, Treasurer, Business Unit Chief Financial
Officers or persons performing similar functions and other designated officers
and employees. A copy of the Financial
Code of Ethics is posted on ServiceMasters website at http://www.svm.com under
Corporate Governance and is available in print, at no charge, to any person
who requests it by writing to the Corporate Secretary at the following address:
The ServiceMaster Company, 3250 Lacey Road, Suite 600, Downers Grove,
Illinois 60515.

AUDIT AND FINANCE COMMITTEE FINANCIAL EXPERT

The information contained in
ServiceMasters Definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders under the heading Board and Committees of the Board is
incorporated by reference in this Form 10-K.

COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934

The
information contained in ServiceMasters Definitive Proxy Statement for the 2006
Annual Meeting of Shareholders under the heading Section 16(a) Beneficial
Ownership Reporting Compliance is incorporated by reference in this Form
10-K.

ITEM 11.  EXECUTIVE COMPENSATION

The
information contained in ServiceMasters Definitive Proxy Statement for the
2006 Annual Meeting of Shareholders under the headings Compensation of
Directors, Executive Officer Compensation and Agreements with Officers and
Directors is incorporated by reference in this Form 10-K.

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

The
information contained in ServiceMasters Definitive Proxy Statement for the
2006 Annual Meeting of Shareholders under the headings Ownership of Our Common
Stock and Equity Compensation Plan Information is incorporated by reference
in this Form 10-K.

ITEM 13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The information contained in ServiceMasters Definitive Proxy Statement
for the 2006 Annual Meeting of Shareholders under the heading Certain
Transactions and Relationships is incorporated by reference in this Form 10-K.

ITEM 14.               PRINCIPAL
ACCOUNTING FEES AND SERVICES

The information contained in
ServiceMasters Definitive Proxy Statement for the 2006 Annual Meeting of Shareholders
under the heading Item 3  Ratification of Selection of Independent Auditors
is incorporated by reference in this Form 10-K.

PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES

(a)
Financial
  Statements, Schedules and Exhibits.1.  Financial StatementsReport
  of Independent Registered Public Accounting Firm contained in Part II, Item 8
  of this Form 10-K.Consolidated
  Statements of Financial Position as of December 31, 2005 and 2004 contained
  in Part II, Item 8 of this Form 10-K.Consolidated
  Statements of Operations for the years ended December 31, 2005, 2004 and 2003
  contained in Part II, Item 8 of this Form 10-K.Consolidated
  Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
  contained in Part II, Item 8 of this Form 10-K.Consolidated
  Statements of Shareholders Equity for the years ended December 31, 2005,
  2004 and 2003 contained in Part II, Item 8 of this Form 10-K.Notes
  to the Consolidated Financial Statements contained in Part II, Item 8 of this
  Form 10-K.2.  Financial Statements SchedulesThe
  following information is filed as part of this Form 10-K and should be read
  in conjunction with the financial statements contained in Part II, Item 8 of
  this Form 10-K:Report
  of Independent Registered Public Accounting Firm on Financial Statement
  SchedulesSchedule
  IIValuation and Qualifying Accounts45

3.  ExhibitsThe
exhibits filed with this report are listed on pages 50-52 (the Exhibits Index).
 Entries marked by an asterisk next to
the exhibits number identify management contracts or compensatory plans,
contracts or arrangements in which a director or any of ServiceMasters
executive officers to be identified in the summary compensation table included
in ServiceMasters Definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders participates or compensatory plans, contracts or arrangements
adopted without approval of security holders pursuant to which ServiceMaster
may award equity and in which any ServiceMaster employee currently
participates.

46

SIGNATURES

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

THE
  SERVICEMASTER COMPANYDate:
  February 28, 2006
By
/s/
  JONATHAN P. WARDJonathan
  P. WardChairman
  and Chief Executive OfficerPursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

Signature

Title

Date/s/ JONATHAN P. WARD

Chairman and Chief
  Executive

February
  28, 2006Officer and Director
  (PrincipalJonathan
  P. Ward

Executive Officer)/s/ ERNEST J. MROZEK

President and Chief Financial

February
  28, 2006Officer
  (Principal FinancialErnest
  J. Mrozek

Officer and
  Principal Accounting Officer)/s/ LOUIS J. GIULIANO

Director

February 24, 2006Louis J. Giuliano/s/ BRIAN GRIFFITHS

Director

February
  24, 2006Brian Griffiths/s/ SIDNEY E. HARRIS

Director

February
  24, 2006Sidney E. Harris/s/ ROBERTO R. HERENCIA

Director

February
  24, 2006Roberto R. Herencia/s/ BETTY JANE HESS

Director

February
  24, 2006Betty Jane Hess/s/ EILEEN A. KAMERICK

Director

February
  24, 2006Eileen A. Kamerick/s/ JAMES D. MCLENNAN

Director

February
  24, 2006James D. McLennan/s/ COLEMAN H. PETERSON

Director

February
  24, 2006Coleman H. Peterson/s/ DALLEN W. PETERSON

Director

February
  24, 2006Dallen W. Peterson/s/ J. PATRICK SPAINHOUR

Director

February
  24, 2006J. Patrick Spainhour/s/ DAVID K. WESSNER

Director

February
  24, 2006David K. Wessner47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

To the Board of Directors and
Shareholders of 
The ServiceMaster Company
Downers Grove, Illinois

We have audited the
consolidated financial statements of The ServiceMaster Company and subsidiaries
(the Company) as of December 31, 2005 and 2004, and for each of the three
years in the period ended December 31, 2005, managements assessment of the
effectiveness of the Companys internal control over financial reporting as of
December 31, 2005, and the effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, and have issued our reports
thereon dated February 27, 2006; such consolidated financial statements and
reports are included elsewhere in this Form 10-K.  Our audits also included the consolidated financial statement
schedule of the Company listed in Item 15.
This schedule is the responsibility of the Companys management.  Our responsibility is to express an opinion
based on our audits.  In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

/s/ Deloitte & Touche LLP
Chicago, Illinois 
February 27, 2006



48

SCHEDULE IITHE SERVICEMASTER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

Balance at
  Beginning of 
  Period

Additions
  Charged to
  Costs and
  Expenses

Deductions (1)

Balance at
  End of PeriodAS OF
  AND FOR THE YEAR ENDING DECEMBER 31, 2005Continuing
  Operations -Allowance for
doubtful accountsAccounts
receivable

$
19,526

$
42,574

$
45,644

$
16,456Notes
receivable


2,213


307


1,274


1,246Reserves
  related to strategic actions in the fourth quarter of 2001 (2)


6,795


1,250


700


7,345Remaining
  liabilities from discontinued operationsLandCare
Construction


4,492


985


2,365


3,112LandCare
utility line clearing business


6,616


(535
)

2,843


3,238Certified
Systems, Inc. and other


8,485


2,526


1,325


9,686International
businesses


11,000


(11,000
)




AS OF AND FOR THE YEAR ENDING DECEMBER
  31, 2004Continuing Operations -Allowance for
doubtful accountsAccounts
receivable

$
19,770

$
42,133

$
42,377

$
19,526Notes
receivable


3,149


557


1,493


2,213Reserves
  related to strategic actions in the fourth quarter of 2001 (2)


10,786


(2,319
)

1,672


6,795Remaining
  liabilities from discontinued operationsLandCare
Construction


7,152


2,021


4,681


4,492LandCare
utility line clearing business


9,011


1,283


3,678


6,616Certified
Systems, Inc. and other


11,307


176


2,998


8,485International
businesses


21,306


(9,151
)

1,155


11,000AS OF AND FOR THE YEAR ENDING DECEMBER
  31, 2003Continuing
  Operations -Allowance for
doubtful accountsAccounts
receivable

$
20,729

$
36,950

$
37,909

$
19,770Notes
receivable


3,140


1,759


1,750


3,149Reserves
  related to strategic actions in the fourth quarter of 2001 (2)


15,494


(1,300
)

3,408


10,786Remaining
  liabilities from discontinued operationsLandCare
Construction


13,974





6,822


7,152LandCare
utility line clearing business


6,393


2,803


185


9,011Certified
Systems, Inc. and other


15,155





3,848


11,307International
businesses


31,148


1,000


10,842


21,306Other


636





636


(1)
Deductions in the allowance
  for doubtful accounts for accounts and notes receivable reflect write-offs of
  uncollectible accounts. Deductions for the remaining items reflect cash
  payments.(2)
Includes accruals for
  residual value guarantees on leased properties, severance for former
  executives and terminated employees and transaction and other costs.49

Exhibit Index

Description of Index

3(i)
  Amended
  and Restated Certificate of Incorporation, amended as of May 9, 2005, is
  incorporated by reference to Exhibit 3(i) to the registrants Current Report
  on Form 8-K dated May 9, 2005 (File No. 1-14762) (the 2005 8-K).3(ii)
  Bylaws,
  amended as of May 9, 2005, are incorporated by reference to Exhibit 3(ii) to
  the 2005 8-K.4.1
  Shareholder
  Rights Agreement between The ServiceMaster Company and the Harris Trust and
  Savings Bank, as adopted on December 12, 1997, is incorporated by reference
  to Exhibit 3 to ServiceMaster Limited Partnerships Current Report on Form
  8-K dated December 23, 1997 (File No. 1-09378).4.2
  First
  Amendment to Shareholders Rights Agreement between The ServiceMaster Company
  and Harris Trust and Savings Bank, is incorporated by reference to Exhibit
  4.1 to the registrants Current Report on Form 8-K dated February 24, 2005
  (File No. 1-14762).4.3
  Indenture
  dated as of August 15, 1997 between The ServiceMaster Company and the Harris
  Trust and Savings Bank, as trustee, is incorporated by reference to Exhibit
  4.1 to the registrants Registration Statement on Form S-3 (File No.
  333-32167) (the 1997 S-3).4.4
  First
  Supplemental Indenture dated as of August 15, 1997 between The ServiceMaster
  Company and the Harris Trust and Savings Bank, as trustee, is incorporated by
  reference to Exhibit 4.4 to the registrants Annual Report on Form 10-K for
  the year ended December 31, 1997 (File No. 1-14762) (the 1997 10-K).4.5
  Second
  Supplemental Indenture dated as of January 1, 1998 between The ServiceMaster
  Company and the Harris Trust and Savings Bank, as trustee, is incorporated by
  reference to Exhibit 2 to the registrants Current Report on Form 8-K dated
  February 26, 1998 (File No. 1-14762).4.6
  Third
  Supplemental Indenture dated as of March 2, 1998 between The ServiceMaster
  Company and the Harris Trust and Savings Bank, as trustee, is incorporated by
  reference to Exhibit 4.3 to the registrants Current Report on Form 8-K dated
  February 27, 1998 (File No. 1-14762) (the 1998 8-K).4.7
  Fourth
  Supplemental Indenture dated as of August 10, 1999 between The ServiceMaster
  Company and the Harris Trust and Savings Bank, as trustee, is incorporated by
  reference to Exhibit 3 to the registrants Current Report on Form 8-K dated
  August 16, 1999 (File No. 1-14762) (the 1999 8-K).4.8
  Indenture
  dated as of November 18, 1999 between The ServiceMaster Company and the
  Harris Trust and Savings Bank, as trustee, is incorporated by reference to
  Exhibit 4.16 to the registrants Registration Statement on Form S-3 (File No.
  333-91381), filed on November 19, 1999.4.9
  First
  Supplemental Indenture dated as of April 4, 2000 between The ServiceMaster
  Company and Harris Trust and Savings Bank, as trustee, is incorporated by
  reference to Exhibit 4.2 to the registrants Quarterly Report on Form 10-Q
  for the quarter ended March 31, 2000 (File No. 1-14762) (the 2000 10-Q).4.10
  Forms
  of 6.95% Note due August 14, 2007 and 7.45% Note due August 14, 2027 are
  incorporated by reference to Exhibit 4.2 to the 1997 S-3.4.11
  Form
  of 7.10% Note due March 1, 2018 is incorporated by reference to Exhibit 4.1
  to the 1998 8-K.4.12
  Form
  of 7.25% Note due March 1, 2038 is incorporated by reference to Exhibit 4.2
  to the 1998 8-K.4.13
  Form
  of 7.875% Note due August 15, 2009 is incorporated by reference to Exhibit 4
  to the 1999 8-K.4.14
  Form
  of 7.875% Note due August 15, 2009 is incorporated by reference to Exhibit 5
  to the 1999 8-K.4.15
  $500,000,000
  Credit Agreement dated as of May 19, 2004 among The ServiceMaster Company,
  the lenders, JPMorgan Chase Bank and Bank of America, N.A. as syndication
  agents, SunTrust Bank, as administrative agent, and U.S. Bank and Wachovia
  Bank, N.A. as documentation agents is incorporated by reference to Exhibit
  4.1 to the registrants Current Report on Form 8-K dated September 20, 2004
  (File No. 1-14762).4.16
  Amendment  No. 1 dated as of May 6, 2005 to  $500,000,000  Credit Agreement
dated
  as of May 19,  2004 among The  ServiceMaster Company,  the
  lenders,  JPMorgan  Chase Bank,  N.A. and Bank of America, N.A.
  as syndication agents, SunTrust Bank as administrative agent, and U.S.
  Bank National Association and Wachovia Bank, N.A. as documentation agents, is
  incorporated by reference to Exhibit 4.1 to the registrants Current Report
  on Form 8-K dated May 12, 2005 (File No. 1-14762).10.1*
  Senior
  Executive Ownership Election Plan, as approved by the registrants Board of
  Directors on December 10, 1999, is incorporated by reference to Exhibit 10.5
  to the registrants50

Exhibit Index

Description of Index

Annual
  Report on Form 10-K for the year ended December 31, 1999 (File No. 1-14762).10.2*
  10-Plus
  Plan, as amended September 3, 1991, is incorporated by reference to Exhibit
  10.21 to the ServiceMaster Limited Partnership Annual Report on Form 10-K for
  the year ended December 31, 1991 (File No. 1-09378) (the 1991 10-K).10.3*
  Form
  of Option Agreement for the 10-Plus Plan, as amended September 3, 1991, is
  incorporated by reference to Exhibit 10.22 to the 1991 10-K.10.4*
  1994
  Non-Employee Directors Share Option Plan is incorporated by reference to
  Exhibit 4.2 to the ServiceMaster Limited Partnership Registration Statement
  on Form S-8 (File No. 33-55761), filed on October 4, 1994 (the 1994 S-8).10.5*
  Form
  of Option Agreement for the 1994 Non-Employee Director Share Option Plan is
  incorporated by reference to Exhibit 4.3 to the 1994 S-8.10.6*
  1997
  Share Option Plan is incorporated by reference to Exhibit 10.28 to the
  ServiceMaster Limited Partnership Annual Report on Form 10-K for the year
  ended December 31, 1996 (File No. 1-09378) (the 1996 10-K).10.7*
  Form
  of Option Agreement for the 1997 Share Option Plan is incorporated by
  reference to Exhibit 10.29 to the 1996 10-K.10.8*
  1998
  Equity Incentive Plan is incorporated by reference to Exhibit 10.15 to the
  1997 10-K.10.9*
  Form
  of Option Agreement for the 1998 Equity Incentive Plan (Non-Qualifying Stock
  Options) is incorporated by reference to Exhibit 10.20 to the 1997 10-K.10.10*
  Form
  of Option Agreement for the 1998 Equity Incentive Plan (Incentive Stock
  Options) is incorporated by reference to Exhibit 10.21 to the 1997 10-K.10.11*
  1998
  Non-Employee Directors Discounted Stock Option Plan is incorporated by
  reference to Exhibit 10.21 to the 1997 10-K.10.12*
  1998
  Long-Term Performance Award Plan is incorporated by reference to Exhibit
  10.22 to the 1997 10-K.10.13*
  2000
  Equity Incentive Plan is incorporated by reference to Exhibit 4.4 to the registrants
  Registration Statement on Form S-8 (File No. 333-42680), filed on July 31,
  2000 (the 2000 S-8).10.14*
  Form
  of Option Agreement for the 2000 Equity Incentive Plan is incorporated by
  reference to Exhibit 10.17 to the registrants Annual Report on Form 10-K for
  the year ended December 31, 2001 (File No. 1-4762) (the 2001 10-K).10.15*
  Form
  of Restricted Stock Award Agreement for the 2000 Equity Incentive Plan is
  incorporated by reference to Exhibit 10.31 to the 2001 10-K.10.16*
  WeServeHomes.com 2000 Stock Option/Stock Issuance
  Plan is incorporated by reference to Exhibit 10.21 to the registrants Annual
  Report on Form 10-K for the year ended December 31, 2000 (File No. 1-14762)
  (the 2000 10-K).10.17*
  Form of Stock Option Agreement for the
  WeServeHomes.com 2000 Stock Option/Stock Issuance Plan is incorporated by
  reference to Exhibit 10.22 to the 2000 10-K.10.18*
  Form of Stock Purchase Agreement for the
  WeServeHomes.com 2000 Stock Option/Stock Issuance Plan is incorporated by
  reference to Exhibit 10.23 to the 2000 10-K.10.19*
  2001 Directors Stock Plan, as amended and restated
  effective January 24, 2003, is incorporated by reference to Exhibit 10.20 to
  the registrants Annual Report on Form 10-K for the year ended December 31,
  2002 (File No. 1-14762) (the 2002 10-K).10.20*
  Form
  of Option Agreement for the 2001 Directors Stock Plan is incorporated by
  reference to Exhibit 4.4 to the registrants Registration Statement on Form
  S-8 (File No. 333-65520), filed on July 20, 2001.10.21*
  Corporate
  Performance Plan, formerly known as the 2001 Long-Term Performance Award
  Plan, as amended March 16, 2001, is incorporated by reference to Exhibit 10.2
  to the registrants Quarterly Report on Form 10-Q for the quarter ended March
  31, 2001 (File No. 1-14762).10.22*
  Form
  of Change in Control Severance Agreement is incorporated by reference to
  Exhibit 10.30 to the 2001 10-K.10.23*
  ServiceMaster
  2003 Equity Incentive Plan is incorporated by reference to Exhibit 4.6 to the
  registrants Registration Statement on Form S-8 (File No. 333-106365), filed
  on June 23, 2003.10.24*
  Form
  of Stock Option Agreement for the ServiceMaster 2003 Equity Incentive Plan is
  incorporated by reference to Exhibit 10.24 to the registrants Annual Report
  on Form 10-K for the year ended December 31, 2003 (File 1-14762) (the 2003
  10-K).10.25*
  Form
  of Restricted Stock Award Agreement for the ServiceMaster 2003 Equity
  Incentive Plan is incorporated by reference to Exhibit 10.25 to the 2003
  10-K.51

Exhibit Index

Description of Index

10.26*
  Form
  of Stock Appreciation Right Agreement for the ServiceMaster 2003 Equity
  Incentive Plan is incorporated by reference to Exhibit 10.26 to the 2003
  10-K.10.27*
  2002
  Directors Deferred Fees Plan, effective October 25, 2002, is incorporated by
  reference to Exhibit 10.35 to the 2002 10-K.10.28*
  ServiceMaster
  2004 Employee Stock Purchase Plan is incorporated by reference to Exhibit 4.5
  to the registrants Registration Statement on Form S-8 (File No. 333-115972),
  filed on May 28, 2004.10.29*
  ServiceMaster
  Deferred Compensation Plan, as amended and restated effective January 1,
  2005, is incorporated by reference to Exhibit 10.1 to the registrants
  Current Report on Form 8-K dated December 14, 2005.10.30*
  Stock Option Agreement dated as of January 9,
  2001 between The ServiceMaster Company and Jonathan P. Ward is incorporated
  by reference to Exhibit 10.20 to the 2000 10-K.10.31*
  Stock
  Option Agreement dated as of February 8, 2002 between The ServiceMaster
  Company and Jonathan P. Ward is incorporated by reference to Exhibit 10.32 to
  the 2003 10-K.10.32*
  Restricted
  Stock Unit Award Agreement dated as of December 18, 2003 between The
  ServiceMaster Company and Jonathan P. Ward is incorporated by reference to
  Exhibit 10.33 to the 2003 10-K.10.33*
  Employment
  Agreement dated as of April 1, 2002 between The ServiceMaster Company and
  Mitchell T. Engel is incorporated by reference to Exhibit 10.25 to the 2002
  10-K.10.34*
  Employment
  Agreement dated as of January 1, 2004 between The ServiceMaster Company and
  Ernest J. Mrozek is incorporated by reference to Exhibit 10.38 to the 2003
  10-K.10.35*
  Employment
  Agreement dated as of November 1, 2004 between The ServiceMaster Company and
  Jonathan P. Ward is incorporated by reference to Exhibit 10.1 to the
  registrants Current Report on Form 8-K dated November 3, 2004 (File No.
  1-14762) (the 2004 8-K).10.36*
  Restricted
  Stock Unit Award Agreement dated as of November 1, 2004 between The
  ServiceMaster Company and Jonathan P. Ward is incorporated by reference to
  Exhibit 10.2 to the 2004 8-K.14
  Financial
  Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 is
  incorporated by reference to Exhibit 14 to the 2003 10-K.21
  Subsidiaries
  of the registrant.23
  Consent
  of Deloitte & Touche LLP.31.1
  Certification
  of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a), as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
  Certification
  of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a), as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
  Certification
  of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18
  of the United States Code, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.32.2
  Certification
  of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18
  of the United States Code, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.*  Indicates compensatory plan, contract or
  arrangement.  Filed herewith52