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|UNITED STATES                     
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|SECURITIES AND EXCHANGE COMMISSION
|Washington, D.C. 20549            
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|FORM 10-K                         
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|x

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|For the fiscal year ended December 31, 2006
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|OR                                         

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|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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|Commission File Number 1-14762                        
|THE 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.)
|                                                                    |                                         

|860 Ridge Lake Boulevard, Memphis, Tennessee 38120          
|------------------------------------------------------------
|(Address of principal executive offices, including zip code)
|                                                            
|(901) 597-1400                                              
|(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 registered
|--------------------------------------- |  | --------------------------------------
|                                        |  |                                       
|Common Stock, $0.01 par value per share |  | New York Stock Exchange               

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|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                                                                                 
|YesxNoo                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                        
|Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                                                                                                                                                                                                                            
|YesoNox                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                        
|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.
|YesxNoo                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                        
|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 filerxAccelerated fileroNon-accelerated filero                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                        
|Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                                                                                                                                                                                                                                                 
|YesoNox                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                        
|The aggregate market value of shares of common stock held by non-affiliates of the registrant as of June 30, 2006 was $2,971,030,007                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                        
|The number of shares of the registrants common stock outstanding as of February 22, 2007 was 291,736,000                                                                                                                                                                                                                                               
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|DOCUMENTS INCORPORATED BY REFERENCE                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                        
|Certain parts of the registrants Definitive Proxy Statement for the 2007 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.                                                                                                                                                                                              

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|THE SERVICEMASTER COMPANY 
|--------------------------
|ANNUAL REPORT ON FORM 10-K
|                          
|TABLE OF CONTENTS         
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|**PART I**    |    |                                                                                                                    |    | 
|------------- | -- | ------------------------------------------------------------------------------------------------------------------ | -- | 
|             
|Item 1.       |    | Business                                                                                                           | 3  | 
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|Item 1A.      |    | Risk Factors                                                                                                       | 6  | 
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|Item 1B.      |    | Unresolved Staff Comments                                                                                          | 8  | 
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|Item 2.       |    | Properties                                                                                                         | 8  | 
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|Item 3.       |    | Legal Proceedings                                                                                                  | 8  | 
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|Item 4.       |    | Submission of Matters to a Vote of Security Holders                                                                | 9  | 
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|**PART II**   |    |                                                                                                                    |    | 
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|Item 5.       |    | Market for Registrants Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities | 9  | 
|             
|Item 6.       |    | Selected Financial Data                                                                                            | 11 | 
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|Item 7.       |    | Managements Discussion and Analysis of Financial Condition and Results of Operations                              | 12 | 
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|Item 7A.      |    | Quantitative and Qualitative Disclosures about Market Risk                                                         | 24 | 
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|Item 8.       |    | Financial Statements and Supplementary Data                                                                        | 26 | 
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|Item 9.       |    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                               | 51 | 
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|Item 9A.      |    | Controls and Procedures                                                                                            | 51 | 
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|Item 9B.      |    | Other Information                                                                                                  | 51 | 
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|**PART III**  |    |                                                                                                                    |    | 
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|Item 10.      |    | Directors, Executive Officers and Corporate Governance                                                             | 53 | 
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|Item 11.      |    | Executive Compensation                                                                                             | 56 | 
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|Item 12.      |    | Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters               | 56 | 
|              |    |                                                                                                                    |    | 
|Item 13.      |    | Certain Relationships and Related Transactions, and Director Independence                                          | 56 | 
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|Item 14.      |    | Principal Accounting Fees and Services                                                                             | 57 | 
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|**PART IV**   |    |                                                                                                                    |    | 
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|Item 15.      |    | Exhibits and Financial Statement Schedules                                                                         | 58 | 
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|Signatures    | 59 |                                                                                                                   
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|Exhibit Index | 62 |                                                                                                                   

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|PART 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, disaster response and reconstruction, cleaning and disaster restoration,
house cleaning, furniture repair, and home inspection. As of December 31, 2006, ServiceMaster provided
these services through a network of approximately 5,500 company-owned locations and franchise licenses
operating under the following leading brands: TruGreen LawnCare, TruGreen LandCare, Terminix, American
Home Shield, InStar, Merry Maids, ServiceMaster Clean, Furniture Medic and AmeriSpec. 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 LawnCare, TruGreen LandCare;
Terminix; American Home Shield; and Other Operations and Headquarters. All ServiceMaster subsidiaries
are wholly owned, except for The Terminix International Company L.P., in which a third party is a
Class B limited partner. The financial information for each operating segment for 2006, 2005 and
2004 is contained in Part II, Item 8 of this Form 10-K.
STRATEGIC ALTERNATIVES
On November 28, 2006, ServiceMaster announced that its Board of Directors has decided to explore strategic
alternatives designed to maximize value for shareholders. The Board has retained Morgan Stanley and
Goldman Sachs as its financial advisors and Sidley Austin as its legal advisor to facilitate the
process. There can be no assurance that any particular alternative will be pursued or any transaction
will occur, or on what terms. ServiceMaster does not plan to release additional information about
the status of the review of strategic alternatives until a definitive agreement is entered into or
the process is otherwise completed.
SERVICES
The following table shows the percentage of ServiceMasters consolidated revenue from continuing
operations derived from each of ServiceMasters reportable segments in the years indicated:
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|Segment                             | 2006 |    | 2005 |  | 2004 |   
|----------------------------------- | ---- | -- | ---- |  | ---- | --
|
|TruGreen LawnCare                   |      | 31 | %    |  |      | 32
|TruGreen LandCare                   |      | 13 | %    |  |      | 14
|Terminix                            |      | 31 | %    |  |      | 33
|American Home Shield                |      | 16 | %    |  |      | 16
|Other Operations and
  Headquarters |      | 9  | %    |  |      | 5 

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|TruGreen LawnCare Segment
The TruGreen LawnCare segment provides lawn care services primarily under the TruGreen LawnCare brand
name. Revenues derived from the TruGreen LawnCare segment constituted 31%, 32% and 32% of the revenue
from continuing operations of the consolidated ServiceMaster enterprise in 2006, 2005 and 2004, respectively.
The TruGreen LawnCare business is seasonal in nature. Weather conditions, such as a drought, or snow
in the late spring or fall, can affect the demand for lawn care services and may result in a decrease
in revenues or an increase in costs.
TruGreen LawnCare is the leading provider of lawn care services in the United States serving both residential
and commercial customers. As of December 31, 2006, TruGreen LawnCare provided these services in 43
states and the District of Columbia through 209 company-owned locations and 55 franchised locations.
As of December 31, 2006, TruGreen LawnCare also provided lawn care services through a subsidiary
in Canada and has licensing arrangements with licensees who provide these services in Japan and the
United Kingdom.
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 13%, 14% and
14% of the revenue from continuing operations of the consolidated ServiceMaster enterprise in 2006,
2005 and 2004, respectively. The TruGreen LandCare business is seasonal in nature. Weather conditions
such as a drought can affect the demand for landscape maintenance services, or declines in the volume
of snow fall can affect the level of snow removal 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, 2006, TruGreen LandCare provided these services
in 43 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 31%, 33% and 33% of the revenue from
continuing operations of the consolidated ServiceMaster enterprise in 2006, 2005 and 2004, respectively.
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.
Terminix is the leading provider of termite and pest control services in the United States serving
both residential and commercial customers. As of December 31, 2006, Terminix provided these services
in 47 states and the District of Columbia through 394 company-owned locations and 134 franchised
locations. As of December 31, 2006, Terminix also provided termite and pest control services through
a subsidiary in Mexico and has licensing arrangements whereby licensees provide

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|these services in 10 other countries, primarily in Japan, 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%, 16% and 16% of
the revenue from continuing operations of the consolidated ServiceMaster enterprise in 2006, 2005
and 2004, respectively. 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 are highest in the summer months, especially during periods
of unseasonably warm temperatures.
American Home Shield. American Home Shield is the 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 other covered
appliances that break down due to normal wear and tear and services those contracts through independent
repair contractors. As of December 31, 2006, 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, 2006, AmeriSpec provided these services in 46 states and the District
of Columbia through one company-owned location and 210 franchised locations. AmeriSpec also provided
home inspection services through a subsidiary in Canada.
Other Operations and Headquarters Segment
The Other Operations and Headquarters segment provides disaster response and reconstruction services
under the InStar brand name, 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 and Headquarters segment constituted
9%, 5% and 5% of the revenue from continuing operations of the consolidated ServiceMaster enterprise
in 2006, 2005 and 2004, respectively.
InStar. InStar is a leading direct provider of disaster response and reconstruction services for customers
in the United States. As of December 31, 2006, InStar provided these services in 33 states and the
District of Columbia through 21 company-owned locations and had no international operations.
ServiceMaster Clean. ServiceMaster Clean is a leading franchisor in the residential and commercial disaster restoration
and cleaning field in the United States. As of December 31, 2006, ServiceMaster Clean provided these
services in all 50 states and the District of Columbia through 3,211 franchise licenses. As of December
31, 2006, 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 seven 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, 2006, these services were provided in 48 states and the District of Columbia through
72 company-owned locations and 767 franchise licenses. As of December 31, 2006, 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 six 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, 2006, Furniture Medic provided these
services in 49 states and the District of Columbia through 318 franchise licenses. As of December
31, 2006, 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 Saudi Arabia.
ACQUISITIONS AND DISPOSITIONS
Purchase
of InStar Services Group. In February 2006, ServiceMaster acquired InStar, a leading provider of disaster response and reconstruction
services for approximately $85 million in cash.
Sales
of American Residential Services (ARS) and American Mechanical Services (AMS).  In the third quarter of 2006, ServiceMaster completed the sales of ARS and AMS generating gross
cash proceeds of approximately $115 million, which was used to reduce outstanding debt balances.
The ARS and AMS operations provided heating, ventilation, air conditioning (HVAC), plumbing and electrical
installation and repair services.
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
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|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.
As of December 31, 2006, the Business Support Center is headquartered in Downers Grove, Illinois.
In October 2006, the Board of Directors of the Company approved a plan to consolidate during 2007
the Business Support Center into the Companys operations support center in Memphis, Tennessee.
SERVICE MARKS, TRADEMARKS AND TRADE NAMES
ServiceMaster holds various service marks, trademarks and trade names, such as Terminix, TruGreen LawnCare,
TruGreen LandCare, Merry Maids, ServiceMaster Clean, American Home Shield, AmeriSpec, InStar and
Furniture Medic, 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 96 other countries and are renewed at each registration expiration date.
FRANCHISES
Franchises are important to TruGreen LawnCare, Terminix, ServiceMaster Clean, Merry Maids, AmeriSpec
and Furniture Medic businesses. Total franchise fees (initial and recurring) represented 3.5%, 3.4%
and 3.3% of consolidated revenue in 2006, 2005 and 2004, respectively. Related franchise operating
expenses were 2.2%, 2.1% and 2.1% of consolidated operating expenses in 2006, 2005 and 2004, respectively.
Total franchise related profits comprised 11.3%, 10.5% and 10.3% of consolidated operating income
before headquarters overhead and restructuring charges in 2006, 2005 and 2004, respectively. Franchise
agreements made in the course of these businesses are generally for a term of five to ten years.
The majority of these franchise agreements are renewed prior to expiration. The majority of international
licenses are for ten year terms.
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 and speed
of service, name recognition and reputation, pricing and promotions, customer satisfaction, brand
awareness, professional sales forces, and reputation/referrals. 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. Scotts continues to expand towards a more
national footprint.
Landscape Maintenance Services. Competition in the market for commercial 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 (Brickman and Valley Crest) 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.
Ecolab competes nationally in the commercial pest control segment.
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.
Residential & Commercial 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.
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.
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.
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|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 (e.g., the Clean Air Act) and
employee benefits (e.g., the Consolidated Omnibus Budget Reconciliation Act of 1985 and the Employee
Retirement Income Security Act of 1974). The TruGreen LawnCare, TruGreen LandCare and Terminix 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 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 LawnCare, and, to a lesser extent, ServiceMasters other operating segments,
to seek additional marketing methods and channels.
Franchise Matters
TruGreen LawnCare, 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 LawnCare 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 Clean Air Act, the Emergency
Planning and Community Right-to-Know Act of 1986, the Oil Pollution Act of 1990 and the Clean Water
Act of 1977. ServiceMaster cannot predict the effect on its operations of possible future environmental
legislation or regulations. During 2006, there were no material capital expenditures for environmental
control facilities, and no such material expenditures are anticipated in 2007. In the first quarter
of 2006, Terminix recorded a $2 million charge for costs associated with site remediation at two locations.
EMPLOYEES
On December 31, 2006, ServiceMaster had a total of approximately 32,000 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.
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
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|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; and disaster restoration services.
For example, droughts and late spring or fall snow storms 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; and cooler temperatures could impede the development of the termite
swarm and lead to lower termite swarm activity.
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 and speed 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, retain, and train 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 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 2006.
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 tuck-in acquisitions in existing service lines and may include acquisitions
in new service lines (e.g., InStar). 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 and consumer confidence affect the demand for ServiceMasters
services.
Changes in general economic conditions and consumer confidence 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 confidence and related spending
levels and, in turn, reduce the demand for ServiceMasters services.
Consolidation of corporate offices could affect financial performance.
ServiceMasters future success and financial performance depends substantially on its ability
to attract and retain skilled employees and senior executive leaders within the Company. On October
30, 2006, the Company announced that it will consolidate its corporate headquarters into its operations
support center in Memphis, Tennessee. The Companys current headquarters in Downers Grove, Illinois,
will be closed with the transition to Memphis scheduled to be completed by November, 2007. ServiceMaster
could experience difficulty in immediately filling job vacancies created by employees and executives
deciding not to relocate to Memphis, or effectively training and transitioning the new employees,
which could affect ServiceMasters success and financial performance until replacements are
hired and trained.
Compliance with subsidiary environmental plan could affect financial performance.
The plea agreement entered into between InStar Services Group, Inc. and the United States Attorneys
Office for the Southern District of Florida will require ongoing monitoring and compliance by InStar
for up to
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7
|-



|five years, violation of which could potentially result in further fines, loss of licenses, loss of
certain federal grants and procurement contracts, and possible criminal sanctions. As part of InStars
plea agreement with the Untied States Attorneys Office, InStar has agreed to implement a comprehensive
environmental compliance plan. The environmental compliance plan requires, among other things, mandatory
training for all InStar employees on the proper identification, handling and management of hazardous
substances, internal monitoring and audits of the compliance plan, and third-party auditing and reporting
of compliance with the plan. If the compliance plan is not fulfilled and the plea agreement is violated,
potential risks to the Company include additional and substantial fines, expanded investigation and
prosecution by the United States Attorneys Office, loss of certain key contractor licenses
currently held by InStar, loss of federal grants and procurement contracts for InStar, negative media
exposure and damage to the Companys reputation that could result in loss of business for InStar
and other business units within the Company, and possible criminal sanctions.
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;       
| | - | ----------------------------------------------------------------------------------
| |   |                                                                                   
| |  | 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 office space to accommodate personnel from the Business Support Center presently
located in Downers Grove, Illinois. ServiceMaster has exercised an option to terminate the lease
as of June 30, 2008 in connection with the consolidation of corporate offices in Memphis, Tennessee.
ServiceMaster also leases office space in Memphis as described below to accommodate Memphis-based
personnel from the Business Support Center. ServiceMaster believes that these office facilities are
suitable and adequate to support the Business Support Centers current needs.
OPERATING COMPANIES
The headquarters for TruGreen LawnCare, TruGreen LandCare and Terminix, 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. In addition, ServiceMaster leases space
for a call center located at 6399 Shelby View 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
located in Memphis are suitable and adequate to support both the current needs of its operating companies
in the Memphis area and may be adequate to support the additional needs resulting from the consolidation
of offices in Memphis.
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    | Owned
    Facilities |    | Leased
      Facilities
|-------------------- | -------------------- | -- | -----------------------
|                    
|TruGreen LawnCare    |                      | 5  |                        
|TruGreen LandCare    |                      | 2  |                        
|Terminix             |                      | 11 |                        
|American Home Shield |                      | 1  |                        
|ServiceMaster Clean  |                      | 0  |                        
|Merry Maids          |                      | 0  |                        
|InStar               |                      | 0  |                        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 3. LEGAL PROCEEDINGS
U. S. Environmental Protection Agency (EPA) Subpoena For Documents And Federal Grand Jury
Investigation of InStar Services Group, LLC
On November 8, 2006, InStar Services Group entered into a plea agreement with the United States
Attorneys Office for the Southern District of Florida requiring that InStar implement an environmental
compliance plan, be placed on probation for a period of up to five years, pay a fine of $0.5 million
for each count, and make a contribution of $2.0 million to the Florida Environmental Task Force Trust
Fund. Under the plea agreement, the Company has agreed to take all reasonable steps necessary to
ensure the implementation and enforcement of the environmental compliance plan by InStar.

|8
|-



|Since the conduct of InStar that was the subject of the plea agreement occurred prior to the Companys
acquisition of InStar, the Company pursued indemnification from the sellers of InStar for its
damages and expenses including fines, contributions and attorneys fees. On December
19, 2006, the Company, InStar and the sellers entered into a settlement agreement and mutual
release. The sellers paid InStar $5 million in full settlement of all claims of InStar
and/or the Company arising from the sale of InStar to the Company.
New York Department of Environmental Conservation Notice of Violation to Terminix
On July 21, 2006, the New York State Department of Environmental Conservation, Division of Legal Affairs,
Region 4 (NYDEC), sent to Terminix a certified letter enclosing a Notice of Hearing,
Pre-Hearing Conference and Complaint, naming as Respondents Terminix and seven individuals employed
by four Terminix branches located in New York. The Complaint alleges various violations by the Respondents
of Article 33 of the Environmental Conservation Law of the State of New York and Part 20 et seq.
of Title 6 of the Official Compilation of Codes, Rules and Regulations and seeks a fine, the submission
of a plan by the Respondents through a third-party consultant for evaluating purported training,
record-keeping, employee license certifications and pesticide label distribution issues at four New
York branches and the submission of a plan to address any issues identified during such evaluation.
On September 29, 2006, Terminix filed on behalf the Respondents an Answer and Affirmative Defenses.
Terminix has met with the NYDEC since the filing of its Answer and Affirmative Defenses
to discuss the resolution of the matter and has provided the NYDEC with settlement proposals. Following
receipt of Terminixs most recent submittal addressing issues raised by the NYDEC in its
Complaint, on January 29, 2007, the NYDEC advised Terminix of its desire to begin settlement discussions
with Terminix. On February 7, 2007, the NYDEC and Terminix agreed to a payment of a $150,000 fine,
contingent upon the parties reaching an agreement on future licensing/certification protocols and
consent agreement language. Terminix believes the current reserve recorded for this matter
is appropriate.
New York Department of Environmental Conservation Notice of Violation to TruGreen LawnCare
On or about March 31, 2006, TruGreen LawnCare received a Notice of Violation (NOV) from
the New York Department of Environmental Conservation (NYDEC) alleging 61 violations
of New York pesticide law related to residential lawn applications occurring in New York over
a 6-year period. The alleged violations include applying pesticides without signed contracts, applying
pesticides without providing warning labels, expired applicator licenses, improper posting, undocumented
training records, failing to comply with labeling requirements, improper application, and other,
similar application issues. None of the allegations claim property damage or harm to humans,
wildlife or the environment. After initial discussions between the NYDEC and TruGreen LawnCare, the
NYDEC agreed to drop certain violations from the original NOV. However, new allegations similar
to the original NOV were added in late 2006 and currently there remain 52 alleged violations.
In January of 2007, the NYDEC made an initial civil penalty demand against TruGreen
LawnCare in the amount of $260,000 to resolve these alleged violations and negotiations
are on-going. TruGreen LawnCare believes the current reserve recorded for this matter is adequate.
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 22, 2007, ServiceMasters common stock was held of record by approximately 65,000 persons.
ServiceMaster estimates that approximately 53,000 persons held shares of its common stock in the
names of nominees as of that date.
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:
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|               | 2006  |          | 2005 |  | 2004
|-------------- | ----- | -------- | ---- |  | ----
|              
|              
|               |      
|First Quarter  | **$** | **0.11** |      |  | 0   
|Second Quarter |       | **0.11** |      |  | 0   
|Third Quarter  |       | **0.12** |      |  | 9   
|Fourth Quarter |       | **0.12** |      |  | 9   
|               |      
|               | **$** | **0.46** |      |  | 5   
|               |      
|               |      
|               |       |          |      |  |     

|                     | 2006 |       | 2005 |   | 2004  | 
|-------------------- | ---- | ----- | ---- | - | ----- | 
|
|
|
|First
      Quarter  | $    | 13.62 |      | $ | 11.89 | 
|Second
      Quarter |      | 13.15 |      |   | 10.19 | 
|Third
      Quarter  |      | 11.94 |      |   | 9.66  | 
|Fourth
      Quarter |      | 13.50 |      |   | 10.65 | 
|                     |      |       |      |   |       | 

|9
|-



|In February 2006, ServiceMasters Board of Directors authorized $250 million for share repurchases.
As presented in the following table, there were no share repurchases of ServiceMasters common
stock for the three months ended December 31, 2006 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 | 
|------------------------------------- | 
|
|                                      | 
|October 1-31, 2006                    | 
|                                      | 
|November 1-30, 2006                   | 
|                                      | 
|December 1-31, 2006                   | 
|                                      | 
|Total                                 | 
|                                      | 
|                                      | 
|                                      | 
|                                      | 

|10
|--



|ITEM 6. SELECTED FINANCIAL DATA
Five-Year Financial Summary
|-----------------------------------------------------------

|(In
      thousands, except per share data)                                       | 2006 |           | 2005    |   | 2004      |     | 2003 |           | 2002 |  
|--------------------------------------------------------------------------------- | ---- | --------- | ------- | - | --------- | --- | ---- | --------- | ---- | -
|                                                                                 
|Operating
      Results:                                                          |      |           |         |   |           |     |      |           |      |  
|Operating
      revenue                                                           | $    | 3,429,145 |         | $ | 3,239,478 |     | $    | 3,068,068 |      | $
|Operating
      income (1)                                                        |      | 326,322   |         |   | 340,083   |     |      | 324,308   |      |  
|*Percentage
      of operating revenue*                                           |      | *9.5*     | ***%*** |   | *10.5*    | *%* |      | *10.6*    | *%*  |  
|Non-operating
      expense                                                       |      | 43,693    |         |   | 45,385    |     |      | 53,464    |      |  
|Provision
      (benefit) for income taxes (1), (2)                               |      | 96,061    |         |   | 114,137   |     |      | (45,779   | )    |  
|                                                                                  |      |          
|Income (loss)
      from continuing operations (1), (2)                           |      | 186,568   |         |   | 180,561   |     |      | 316,623   |      |  
|                                                                                  |      |           |         |   |           |     |      |           |      |  
|Income (loss)
      from discontinued operations, net of
        income taxes (1) |      | (16,869   | **)**   |   | 18,364    |     |      | 14,604    |      |  
|                                                                                  |      |          
|Net income
      (loss)                                                           | $    | 169,699   |         | $ | 198,925   |     | $    | 331,227   |      | $
|                                                                                  |      |           |         |   |           |     |      |           |      |  
|Earnings
      (loss) per share:                                                  |      |           |         |   |           |     |      |           |      |  
|Basic                                                                             | $    | 0.59      |         | $ | 0.68      |     | $    | 1.14      |      | $
|Diluted:                                                                          |      |           |         |   |           |     |      |           |      |  
|Income
      (loss) from continuing operations (1), (2)                           | $    | 0.64      |         | $ | 0.61      |     | $    | 1.06      |      | $
|Income
      (loss) from discontinued operations (1)                              |      | (0.06     | **)**   |   | 0.06      |     |      | 0.06      |      |  
|                                                                                  |      |          
|Diluted
      earnings (loss) per share                                           | $    | 0.58      |         | $ | 0.67      |     | $    | 1.11      |      | $
|                                                                                  |      |           |         |   |           |     |      |           |      |  
|Shares used
      to compute basic earnings per share                             |      | 289,765   |         |   | 291,251   |     |      | 290,514   |      |  
|Shares used
      to compute diluted earnings per share                           |      | 299,362   |         |   | 296,807   |     |      | 303,568   |      |  
|                                                                                  |      |           |         |   |           |     |      |           |      |  
|Cash dividends
      per share                                                    | $    | 0.46      |         | $ | 0.44      |     | $    | 0.43      |      | $
|Share price
      range:                                                          |      |           |         |   |           |     |      |           |      |  
|High
      price                                                                  | $    | 13.62     |         | $ | 14.28     |     | $    | 13.87     |      | $
|Low
      price                                                                   | $    | 9.66      |         | $ | 11.69     |     | $    | 10.65     |      | $
|                                                                                  |      |           |         |   |           |     |      |           |      |  
|Financial
      Position:                                                         |      |           |         |   |           |     |      |           |      |  
|Total assets                                                                      | $    | 3,117,463 |         | $ | 3,028,870 |     | $    | 3,140,202 |      | $
|Total liabilities                                                                 |      | 1,928,605 |         |   | 1,874,230 |     |      | 2,048,667 |      |  
|Total debt
      outstanding                                                      |      | 690,422   |         |   | 658,150   |     |      | 805,088   |      |  
|Minority
      interest                                                           |      | 100,000   |         |   | 100,000   |     |      | 100,000   |      |  
|Shareholders
      equity (1), (2)                                               |      | 1,088,858 |         |   | 1,054,640 |     |      | 991,535   |      |  
|                                                                                  |      |           |         |   |          

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2006 results include restructuring charges for severance, as well as costs associated with Project

Accelerate, the Companys initiative to improve the effectiveness and efficiency of its functional

support areas, and accruals for employee retention and severance to be paid in future periods that

are related to the Companys decision to consolidate its corporate headquarters into its operations

support center in Memphis, Tennessee and close its current headquarters in Downers Grove, Illinois.

The restructuring charges totaled $21.6 million pretax, $6.9 million after-tax and $0.02 per diluted

share. The after-tax impact of the restructuring charges includes approximately $6 million of non-recurring

net operating loss carryforward benefits which became realizable to the Company as a result of
  its
  decision to consolidate its corporate headquarters in Memphis.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | 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 of $292 million pretax, $227 million after-tax, associated with the goodwill and intangible
  assets of certain sold operations and this charge is classified within the financial statement caption
discontinued operations.                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | In the fourth quarter of 2006, the Company recorded a reduction in income tax expense of $7 million
  ($0.02 per diluted share) resulting from the favorable resolution of state tax items related to a
  prior non-recurring transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Related to a comprehensive agreement with the Internal Revenue Service regarding its examination of
  the Companys federal income taxes through the year 2002, 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 $9 million related to
  discontinued operations ($.03 per diluted share). See the Income Taxes note in the Notes
  to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                     

|11
|--



|Item 7.  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Consolidated Review of 2006 and Outlook for 2007
ServiceMaster (the Company) is encouraged by its strong finish to 2006. For the year, the
Company achieved revenue and earnings growth despite an unusual combination of challenges it faced
during the year. These challenges included a very weak termite swarm, a significant softening in
home resales, rapid increases in fuel, health care and interest costs, and the impact on American
Home Shields claims costs of new energy efficiency legislation. The Company overcame these
challenges with steady and significant gains in customer retention, continued sharp improvement in
the development of prior year safety claims, and savings from Project Accelerate and other cost control
initiatives.
The Company is encouraged by improvement in certain key fundamentals of its businesses. Customer retention,
a top priority across the company, improved in every business unit. In 2006, the Company expanded
its sales channels, with 600,000 customer contracts coming from direct mail. The Company gained over
100,000 customers from leads generated from the Internet. American Home Shield launched its new business
partnership with Realogy, the worlds largest real estate brokerage firm, which includes the
Coldwell Banker, Century 21 and ERA brands. In addition, the Company successfully divested American
Residential Services and American Mechanical Services, to concentrate its resources and management
focus on a stronger portfolio of services.
On November 28, 2006, the Company announced that its Board of Directors has decided to explore strategic
alternatives designed to maximize value for shareholders. The Board has retained Morgan Stanley and
Goldman Sachs as its financial advisors and Sidley Austin as its legal advisor to facilitate the
process. There can be no assurance that any particular alternative will be pursued or any transaction
will occur, or on what terms.
The Companys plan for 2007 focuses on four key areas:
(1) The Companys relationships with customers  The Company is taking action to decrease
churn and increase customer retention. TruGreen LawnCare will continue to rollout additional Lawn
Quality Audits (LQAs) to increase customer satisfaction and retention. The Company has already
seen promising results from this new initiative. Not only is the Company reducing its reliance on
telemarketing, but it is significantly reshaping and repositioning its phone sales to focus on re-engaging
both former and existing customers.
(2) The Companys relationships with associates  The Company is taking action to improve
the recruitment, training and retention of its associates. TruGreen LandCares TruPotential
branch manager training program strives to ensure that the Company will have a consistent level of
skilled managers across its branches. American Home Shields new Customer Service Center Application
equips its associates with the tools and information they need to serve their customers in a way
which is both efficient and more satisfying to the customer on the phone.
(3) Innovation  The Company is emphasizing a genuine service culture to delight its customers
and build lasting relationships. The Company believes that the LQAs at TruGreen LawnCare are
a significant innovation in customer engagement. In addition, the Company believes that Terminixs
introduction of a new Inspection and Protection Plan is a cost-effective approach that will attract
a wide base of new customers, answering their needs in an innovative new way.
(4) Integration and leverage  The Company is redeploying its people and assets to create new
opportunities and more effective ways of doing business. To further utilize the talents of its senior
management team, the Company created two Group President positions. Katrina Helmkamp oversees the
Companys branch businesses: TruGreen LawnCare, TruGreen LandCare, and Terminix. Scott Cromie
oversees the Companys franchise and virtual businesses: American Home Shield, ServiceMaster
Clean, Merry Maids and InStar. The first proof of the power of this integration is the Companys
plan to pilot new shared facilities for TruGreen LawnCare and Terminix pest control branches. The
Company believes this concept will generate operational savings and the opportunity to cross-sell services.
In 2007, the Company will stay focused on increasing the retention of its customers and its associates,
to ensure that it can consistently deliver a satisfying service experience. The Company will reinvest
in the business, particularly in areas that will drive sales and satisfaction. During the Companys
off-season first quarter, incremental investments will be made in people and sales and marketing
programs, which the Company believes will contribute to stronger sales and profits later in the year.
The Company believes that improving momentum in key fundamentals of its businesses, combined with
solid execution of its business plan, should enable it to deliver mid to high single-digit revenue
growth in 2007. The Company expects 2007 earnings per share, before restructuring charges, to be
in the range of $.67 to $.68. Based on the actions the Company is taking in 2007 and plans to take
in the future, the Companys target is to achieve high single-digit revenue growth, and earnings
per share growth progressively increasing to the mid-teen level by 2009, with cash from operations
growing and continuing to substantially exceed net income.
2006 Compared with 2005
Revenue from continuing operations for 2006 was $3.4 billion, a six percent increase over 2005. Approximately
four percent of the increase in revenue resulted from acquisitions, primarily InStar Services Group
(InStar), which was acquired at the end of February 2006.
The Company reported income from continuing operations in 2006 of $187 million and a loss from discontinued
operations of ($17) million. Net income (i.e., from both continuing operations and discontinued operations)
was $170 million in 2006 compared with $199 million in 2005, and total diluted earnings per share
were $.58 in 2006 compared with $.67 in 2005.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
|--



|Diluted earnings per share from continuing operations were $.64 in 2006 compared with $.61 in 2005.
As more fully discussed in the Restructuring Charge section, the diluted earnings per share from
continuing operations for 2006 includes restructuring charges net of related tax benefits of $.02
per share ($22 million pre-tax, $7 million after-tax). Additionally, the 2006 results include a reduction
in income tax expense of $7 million ($0.02 per diluted share) from the favorable resolution in the
fourth quarter 2006 of state tax items related to a prior year non-recurring transaction. Operating
income for 2006, which included $22 million in restructuring charges, was $326 million compared with
$340 million in 2005. The net change in operating income reflects the impact of the restructuring
charges and lower profits in several business segments, which are more fully discussed in the segment
reviews, offset in part by continued favorable trending of prior year insurance claims, lower functional
support costs and solid profit growth at Terminix.
The Company continued to experience significant increases in some of its key factor costs. Unusually
rapid increases in fuel, health care, and interest costs had a combined adverse impact relative to
2005 of approximately $36 million pretax. With respect to fuel, the Companys fleet, which consumes
roughly 30 million gallons annually, continued to be negatively impacted by significant increases
in oil prices. Each year, the Company hedges approximately two-thirds of its estimated annual fuel
usage. Fuel costs, after the impacts of the hedges, increased approximately $13 million pretax in
2006. Based upon the hedges the Company has executed to date for 2007, as well as current Department
of Energy price forecasts, the Company would again expect an incremental adverse impact in 2007,
but at a lower rate of increase of approximately $.01 per share, which is meaningful, but less than
the almost $.03 per share increase experienced in 2006.
Health care costs continued to experience strong inflationary pressures in 2006. In addition, the Company
made incremental investments of approximately $.01 per share in employee health benefits in
2006 as part of its efforts to further enhance employee satisfaction and retention. No similar benefit
enhancement will be required in 2007. In total, health care and related costs increased approximately
$15 million pretax, or $.03 per share, in 2006. For 2007, the Company estimates that it will absorb
approximately $.02 per share of incremental health care costs.
Increases in short term interest rates have adversely impacted the Companys businesses at both
the operating and non-operating income lines by virtue of their effects on variable rate-based fleet
and occupancy leases, as well as floating rate debt and investment income. On a combined basis, interest
rate increases adversely impacted the Companys 2006 results by approximately $8 million pretax.
The Company continued to make strides in reducing the costs that it can more directly control. The
Company has maintained its focus and momentum in driving down safety-related costs. Total safety-related
costs, including the income statement effects of favorable trending of prior year claims, decreased
approximately $14 million pretax, or nearly $.03 per share in 2006. The Company believes there is
opportunity for further improvement in this area and is still well short of its long-term safety
goals. The Company expects continued favorable trending of prior year safety-related claims in 2007;
however at a lower rate than the strong results achieved in 2006. In addition, the Company remains
ahead of schedule with respect to savings from Project Accelerate, the Companys initiative
to improve the effectiveness and efficiency of its functional support areas. In 2006, the Company
realized approximately $.04 per share of net savings, and expects to achieve incremental savings
of $.03 per share in 2007.
Restructuring Charges
The 2006 results include restructuring charges for severance, as well as costs associated with Project
Accelerate and the costs related to the Companys decision to consolidate its corporate headquarters
into its operations support center in Memphis, Tennessee and close its current headquarters in Downers
Grove, Illinois. Combined restructuring charges totaled $21.6 million pretax, $6.9 million after-tax
and $.02 per diluted share in 2006. The after-tax impact of the restructuring charges includes approximately
$6 million of non-recurring net operating loss carryforward benefits which became realizable to the
Company as a result of its decision to consolidate its corporate headquarters in Memphis. These pretax
charges are reported in the Restructuring Charges line in the Consolidated Statements
of Operations and are recorded in the Other Operations and Headquarters business segment.
The Company is tracking ahead of schedule with respect to realizing its previously forecasted savings
from Project Accelerate. The Company remains confident that it will ultimately realize annual pretax
savings in the $25 million to $35 million range, or $.05 to $.07 per share, by 2008. The Company
expects to realize these savings progressively with approximately $.04 per share of net savings having
been realized in 2006. Most of these savings will benefit the selling, general and administrative
line in the statement of operations. Severance and third party professional fees and expenses resulting
from the organizational changes made as part of Project Accelerate and severance costs associated
with the resignation in the second quarter of the Companys former Chief Executive Officer totaled
$11.2 million, substantially all of which was paid by the end of 2006.
In October 2006, the Board of Directors of the Company approved a plan to consolidate the Companys
headquarters into its operations support center in Memphis, Tennessee and close its current headquarters
in Downers Grove, Illinois. The Company believes the consolidation of the Downers Grove support functions
and positions with the operating unit leadership in Memphis will improve the speed and effectiveness
of communications and decision-making. The transition to Memphis is targeted to be completed by November
2007. In connection with the consolidation plan, the Company expects to incur incremental costs in
the range of $30 to $35 million through the end of 2007. Such costs include anticipated employee
retention and severance costs, lease termination costs, and recruiting costs. Almost all such costs
will be cash expenditures. In accordance with U.S. GAAP, these costs are being expensed over the
transition period. The Company recognized approximately $10.4 million of these charges in the fourth
quarter of 2006, and the remaining charges will be recognized in 2007.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|13
|--



|In addition to the charges noted above, the Company expects to incur certain other cash expenditures
throughout the consolidation process. These additional expenditures include training of replacement
employees, the costs related to headcount overlap during a transitional training period, and temporary
employee staffing, should the need arise. While the estimate of these costs is not yet final, the
Company currently expects that they will total approximately $3 million pretax, with virtually all
occurring during the first ten months of 2007. In connection with the consolidation, the Company
expects to realize reductions in travel and rent costs of approximately $3 million per year, with
full realization of these annual savings beginning in 2008. Additionally, savings are expected to
be realized from state and local tax incentives. These incentives are expected to be realized over
a period of 8 to 20 years, depending on their type, the net present value of which is comparable
to the costs of the consolidation.
Operating and Non-Operating Expenses
Cost of services rendered and products sold increased seven percent compared to the prior year and
increased as a percentage of revenue to 62.6 percent in 2006 from 62.1 percent in 2005. This increase
primarily reflects the impact of fuel and other factor cost increases throughout the enterprise.
Selling and administrative expenses increased five percent and decreased as a percentage of revenue
to 27.0 percent from 27.2 percent in 2005. The decrease in selling and administrative expenses as
a percentage of revenue primarily reflects lower functional support costs and improved sales labor
efficiency at Terminix.
Interest income increased $6 million reflecting both higher investment income resulting from an increase
in the market value of investments within an employee deferred compensation trust (for which there
is a corresponding and offsetting increase in compensation expense within operating income), 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. Interest expense increased $4 million due to higher debt balances and
interest rates.
The effective tax rate for continuing operations was 34 percent in 2006 and 39 percent in 2005. The
2006 effective tax rate is impacted by the tax benefits related to the restructuring charges, which
include a non-recurring credit of approximately $6 million of non-recurring net operating loss carryforward
benefits which became realizable to the Company as a result of its decision to consolidate its corporate
headquarters to Memphis, as well as an approximately $7 million reduction in the 2006 tax expense
resulting from the resolution of state tax items related to a prior non-recurring transaction. The
Company expects that its effective tax rate for 2007 will approximate 39 percent.
Segment Review (2006 vs 2005)
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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|Key Performance Indicators           |  |      |   |     |  |      |  
|------------------------------------ |  | ---- | - | --- |  | ---- | -
|
|                                     |  |      |   |     | 
|TruGreen LawnCare -                  |  |      |   |     |  |      |  
|Growth in Full Program Contracts     |  | 0    | % |     |  | 1    | %
|Customer Retention Rate              |  | 62.9 | % |     |  | 61.2 | %
|                                     |  |      |   |     |  |      |  
|Terminix -                           |  |      |   |     |  |      |  
|Growth in Pest Control Customers     |  | 9    | % | (a) |  | 3    | %
|Pest Control Customer Retention Rate |  | 79.5 | % | (a) |  | 77.2 | %
|                                     |  |      |   |     |  |      |  
|Growth in Termite Customers          |  | 0    | % |     |  | 0    | %
|Termite Customer Retention Rate      |  | 87.5 | % |     |  | 87.2 | %
|                                     |  |      |   |     |  |      |  
|American Home Shield -               |  |      |   |     |  |      |  
|Growth in Warranty Contracts         |  | 2    | % |     |  | 6    | %
|Customer Retention Rate              |  | 58.2 | % |     |  | 57.4 | %

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) Pest control customer count growth, excluding the impact of the Safeguard Pest Control acquisition
completed at the beginning of the fourth quarter of 2006, was 5%. The customer retention rate improvement
in 2006, excluding the impact of the Safeguard acquisition added to the customer base, was approximately
170 basis points.
TruGreen LawnCare Segment
The TruGreen LawnCare segment, which includes lawn care services, reported a three percent increase
in revenue to $1.05 billion from $1.02 billion in 2005. Operating income totaled $158 million in
2006 compared to $172 million in 2005.
The growth in revenue reflects increased price realization during the year, as well as increases in
supplemental and commercial services. At year end, customer counts were comparable to 2005 levels,
as strong improvements in retention and the impacts of acquisitions offset a decline in unit sales.
Customer retention for the rolling twelve months ended December 31, 2006 increased 170 basis points,
a sharp improvement from the declines that existed in the first half of the year. The Company expanded
its efforts to improve customer satisfaction and retention. These efforts included the initiation
of a program of lawn quality audits (LQAs), which are customer visits to evaluate the condition
of the lawn and landscape. The Company is encouraged by the initial positive results of the LQA program,
as the initial retention rates for samples of customers that received an LQA was meaningfully higher
than samples of customers that did not receive an LQA. The Company has also implemented faster response
standards and follow-up calls on re-services, and improved customer communication and problem resolution
procedures. The Company believes that substantial improvement in customer retention can be achieved
over the next several years as it expands the LQA program, focuses its efforts on reducing route
manager turnover and continues to improve overall communication with customers.

|14
|--



|Significant declines in telemarketing sales, due to the expansion of Do-Not-Call lists and caller ID
mechanisms, more than offset solid growth in sales from newer channels, including direct mail and
neighborhood programs. In 2007 and beyond, the Company will continue to reduce its reliance on telemarketing.
Direct mail programs will become more dominant, supplemented by improved and expanded neighborhood,
internet and other sales efforts.
The decrease in operating income was attributable to investments in new programs to improve customer
satisfaction and retention, as well as increased fuel and fertilizer prices and higher health insurance
and variable lease costs. Over the next several years, the Company believes margins will be favorably
impacted by improving customer retention, reducing route manager turnover, experiencing more normal
increases in key factor costs and better leveraging its infrastructure through improved revenue growth
and route density.
Capital employed in the TruGreen LawnCare segment increased seven percent, primarily reflecting the
impact of tuck-in acquisitions.
TruGreen LandCare Segment
The TruGreen LandCare segment, which includes landscape maintenance services, reported a two percent
decrease in revenue to $444 million from $453 million in 2005 and operating loss of ($0.6) million
compared to operating income of $4 million in 2005.
Base contract maintenance revenue was comparable to the prior year. Sales activity at the end of 2006
was strong and there was a modest improvement in customer retention. During 2006, TruGreen LandCare
continued to invest in expanding the size and caliber of its sales force and providing it with improved
tools and training. These investments have led to steady improvement in the relative size and quality
of sales proposals, which the Company believes will support improving growth in base contract maintenance
sales in 2007 and future periods.
Enhancement revenue (e.g., add-on services such as seasonal flower plantings, mulching, etc.), which
represents approximately one-third of LandCares revenue, was consistent with 2005 levels, as
solid growth early in 2006 was offset by a large amount of fourth quarter 2005 hurricane-related
work that did not recur.
The decline in operating results was largely impacted by much lower snow removal revenue due to less
snow. Although the Companys snow removal business accounts for less than five percent of the
full year revenue, it has relatively high margins. In 2006, gross profit from snow removal work decreased
$6 million from the level in 2005. Over the next several years, the Companys Plan targets significant
margin improvement, which the Company believes will be accomplished through: (1) a better customer
mix, reflecting higher average job sizes, stricter pricing on new sales, and the pruning of less
profitable jobs, (2) improvements in branch manager selection and training, and (3) increased customer
retention from new operating and account management initiatives.
Capital employed in the TruGreen LandCare segment totaled $41 million approximately $7 million more
than prior year-end, reflecting the timing and reduced level of accounts payable and accrued expenses.
Terminix Segment
The Terminix segment, which includes termite and pest control services, reported a two percent increase
in revenue to $1.08 billion from $1.06 billion in 2005. Operating income increased five percent to
$152 million compared to $146 million in 2005.
The Terminix segments overall revenue growth reflected solid growth on the pest control side
of the business and increases in termite contract renewals, offset in part by a decline in revenue
from initial termite applications. Revenue from pest control services, which represents approximately
one-half of the annual revenues of the Terminix segment, increased six percent, supported by an improvement
in retention, solid growth in unit sales, and the impact of acquisitions. At the beginning of the
fourth quarter, Terminix acquired Safeguard Pest Control, a company that operates in 16 markets across
the United States with annual revenue of over $23 million. This acquisition had a positive impact
on the nine percent overall pest control customer count growth, as well as related retention rates.
Excluding this acquisition, the Company achieved a five percent increase in pest control customers
and a 170 basis point improvement in related pest control retention rates.
Revenue from initial termite applications declined eight percent as a result of a combination of factors.
A weak annual termite swarm season in most regions of the country drove a significant (16 percent)
decline in the in flow of sales leads. However, the lead to sales conversion rate for the year improved,
resulting in a four percent increase in renewable unit sales. The increase in unit sales was, in
turn, offset by the combined effects of a continued shift in mix from the bait service to lower priced
liquid treatments, as well as less revenue being recognized in the current year from prior year sales.
This latter factor resulted from the change to a new bait product in early 2005. The new bait product
has different operational protocols, which required less revenue and profits to be deferred into
2006 than had been deferred into 2005. This factor should not have a recurring impact in 2007 and
beyond. Revenue from termite contract renewals increased four percent, supported by improved pricing
and gains in retention.
The operating income comparison includes unusual and offsetting items that did not have a significant
net impact on comparability of results between years. In 2006, the Company recorded $2 million of
costs associated with site remediation at two locations in the first quarter and $4 million of litigation
expense in the fourth quarter. Additionally, 2006 included the above-mentioned impact of less deferred
bait revenue and profit. Offsetting these items, the Company recorded $10 million of incremental
damage claims expense in 2005 due to a correction in estimating prior years termite
damage claims reserves. The overall growth in operating income primarily resulted from lower termite
material costs and improved labor efficiency, offset in part by higher fuel prices and health insurance
costs.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15
|--



|Capital employed in the Terminix segment increased seven 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 a seven percent increase in revenue to $565 million from
$529 million in 2005, and operating income of $63 million compared to $71 million in 2005, a decrease
of 12 percent.
Warranty contract sales and renewals, which are reported as earned revenue over the subsequent twelve-month
contract period, increased six percent in 2006. Warranty contract renewals, which represent approximately
60 percent of total annual contracts written, increased ten percent, supported by a larger base of
renewable customers and continued improvements in retention. This growth was partially offset by
declines in new sales from both the real estate and direct to consumer channels.
Unit sales in the real estate channel, which represents approximately 25 percent of total annual contracts
written, were down nine percent, due to a pervasive weakening in the home resale market. In the third
quarter of 2006, the Company signed an agreement with Realogy, which includes the Coldwell Banker,
Century 21 and ERA brands. This agreement is strategically very important and is expected to help
generate strong growth in real estate sales in 2007. In the first full year of the contract, the
Company expects incremental sales to exceed 100,000 units, or approximately $40 million, while initial
costs of the agreement will result in a net minimal impact to operating income in the first year,
but an increasingly positive profit impact in subsequent years. The annual level of incremental sales
is expected to double over the five year contract term, as the Company expands penetration of the
franchised outlets of these brands and increases contract renewals.
The direct-to-consumer channel, which represents approximately 15 percent of total annual contracts
written, experienced a six percent decline in unit sales due to lower response rates on certain direct
mail programs.
The decline in operating income primarily resulted from increases in the average cost per service claim.
Heating and air conditioning related costs were at relatively higher levels than last year due to
the required conversion to more efficient 13 SEER units as a result of legislation that
became effective early in 2006. Claim costs in other areas, such as appliance and plumbing, were
also higher as a result of inflationary pressures. Additionally, the Company incurred marketing fees
related to the Realogy agreement; and the Company increased its volume of direct mailing in the second
half of 2006, supporting an expected improvement in direct-to-consumer unit sales growth in 2007.
Capital employed increased 21 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 $251 million and $208 million at December 31, 2006 and 2005, respectively, includes
approximately $323 million and $283 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 and Headquarters Segment
The Other Operations and Headquarters segment includes the operations of ServiceMaster Clean, InStar
and Merry Maids, as well as the Companys headquarters functions. Revenue in this segment increased
to $292 million in 2006 compared with $177 million in 2005. Revenue from InStar (which was acquired
on February 28, 2006) was $96 million with operating income, net of acquisition-related amortization
costs, of $2 million. InStars results were negatively impacted by reduced hurricane activity
in 2006 and operating profits were reduced by increased reserves for certain receivables associated
with prior year hurricanes. The ServiceMaster Clean and Merry Maids franchise operations reported
a combined growth in revenue of 12 percent, driven by continued strong increases in disaster restoration
and solid internal revenue growth in residential maid service. The overall segment operating loss
for 2006 was ($45.7) million compared with ($52.5) million in 2005. Included in the 2006 operating
loss are restructuring charges totaling $21.6 million. The segments operating loss improved
by $7 million, despite the inclusion of the restructuring charges, primarily reflecting continued
favorable trending of prior year insurance claims, lower overhead support costs and incentive compensation
expense, and increased profits from the combined franchise operations, offset in part by the aforementioned
restructuring charges.
Total initial and recurring franchise fees represented 3.5 percent and 3.4 percent of consolidated
revenue in 2006 and 2005, respectively and direct franchise operating expenses were 2.2 in 2006 and
2.1 percent in 2005. Total franchise fee profits comprised 11.3 percent and 10.5 percent of consolidated
operating income before headquarter overhead and restructuring charges in 2006 and 2005, 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 and Headquarters segment decreased, primarily reflecting the
realization of the annual tax benefit associated with the amortization of tax intangible assets that
will continue through 2012.
Discontinued Operations
In the third quarter of 2006, the Company completed the sales of American Residential Services (ARS)
and American Mechanical Services (AMS) generating gross cash proceeds of approximately $115 million,
which was used to reduce outstanding debt balances. The results of the ARS/AMS operations, which
provide heating, ventilation, air conditioning (HVAC), plumbing and electrical installation and repair,
have been reported within the financial statement caption discontinued operations for
all periods. During the first quarter of 2006, the Company recorded a $25 million after-tax ($42
million pretax) impairment charge for expected losses on the disposition of certain ARS/AMS properties
held pending sale. The Company recorded an after-tax net loss of ($0.5) million related to the sales
of the ARS and AMS businesses in the third quarter of 2006.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|16
|--



|Operating income from discontinued operations in 2005 includes approximately $11 million related to
the favorable conclusion of certain obligations related to international pest control businesses
sold in prior years.
The components of income (loss), net of income taxes of discontinued operations for 2006 and 2005 are
as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                           

|(In thousands)                             | 2006  |             | 2005  |  
|------------------------------------------ | ----- | ----------- | ----- | -
|                                           |      
|Operating income                           | **$** | **14,314**  |       | $
|Impairment charge                          |       | **(42,000** | **)** |  
|                                           |      
|Pretax income (loss)                       |       | **(27,686** | **)** |  
|                                           |       |             |       |  
|Provision (benefit) for income taxes       |       | **(11,312** | **)** |  
|                                           |       |             |       |  
|(Loss) on sale, net of tax                 |       | **(495**    | **)** |  
|                                           |      
|Income (loss) from discontinued operations | **$** | **(16,869** | **)** | $
|                                           |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
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 LawnCare realized in the third quarter of
2004 from the sale of a support facility, (no similar gain was realized in 2005), as well as the
first time inclusion of approximately $3 million of seasonal operating losses in the Canadian operations
acquired by TruGreen LawnCare in April 2004.
The Company has experienced both positive and negative trending in some of its key factor costs. The
Companys large fleet was negatively impacted by significant increases in oil prices, which
also adversely impacted fertilizer costs at TruGreen LawnCare. 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. Additionally, health care costs continued to experience
strong inflationary pressures during 2005.
On the positive side, the Company experienced 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.
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 in 2005 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 for 2005 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

|17
|--



|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.
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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|Key Performance Indicators           |  |          |       |  |      |  
|------------------------------------ |  | -------- | ----- |  | ---- | -
|
|                                     |  |          |       |  |      |  
|**TruGreen LawnCare -**              |  |          |       |  |      |  
|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 | %

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|TruGreen LawnCare Segment
The TruGreen LawnCare segment reported revenue for 2005 in excess of $1 billion for the first time
in its history. A four percent increase in revenue to $1.02 billion in 2005 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.
The four percent growth in revenue was supported by a two percent improvement in price realization,
growth in supplemental residential services (e.g., seeding and aeration) and commercial services,
as well as a one percent increase in customer counts. The improvement in pricing 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 2004 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. The shift away from telemarketing sales impacted the
relative timing of customer sales.
TruGreen LawnCare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 were unique, and included the combination of five acquired brands into one
at the beginning of the 2005 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.
Operating income totaled $172 million in 2005 compared to $176 million in 2004. The operating income
comparison was adversely impacted by the $4 million non-recurring 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 LawnCare segment increased two percent, primarily reflecting the impact
of acquisitions.
TruGreen LandCare Segment
The TruGreen LandCare segment reported a three percent increase in revenue to $453 million in 2005
from $439 million in 2004 and operating income of $4 million in 2005 compared to an operating loss
of ($4) million in 2004.
Base contract maintenance revenue increased two percent despite a modest decline in customer retention.
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 in 2005 and was favorably
impacted by more consistent focus throughout the country, as well as hurricane-related work.
Operating results improved by almost $9 million in 2005. The increase in profit was due to improved
labor management techniques, including quicker implementation of reductions in the seasonal workforce
in the fourth quarter, improvements in safety-related costs and the impact of approximately $1.5
million of non-recurring 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.

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|Terminix Segment
The Terminix segment achieved a milestone in 2005 by surpassing $1 billion in revenue. Revenue increased
six percent to $1.1 billion in 2005 from $997 million in 2004 while operating income increased 10
percent to $146 million in 2005 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. 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. Terminixs
results also benefited from the effects of a change to a new bait product in 2005. The new product
has different operational protocols, which required less revenue to be deferred into 2006 than had
been deferred into 2005 using the old product.
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 product 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 continued to trend favorably in 2005. 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 reported an eight percent increase in revenue to $529 million in 2005
from $487 million in 2004, and operating income of $71 million in 2005 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 2005, but were adversely impacted throughout 2005 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 2004 was positively impacted by a $5.5 million
cumulative negative adjustment to deferred revenue and operating income that was recorded in the
third quarter of 2004.
Capital employed increased 24 percent in 2005 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 and Headquarters Segment
The Other Operations and Headquarters segment reported revenue of $177 million in 2005, an eight percent
increase compared with $164 million in 2004. On a combined basis, the ServiceMaster Clean and Merry
Maids franchise operations reported revenue growth of eight percent in 2005 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
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|franchises was not material to the Companys consolidated financial statements for all periods.
Capital employed in the Other Operations and Headquarters segment decreased in 2005 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.
Discontinued Operations
Operating income of discontinued operations in 2005 includes approximately $11 million related to 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.
The components of income, net of income taxes of discontinued operations for 2005 and 2004 are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|(In thousands)                       | 2005 |        | 2004 |  
|------------------------------------ | ---- | ------ | ---- | -
|                                     |     
|Pretax income                        | $    | 30,355 |      | $
|                                     |      |        |      |  
|Provision (benefit) for income taxes |      | 11,991 |      |  
|                                     |     
|Income from discontinued operations  | $    | 18,364 |      | $
|                                     |     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|2006 Financial Position and Liquidity
Cash Flows from Operating Activities from ContinuingOperations
Net cash provided from operating activities from continuing operations was $289 million in 2006, compared
to $243 million in 2005. The increase in cash provided from operating activities from continuing
operations primarily reflects the tax payments resulting from the 2005 IRS agreement, which concluded
audits covering the periods through 2002. Related to this agreement, the Company made tax payments
in early 2005 totaling $131 million and realized a $45 million reduction in estimated payments in
the third and fourth quarters of 2005. In February 2006, the IRS concluded the 2003 and 2004 audits
of the Companys tax returns resulting in a payment of $3 million to the IRS and various states.
In the fourth quarter of 2006, the IRS completed the audit of the Companys 2005 tax return
with no adjustments or additional payments required.
Excluding tax payments from the resolution of IRS audits in both years, cash provided from operating
activities from continuing operations decreased by $36 million. This decline resulted primarily from
higher working capital requirements associated with the new InStar commercial disaster restoration
business, lower levels of customer prepayments at American Home Shield, primarily as a result of
a market wide decline in sales from the real estate channel (where virtually all sales are paid for
up-front), and severance and other cash payments associated with Project Accelerate.
Three factors contribute to the Companys strong cash generating capabilities: a solid earnings
base, businesses that need relatively little working capital to fund growth in their operations,
and significant annual deferred tax benefits. 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 financial reporting purposes. A significant portion of these assets arose in
connection with the 1997 conversion from a limited partnership to a corporation. The 2005 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
$50 to $55 million of average annual cash tax benefits through 2012 for which no corresponding income
statement benefit is recognized. Subsequent to 2012, the benefit from the step-up in tax basis that
resulted from the reincorporation will be fully amortized. The divestitures of ARS and AMS resulted
in a reduction of approximately $4 million in the average future annual cash tax benefits; however,
these cash tax benefits were accelerated into 2006 and 2007, such that the aggregate tax benefits were unchanged.
Cash Flows from Investing Activities from ContinuingOperations
Capital expenditures increased over the prior year and included recurring capital needs, investments
in information systems and productivity enhancing operating systems. The Company has no material
capital commitments at this time.
Acquisitions in 2006 totaled $167 million, compared with $51 million in 2005. This increase includes
the acquisition of InStar, a leading direct provider of commercial disaster response and reconstruction
services, for approximately $85 million of cash, the acquired assets of Safeguard Pest Control which
operates in 16 markets across the United States with annual revenues of over $23 million, as well
as tuck-in acquisitions, primarily in the Terminix and TruGreen LawnCare businesses. Consideration
paid for tuck-in acquisitions consisted of cash payments, seller financed notes and Company stock.
In 2007, the Company expects to continue its tuck-in acquisition program at both Terminix and TruGreen
LawnCare.
Cash Flows from Financing Activities from ContinuingOperations
Cash dividends paid to shareholders in 2006 amounted to $.46 per share, a 4.5 percent increase over
2005. This was the 36th consecutive year of annual growth in dividends for the Company. Cash dividends
paid in 2006 totaled $133 million, a four percent increase over 2005, reflecting the per share increase,
partially offset by the impact of share repurchases. In January 2007, the Company announced the declaration
of a cash dividend of $.12 per share payable on February 28, 2007 to shareholders of record on February
16, 2007. 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.
In 2006, the Company repurchased $86 million of its shares at an average price of approximately $11.78
per share. The Company anticipates share repurchases in 2007 to be in the $75 to $100 million range.
The actual level of future share

|20
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|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 $421 million at December 31,
2006, compared with approximately $367 million at December 31, 2005. Approximately $412 million of
the cash and short and long-term marketable securities balance is associated with regulatory requirements
at American Home Shield and for other purposes. Based on the Companys normal annual dividends
and other payments from regulated American Home Shield subsidiaries, recent changes in regulations
in certain states, and a reevaluation of the level of required reserves in other states, the Company
currently estimates that approximately 25 percent to 35 percent of the balance at December 31, 2006
could be liquidated and used to reduce debt or to fund other liquidity needs. Total debt at December
31, 2006 was $690 million, approximately $32 million more than the amount at December 31, 2005. Approximately
56 percent of the Companys debt matures beyond five years and 44 percent beyond fifteen years.
The Companys next public debt maturity is in August 2007. The Company currently has both the
intent and ability to pay this debt with other long-term financing.
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. At December
31, 2006, the Company had $30 million outstanding under this facility and had issued approximately
$133 million of letters of credit, resulting in unused commitments of approximately $337 million.
The Company also has $550 million of senior unsecured debt and equity securities 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 2006, 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, 2006, and throughout the year, the Company was in compliance with the covenants and, based on
its operating outlook for 2007, 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,
2006 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, 2006 and 2005. 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, 2006,
the Companys residual value guarantee related to the leased assets totaled $53 million for
which the Company has recorded the estimated fair value of this guarantee (approximately $0.7 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, 2006, there were approximately
$229 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, 2006 the Company has recorded the estimated fair value of this
guarantee (approximately $1.1 million) in the Consolidated Statements of Financial Position.
The following table presents the Companys contractual obligations and commitments:
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|(In millions)                                        |  | Total |       | < 1 Yr |   | 2-3
      Yrs |  | 4-5
      Yrs |     | >5
      Yrs |  
|---------------------------------------------------- |  | ----- | ----- | ------ | - | ------------- |  | ------------- | --- | ------------ | -
|                                                     | 
|Debt balances*                                       |  | $     | 690   |        | $ | 71            |  | $             | 215 |              | $
|Non-cancelable
  operating leases                    |  |       | 243   |        |   | 73            |  |               | 106 |              |  
|Purchase obligations:                                |  |       |       |        |   |               |  |               |     |              |  
|Telecommunications                                   |  |       | 32    |        |   | 26            |  |               | 6   |              |  
|Supply agreements
   and other                       |  |       | 77    |        |   | 59            |  |               | 13  |              |  
|Other long-term liabilities:*                        |  |       |       |        |   |               |  |               |     |              |  
|Insurance claims                                     |  |       | 202   |        |   | 89            |  |               | 54  |              |  
|Discontinued
   operations                           |  |       | 15    |        |   | 8             |  |               | 3   |              |  
|Other, primarily
    deferred
    compensation trust |  |       | 55    |        |   | 6             |  |               | 9   |              |  
|                                                     | 
|Total Amount                                         |  | $     | 1,314 |        | $ | 332           |  | $             | 406 |              | $
|                                                     | 

| |                                                                                 
| | --------------------------------------------------------------------------------
| | *  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 $168 million and are
discussed in the Notes to the Consolidated Financial Statements. The majority of the

|21
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|Companys debt is fixed rate debt. Therefore, the Company has calculated the expected interest
payments on debt outstanding as of December 31, 2006 to be approximately $49 million, $46 million,
$39 million, $29 million, $29 million in 2007, 2008, 2009, 2010, 2011, respectively and $419 million
thereafter.
Financial Position - Continuing Operations
The increase in receivables is due primarily to the inclusion of approximately $65 million of InStar
receivables (including approximately $22 million of unbilled work-in-process). InStars receivables
at December 31, 2006 include hurricane disaster recovery work performed in New Orleans, southern
Florida and other hurricane-affected areas. The Company has accounts receivable from customers that
were insured by a family of insurance companies in Florida that are insolvent, and whose claims are
being administered by the Florida Insurance Guaranty Association. The Company expects that collection
of these receivables will be significantly delayed. The aggregate receivable balance due from these
customers, net of related reserves, totaled approximately $9 million at December 31, 2006, and represents
the Companys best estimate of the amounts that will ultimately be collected. Should the Company
be unable to collect the balance of these and/or other hurricane-related receivables, it may have
to initiate legal action. While InStar has a history of recovering amounts related to its disaster
recovery projects, the current circumstances increase the uncertainties in estimating the amounts
recoverable on certain projects. The allowance for doubtful accounts at December 31, 2006 reflects
the estimated losses resulting from the inability of these customers to make required payments. If
the estimated amounts recoverable on these projects change from the amounts currently recorded, those
differences will be recognized as income or loss when the change in estimate is made.
Inventory levels increased reflecting general business growth. 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, and are
amortized over its initial term. In 2006, these deferred customer acquisition costs declined reflecting
Terminixs continued shift in mix from the bait product to lower priced liquid treatments which
because of different operational protocols, require less revenues and costs to be deferred into future
periods. Property and equipment increased from 2005 levels primarily reflecting the InStar acquisition,
general business growth and investments in information systems and productivity enhancing operating
systems. The Company does not have any material capital commitments at this time.
The growth in accounts payable reflects an increase in checks written and outstanding, as well as the
acquisition of InStar. Deferred revenue increased, reflecting growth in warranty contracts written
at American Home Shield, partially offset by lower customer prepayment balances for lawn care services
as a result of a one month delay in launching prepayment programs for the upcoming year, as well
as a reduction at Terminix associated with the mix shift in termite treatments described above. Growth
in other accrued liabilities primarily reflects the timing of certain payments, as well as increased
provisions for litigation reserves.
The Company has minority investors in Terminix. At any time, holders of this minority interest 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. ServiceMaster has the ability to require conversion of the security
into ServiceMaster common shares, once the closing share price of ServiceMasters common stock
averages at least $15 per share for 40 consecutive trading days.
Total shareholders equity was $1.09 billion and $1.05 billion at December 31, 2006 and 2005,
respectively. The increase primarily reflects operating profits in the business and proceeds from
employee share plans, offset in part by cash dividend payments and share repurchases.
For federal income tax reporting purposes, 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 that exist for tax reporting purposes only, deductions relating
to business closures and divestitures, and the timing of certain other tax-related items. The Company
reported that 11 percent of its 2006 dividends on common stock will be taxable as dividend income
for federal income tax purposes. This is lower than the taxability percentage for 2005 dividends
of 87 percent, primarily due to one-time effects of the dispositions of American Residential Services
and American Mechanical Services. 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 outstanding shares.
The Company currently expects that approximately 55 percent to 65 percent of its 2007 dividends on
common stock will be taxable as dividend income for federal income tax purposes, which is lower than
previous projections primarily due to the impact of headquarters relocation costs. The 2007 estimate
is subject to change, based on the outcome of future events. The Company expects that the taxable
portion of its dividend will increase sharply in 2008 and will grow to be fully taxable over the succeeding few years.
Financial Position  Discontinued Operations
The assets and liabilities related to discontinued operations have been classified in a separate caption
on the Consolidated Statements of Financial Position. The assets and liabilities of discontinued
operations have decreased from the 2005 amounts due to the sales of the American Residential Services
(ARS) and American Mechanical Services (AMS) businesses during 2006. The remaining liabilities primarily
represent ARS and AMS severance and wind-down costs, as well as long-term insurance costs from other
previously discontinued operations.
As part of the ARS and AMS sale agreements, the Company guaranteed obligations to third parties with
respect to bonds (primarily performance and license type), operating leases for which the Company
has been released as being the primary obligor, real estate leased and operated by the buyers, and
other guarantees of payment. At the present time, the
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|Company does not believe it is probable that the buyers will default on their obligations subject to
guarantee. The fair value of the Companys obligations related to these guarantees is not significant
and no liability has been recorded.
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 revenue recognition, the
allowance for uncollectible 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 outcome of outstanding litigation; accruals for income tax
liabilities as well as deferred tax accounts; the deferral and amortization of customer acquisition
costs; work-in-process balances related to commercial disaster response and reconstruction projects;
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. InStar has receivables from customers that were insured by a family of insurance
companies in Florida that are insolvent, and whose claims are being administered by the Florida Insurance
Guaranty Association. Should the Company be unable to collect the balance of these and/or other hurricane-related
receivables, it may have to initiate legal action. While InStar has a history of recovering amounts
related to its disaster recovery projects, the current circumstances increase the uncertainties in
estimating the amounts recoverable on certain projects. The allowance for doubtful accounts at December
31, 2006 reflects the estimated losses resulting from the inability of these customers to make required
payments. If the estimated amounts recoverable on these projects change from the amounts currently
recorded, those differences will be recognized as income or loss when the change in estimate is made.
Accounts receivable and work-in-process balances for commercial disaster response and reconstruction

projects are recorded based on estimates of the percentage of completion of the projects, which
includes
several factors including the contract values, the total expected costs to complete the
projects,
historical returns and margins on comparable projects, and the mix and type of labor
and equipment
required to complete the project.
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 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. Termite damage claim accruals are recorded based on
both the historical rates of claims incurred within a contract year and the cost per claim. 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 (which
are not recognized 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.
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.
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 Statement of Financial Accounting Standards (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 2006 goodwill and trade
name impairment review, the Company carried forward the valuations for all reporting units, except
for InStar, which was purchased during the first quarter of 2006.
Revenue from lawn care and pest control services, as well as liquid and fumigation termite applications
are recognized as the services are provided. Revenue from landscaping
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|23
|--



|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, 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. Those
costs bear a direct relationship to the fulfillment of the Companys obligations under the contracts
and are representative of the relative value provided to the customer (proportional performance method).
Home warranty contract revenue is recognized based on the expected emergence of total claim costs.
The Company regularly reviews its estimates of direct costs for its termite bait and home warranty
contracts and adjusts the estimates when appropriate. Revenues from the Companys commercial
disaster response and reconstruction projects are recognized using the percentage of completion method
in the ratio that total incurred costs bear to total estimated costs. Revenue from trade name licensing
arrangements is recognized when earned. Franchise 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.
Newly Issued Accounting Statements and Positions
In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 Accounting
for Uncertain Tax Positions (FIN 48). FIN 48 provides guidance on the accounting for and disclosure
of tax positions accounted for in accordance with SFAS 109. FIN 48 requires that the effects of a
tax position be initially recognized when it is more likely than not (which is defined
as a greater than 50 percent chance) that the position will be sustained upon examination by the
taxing authorities. In addition, FIN 48 requires additional disclosures regarding tax positions.
FIN 48 is effective beginning January 1, 2007. The Company does not expect the adoption of this Statement
to have a material effect on these Consolidated Financial Statements.
In September 2006, the Financial Accounting Standards Board issued SFAS 157, Fair Value Measurement.

This Statement defines fair value, establishes a framework for measuring fair value in generally

accepted accounting principles (GAAP), and expands disclosures about fair value measurements. There

are no new fair value measurements required. This Statement is effective for financial statements

issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the

impact of this Statement to the Companys consolidated financial position, results of operations

and cash flows; however, the Company does not expect the adoption of this Statement to have a material

effect on these Consolidated Financial Statements.
In February 2007, the Financial Accounting Standards Board issued SFAS 159, The Fair Value Option

for Financial Assets and Financial Liabilities. This Statement permits entities to choose
to
measure at fair value many financial instruments and certain other items such as investments,
debt
and derivative instruments. This Statement is effective for financial statements issued for
fiscal
years beginning after November 15, 2007. The Company is currently assessing the impact of
this Statement
on its Consolidated Financial Statements.
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 (9.1 percent average rate during 2006).
The Company generally maintains the majority of its debt at fixed rates. After considering the effect
of the interest rate swap agreements, approximately 70 percent of total recorded debt at December
31, 2006 was at a fixed rate.
The following table summarizes information about the Companys fixed rate debt as of December
31, 2006 (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 $448 million at December 31, 2006.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                | Expected Maturity Date |  
|--------------- | ---------------------- | -
|
|
|                |                       
|Fixed rate debt |                        | $
|Avg. rate       |                        |  

|                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company believes its exposure to interest rate fluctuations, when viewed on both a gross and net
basis, is not material to its overall results of operations. On a gross basis, the Companys
adverse exposure to rising interest rates principally relates to interest payments on floating rate
debt ($205 million at December 31, 2006, after considering

|24
|--



|the effect of interest swap agreements) and payments on operating leases that are tied to floating
interest rates. These operating leases consist of 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 $229 million in residual value). The Companys exposure to interest
expense based on floating rates is partially offset on a net basis by floating rate investment income
earned on its cash and marketable securities balances. The Company estimates that on a net basis,
each one percentage point change in interest rates would result in a change of less than $.01 in
earnings per share on an annual basis.
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, 2006, 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 $0.8 million.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25
|--



|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, 2006. 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, 2006, 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,
2006. 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, 2006, 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, 2006, 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, 2006, 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,
2006 of the Company and our report dated February 26, 2007 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche LLP
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Chicago,
      Illinois | 
|----------------------- | 

|February
        26, 2007
      26
|----------------------------------



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

|For years ended December 31,                                        | 2006 |   | 2005          |   | 2004 |          
|------------------------------------------------------------------- | ---- | - | ------------- | - | ---- | ---------
|                                                                    |     
|**Operating Revenue**                                               |      | $ | **3,429,145** |   | $    | 3,239,478
|                                                                    |      |   |               |   |      |          
|**Operating Costs and Expenses:**                                   |      |   |               |   |      |          
|Cost of services rendered and products sold                         |      |   | **2,145,123** |   |      | 2,011,978
|Selling and administrative expenses                                 |      |   | **924,809**   |   |      | 881,963  
|Amortization expense                                                |      |   | **11,243**    |   |      | 5,454    
|Restructuring charges (1)                                           |      |   | **21,648**    |   |      |         
|                                                                    |     
|Total operating costs and expenses                                  |      |   | **3,102,823** |   |      | 2,899,395
|                                                                    |     
|                                                                    |      |   |               |   |      |          
|**Operating Income**                                                |      |   | **326,322**   |   |      | 340,083  
|                                                                    |      |   |               |   |      |          
|**Non-operating Expense (Income)**                                  |      |   |               |   |      |          
|Interest expense                                                    |      |   | **61,395**    |   |      | 56,999   
|Interest and investment income, net                                 |      |   | **(25,942**   | ) |      | (19,832  
|Minority interest and other expense, net                            |      |   | **8,240**     |   |      | 8,218    
|                                                                    |     
|                                                                    |      |   |               |   |      |          
|**Income from Continuing Operations before Income Taxes (1)**       |      |   | **282,629**   |   |      | 294,698  
|Provision (benefit) for income taxes (1), (2), (3)                  |      |   | **96,061**    |   |      | 114,137  
|                                                                    |     
|                                                                    |      |   |               |   |      |          
|**Income from Continuing Operations (1), (2), (3)**                 |      |   | **186,568**   |   |      | 180,561  
|Income (loss) from discontinued operations, net of income taxes (3) |      |   | **(16,869**   | ) |      | 18,364   
|                                                                    |     
|**Net Income**                                                      |      | $ | **169,699**   |   | $    | 198,925  
|                                                                    |     
|                                                                    |      |   |               |   |      |          
|**Basic Earnings Per Share:**                                       |      |   |               |   |      |          
|Income from continuing operations                                   |      | $ | **0.64**      |   | $    | 0.62     
|Income (loss) from discontinued operations                          |      |   | **(0.06**     | ) |      | 0.06     
|                                                                    |     
|**Basic Earnings Per Share**                                        |      | $ | **0.59**      |   | $    | 0.68     
|                                                                    |     
|                                                                    |      |   |               |   |      |          
|**Diluted Earnings Per Share:**                                     |      |   |               |   |      |          
|Income from continuing operations (1), (2), (3)                     |      | $ | **0.64**      |   | $    | 0.61     
|Income (loss) from discontinued operations (3)                      |      |   | **(0.06**     | ) |      | 0.06     
|                                                                    |     
|**Diluted Earnings Per Share**                                      |      | $ | **0.58**      |   | $    | 0.67     
|                                                                    |     

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2006 results include restructuring charges for severance, as well as costs associated with Project

Accelerate, the Companys initiative to improve the effectiveness and efficiency of its functional

support areas, and accruals for employee retention and severance to be paid in future periods that

are related to the Companys decision to consolidate its corporate headquarters into its operations

support center in Memphis, Tennessee and close its current headquarters in Downers Grove, Illinois.

The restructuring charges totaled $21.6 million pretax, $6.9 million after-tax and $0.02 per diluted

share. The after-tax impact of the restructuring charges includes approximately $6 million of non-recurring

net operating loss carryforward benefits which became realizable to the Company as a result of
  its
  decision to consolidate its corporate headquarters in Memphis.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | In the fourth quarter of 2006, the Company recorded a reduction in income tax expense of $7 million
  ($0.02 per diluted share) resulting from the resolution of state tax items related to a prior non-recurring
  transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | As a result of a comprehensive agreement with the Internal Revenue Service regarding its examination
  of the Companys federal income taxes through the year 2002, 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 $9 million
  related to discontinued operations ($.03 per diluted share). See the Income Taxes note
  in the Notes to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                 

|                                                                
|----------------------------------------------------------------
|See accompanying Notes to the Consolidated Financial Statements.

|27
|--



|                                                                                                       |  |       |              
|------------------------------------------------------------------------------------------------------ |  | ----- | -------------
|
|
|                                                                                                       | 
|**Assets:**                                                                                            |  |       |              
|                                                                                                       |  |       |              
|**Current Assets:**                                                                                    |  |       |              
|Cash and cash equivalents                                                                              |  | **$** | **123,675**  
|Marketable securities                                                                                  |  |       | **109,992**  
|Receivables, less allowances of $26,759 and $17,702, respectively                                      |  |       | **407,409**  
|Inventories                                                                                            |  |       | **69,107**   
|Prepaid expenses and other assets                                                                      |  |       | **25,868**   
|Deferred customer acquisition costs                                                                    |  |       | **37,427**   
|Deferred taxes                                                                                         |  |       | **37,400**   
|Assets of discontinued operations                                                                      |  |       | **2,343**    
|                                                                                                       | 
|Total Current Assets                                                                                   |  |       | **813,221**  
|                                                                                                       | 
|**Property and Equipment:**                                                                            | 
|At cost                                                                                                |  |       | **413,810**  
|Less: accumulated depreciation                                                                         |  |       | **(236,602** 
|                                                                                                       | 
|Net Property and Equipment                                                                             |  |       | **177,208**  
|                                                                                                       | 
|                                                                                                       | 
|**Other Assets:**                                                                                      | 
|Goodwill                                                                                               |  |       | **1,648,258**
|Intangible assets, primarily trade names, net                                                          |  |       | **249,217**  
|Notes receivable                                                                                       |  |       | **29,488**   
|Long-term marketable securities                                                                        |  |       | **187,201**  
|Other assets                                                                                           |  |       | **12,870**   
|Assets of discontinued operations                                                                      |  |       | ****        
|                                                                                                       | 
|Total Assets                                                                                           |  | **$** | **3,117,463**
|                                                                                                       | 
|**Liabilities and Shareholders Equity:**                                                              |  |       |              
|                                                                                                       |  |       |              
|**Current Liabilities:**                                                                               |  |       |              
|Accounts payable                                                                                       |  | **$** | **114,533**  
|Accrued liabilities:                                                                                   |  |       |              
|Payroll and related expenses                                                                           |  |       | **98,425**   
|Self-insured claims and related expenses                                                               |  |       | **89,398**   
|Income taxes payable                                                                                   |  |       | **33,726**   
|Other                                                                                                  |  |       | **111,974**  
|Deferred revenue                                                                                       |  |       | **442,393**  
|Liabilities of discontinued operations                                                                 |  |       | **7,644**    
|Current portion of long-term debt                                                                      |  |       | **21,549**   
|                                                                                                       | 
|Total Current Liabilities                                                                              |  |       | **919,642**  
|                                                                                                       | 
|**Long-Term Debt**                                                                                     |  |       | **668,873**  
|                                                                                                       | 
|**Long-Term Liabilities:**                                                                             |  |       |              
|Deferred taxes                                                                                         |  |       | **168,000**  
|Liabilities of discontinued operations                                                                 |  |       | **7,541**    
|Other long-term obligations, primarily self-insured claims                                             |  |       | **164,549**  
|                                                                                                       | 
|Total Long-Term Liabilities                                                                            |  |       | **340,090**  
|                                                                                                       | 
|**Minority Interest**                                                                                  |  |       | **100,000**  
|                                                                                                       |  |       |              
|**Commitments and Contingencies**(See Note)                                                            |  |       |              
|                                                                                                       |  |       |              
|**Shareholders Equity:**                                                                              |  |       |              
|Common stock $0.01 par value, authorized 1,000,000 shares; issued
   326,168 and 321,338, respectively |  |       | **3,262**    
|Additional paid-in capital                                                                             |  |       | **1,172,206**
|Retained earnings                                                                                      |  |       | **319,459**  
|Accumulated other comprehensive income                                                                 |  |       | **10,118**   
|Restricted stock (unearned compensation) (1)                                                           |  |       | ****        
|Treasury stock                                                                                         |  |       | **(416,187** 
|                                                                                                       | 
|Total Shareholders Equity                                                                             |  |       | **1,088,858**
|                                                                                                       | 
|**Total Liabilities and Shareholders Equity**                                                         |  | **$** | **3,117,463**
|                                                                                                       | 

|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Upon the adoption of SFAS 123(R) and effective January 1, 2006, the Company reclassified within Shareholders Equity the $14.4 million balance of Restricted stock (unearned compensation) to Additional paid-in capital.
|    |                                                                                                                                                                                                                              

|See accompanying Notes to the Consolidated Financial Statements
|---------------------------------------------------------------

|28
|--



|                                                             
|-------------------------------------------------------------
|Consolidated Statements of Shareholders Equity(In thousands)
|                                                             

|                                                                                  | Common
      Stock |       | Additional
      Paid-in
      Capital |   | Retained
      Earnings |   | Accumulated
      Comprehensive
      Income (Loss) |          | Restricted
      Stock |   | Treasury
      Stock |   | Total
      Equity |        
|--------------------------------------------------------------------------------- | ------------------ | ----- | -------------------------------------- | - | ----------------------- | - | --------------------------------------------------- | -------- | ---------------------- | - | -------------------- | - | ------------------ | -------
|                                                                                  |                   
|Balance December 31, 2003                                                         | $                  | 3,173 |                                        | $ | 1,061,640               |   | $                                                   | 6,365    |                        | $ | 7,932                |   | $                  | (4,368 
|                                                                                  |                   
|Net income 2004                                                                   |                    |       |                                        |   |                         |   |                                                     | 331,227  |                        |   |                      |   |                    |        
|Other comprehensive income,
 net of tax:                                          |                    |       |                                        |   |                         |   |                                                     |          |                        |   |                      |   |                    |        
|Net unrealized gain on securities,
   net of reclassification
    adjustment (1)  |                    |       |                                        |   |                         |   |                                                     |          |                        |   | 826                  |   |                    |        
|Foreign currency translation                                                      |                    |       |                                        |   |                         |   |                                                     |          |                        |   | 2,046                |   |                    |        
|                                                                                  |                   
|Total comprehensive income                                                        |                    |       |                                        |   |                         |   |                                                     | 331,227  |                        |   | 2,872                |   |                    |        
|                                                                                 
|Shareholders dividends                                                           |                    |       |                                        |   |                         |   |                                                     | (125,476 | )                      |   |                      |   |                    |        
|Shares issued under options, grant plans,
 and other (2,711 shares)               |                    | 13    |                                        |   | 21,273                  |   |                                                     |          |                        |   |                      |   |                    | (8,489 
|Treasury shares purchased
  (5,353 shares)                                        |                    |       |                                        |   |                         |   |                                                     |          |                        |   |                      |   |                    |        
|Shares issued for acquisitions
  (297 shares)                                     |                    |       |                                        |   | 144                     |   |                                                     |          |                        |   |                      |   |                    |        
|                                                                                  |                   
|Balance December 31, 2004                                                         | $                  | 3,186 |                                        | $ | 1,083,057               |   | $                                                   | 212,116  |                        | $ | 10,804               |   | $                  | (12,857
|                                                                                  |                   
|Net income 2005                                                                   |                    |       |                                        |   |                         |   |                                                     | 198,925  |                        |   |                      |   |                    |        
|Other comprehensive income,
 net of tax:                                          |                    |       |                                        |   |                         |   |                                                     |          |                        |   |                      |   |                    |        
|Net unrealized loss on securities,
    net of reclassification
    adjustment (1) |                    |       |                                        |   |                         |   |                                                     |          |                        |   | (2,188               | ) |                    |        
|Foreign currency translation                                                      |                    |       |                                        |   |                         |   |                                                     |          |                        |   | (1,419               | ) |                    |        
|                                                                                  |                   
|Total comprehensive income (loss)                                                 |                    |       |                                        |   |                         |   |                                                     | 198,925  |                        |   | (3,607               | ) |                    |        
|                                                                                 
|Shareholders dividends                                                           |                    |       |                                        |   |                         |   |                                                     | (128,048 | )                      |   |                      |   |                    |        
|Shares issued under options, grant plans,
  and other (4,076 shares)              |                    | 27    |                                        |   | 34,277                  |   |                                                     |          |                        |   |                      |   |                    | (1,581 
|Treasury shares purchased
  (3,791 shares)                                        |                    |       |                                        |   |                         |   |                                                     |          |                        |   |                      |   |                    |        
|Shares issued for acquisitions
  (88 shares)                                      |                    |       |                                        |   | 54                      |   |                                                     |          |                        |   |                      |   |                    |        
|                                                                                  |                   
|Balance December 31, 2005                                                         | $                  | 3,213 |                                        | $ | 1,117,388               |   | $                                                   | 282,993  |                        | $ | 7,197                |   | $                  | (14,438
|                                                                                  |                   
|Net income 2006                                                                   |                    |       |                                        |   |                         |   |                                                     | 169,699  |                        |   |                      |   |                    |        
|Other comprehensive income,
 net of tax:                                          |                    |       |                                        |   |                         |   |                                                     |          |                        |   |                      |   |                    |        
|Net unrealized gain on securities,
    net of reclassification
    adjustment (1) |                    |       |                                        |   |                         |   |                                                     |          |                        |   | 2,175                |   |                    |        
|Foreign currency translation                                                      |                    |       |                                        |   |                         |   |                                                     |          |                        |   | 746                  |   |                    |        
|                                                                                  |                   
|Total comprehensive income                                                        |                    |       |                                        |   |                         |   |                                                     | 169,699  |                        |   | 2,921                |   |                    |        
|                                                                                 
|Restricted stock reclassification(2)                                              |                    |       |                                        |   | (14,438                 | ) |                                                     |          |                        |   |                      |   |                    | 14,438 
|Shareholders dividends                                                           |                    |       |                                        |   |                         |   |                                                     | (133,233 | )                      |   |                      |   |                    |        
|Shares issued under options,
  grant plans,
  and other (5,486 shares)            |                    | 49    |                                        |   | 66,607                  |   |                                                     |          |                        |   |                      |   |                    |        
|Treasury shares purchased
  (7,306 shares)                                        |                    |       |                                        |   |                         |   |                                                     |          |                        |   |                      |   |                    |        
|Shares issued for acquisitions
  (736 shares)                                     |                    |       |                                        |   | 2,649                   |   |                                                     |          |                        |   |                      |   |                    |        
|                                                                                  |                   
|Balance December 31, 2006                                                         | $                  | 3,262 |                                        | $ | 1,172,206               |   | $                                                   | 319,459  |                        | $ | 10,118               |   | $                  | 0      
|                                                                                  |                   

|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|(1) | Disclosure of reclassification amounts (net of tax) relating to comprehensive income:
|   
|   

|                                               | 2006 |        | 2005 |   | 2004   |  
|---------------------------------------------- | ---- | ------ | ---- | - | ------ | -
|
|Net unrealized holding gains arising in period | $    | 8,737  |      | $ | 2,749  |  
|Less: Gains net of losses realized             |      | (6,562 | )    |   | (4,937 | )
|                                               |     
|Net unrealized gains (losses) on securities    | $    | 2,175  |      | $ | (2,188 | )
|                                               |     

|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Upon the adoption of SFAS 123(R) and effective January 1, 2006, the Company reclassified within Shareholders Equity the $14.4 million balance of Restricted Stock (unearned compensation) to Additional paid-in capital.

|                                                                
|----------------------------------------------------------------
|See accompanying Notes to the Consolidated Financial Statements.

|29
|--



|Consolidated Statements of Cash Flows
    (In thousands)
|--------------------------------------------------------
|                                                        

|For years ended December 31,                                                             | 2006 |            | 2005 |   | 2004     |  
|---------------------------------------------------------------------------------------- | ---- | ---------- | ---- | - | -------- | -
|                                                                                         |     
|Cash and Cash Equivalents at January 1                                                   | $    | 114,508    |      | $ | 256,626  |  
|Cash Flows from Operating Activities from Continuing Operations:                         |      |            |      |   |          |  
|Net Income                                                                               |      | 169,699    |      |   | 198,925  |  
|Adjustments to reconcile net income to net cash
     provided from operating activities: |      |            |      |   |          |  
|Loss (income) from discontinued operations                                               |      | 16,869     |      |   | (18,364  | )
|Non-cash reduction in continuing operations tax expense                                  |      |           |      |   |         |  
|Depreciation expense                                                                     |      | 48,679     |      |   | 44,313   |  
|Amortization expense                                                                     |      | 11,243     |      |   | 5,454    |  
|Option and restricted stock expense                                                      |      | 10,869     |      |   | 8,566    |  
|                                                                                        
|Change in working capital, net of acquisitions:                                          |      |            |      |   |          |  
|Change in tax accounts:                                                                  |      |            |      |   |          |  
|Current and deferred income taxes                                                        |      | 56,457     |      |   | 60,941   |  
|Resolution of income tax audits                                                          |      | (3,480     | )    |   | (86,356  | )
|Receivables                                                                              |      | (43,240    | )    |   | (29,439  | )
|Inventories and other current assets                                                     |      | (4,178     | )    |   | (3,743   | )
|Accounts payable                                                                         |      | 15,936     |      |   | 36,741   |  
|Deferred revenue                                                                         |      | 3,093      |      |   | 1,540    |  
|Accrued liabilities                                                                      |      | 309        |      |   | 17,848   |  
|Other, net                                                                               |      | 7,030      |      |   | 6,282    |  
|                                                                                         |     
|Net Cash Provided from Operating Activities from Continuing
  Operations                 |      | 289,286    |      |   | 242,708  |  
|                                                                                         |     
|Cash Flows from Investing Activities from Continuing Operations:                         |      |            |      |   |          |  
|Property additions                                                                       |      | (52,492    | )    |   | (41,771  | )
|Sale of equipment and other assets                                                       |      | 1,830      |      |   | 2,838    |  
|Business acquisitions, net of cash acquired                                              |      | (143,406   | )    |   | (33,719  | )
|Notes receivable, financial investments and securities                                   |      | (26,495    | )    |   | (8,371   | )
|                                                                                         |     
|Net Cash Used for Investing Activities from Continuing Operations                        |      | (220,563   | )    |   | (81,023  | )
|                                                                                         |     
|Cash Flows from Financing Activities from Continuing Operations:                         |      |            |      |   |          |  
|Borrowings of debt                                                                       |      | 1,259,565  |      |   | 730,287  |  
|Payments of debt                                                                         |      | (1,251,326 | )    |   | (894,102 | )
|Shareholders dividends                                                                  |      | (133,233   | )    |   | (128,048 | )
|Purchase of ServiceMaster stock                                                          |      | (86,053    | )    |   | (52,324  | )
|Proceeds from employee share plans                                                       |      | 54,606     |      |   | 29,518   |  
|                                                                                         |     
|Net Cash Used for Financing Activities from Continuing Operations                        |      | (156,441   | )    |   | (314,669 | )
|                                                                                         |     
|Cash Flows from Discontinued Operations:                                                 |      |            |      |   |          |  
|Cash provided from (used for) operating activities                                       |      | (18,662    | )    |   | 14,181   |  
|Cash provided from (used for) investing activities:                                      |      |            |      |   |          |  
|Proceeds from sale of businesses                                                         |      | 115,415    |      |   |         |  
|Other investing activities                                                               |      | 132        |      |   | (3,315   | )
|                                                                                         |     
|Net Cash Provided from (Used for) Discontinued Operations                                |      | 96,885     |      |   | 10,866   |  
|                                                                                         |     
|Cash Increase (Decrease) During the Year                                                 |      | 9,167      |      |   | (142,118 | )
|                                                                                         |     
|Cash and Cash Equivalents at December 31                                                 | $    | 123,675    |      | $ | 114,508  |  
|                                                                                         |     

|                                                                
|----------------------------------------------------------------
|See accompanying Notes to the Consolidated Financial Statements.

|30
|--



|Notes to the Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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. The financial results as well as the assets and liabilities related
to American Residential Services and American Mechanical Services which were sold during 2006 have
been classified as discontinued operations in all periods.
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 revenue recognition, the allowance for uncollectible 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 outcome of outstanding
litigation; accruals for income tax liabilities as well as deferred tax accounts; the deferral and
amortization of customer acquisition costs; work-in-process balances related to commercial disaster
response and reconstruction projects; 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. InStar has receivables from customers that were insured by a family of insurance
companies in Florida that are insolvent, and whose claims are being administered by the Florida Insurance
Guaranty Association. Should the Company be unable to collect the balance of these and/or other hurricane-related
receivables, it may have to initiate legal action. While InStar has a history of recovering amounts
related to its disaster recovery projects, the current circumstances increase the uncertainties in
estimating the amounts recoverable on certain projects. The allowance for doubtful accounts at December
31, 2006 reflects the estimated losses resulting from the inability of these customers to make required
payments. If the estimated amounts recoverable on these projects differ from amounts ultimately collected,
those differences will be recognized as income or loss.
Accounts receivable and work-in-process balances for commercial disaster response and reconstruction

projects are recorded based on estimates of the percentage of completion of the projects, which
includes
several factors including the contract values, the total expected costs to complete the
projects,
historical returns and margins on comparable projects, and the mix and type of labor
and equipment
required to complete the project.
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, as well as warranty claims in the American Home Shield business, are made
based on the Companys claims experience and actuarial projections. Termite damage claim accruals
are recorded based on both the historical rates of claims incurred within a contract year and the
cost per claim. 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 Statement of Financial Accounting Standards (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 and pest control services, as well as 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.,

|31
|--



|Notes to the Consolidated Financial Statements
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. Those costs bear a direct relationship to the fulfillment of the Companys
obligations under the contracts and are representative of the relative value provided to the customer
(proportional performance method). Home warranty contract revenue is recognized based on the expected
emergence of total claim costs. The Company regularly reviews its estimates of direct costs for its
termite bait and home warranty contracts and adjusts the estimates when appropriate. Revenues from
the Companys commercial disaster response and reconstruction projects are recognized using
the percentage of completion method in the ratio that total incurred costs bear to total estimated
costs. Revenue from trade name licensing arrangements is recognized when earned. Franchised revenue
(which in the aggregate represents approximately four 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. Franchise 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 profits from
the franchised operations (excluding trade name licensing) comprised 11.3, 10.5 and 10.3 percent
of consolidated operating income before headquarter overhead and restructuring charges in 2006, 2005
and 2004, respectively. The portion of total franchise fee income related to initial fees received
from the sale of a franchise was immaterial to the Companys consolidated financial statements for all periods.
The Company had $442 million and $433 million of deferred revenue at December 31, 2006 and 2005, 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 are incurred, 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 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 LawnCare has significant seasonality in its business. In the winter and 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 LawnCare defers these incremental selling expenses, pre-season
advertising costs and annual repairs and maintenance procedures that are performed primarily in the
first quarter. These costs are deferred and recognized in proportion to the contract 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 and TruGreen LawnCare, consisting primarily of direct-mail promotions, is capitalized
and amortized over its expected period of future benefits.
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
($1.6 billion), trade names ($215 million) and other intangible assets ($34 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 2006 goodwill and trade
name impairment review, the Company carried forward the valuations for all reporting units except
InStar, which was purchased during the first quarter of 2006.
As required by SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets,
the Companys long-lived
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|32
|--



|Notes to the Consolidated Financial Statements
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 amounts 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 $690 million and
$658 million and the estimated fair value is approximately $653 million and $666 million at December
31, 2006 and 2005, 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. The Company has historically hedged approximately two-thirds of its annual fuel
consumption of approximately 30 million gallons. The Companys fuel hedges are classified as
a cash flow hedges and as such, the hedging instruments are recorded on the balance sheet as either
an asset or liability at fair value, with the effective portion of changes in the fair value attributable
to the hedged risks recorded in other comprehensive income.
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 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 majority of the Companys receivables have little concentration of credit risk due to the
large number of customers with relatively small balances and their dispersion across geographical
areas. InStar has receivables from customers in Florida that were insured by a carrier that was placed
in liquidation in 2006 and whose claims are being administered by the state insurance guarantee association.
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 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 number of shares
used in the denominator include the shares issuable upon conversion of the securities.
Stock-Based Compensation: In December 2004, the Financial Accounting Standards Board 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 Accounting Principles Board Opinion 25, Accounting for Stock Issued
to Employees (APB 25). 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. SFAS
123(R) 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 SFAS 123(R). The
Company adopted the provisions of SFAS 123(R) effective January 1, 2006 using the modified prospective
method. Prior to adopting SFAS 123(R), and beginning in 2003, the Company was using the Prospective
Method as permitted under SFAS 148, Accounting for Stock-Based Compensation  Transition
and Disclosure, an amendment of FASB Statement No. 123, which required the Company to expense
the fair value of new employee option grants awarded subsequent to 2002.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|33
|--



|Notes to the Consolidated Financial Statements
The following table presents the proforma impact on continuing operations for the years ended December
31, 2005 and 2004 of compensation expense relating to stock option awards as computed under SFAS
123(R):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                              

|(In thousands,
      except per share data)                                                                      | 2005 |         | 2004 |  
|---------------------------------------------------------------------------------------------------------------- | ---- | ------- | ---- | -
|                                                                                                                 |     
|Net income as reported (income from
 continuing operations)                                                      | $    | 180,561 |      | $
|Add back: Stock-based compensation
     expense included in reported net
     income, net of related tax effects |      | 2,280   |      |  
|                                                                                                                
|Deduct: Stock-based compensation expense
     determined under SFAS 123(R)                                       |      | (5,742  | )    |  
|                                                                                                                 |     
|Proforma net income                                                                                              | $    | 177,099 |      | $
|                                                                                                                
|Basic Earnings Per Share:                                                                                        |      |         |      |  
|As reported                                                                                                      | $    | 0.62    |      | $
|Proforma                                                                                                         |      | 0.61    |      |  
|                                                                                                                
|Diluted Earnings Per Share:                                                                                      |      |         |      |  
|As reported                                                                                                      | $    | 0.61    |      | $
|Proforma                                                                                                         |      | 0.60    |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 Accounting
for Uncertain Tax Positions (FIN 48). FIN 48 provides guidance on the accounting for and disclosure
of tax positions accounted for in accordance with SFAS 109. FIN 48 requires that the effects of a
tax position be initially recognized when it is more likely than not (which is defined
as a greater than 50 percent chance) that the position will be sustained upon examination by the
taxing authorities. In addition, FIN 48 requires additional disclosures regarding tax positions.
FIN 48 is effective beginning January 1, 2007. The Company has assessed the impact of FIN 48 to the
Companys consolidated financial position, results of operations and cash flows. The Company
does not expect the adoption of this Statement to have a material effect on these Consolidated Financial
Statements.
In September 2006, the Financial Accounting Standards Board issued SFAS 157, Fair Value Measurement.

This Statement defines fair value, establishes a framework for measuring fair value in generally

accepted accounting principles (GAAP), and expands disclosures about fair value measurements. There

are no new fair value measurements required. This Statement is effective for financial statements

issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the

impact of this Statement to the Companys consolidated financial position, results of operations

and cash flows; however, the Company does not expect the adoption of this Statement to have a material

effect on these Consolidated Financial Statements.
In February 2007, the Financial Accounting Standards Board issued SFAS 159, The Fair Value Option

for Financial Assets and Financial Liabilities. This Statement permits entities to choose
to
measure at fair value many financial instruments and certain other items such as investments,
debt
and derivative instruments. This Statement is effective for financial statements issued for
fiscal
years beginning after November 15, 2007. The Company is currently assessing the impact of
this Statement
on its Consolidated Financial Statements.
Recently Adopted Accounting Principles:As discussed in the Stock-Based Compensation section above, the Company adopted the provisions
of SFAS 123(R) effective January 1, 2006 using the modified prospective method. The adoption of SFAS
123(R) reduced earnings per share in 2006 by less than $.01.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulleting No. 108
(SAB 108). SAB 108 states that registrants should use both the balance sheet approach and an income
statement approach when quantifying and evaluating the materiality of misstatements. SAB 108 provides
guidance on correcting errors under the dual approach and provides transition guidance for correcting
errors in prior years. SAB 108 was effective for the year ending December 31, 2006 and its adoption
did not have a material impact on the Companys consolidated financial position, results of
operations or cash flows.
Business Segment Reporting
The business of the Company is conducted through five reportable segments: TruGreen LawnCare, TruGreen
LandCare, Terminix, American Home Shield and Other Operations and Headquarters.
In accordance with SFAS 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 LawnCare segment provides residential and commercial lawn care services. The TruGreen
LandCare segment provides landscaping services primarily 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 and Headquarters segment includes InStar Services Group, a direct provider of
disaster response and reconstruction services as well as 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. The Other Operations
and Headquarters 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

|34
|--



|Notes to the Consolidated Financial Statements
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, 2006, 2005, and 2004 is presented below.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|35
|--



|Notes to the Consolidated Financial Statements
|----------------------------------------------
|                                              

|Business
      Segment Table(In thousands)                                                   | 2006 |           | % Change |  | 2005    |        | % Change |           | 2004 |   
|-------------------------------------------------------------------------------------------- | ---- | --------- | -------- |  | ------- | ------ | -------- | --------- | ---- | --
|
|Operating
      Revenue:                                                                     |      |           |          |  |         |        |          |           |      |   
|TruGreen
      LawnCare                                                                      | $    | 1,052,257 |          |  | **3**   | **%**  | $        | 1,024,641 |      |   
|TruGreen
      LandCare                                                                      |      | 444,338   |          |  | **(2**  | **)**  |          | 453,323   |      |   
|Terminix                                                                                     |      | 1,075,481 |          |  | **2**   |        |          | 1,056,285 |      |   
|American
      Home Shield                                                                   |      | 564,817   |          |  | **7**   |        |          | 528,687   |      |   
|Other
      Operations and Headquarters                                                      |      | 292,252   |          |  | **66**  |        |          | 176,542   |      |   
|                                                                                             |     
|Total Operating
      Revenue                                                                | $    | 3,429,145 |          |  | **6**   | **%**  | $        | 3,239,478 |      |   
|                                                                                             |     
|Operating
      Income (Loss):(1, 2)                                                         |      |           |          |  |         |        |          |           |      |   
|TruGreen
      LawnCare                                                                      | $    | 157,695   |          |  | **(8**  | **%)** | $        | 171,758   |      |   
|TruGreen
      LandCare                                                                      |      | (587      | )        |  | **N/M** |        |          | 4,317     |      |   
|Terminix                                                                                     |      | 152,161   |          |  | **5**   |        |          | 145,568   |      |   
|American
      Home Shield                                                                   |      | 62,780    |          |  | **(12** | **)**  |          | 70,959    |      |   
|Other
      Operations and Headquarters(2)                                                   |      | (45,727   | )        |  | **13**  |        |          | (52,519   | )    |   
|                                                                                             |     
|Total Operating
      Income                                                                 | $    | 326,322   |          |  | **(4**  | **%)** | $        | 340,083   |      |   
|                                                                                             |     
|Capital Employed:
      (3)                                                                  |      |           |          |  |         |        |          |           |      |   
|TruGreen
      LawnCare                                                                      | $    | 871,145   |          |  | **7**   | **%**  | $        | 812,873   |      |   
|TruGreen
      LandCare                                                                      |      | 40,571    |          |  | **20**  |        |          | 33,900    |      |   
|Terminix                                                                                     |      | 698,063   |          |  | **7**   |        |          | 652,230   |      |   
|American
      Home Shield                                                                   |      | 250,711   |          |  | **21**  |        |          | 207,864   |      |   
|American
      Home Shield without cash and 
                marketable securities
      (3) |      | *(72,329* | *)*      |  | ***4*** |        | **       | *(75,026* | *)*  | **
|Other
      Operations and Headquarters                                                      |      | 18,790    |          |  | **(82** | **)**  |          | 105,923   |      |   
|                                                                                             |     
|Total Capital
      Employed                                                                 | $    | 1,879,280 |          |  | **4**   | **%**  | $        | 1,812,790 |      |   
|                                                                                             |     
|Identifiable
      Assets:                                                                   |      |           |          |  |         |        |          |           |      |   
|TruGreen
      LawnCare                                                                      | $    | 932,584   |          |  | **5**   | **%**  | $        | 885,153   |      |   
|TruGreen
      LandCare                                                                      |      | 93,575    |          |  | **1**   |        |          | 92,694    |      |   
|Terminix                                                                                     |      | 909,984   |          |  | **6**   |        |          | 862,270   |      |   
|American
      Home Shield                                                                   |      | 593,293   |          |  | **12**  |        |          | 530,486   |      |   
|Other
      Operations and Headquarters                                                      |      | 588,027   |          |  | **(11** | **)**  |          | 658,267   |      |   
|                                                                                             |     
|Total Identifiable
      Assets                                                              | $    | 3,117,463 |          |  | **3**   | **%**  | $        | 3,028,870 |      |   
|                                                                                             |     
|Depreciation
      & Amortization Expense:                                                   |      |           |          |  |         |        |          |           |      |   
|TruGreen
      LawnCare                                                                      | $    | 14,462    |          |  | **15**  | **%**  | $        | 12,611    |      |   
|TruGreen
      LandCare                                                                      |      | 6,209     |          |  | **(26** | **)**  |          | 8,411     |      |   
|Terminix                                                                                     |      | 14,433    |          |  | **23**  |        |          | 11,778    |      |   
|American
      Home Shield                                                                   |      | 8,222     |          |  | **(3**  | **)**  |          | 8,492     |      |   
|Other
      Operations and Headquarters                                                      |      | 16,596    |          |  | **96**  |        |          | 8,475     |      |   
|                                                                                             |     
|Total Depreciation
      & Amortization Expense (4)                                          | $    | 59,922    |          |  | **20**  | **%**  | $        | 49,767    |      |   
|                                                                                             |     
|Capital Expenditures:                                                                        |      |           |          |  |         |        |          |           |      |   
|TruGreen
      LawnCare                                                                      | $    | 10,204    |          |  | **(13** | **%)** | $        | 11,724    |      |   
|TruGreen
      LandCare                                                                      |      | 6,776     |          |  | **85**  |        |          | 3,659     |      |   
|Terminix                                                                                     |      | 14,928    |          |  | **31**  |        |          | 11,417    |      |   
|American
      Home Shield                                                                   |      | 9,312     |          |  | **74**  |        |          | 5,343     |      |   
|Other
      Operations and Headquarters                                                      |      | 11,272    |          |  | **17**  |        |          | 9,628     |      |   
|                                                                                             |     
|Total Capital
      Expenditures                                                             | $    | 52,492    |          |  | **26**  | **%**  | $        | 41,771    |      |   
|                                                                                             |     

|                    
|--------------------
|N/M = Not meaningful
|                    

|(1) | Presented below is a reconciliation of segment operating income to income from continuing operations
  before income taxes.
|--- | ---------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                            

|(In thousands)                                        | 2006 |         |   |  |  | 2005 |   |         |   |  | 2004 | 
|----------------------------------------------------- | ---- | ------- | - |  |  | ---- | - | ------- | - |  | ---- | 
|                                                      |     
|Segment Operating Income                              | $    | 326,322 |   |  |  |      | $ | 340,083 |   |  |      | 
|Non-operating expense (income):                       |      |         |   |  |  |      |   |         |   |  |      | 
|Interest expense                                      |      | 61,395  |   |  |  |      |   | 56,999  |   |  |      | 
|Interest and investment income                        |      | (25,942 | ) |  |  |      |   | (19,832 | ) |  |      | 
|Minority interest and other expense, net              |      | 8,240   |   |  |  |      |   | 8,218   |   |  |      | 
|                                                      |     
|Income from Continuing Operations before Income Taxes | $    | 282,629 |   |  |  |      | $ | 294,698 |   |  |      | 
|                                                      |     

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The 2006 results include restructuring charges for severance, as well as costs associated with Project
  Accelerate, the Companys initiative to improve the effectiveness and efficiency of its functional
  support areas, and accruals for employee retention and severance to be paid in future periods that
  are related to the Companys decision to consolidate its corporate headquarters into its operations
  support center in Memphis, Tennessee and close its current headquarters in Downers Grove, Illinois.
  The restructuring charges totaled $21.6 million pretax.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(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 $323 million, $283 million and $258 million of cash and marketable
  securities at December 31, 2006, 2005 and 2004, 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)                                                       | 2006 |           |  |  |  | 2005 |   |           |  |  | 2004 | 
|-------------------------------------------------------------------- | ---- | --------- |  |  |  | ---- | - | --------- |  |  | ---- | 
|                                                                     |     
|Total Assets                                                         | $    | 3,117,463 |  |  |  |      | $ | 3,028,870 |  |  |      | 
|Less:                                                                |      |           |  |  |  |      |   |           |  |  |      | 
|Current liabilities, excluding current portion
    of long-term debt |      | 898,093   |  |  |  |      |   | 936,449   |  |  |      | 
|Long-term liabilities                                                |      | 340,090   |  |  |  |      |   | 279,631   |  |  |      | 
|                                                                     |     
|Total Capital Employed                                               | $    | 1,879,280 |  |  |  |      | $ | 1,812,790 |  |  |      | 
|                                                                     |     

|36
|--



|Notes to the Consolidated Financial Statements
|----------------------------------------------
|                                              

|(4) | There are no adjustments necessary to reconcile total depreciation and amortization as presented in
  the business segment table to the consolidated totals.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--



|Notes to the Consolidated Financial Statements
The Other Operations and Headquarters segment includes the operations of InStar,
ServiceMaster Clean and Merry Maids, as well as the Companys headquarters
function. During 2006, InStar (acquired February 28, 2006) reported revenue of
$96 million and operating income, net of first-year acquisition-related
amortization costs, of $2 million. The ServiceMaster Clean and Merry Maids
franchise operations reported combined revenue of $189 million, $169 million and
$156 million in 2006, 2005 and 2004, respectively and combined operating income
of $55 million, $51 million and $47 million in 2006, 2005 and 2004,
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)                  | 2006(1) |           | 2005 |   | 2004      | 
|------------------------------- | ------- | --------- | ---- | - | --------- | 
|                                |        
|TruGreen LawnCare               | $       | 740,249   |      | $ | 700,029   | 
|Terminix                        |         | 705,870   |      |   | 661,166   | 
|American Home Shield            |         | 86,918    |      |   | 85,526    | 
|Other Operations & Headquarters |         | 115,221   |      |   | 101,349   | 
|                                |        
|Total                           | $       | 1,648,258 |      | $ | 1,548,070 | 
|                                |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)   In the fourth quarter of 2006, $20 million of enterprise goodwill was reclassified to
the TruGreen LawnCare, Terminix, and American Home Shield segments from the Other Operations and
Headquarters 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. For the 2006 goodwill and trade name impairment review, the Company carried forward the
valuations for all reporting units, except InStar which was purchased during the first quarter of 2006.
In February 2006, the Company acquired InStar, a leading provider of commercial disaster response and
reconstruction services for approximately $85 million in cash. The results of InStars operations
have been included in the Companys consolidated financial statements since the acquisition
date. The purchase price was allocated to the underlying net assets acquired, consisting primarily
of trade receivables, project costs in excess of billings and accounts payable and accrued expenses.
In addition, the Company allocated $20 million to customer relationships, project backlog and other
intangible assets that have a weighted-average useful life of approximately five years. The Company
recorded $31 million of goodwill. In determining this preliminary allocation of purchase price, the
Company utilized the services of third-party valuation experts. The allocation of purchase price
is substantially complete. Pending receipt of additional information regarding the fair value of
certain pre-acquisition contingencies, the Company expects to finalize the purchase price allocation
during the first quarter of 2007. The remaining increase in goodwill and intangible assets for 2006
relates to the acquisition of Safeguard Pest Control and other tuck-in acquisitions primarily at
Terminix and TruGreen LawnCare.
The increase in goodwill and intangible assets in 2005 relates to tuck-in acquisitions completed throughout
the year by Terminix and TruGreen LawnCare, as well as the acquisition of a distributorship by ServiceMaster
Clean in the third quarter.
In April 2004, TruGreen LawnCare 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 LawnCare.
The table below summarizes the goodwill and intangible asset balances:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|(In thousands)           | 2006 |           | 2005 |   | 2004      |  
|------------------------ | ---- | --------- | ---- | - | --------- | -
|                         |     
|Goodwill (1)             | $    | 1,648,258 |      | $ | 1,548,070 |  
|Trade names(1)           |      | 215,493   |      |   | 215,493   |  
|                        
|Other intangible assets  |      | 80,098    |      |   | 49,981    |  
|Accumulated amortization |      | (46,374   | )    |   | (35,131   | )
|                         |     
|Net other intangibles    |      | 33,724    |      |   | 14,850    |  
|                         |     
|Total                    | $    | 1,897,475 |      | $ | 1,778,413 |  
|                         |     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)   Not subject to amortization.
(2)  Amortization expense of $11 million, $5 million and $6 million was recorded in 2006, 2005 and
2004, respectively. For the existing intangible assets, the Company anticipates amortization expense
of $10 million in 2007 declining ratably to approximately $2 million of amortization expense in 2011.
Income Taxes
In the ordinary course, the Company is subject to review by domestic and foreign taxing authorities,
including the IRS. 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

|38
|--



|Notes to the Consolidated Financial Statements
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 discontinued operations).
The U.S. Federal tax returns filed by the Company through the calendar year 2005 return have been reviewed
by the IRS. The Company paid $3 million (primarily in the first quarter of 2006) relating to the
resolution of the 2003 and 2004 audits. In the fourth quarter of 2006, the IRS completed the audit
of the Companys tax return for 2005 with no adjustments or additional payments required.
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:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                                            | 2006 |      | 2005 |  | 2004 |  
|----------------------------------------------------------- | ---- | ---- | ---- |  | ---- | -
|                                                            |     
|Tax at U.S. federal statutory rate                          |      | 35.0 | %    |  | 35.0 | %
|State and local income
 taxes, net of U.S.
 federal benefit |      | 3.5  |      |  | 3.3  |  
|Adjustment relating to the IRS agreement                    |      |      |      |  |     |  
|Tax credits                                                 |      | (0.7 | )    |  | (1.0 | )
|State NOL not previously recorded                           |      | (2.0 | )    |  |     |  
|Other                                                       |      | (1.8 | )    |  | 1.4  |  
|                                                            |     
|Effective rate                                              |      | 34.0 | %    |  | 38.7 | %
|                                                            |     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The effective tax rate for discontinued operations was a tax benefit of 0.0% in 2006 and included the
impact of non-deductible goodwill and tax expense of 39.5% in 2005. In 2004, the effective tax rate
for discontinued operations was a tax benefit of 72.7% and included a $9 million reduction in the
tax provision resulting from the Companys comprehensive agreement with the Internal Revenue
Service.
Income tax expense from continuing operations is as follows:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|(In thousands)  | 2006    |        
|--------------- | ------- | -------
|
|                | Current |        
|U.S. federal    | $       | 71,091 
|State and local |         | 3,199  
|                |        
|                | $       | 74,290 
|
|
|
|
|                | Current |        
|U.S. federal    | $       | 12,393 
|State and local |         | 1,723  
|                |        
|                | $       | 14,116 
|
|
|
|
|                | Current |        
|U.S. federal    | $       | 129,943
|State and local |         | 10,429 
|                |        
|                | $       | 140,372
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Deferred income tax expense results from timing differences in the recognition of income and expense
for income tax and financial reporting purposes. Deferred income tax balances reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting and income tax purposes. The deferred tax asset primarily reflects the impact of future
tax deductions related to the Companys accruals and certain net operating loss carryforwards.
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.
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 $50 to $55 million through 2012 for which no corresponding income
statement benefit is recorded. Subsequent to 2012, the benefit from the step-up in tax basis that
resulted from reincorporation will be fully amortized. The divestitures of ARS and AMS resulted in
a reduction of approximately $4 million in the average annual cash tax benefits; however, the cash
tax benefits were accelerated into 2006 and 2007 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)                                     | 2006 |          | 2005 |  
|-------------------------------------------------- | ---- | -------- | ---- | -
|                                                   |     
|Deferred tax assets (liabilities):                 |      |          |      |  
|Current:                                           |      |          |      |  
|Prepaid expenses                                   | $    | (14,300  | )    | $
|Receivables allowances                             |      | 14,900   |      |  
|Accrued insurance expenses                         |      | 10,900   |      |  
|Net operating loss and tax credit
   carryforwards |      | 1,600    |      |  
|Other accrued expenses                             |      | 24,300   |      |  
|                                                   |     
|Total current asset                                |      | 37,400   |      |  
|                                                   |     
|Long-Term:                                         |      |          |      |  
|Intangible assets (1)                              |      | (225,300 | )    |  
|Accrued insurance expenses                         |      | 6,100    |      |  
|Net operating loss and tax
   credit carryforwards |      | 44,100   |      |  
|Less valuation allowance                           |      | (1,800   | )    |  
|Other long-term obligations                        |      | 8,900    |      |  
|                                                   |     
|Total long-term liability                          |      | (168,000 | )    |  
|                                                   |     
|Net deferred tax asset (liability)                 | $    | (130,600 | )    | $
|                                                   |     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2006, the Company had tax effected federal and state net operating loss carryforwards
net of valuation allowances of approximately $41 million, expiring at various dates up to 2025. The
Company also had federal and state tax credit carryforwards net of valuation allowances

|39
|--



|Notes to the Consolidated Financial Statements
of approximately $3 million which expire at various dates up to 2024.
In 2006, cash paid for income taxes was $46 million, including a payment of $3 million relating to
the resolution of the 2003 and 2004 audits. In 2005, cash paid for income taxes was $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.
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.
Current Year
In February 2006, the Company acquired InStar, a leading provider of disaster response and reconstruction
services, for approximately $85 million in cash. The Company recorded $31 million of goodwill and
other intangible assets of $20 million related to the InStar acquisition.
During 2006, the Company completed several lawn care and pest control tuck-in acquisitions, including
Safeguard Pest Control (acquired in October 2006), for a total net purchase price of $82 million.
Related to these acquisitions, the Company recorded goodwill of approximately $69 million and other
intangible assets of $10 million.
Prior Years
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.
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.
Cash Flow Information for Acquisitions
Supplemental cash flow information regarding the Companys acquisitions is as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|(In thousands)                   |  |  | 2006  |             | 2005  |   | 2004   |  
|-------------------------------- |  |  | ----- | ----------- | ----- | - | ------ | -
|                                 | 
|Purchase price                   |  |  | **$** | **196,891** |       | $ | 53,692 |  
|Less liabilities
  assumed       |  |  |       | **(29,955** | **)** |   | (2,425 | )
|                                 | 
|Net purchase price               |  |  | **$** | **166,936** |       | $ | 51,267 |  
|                                 | 
|Net cash paid
  for acquisitions |  |  | **$** | **143,406** |       | $ | 33,719 |  
|Value of shares issued           |  |  |       | **9,270**   |       |   | 1,191  |  
|Seller financed debt             |  |  |       | **14,260**  |       |   | 16,357 |  
|                                 | 
|Payment for
  acquisitions       |  |  | **$** | **166,936** |       | $ | 51,267 |  
|                                 | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Discontinued Operations
Current Year Dispositions
In the third quarter of 2006, the Company completed the sales of American Residential Services (ARS)
and American Mechanical Services (AMS) generating gross cash proceeds of approximately $115 million,
which was used to reduce outstanding debt balances. The results of the ARS/AMS operations, which
provide heating, ventilation, air conditioning (HVAC), plumbing and electrical installation and repair,
have been reported within the financial statement caption discontinued operations for
all periods. During the first quarter of 2006, the Company recorded a $25 million after-tax ($42
million pretax) impairment charge for expected losses on the disposition of certain ARS/AMS properties
held pending sale. Related to the sales of the ARS and AMS businesses, the Company recorded an after-tax
net loss of ($0.5) million. The sale of ARS resulted in the elimination of $56 million of goodwill
that had previously been included in the assets of discontinued operations.
Prior Year 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.
Financial Information for Discontinued Operations
Reported Discontinued operations for all periods presented include the operating results
of the sold and discontinued businesses noted above. The operating results and financial position
of discontinued operations are as follows:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|(In thousands, except per share data)
      Operating Results: |  |  | 2006  |             | 2005  |   | 2004    | 
|-------------------------------------------------------------- |  |  | ----- | ----------- | ----- | - | ------- | 
|                                                               | 
|Operating revenue                                              |  |  | **$** | **518,830** |       | $ | 764,888 | 
|                                                               |  |  |       |             |       |   |         | 
|Operating income                                               |  |  |       | **14,314**  |       |   | 30,355  | 
|Impairment charge                                              |  |  |       | **(42,000** | **)** |   |        | 
|                                                               | 
|Pretax income (loss)                                           |  |  |       | **(27,686** | **)** |   | 30,355  | 
|                                                               |  |  |       |             |       |   |         | 
|Provision (benefit) for income
  Taxes (1)                     |  |  |       | **(11,312** | **)** |   | 11,991  | 
|                                                               |  |  |       |             |       |   |         | 
|(Loss) on sale, net of tax                                     |  |  |       | **(495**    | **)** |   |        | 
|                                                               | 
|Income (loss) from
  discontinued operations                   |  |  | **$** | **(16,869** | **)** | $ | 18,364  | 
|                                                               | 
|Diluted income (loss) from
  discontinued operations           |  |  | **$** | **(0.06**   | **)** | $ | 0.06    | 
|                                                               | 

|    |                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2004 includes a $9 million non-cash reduction in the tax provision of 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:   |  |  | 2006  |            | 2005 |  
|--------------------- |  |  | ----- | ---------- | ---- | -
|                      | 
|Current assets        |  |  | **$** | **2,343**  |      | $
|Long-term assets      |  |  |       | ****      |      |  
|                      | 
|Total assets          |  |  | **$** | **2,343**  |      | $
|                      | 
|Current liabilities   |  |  | **$** | **7,644**  |      | $
|Long-term liabilities |  |  |       | **7,541**  |      |  
|                      | 
|Total liabilities     |  |  | **$** | **15,185** |      | $
|                      | 

|40
|--



|Notes to the Consolidated Financial Statements
The table below summarizes the activity during the twelve months ended December 31, 2006 for the remaining
liabilities from operations that were discontinued in years prior to 2006 (i.e., does not include
the liabilities of the sold ARS/AMS businesses). The remaining obligations primarily relate to long-term
self-insurance claims. The Company believes that the remaining reserves continue to be adequate and
reasonable.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|(In thousands)                                    | Balance at
      Dec. 31,
      2005 |       | Cash
      Payments
      or Other |   | Income/
      (Expense) |  | Balance at
      Dec. 31,
      2006 |       
|------------------------------------------------- | ------------------------------------ | ----- | ---------------------------------- | - | ----------------------- |  | ------------------------------------ | ------
|                                                  |                                     
|Remaining liabilities of discontinued operations: |                                      |       |                                    |   |                         |  |                                      |       
|Land Care Construction                            | $                                    | 3,112 |                                    | $ | 1,345                   |  | $                                    | 53    
|Land Care utility line clearing business          |                                      | 3,238 |                                    |   | 897                     |  |                                      | 266   
|Certified Systems, Inc. and other                 |                                      | 9,686 |                                    |   | 4,447                   |  |                                      | (1,856
|                                                  |                                     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At December 31, 2006, there were approximately $4 million of liabilities of ARS and AMS, consisting

of severance and wind-down costs that are expected to be paid in the early part of 2007.
Restructuring Charges
The 2006 results include restructuring charges for severance, as well as costs associated with Project
Accelerate, the Companys initiative to improve the effectiveness and efficiency of its functional
support areas. They also include costs related to the Companys decision to consolidate its
corporate headquarters into its operations support center in Memphis, Tennessee and close its current
headquarters in Downers Grove, Illinois. These combined restructuring charges totaled $21.6 million
pretax, $6.9 million after-tax and $.02 per diluted share in 2006. The after-tax impact of the restructuring
charges includes $6 million of non-recurring net operating loss carryforward benefits which became
realizable to the Company as a result of its decision to consolidate its corporate headquarters in
Memphis. These pretax charges are reported in the Restructuring Charges line in the Consolidated
Statements of Operations and are recorded in the Other Operations and Headquarters business segment.
The Company has implemented certain organizational changes focused on increasing the speed and intensity
of executing its strategic initiatives and accelerating the growth of the Company. Early in 2006,
the Company launched Project Accelerate, an internal, multi-phase restructuring project designed
to improve the effectiveness and efficiency of all functional support areas. In the second quarter,
Jonathan P. Ward resigned as Chairman and Chief Executive Officer of the Company and the Company
appointed J. Patrick Spainhour to serve as Chairman and Chief Executive Officer. Related to these
organizational changes, the Company recorded restructuring charges of $11.2 million in 2006. These
charges included severance ($4.4 million for the former Chief Executive Officer and $3.2 million
for other individuals), and third-party professional fees and other expenses ($3.6 million) directly
related to implementing the organizational changes.
In October, 2006, the Board of Directors of the Company approved a plan to consolidate its corporate
headquarters into its operations support center in Memphis, Tennessee and close its current headquarters
in Downers Grove, Illinois. The transition to Memphis is targeted to be completed by November 2007.
In connection with the corporate headquarters consolidation plan, the Company expects to incur incremental
costs in the range of $30 to $35 million through the end of 2007. Such costs include employee retention
and severance costs of approximately $21 to $24 million, lease termination costs of approximately
$5 million, and recruiting costs of approximately $4 to $6 million. Almost all such costs will be
cash expenditures. The Downers Grove, Illinois office currently employs approximately 150 individuals,
virtually all of which will be impacted by the decision to consolidate headquarters. The Downers
Grove functions affected by the consolidation include corporate accounting, treasury and finance,
tax and portions of the legal, information technology, marketing, and mergers and acquisitions functions.
In accordance with U.S. GAAP, these costs are being expensed throughout the transition period. The
Company recognized approximately $10.4 million of these charges in the fourth quarter of 2006 and
the remaining charges will be recognized over the first ten months of 2007. The 2006 charge consisted
of $6.9 million of employee retention and severance, $2.3 million of lease termination costs and
$1.2 million of recruiting costs.
In addition to the charges noted above, the Company expects to incur certain other cash charges throughout
the consolidation process. These additional charges include training of replacement employees, the
costs related to headcount overlap during a transitional training period, and temporary employee
staffing, should the need arise. While the estimate of these costs, in total, is not yet final, the
Company currently expects that they will total approximately $3 million pretax, with virtually all
occurring during the first nine months of 2007.
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 2006, 2005 and 2004 was $172 million, $163 million and $147 million, respectively.
Future long-term non-cancelable operating lease payments are approximately $73 million in 2007, $59
million in 2008, $47 million in 2009, $27 million in 2010, $18 million in 2011, and $19 million in
2012 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

|41
|--



|Notes to the Consolidated Financial Statements
payments due under the guarantees. At December 31, 2006 there was approximately $229 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.
At December 31, 2006 the Company has recorded the estimated fair value of this guarantee (approximately
$1.1 million) in the Consolidated Statement of Financial Position.
The Company maintains lease facilities with banks totaling $68 million which provide for the financing
of branch properties to be leased by the Company. At December 31, 2006, approximately $68 million
was funded under these facilities. Approximately $15 million of these leases are treated as capital
leases and have been included on the balance sheet as assets with related debt as of December 31,
2006. 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, 2006, the Companys residual
value guarantee related to the leased assets totaled $53 million for which the Company has recorded
the estimated fair value of this guarantee (approximately $0.7 million) in the Consolidated Statements
of Financial Position.
Approximately $27 million of the Companys assets are leased under capital leases, consisting
of certain branch properties discussed above, a call center facility, and equipment. Future lease
payments under capital leases are approximately $2 million in 2007, $16 million in 2008, $1 million
in 2009, $1 million in 2010, $4 million in 2011, and $3 million in 2012 thereafter.
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 effect on the Companys business, financial condition, or results of operations.
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. At December 31, 2006, these accruals totaled $202 million, with $89 million
included in Self-insured claims and related expenses and $113 million included in Other
long-term obligations in the accompanying Consolidated Statements of Financial Position. In
2005, Terminix recorded a $10 million unfavorable correction in estimating prior years termite
damage claim reserves which is reflected in the total mentioned above. 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.
As part of the ARS and AMS sale agreements, the Company continues to be obligated to third parties
with respect to bonds (primarily performance and license type), operating leases for which the Company
has been released as being the primary obligor, certain real estate leased and operated by the buyers,
and other guarantees of payment. The Companys obligations under these agreements may be limited
in terms of time and or amount, and in some cases, the Company may have recourse against the buyers
for any potential future payments made by the Company. At the present time, the Company does not
believe it is probable that the buyers will default on their obligations subject to guarantee. The
fair value of the Companys obligations related to these guarantees is not significant and no
liability has been recorded.
The Company has guarantees on certain bonds issued by the divested companies, primarily performance
and license type bonds. The maximum payments the Company could be required to make if the buyers
are unable to fulfill their obligations is approximately $21 million at December 31, 2006. Approximately
50 percent of the bonds expire in 2007, with the remaining bonds expiring primarily in 2008. The
Company believes that if it were to incur a loss on any individual bond guarantee, the likelihood
of which the Company believes is remote, such loss would not have a material effect on the Companys
business, financial condition or results of operations.
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 effect on the
Companys business, financial condition, or results of operations.
On November 8, 2006, InStar Services Group entered into a plea agreement with the United States
Attorneys Office for the Southern District of Florida requiring that InStar implement
an environmental compliance plan, be placed on probation for a period of up to five years, pay a
fine of $0.5 million for each count, and make a contribution of $2.0 million to the Florida Environmental
Task Force Trust Fund. Under the plea agreement, the Company has agreed to take all reasonable steps
necessary to ensure the implementation and enforcement of the environmental compliance plan by InStar.
Since the conduct of InStar that was the subject of the plea agreement occurred prior to the Companys

acquisition of InStar, the Company pursued indemnification from the sellers of InStar for its

damages and expenses including fines, contributions and attorneys fees. On December
19,
2006, the Company, InStar and the sellers entered into a settlement agreement and mutual
release.
The sellers paid InStar $5 million in full settlement of all claims of InStar
and/or the
Company arising from the sale of InStar to the Company.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|42
|--



|Notes to the Consolidated Financial Statements
The Company believes that any disruption to the InStar business arising from the plea will not have
a material effect on the Companys financial condition or results of operations.
Employee Benefit Plans
Discretionary contributions to qualified profit sharing and non-qualified deferred compensation plans
were made in the amount of $10.2 million for 2006, $9.9 million for 2005 and $9.3 million for 2004.
Under the Employee Share Purchase Plan, the Company contributed $0.9 million in 2006 and $0.8 million
in 2005 and 2004, respectively. 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. At any time, the holders of this minority
interest 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, 2006, 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|Long-Term Debt                         |   |         |   |  
|-------------------------------------- | - | ------- | - | -
|Long-term debt includes the following:
|
|
|                                       |  
|6.95% maturing in 2007                 | $ | 49,225  |   | $
|7.88% maturing in 2009                 |   | 179,000 |   |  
|7.10% maturing in 2018                 |   | 79,473  |   |  
|7.45% maturing in 2027                 |   | 195,000 |   |  
|7.25% maturing in 2038                 |   | 82,650  |   |  
|Other                                  |   | 105,074 |   |  
|Less current portion                   |   | (21,549 | ) |  
|                                       |  
|Total long-term debt                   | $ | 668,873 |   | $
|                                       |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 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 2006, the Company was in compliance with
the covenants related to these debt agreements and, based on its operating outlook for 2007, 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, 2006, 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, 2006, the Company
had $30 million outstanding under this facility and had issued approximately $133 million of letters
of credit under the facility and had unused commitments of approximately $337 million. 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 2006, $57 million in 2005 and $60 million in 2004. Future
scheduled long-term debt payments are $71 million in 2007 (average rate of 6.5 percent), $27 million
in 2008 (average rate of 7.0 percent), $187 million in 2009 (average rate of 8.0 percent), $11 million
in 2010 (average rate of 6.7 percent) and $8 million in 2011 (average rate of 6.8 percent). The Companys
next significant debt maturity of approximately $49 million is in August 2007. The Company has both
the intent and ability to pay this debt with other long-term financing.
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 accumulated other comprehensive income. As of December 31, 2006 and
2005, the Companys investments consist primarily of domestic publicly traded debt of $115 million
and $108 million, respectively and common equity securities of $183 million and $144 million, respectively.
The aggregate market value of the Companys short-term and long-term investments in debt and equity
securities was $297 million and $252 million and the aggregate cost basis

|43
|--



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|was $284 million and $246 million at December 31, 2006 and 2005, respectively.
Interest and dividend income received on cash and marketable securities was $26 million, $20 million,
and $15 million, in 2006, 2005, and 2004, 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 $18 million and $13 million as
of December 31, 2006 and 2005, respectively. Unrealized losses were approximately $3 million and
$7 million as of December 31, 2006 and 2005, respectively. The portion of these unrealized losses
older than one year at December 31 was less than $2 million for both 2006 and 2005. The aggregate
fair value of the investments with unrealized losses totaled $109 million and $133 million at December
31, 2006 and 2005, 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 LawnCare and Terminix to a wholly-owned, bankruptcy-remote subsidiary, ServiceMaster
Funding LLC. 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 2006, 2005 and 2004, 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)**    |       | **2006**   | 
|                                                |      
|Net unrealized holding  gains arising in period | **$** | **14,562** | 
|Tax expense                                     |       | **5,825**  | 
|                                                |      
|Net of tax amount                               | **$** | **8,737**  | 
|                                                |      
|Net gains realized                              | **$** | **10,937** | 
|Tax expense                                     |       | **4,375**  | 
|                                                |      
|Net of tax amount                               | **$** | **6,562**  | 
|                                                |      

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

|                                                 |       |            | 
|------------------------------------------------ | ----- | ---------- | 
|**(In thousands)**                               |       | **2006**   | 
|                                                 |      
|Net unrealized gains on  securities,  net of tax | **$** | **6,799**  | 
|Foreign currency Translation                     |       | **3,319**  | 
|                                                 |      
|Total                                            | **$** | **10,118** | 
|                                                 |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Shareholders Equity
The Company has authorized one billion shares of common stock with par value of $.01. In January 2007,
the Company announced the declaration of a cash dividend of $.12 per share payable on February 27,
2007 to shareholders of record on February 16, 2007.
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 3.6
million shares available for issuance under this registration statement at December 31, 2006.
The Company maintains a shareholder approved incentive plan that allows for the issuance of equity-based
compensation awards, including stock options, stock appreciation rights, share grants and restricted
stock awards. The Company uses treasury stock and newly issued stock to satisfy equity-based compensation
awards. As of December 31, 2006, there were approximately 27 million Company shares available for
issuance upon the exercise of outstanding employee stock options and stock appreciation rights and
for future grants. Also, as of December 31, 2006, there was approximately $16 million of total unrecognized
compensation expense related to non-vested share-based compensation arrangements. That cost is expected
to be recognized primarily over the next four years.
The Companys stock options and stock appreciation rights, collectively option(s),
are issued at a price not less than the fair market value on the grant date and expire within 10
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.
Options generally vest over a five year period.
In December 2004, the Financial Accounting Standards Board 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 Accounting Principles Board Opinion 25, Accounting for Stock Issued
to Employees (APB 25). 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. SFAS
123(R) 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 SFAS 123(R). The
Company has adopted the

|44
|--



|Notes to the Consolidated Financial Statements
provisions of SFAS 123(R) effective January 1, 2006 using the modified prospective method which requires application of the rule after January 1, 2006.
Prior to adopting SFAS 123(R), and beginning in 2003, the Company adopted SFAS
123 using the Prospective Method as permitted under SFAS 148,
Accounting for Stock-Based Compensation  Transition and Disclosure,
an amendment of FASB Statement No. 123, which required the Company to
expense the fair value of new employee option grants awarded subsequent to 2002.
Related to the unvested option awards granted prior to 2003, the adoption of
SFAS 123(R) in 2006 resulted in incremental compensation expense for the twelve
months ended December 31, 2006 of approximately $3.0 million pretax, $1.8
million after-tax. Also, upon the adoption of SFAS 123(R) and effective January 1, 2006, the Company reclassified
within Shareholders Equity the $14.4 million balance of Restricted
stock (unearned compensation) to Additional paid-in
capital.

Prior to the adoption of SFAS 123(R), the Company adjusted option expense related to forfeited options
as the forfeitures occurred. With the adoption of SFAS 123(R), the Company is estimating the forfeitures
that will occur and is recording periodic option expense net of the estimated forfeitures. The cumulative
impact of the change in accounting for forfeitures was not material to the consolidated financial
statements. As required by SFAS 123(R), the Company has included in Cash Used for Financing Activities
from Continuing Operations approximately $1 million of excess tax benefits associated with options
exercised and restricted stock that vested in 2006.
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.
Total pretax option expense and income tax benefits recognized was approximately $6.7 million and $2.7
million, respectively for the twelve months ended December 31, 2006, $3.8 million and $1.5 million
respectively, for the twelve months ended December 31, 2005, and $2.9 million and $1.2 million for
the twelve months ended December 31, 2004.
Under a 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 exercises and employee terminations 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 using a term structure.
The lattice-based model used the following assumptions for options awarded in 2006: range of expected
volatility 17.90 percent to 42.10 percent; weighted-average volatility of 19 percent; expected life
(in years) of 9; dividend yield of 3.0 percent; risk-free rate in the range of 4.39 percent to 4.64
percent; and the weighted-average risk-free rate of 4.54 percent.
The lattice-based model used the following assumptions 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: risk-free rate of 3.7 percent; dividend yield
of 4.0 percent; share price volatility of 30.6 percent; and average expected life (in years) 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 granted to employees during the twelve months ended December 31, 2006, 2005 and 2004 had a
weighted average fair value of $2.52, $2.80 and $2.35, respectively.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|45
|--



|Notes to the Consolidated Financial Statements
A summary of option activity as of December 31, 2006, 2005 and 2004 and changes during the twelve months
then ended is presented below:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                      

|                                     |  |                         |   |  
|------------------------------------ |  | ----------------------- | - | -
|                                     |  | **Stock
      Options** |   |  
|                                     | 
|Total exercisable, December 31, 2003 |  | 20,346,581              |   | $
|Total outstanding, December 31, 2003 |  | 31,709,766              |   | $
|                                     | 
|**Transactions during 2004**         |  |                         |   |  
|Granted to employees                 |  | 2,049,680               |   | $
|Exercised                            |  | (1,250,434              | ) | $
|Terminated or resigned               |  | (545,085                | ) | $
|                                     | 
|Total exercisable, December 31, 2004 |  | 22,573,344              |   | $
|Total outstanding, December 31, 2004 |  | 31,963,927              |   | $
|                                     | 
|**Transactions during 2005**         |  |                         |   |  
|Granted to employees                 |  | 2,103,103               |   | $
|Exercised                            |  | (2,385,142              | ) | $
|Terminated or resigned               |  | (2,173,615              | ) | $
|                                     | 
|Total exercisable, December 31, 2005 |  | 22,057,309              |   | $
|Total outstanding, December 31, 2005 |  | 29,508,273              |   | $
|                                     | 
|**Transactions during 2006**         |  |                         |   |  
|Granted to employees                 |  | 2,325,250               |   | $
|Exercised                            |  | (5,201,108              | ) | $
|Terminated or resigned               |  | (2,570,509              | ) | $
|                                     | 
|Total exercisable, December 31, 2006 |  | 18,465,807              |   | $
|Total outstanding, December 31, 2006 |  | 24,061,906              |   | $
|                                     | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|During the twelve months ended December 31, 2006, 2005, and 2004, the total intrinsic value of awards
      exercised was approximately $11.1 million, $8.4 million and $5.2 million, respectively. The aggregate
      intrinsic value of outstanding and exercisable awards was $31.2 million and $24.8 million, respectively
      at December 31, 2006, $25.8 million and $19.9 million, respectively at December 31, 2005 and $70.9
      million and $48.0 million, respectively at December 31, 2004. The cash received from the exercise
      of options was approximately $48 million, $23 million, and $10 million for thetwelve months ended December 31, 2006, 2005, and 2004 respectively.
        The following table summarizes the range of exercise prices and the weighted average remaining contractual
        life of the options outstanding and the range of exercise prices for the options exercisable at December
        31, 2006:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                   |                                                                                                       |                                                |  |                                                                         |      
|---------------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------------------- |  | ----------------------------------------------------------------------- | -----
|**Range of
      Exercise Prices** |                                                                                                       | **Number
      Outstanding
      at 12/31/06** |  | **Weighted
      Average
      Remaining
      Contractual
      Term** |      
|                                   |                                                                                                      
|$8.40  10.78                      |                                                                                                       | 6,946,711                                      |  | 4                                                                       | Years
|$10.89  15.94                     |                                                                                                       | 11,720,750                                     |  | 4                                                                       | Years
|$16.12  22.33                     |                                                                                                       | 5,279,959                                      |  | 2                                                                       | Years
|$31.13  77.56                     |                                                                                                       | 114,486                                        |  | 1                                                                       | Year 
|                                   |                                                                                                      
|$8.40  77.56(1)                   |                                                                                                       | 24,061,906                                     |  | 4                                                                       | Years
|                                   |                                                                                                      
|(1)                                | The options priced at $77.56 are options assumed by the Company as a result of business acquisitions. |                                               
|                                   |                                                                                                      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Companys share grants and restricted stock awards have a general vesting period of five years
      and are restricted as to the sale or transfer of the shares prior to vesting. 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 fair value of the restricted stock awards is
      equal to the value of the Companys stock on the date of grant. The Company includes the vested
      and unvested portions of the restricted

|46
|--



|Notes to the Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|stock awards in shares outstanding in the denominator of its earnings per share calculations.
Restricted stock awards granted to employees during the twelve months ended December 31, 2006, 2005
and 2004 had a weighted average fair value of $12.10, $13.39 and $11.61, respectively, at the date
of grant. Total pretax share grant and restricted stock compensation expense for the twelve months
ended December 31, 2006, 2005, and 2004 was approximately $4.1 million, $4.8 million, and $3.0 million
respectively, and the income tax benefits recognized for these awards was approximately $1.6 million,
$1.9 million, and $1.2 million, respectively. A summary of the share grant and restricted stock activity
during the twelve months ended December 31, 2006, 2005 and 2004 are summarized in the table below:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                     |                                                 |          
|------------------------------------ | ----------------------------------------------- | ---------
|                                     | **Share Grants/
      Restricted 
      Stock** |          
|                                     |                                                
|Total outstanding, December 31, 2003 |                                                 | 537,700  
|                                     |                                                
|**Transactions during 2004**         |                                                 |          
|Granted to employees                 |                                                 | 988,309  
|Vested/exercised                     |                                                 | (109,827 
|Terminated or resigned               |                                                 | (16,491  
|                                     |                                                
|Total outstanding, December 31, 2004 |                                                 | 1,399,691
|                                     |                                                
|**Transactions during 2005**         |                                                 |          
|Granted to employees                 |                                                 | 598,723  
|Vested/exercised                     |                                                 | (270,695 
|Terminated or resigned               |                                                 | (144,842 
|                                     |                                                
|Total outstanding, December 31, 2005 |                                                 | 1,582,877
|                                     |                                                
|**Transactions during 2006**         |                                                 |          
|Granted to employees                 |                                                 | 625,894  
|Vested/exercised                     |                                                 | (489,904 
|Terminated or resigned               |                                                 | (714,406 
|                                     |                                                
|Total outstanding, December 31, 2006 |                                                 | 1,004,461
|                                     |                                                

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Earnings Per Share
        Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average
          number of shares outstanding for the period. The weighted average common shares for the diluted earnings
          per share calculation includes the incremental effect related to outstanding options 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. Shares potentially
          issuable under convertible securities have not been considered outstanding for 2005 as their inclusion
          results in a less dilutive computation. Had the inclusion of convertible securities not resulted
          in a less dilutive computation in 2005, 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.
      The following table reconciles both the numerator and the denominator of the basic earnings per share
        from continuing operations computation to the numerator and the denominator of the diluted earnings
        per share from continuing operations computation.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(In thousands,except per share date)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                               |                         |             |                         |  |                         |  |            |          |           
|------------------------------ | ----------------------- | ----------- | ----------------------- |  | ----------------------- |  | ---------- | -------- | ----------
|                               | **For year ended 2006** |             | **For year ended 2005** |  | **For year ended 2004** | 
|                               |                         |             |                         |  |                         | 
|**Continuing Operations:**     | **Income**              |             | **Shares**              |  | **EPS**                 |  | **Income** |          | **Shares**
|                               |                        
|Basic EPS                      | **$**                   | **186,568** |                         |  | **289,765**             |  | **$**      | **0.64** |           
|Effect of Dilutive Securities: |                         |             |                         |  |                         |  |            |          |           
|Options & SARS                 |                         |             |                         |  | **1,597**               |  |            |          |           
|Convertible securities         |                         | **4,888**   |                         |  | **8,000**               |  |            |          |           
|                               |                        
|Diluted EPS                    | **$**                   | **191,456** |                         |  | **299,362**             |  | **$**      | **0.64** |           
|                               |                        

|47
|--



|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, 2006 and 2005, and the related
consolidated statements of operations, shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2006. 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, 2006 and 2005,
and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2006, 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, 2006, 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 26, 2007 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 LLPChicago, IllinoisFebruary 26, 2007

|48
|--



|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 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 LawnCare and other business segments
of the Company incur pre-season advertising costs. In addition, TruGreen LawnCare 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)**   | **2006** |                 | **Chg** |  | **2005**
|                                            |         
|Continuing Operations:                      |          |                 |         |  |         
|Operating Revenue:                          |          |                 |         |  |         
|First Quarter                               | **$**    | **662,387**     |         |  | 6       
|Second Quarter                              |          | **1,024,624**   |         |  | 6       
|Third Quarter                               |          | **971,436**     |         |  | 5       
|Fourth Quarter                              |          | **770,698**     |         |  | 7       
|                                            |         
|                                            | **$**    | **3,429,145**   |         |  | 6       
|                                            |         
|Gross Profit:                               |          |                 |         |  |         
|First Quarter                               | **$**    | **227,717**     |         |  | 8       
|Second Quarter                              |          | **412,762**     |         |  | 3       
|Third Quarter                               |          | **372,334**     |         |  | 3       
|Fourth Quarter                              |          | **271,209**     |         |  | 6       
|                                            |         
|                                            | **$**    | **1,284,022**   |         |  | 5       
|                                            |         
|Income from Continuing Operations: (1)      |          |                 |         |  |         
|First Quarter                               | **$**    | **12,211**      |         |  | 11      
|Second Quarter                              |          | **74,746**      |         |  | (1      
|Third Quarter                               |          | **61,498**      |         |  | (12     
|Fourth Quarter (2), (3)                     |          | **38,113**      |         |  | 59      
|                                            |         
|                                            | **$**    | **186,568**     |         |  | 3       
|                                            |         
|Basic Earnings Per Share:                   |          |                 |         |  |         
|First Quarter                               | **$**    | **0.04**        |         |  |        
|Second Quarter                              |          | **0.26**        |         |  |        
|Third Quarter                               |          | **0.21**        |         |  | (13     
|Fourth Quarter                              |          | **0.13**        |         |  | 63      
|                                            |         
|                                            | **$**    | **0.64**        |         |  | 3       
|                                            |         
|Diluted Earnings Per Share: (1)             |         
|First Quarter                               | **$**    | **0.04**        |         |  |        
|Second Quarter                              |          | **0.25**        |         |  |        
|Third Quarter                               |          | **0.21**        |         |  | (9      
|Fourth Quarter (2), (3)                     |          | **0.13**        |         |  | 63      
|                                            |         
|                                            | **$**    | **0.64**        |         |  | 5       
|                                            |         
|**Discontinued Operations:**                |          |                 |         |  |         
|Income (Loss) from Discontinued Operations: |          |                 |         |  |         
|First Quarter                               |          | **($   26,524** | **)**   |  | N/M     
|Second Quarter                              |          | **2,400**       |         |  | (46     
|Third Quarter                               |          | **6,472**       |         |  | (43     
|Fourth Quarter (2), (3)                     |          | **783**         |         |  | (74     
|                                            |         
|                                            |          | **($   16,869** | **)**   |  | (192    
|                                            |         
|Diluted Earnings (Loss) Per Share:          |          |                 |         |  |         
|First Quarter                               |          | **($     0.09** | **)**   |  | N/M     
|Second Quarter                              |          | **0.01**        |         |  |        
|Third Quarter                               |          | **0.02**        |         |  | (50     
|Fourth Quarter (3)                          |          | ****           |         |  | (100    
|                                            |         
|                                            |          | **($     0.06** | **)**   |  | (200    
|                                            |         

| |                     
| | --------------------
| | N/M = Not meaningful
| |                     

|(1) | The 2006 results include restructuring charges for severance, as well as costs associated with Project
  Accelerate, the Companys initiative to improve the effectiveness and efficiency of its functional
  support areas, and accruals for employee retention and severance to be paid in future periods that
  are related to the Companys decision to consolidate its corporate headquarters into its operations
  support center in Memphis, Tennessee and close its current headquarters in Downers Grove, Illinois.
  The after-tax impact of the restructuring charges includes the benefit of state tax incentives granted
  to the Company as a result of its decision to consolidate its corporate headquarters in Memphis, Tennessee.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The table below summarizes the quarterly impacts of the restructuring charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | ($ in millions, except
        per share data) | First
      Quarter |   |  | Second
      Quarter |   |  | Third
      Quarter |   |  | Fourth
      Quarter |   |  | Full
      Year |  
| | ---------------------------------------------- | ------------------- | - |  | -------------------- | - |  | ------------------- | - |  | -------------------- | - |  | --------------- | -
| |                                                |                    
| | Pretax                                         | ($3.5               | ) |  | ($6.3                | ) |  | ($0.9               | ) |  | ($10.9               | ) |  | ($21.6          | )
| | After-tax                                      | (2.2                | ) |  | (3.8                 | ) |  | (0.5                | ) |  | (0.4                 | ) |  | (6.9            | )
| | Per diluted share                              | ($0.01              | ) |  | ($0.01               | ) |  | $                  |   |  | $                   |   |  | ($0.02          | )

|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In the fourth quarter of 2006, the Company recorded a reduction in income tax expense of $7 million
  ($0.02 per diluted share) resulting from the resolution of state tax items relating to a prior non-recurring
  transaction.                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                        
|(3) | As a result of a comprehensive agreement with the Internal Revenue Service regarding its examination of the Companys federal income taxes through the year 2002, 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
|    |                                                                                                                                                                                                                                                                                                                                                                        

|49
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| | to continuing operations ($.49 per diluted share) and $9 million related to discontinued operations
      ($.03 per diluted share). See the Income Taxes note in the Notes to the Consolidated
      Financial Statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|50
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|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, J. Patrick Spainhour, and ServiceMasters
Vice Chairman 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 Downers Grove office of ServiceMaster. 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. Spainhour 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 2006 that has materially affected, or is reasonably likely to materially affect, ServiceMasters
internal control over financial reporting.
Management Certifications.In June 2006, 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, 2006, 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
The following information is being provided pursuant to Item 5.02(e) of Form 8-K.
Entry into Separation Agreements.  In October 2006, the Board of Directors of the Company approved a plan to consolidate the Companys
headquarters into its operations support center in Memphis, Tennessee and close its current headquarters
in Downers Grove, Illinois. The Company believes the consolidation of the Downers Grove support functions
and positions with the operating unit leadership in Memphis will improve the speed and effectiveness
of communications and decision-making. The transition to Memphis is targeted to be completed by November
2007.
In connection with the consolidation plan, the Company offered approximately 150 employees located
in the Downers Grove office the opportunity to accept a relocation agreement relating to an employees
relocation from the Downers Grove office to the Memphis office or a separation agreement in the event
the employee chose not to relocate. On February 26, 2007, the Company entered into separation agreements
(each a Separation Agreement) approved by the Compensation and Leadership Development
Committee with each of Mitchell Engel, the Chief Marketing Officer, and Jim Kaput, Senior Vice
President and General Counsel.
Mr. Engels Separation Agreement provides that his separation date will be December 31, 2007.
Mr. Kaputs Separation Agreement provides that his separation date will be October 31, 2007.
In exchange for Messrs. Engels and Kaputs separate agreements not to compete against
the Company and not to solicit employees or customers of the Company for a period of two years after
their respective separation dates, Mr. Engel will receive an amount equal to two times his current
base salary and target annual bonus, or $1,784,000, and Mr. Kaput will receive an amount equal to
two times his current base salary and target annual bonus, or $1,700,000, in each case less applicable
tax withholdings. In addition, Messrs. Engel and Kaput will receive a retention bonus equal to $446,000
and $283,333, respectively, for performing services through their respective separation dates in
connection with the closure of the Downers Grove office and the consolidation of offices in Memphis.
During 2007, Messrs. Engel and Kaput will each participate in the Companys 2007 annual bonus
plan and any other compensation plans of the Company other than any long-term incentive plan. Messrs.
Engel and Kaput will cease participation in compensation plans on their respective separation dates.
If Mr. Engels employment with the Company is terminated by the Company without cause Mr. Engel
would receive, subject to the execution of a release by Mr. Engel, the amounts set forth above for
Mr. Engel. If Mr. Kaputs employment with the Company is terminated by the Company without cause
Mr. Kaput would receive, subject to the execution of a release by Mr. Kaput, the amounts set forth
above for Mr. Kaput.
If Mr. Engels employment with ServiceMaster is terminated for any reason other than by ServiceMaster
without cause, Mr. Engel will forfeit the amounts set forth above for Mr. Engel. If Mr. Kaputs
employment with ServiceMaster is terminated for any reason other than by ServiceMaster without cause,
Mr. Kaput will forfeit the amounts set forth above for Mr. Kaput.
Shareholder Proposals.  As set forth under Shareholder Proposals and Other Business in the Companys
proxy statement dated March 24, 2006 (the 2006 Proxy Statement) relating to the 2006
annual meeting of shareholders, the 2007 annual meeting of shareholders is currently scheduled to
be held on May 4, 2007. The 2006 Proxy Statement stated that a shareholder proposal or nomination
intended to be brought before the 2007 annual meeting must be delivered to the Corporate Secretary
no later than the close of business on February 18, 2007. The
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|51
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|Company has received the following proposals or nominations in connection with the 2007 annual meeting.
Shareholder Proposal Regarding Annual Election of Directors. Mr. Nick Rossi, a shareholder of the Company,
has submitted a letter to the Company stating his intention to bring before the 2007 annual meeting
of shareholders a shareholder proposal to adopt a resolution asking the Board of Directors to adopt
and implement the annual election of all directors.
Shareholder Proposal Regarding Report on the Discontinuance of the Use of Lawncare Pesticides. Green
Century Capital Management, Inc., a shareholder of the Company, has submitted a letter to the Company
stating its intention to bring before the 2007 annual meeting of shareholders a shareholder proposal
to adopt a resolution asking the Board of Directors to prepare a report on the feasibility and implications
of a policy to discontinue the use of synthetic pesticides at TruGreen LawnCare.
Shareholder Nomination of Individuals for Election as Directors. On November 29, 2006, Newcastle Partners,
L.P., a Texas limited partnership (Newcastle), and other participants, filed a Schedule
14A with the Securities and Exchange Commission (SEC) stating the intention of Newcastle
and such participants to make a preliminary proxy filing with the SEC of a proxy statement and accompanying
proxy card to be used to solicit votes for the election of their directors nominees at the 2007 annual
meeting of shareholders. Newcastle has notified the Company of its intention to nominate four nominees
for election to the Board of Directors of the Company at the 2007 annual meeting of shareholders.
The letter from Newcastle stating its intention, identifying the four nominees and providing information
regarding such nominees is included as an exhibit to this Form 10-K.
Shareholder Proposal Regarding Reimbursement of Expenses. Newcastle has also notified the Company of
its intention to submit a shareholder proposal to adopt a resolution recommending to the Board of
Directors of the Company that the Company reimburse Newcastle for its expenses incurred in connection
with the proxy solicitation to elect Newcastles nominees at the 2007 annual meeting of shareholders.
The letter from Newcastle stating its intention and setting forth the text of the proposed shareholder
resolution is included as an exhibit to this Form 10-K.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|52
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|PART III
      ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
      DIRECTORS
      The names and ages of the directors of ServiceMaster as of February 28, 2007, together with certain
    biographical information, are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                       

|Name                  |  | Age |  | Principal Occupation                                                  |  | Director
      Since
|--------------------- |  | --- |  | --------------------------------------------------------------------- |  | --------------------
|                      |  |     |  |                                                                       |  |                     
|                      |  |     |  |                                                                       |  |                     
|Brian  Griffiths      |  | 65  |  | Vice Chairman, Goldman Sachs International, Ltd.                      |  | 1992                
|                      |  |     |  |                                                                       |  |                     
|Sidney  E. Harris     |  | 57  |  | Professor, Georgia State University                                   |  | 1994                
|                      |  |     |  |                                                                       |  |                     
|James D.  McLennan    |  | 70  |  | Chairman and Chief Executive Officer  of McLennan Company             |  | 1986                
|                      |  |     |  |                                                                       |  |                     
|Coleman H. Peterson   |  | 58  |  | President and Chief Executive  Officer, Hollis Enterprises, L.L.C.    |  | 2004                
|                      |  |     |  |                                                                       |  |                     
|Roberto R. Herencia   |  | 47  |  | President, Banco Popular North  America                               |  | 2003                
|                      |  |     |  |                                                                       |  |                     
|Louis J.  Giuliano    |  | 60  |  | Retired                                                               |  | 2004                
|                      |  |     |  |                                                                       |  |                     
|Betty  Jane Hess      |  | 58  |  | Retired                                                               |  | 2003                
|                      |  |     |  |                                                                       |  |                     
|Eileen  A. Kamerick   |  | 48  |  | Chief Financial Officer, Heidrick  & Struggles International, Inc.    |  | 2005                
|                      |  |     |  |                                                                       |  |                     
|J.  Patrick Spainhour |  | 56  |  | Chairman and Chief Executive  Officer, The ServiceMaster Company      |  | 2005                
|                      |  |     |  |                                                                       |  |                     
|David K. Wessner      |  | 55  |  | President and Chief Executive  Officer, Park Nicollet Health Services |  | 1987                

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Brian Griffiths is Vice Chairman of Goldman Sachs International Ltd., an investment
banking firm, 1991 to present. He was made a life peer at the conclusion of his service to the British
Prime Minister during the period 1985 to 1990. Lord Griffiths is a director of Times Newspapers Holding
Ltd., a newspaper company; English, Welsh and Scottish Railways, a railroad company; and Herman Miller,
Inc., an office furniture manufacturer.
Sidney E. Harris is Professor of Management and International Business, Georgia State
University, 2004 to present. From 1997 to 2004, Dr. Harris was Dean, Robinson College of Business,
Georgia State University. Dr. Harris is a director of Transamerica Investors, Inc., an investment
management company; Total System Services, Inc., a credit/debit card processor; and STI Classic Funds,
a family of investment funds.
James D. McLennan is Chairman and Chief Executive Officer of McLennan Company, a full-service
real estate company, 1998 to present.
Coleman H. Peterson is President and Chief Executive Officer, Hollis Enterprises,
L.L.C., engaged in supporting businesses in improving their organizational effectiveness, from 2004
to present. He was Executive Vice President of Wal-Mart Stores, Inc., the worlds largest retailer,
1994 to 2004. Mr. Peterson is a director of J. B. Hunt Transport Services, Inc., a full truck-load
transportation and logistics company; and Build-A-Bear Workshop, Inc., a make your own stuffed animal
retailer.
Roberto R. Herencia is President, Banco Popular North America, a diversified community
banking institution, 2001 to present. He was Senior Executive Vice President and Chief Operating
Officer from 1999 to 2001. Mr. Herencia is Executive Vice President, and a member of the Corporate
Leadership Council of Popular, Inc., the parent company of Banco Popular North America, 1997 to present.
Louis J. Giuliano retired in 2004 as Chairman, ITT Industries, Inc., a multi-industry
company engaged in the design and manufacture of a wide range of engineered products. Mr. Giuliano
was Chairman and Chief Executive Officer of ITT Industries from 2001 through 2004; President from
1998 to 2004; and Chief Operating Officer from 1998 to 2001. Mr. Giuliano has served as a governor
of the United States Postal Service Board of Governors since 2004, and has served as a director and
Chairman of John Maneely Company since 2006.
Betty Jane Hess retired in 2004 as Senior Vice President, Arrow Electronics, Inc.,
a distributor of electronic components and computer products. Ms. Hess was Senior Vice President
of Arrow Electronics from 1997 to 2004. She was a member of Office of the President of Arrow Electronics,
Inc. from 1997 to 2002. Mrs. Hess is a director of Cott Corporation, a supplier of retail brand carbonated
beverages.

|53
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|Eileen A. Kamerick is Chief Financial Officer, Heidrick & Struggles International,
      Inc., a recruiting and search firm, 2004 to present. Ms. Kamerick was the Executive Vice President
      and Chief Financial Officer of Bcom3 Group, Inc., a provider of advertising and marketing communications
      services, from 2001 to 2003. From 2000 to 2001, Ms. Kamerick was the Executive Vice President and
      Chief Financial Officer of United Stationers, Inc., a wholesale distributor of business products.
      Ms. Kamerick is a director of Westell Technologies, Inc., a diversified broadband supplier.
      J. Patrick Spainhour has served as Chairman and Chief Executive Officer of The ServiceMaster
        Company since May 2006. He served as Chairman and Chief Executive Officer of Ann Taylor Stores Corporation
        from 1996 to 2005. Mr. Spainhour is a director of Circuit City Stores, Inc., a retailer of consumer
        electronics; and Tupperware Corporation, a direct seller of food storage items.
      David K. Wessner is President and Chief Executive Officer of Park Nicollet Health
        Services, an integrated healthcare delivery system, 1998 to present.
      EXECUTIVE OFFICERS OF SERVICEMASTER
      The names and ages of the executive officers of ServiceMaster as of February 27, 2007, together with
    certain biographical information, are as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|Name                 |  | Age |  | Present Positions                                                           |  | First Became
    an Officer
|-------------------- |  | --- |  | --------------------------------------------------------------------------- |  | ---------------------------
|                     |  |     |  |                                                                             |  |                            
|                     |  |     |  |                                                                             |  |                            
|J. Patrick Spainhour |  | 56  |  | Chairman
      and Chief Executive Officer                                  |  | 2006                       
|                     |  |     |  |                                                                             |  |                            
|Ernest J. Mrozek     |  | 53  |  | Vice
      Chairman and Chief Financial Officer                             |  | 1987                       
|                     |  |     |  |                                                                             |  |                            
|Richard A. Ascolese  |  | 53  |  | President,
      TruGreen LandCare                                          |  | 1997                       
|                     |  |     |  |                                                                             |  |                            
|Steven B. Bono       |  | 54  |  | Senior
      Vice President, Corporate Communications                       |  | 2001                       
|                     |  |     |  |                                                                             |  |                            
|Scott J. Cromie      |  | 50  |  | Group
      President, American Home Shield, InStar and the franchise group |  | 1990                       
|                     |  |     |  |                                                                             |  |                            
|Mitchell T. Engel    |  | 54  |  | Chief
      Marketing Officer                                               |  | 2002                       
|                     |  |     |  |                                                                             |  |                            
|Lisa V. Goettel      |  | 43  |  | Senior
      Vice President, Human Resources                                |  | 2002                       
|                     |  |     |  |                                                                             |  |                            
|James A. Goetz       |  | 49  |  | Senior
      Vice President and Chief Information Officer                   |  | 2000                       
|                     |  |     |  |                                                                             |  |                            
|Katrina L. Helmkamp  |  | 41  |  | Group
      President, Terminix, TruGreen LawnCare and TruGreen LandCare    |  | 2005                       
|                     |  |     |  |                                                                             |  |                            
|Jim L. Kaput         |  | 46  |  | Senior
      Vice President and General Counsel                             |  | 2000                       
|                     |  |     |  |                                                                             |  |                            
|Dennis R. Sutton     |  | 52  |  | President
      and Chief Operating Officer, TruGreen LawnCare              |  | 1994                       

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|J. Patrick Spainhour has served as Chairman and Chief Executive Officer since
May 2006. He served as Chairman and Chief Executive Officer of AnnTaylor Stores Corporation from
1996 to 2005.
Ernest J. Mrozek is Vice Chairman and Chief Financial Officer. He served as
President and Chief Financial Officer from January 2004 to November 2006. 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.
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.
Scott J. Cromie has served as Group President of American Home Shield, InStar
and the franchise group since February 2006. From October 1996 to February 2006 he served as President
and Chief Operating Officer of American Home Shield.
Mitchell T. Engel has served as Chief Marketing Officer since April 2002.  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.
James A. Goetz has served as Senior Vice President and Chief Information Officer
since 2002.
Katrina L. Helmkamp has served as Group President, Terminix, TruGreen LawnCare
and TruGreen LandCare since December 2006. She served as President, Terminix International from December
2004 to December 2006. She served as Vice President of Boston Consulting Group in Chicago, Illinois
from January 1999 to December 2004.
Jim L. Kaput has served as Senior Vice President and General Counsel of ServiceMaster
since April 2000.

|54
|--



|Dennis R. Sutton has served as President and Chief Operating Officer, TruGreen LawnCare
since November 2004. Mr. Sutton served as Senior Vice President, TruGreen LawnCare from July 2004
to November 2004. He served as Division Vice President, TruGreen LawnCare from August 1994 to July
2004.
FINANCIAL CODE OF ETHICS
ServiceMaster has a Financial Code of Ethics that applies to the Chief Executive Officer, Chief Financial
Officer and Controller, or persons performing similar functions, and other designated officers and
employees, including the Chief Financial Officer of each ServiceMaster business unit and the Treasurer.
ServiceMaster also has a Code of Conduct that applies to directors, officers and employees. The Financial
Code of Ethics and Code of Conduct each address matters such as conflicts of interest, confidentiality,
fair dealing and compliance with laws and regulations. Copies of the Financial Code of Ethics and
the Code of Conduct are available on ServiceMasters website at http://www.svm.com under Corporate Governance and is also 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.
DIRECTOR NOMINATIONS, AUDIT AND FINANCE COMMITTEE AND AUDIT AND FINANCE COMMITTEE FINANCIAL EXPERT
Director Candidates and Changes in Board Membership
The Governance and Nominating Committee is responsible for reviewing the qualifications of, and recommending
to the Board, nominees for membership on the Board. Consideration of Board candidates typically involves
a series of internal discussions, review of information concerning candidates and interviews with
selected candidates. In general, candidates for nomination to the Board are suggested by Board members
or by management. The Governance and Nominating Committee has also utilized the services of a search
firm to identify director candidates. The Governance and Nominating Committee will consider candidates
suggested by shareholders. A shareholder seeking to recommend a prospective nominee for the Governance
and Nominating Committees consideration should submit the candidates name and qualifications
to the Corporate Secretary at the following address: The ServiceMaster Company, 3250 Lacey Road,
Suite 600, Downers Grove, Illinois 60515.
In considering whether to recommend a candidate for membership on the Board, the Governance and Nominating
Committee evaluates the nominee against the standards and qualifications set forth in ServiceMasters
Corporate Governance Principles. The Governance and Nominating Committee evaluates candidates proposed
by shareholders using the same criteria that are used to evaluate other candidates. The Governance
and Nominating Committee reviews a candidates qualifications in light of the needs of the Board
and ServiceMaster at that time given the then existing mix of director skill sets. ServiceMaster
strives to create a Board that has a diversity of gender, ethnicity, culture and race. Members should,
in general, have skills, experience or expertise in one or more of the following areas: corporate
finance, accounting, information technology, senior management of a major company, federal or state
government agencies or contracting practices, marketing, strategic planning, human resources, ethical
training, law, and regulatory compliance.
Audit and Finance Committee
The Audit and Finance Committee functions as the standing audit committee established in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. This Committee, in its capacity
as an audit committee, assists the Board in its oversight of the integrity of ServiceMasters
financial statements; ServiceMasters compliance with legal and regulatory requirements; the
independent auditors qualifications and independence; the performance of ServiceMasters
internal audit function and independent auditor; and prepares an audit committee report for inclusion
in the proxy statement. This Committee, in its capacity as a finance committee, assists our Board
in its oversight of financial matters affecting ServiceMaster. In addition, this Committee is responsible
for appointing, retaining, compensating, evaluating, and terminating, when appropriate, the independent
auditor; reviewing with management the adequacy of, and related disclosures in ServiceMasters
quarterly and annual reports concerning ServiceMasters disclosure controls and procedures and
internal control over financial reporting; discussing with management and the independent auditor,
ServiceMasters annual and quarterly financial statements, including disclosures under Managements
Discussion and Analysis of Financial Condition and Results of Operations; and discussing policies
with respect to risk assessment and risk management, including guidelines and policies to govern
the process by which risk assessment and risk management is undertaken.
Audit Committee Financial Expert
Our Board has determined that each of Roberto Herencia and Eileen Kamerick is an audit committee
financial expert as defined under Securities and Exchange Commission regulations and is independent
under New York Stock Exchange listing standards.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers
to file reports of holdings and transactions in our common stock with the Securities and Exchange
Commission. An amended Form 4 was filed on November 20, 2006 on behalf of Betty Jane Hess reflecting
that certain shares acquired through the Director Deferred Fees trust were omitted from the original
Form 4 filed on February 16, 2006; a late Form 4 was filed on December 1, 2006 on behalf of Dennis
Sutton for a transaction occurring on November 22, 2006; and a Form 5 was filed on February 14, 2007
on behalf of Scott Cromie reflecting a sale of 27,000 shares on June 30, 2004, which was not reported
on the Form 4 filed on July
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|55
|--



|1, 2004 due to an administrative error. To our knowledge, all other required reports were filed on
time.
      ITEM
        11. EXECUTIVE COMPENSATION
The information contained in ServiceMasters proxy statement for the 2007 Annual Meeting of Shareholders
under the headings Compensation of Directors, Executive Compensation, Compensation
Committee Interlocks and Insider Participation and Compensation Committee Report
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 proxy statement for the 2007 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, AND DIRECTOR INDEPENDENCE
Policies and Procedures for Related Person Transaction policy
In February 2007, the Governance and Nominating Committee of our Board approved policies and procedures with respect to the review and possible approval or ratification of any transaction between ServiceMaster
and a Related Person (a Related Person Transaction), which we refer to as
our Related Person Transaction Policy. Pursuant to the terms of the Related Person Transaction
Policy, the Audit and Finance Committee must review and decide whether to approve or ratify any Related
Person Transaction. Any Related Person Transaction is required to be reported to our legal department
and the legal department will determine whether it should be submitted to the Audit and Finance Committee
for consideration.
For the purposes of the Related Person Transaction Policy, a Related Person Transaction
is a transaction, arrangement or relationship (or any series of similar transactions, arrangements
or relationships) in which ServiceMaster (including any of its subsidiaries) was, is or will be a
participant and the amount involved exceeds $120,000, and in which any Related Person had, has or
will have a direct or indirect interest.
A Related Person as defined in the Related Person Transaction Policy, means any person
who is, or at any time since the beginning of ServiceMasters last fiscal year was, a director
or executive officer of ServiceMaster or a nominee to become a director of ServiceMaster; any person
who is known to be the beneficial owner of more than 5% of ServiceMasters common stock; any
immediate family member of any of the foregoing persons, including any child, stepchild, parent,
stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law,
or sister-in-law of the director, executive officer, nominee or more than 5% beneficial owner, and
any person (other than a tenant or employee) sharing the household of such director, executive officer,
nominee or more than 5% beneficial owner; and any firm, corporation or other entity in which any
of the foregoing persons is a general partner or, for other ownership interests, a limited partner
or other owner in which such person has a beneficial ownership interest of 10% or more.
Litigation Program
In 2006, ServiceMaster used the legal services of the law firm of Hinshaw & Culbertson. Hinshaw &
Culbertson serves as ServiceMasters primary counsel in our national litigation program for
our general and automobile liability risks. The engagement letter with Hinshaw & Culbertson for
the 2006 and 2007 years under our litigation program was executed prior to the adoption of the Related
Person Transaction policy. Our national services require millions of service transactions at homes
and businesses involving thousands of our employees and approximately 25,000 vehicles. Consequently,
we elected in 2004 to manage our entire litigation program primarily through one law firm, Hinshaw &
Culbertson, that had served as one of our casualty program law firms since 1987. Total fees paid
to Hinshaw & Culbertson for 2006 in connection with our national litigation program were
approximately $4.8 million. Donald Mrozek, Esq., Chairman of Hinshaw & Culbertson,
is the brother of Ernest Mrozek, our Vice Chairman and Chief Financial Officer. Hinshaw &
Culbertson served as one of our casualty program law firms prior to Ernest Mrozeks becoming
employed by ServiceMaster. Ernest Mrozek does not have management responsibility for our litigation program.
Independence
Under New York Stock Exchange listing standards, a director does not qualify as independent
unless the board affirmatively determines that the director has no material relationship with the
company. ServiceMasters Board adopted categorical standards of independence to assist it in
determining whether a director has a material relationship with ServiceMaster. A director will not
be considered to have a material relationship with ServiceMaster because (1) the director is
a partner, principal, counsel or advisor to, or shareholder, director or officer of, another company
that does business with ServiceMaster if the annual sales to, or purchases from, ServiceMaster are
less than 1% of the annual revenue of the other company and the director does not receive any compensation
as a direct result of the other companys business with ServiceMaster or (2) the director
is an officer, director or trustee of a charitable organization, if ServiceMasters discretionary
charitable contributions to the organization are less than 1% (and no more than $50,000) of that
organizations total annual charitable receipts. A director will be considered to have a material
relationship with ServiceMaster if the director is an officer of another company that is not a charitable
organization and any of ServiceMasters present executives serves on that other companys board of directors.
New York Stock Exchange listing standards also provide that a director is not independent
if (1) the director is, or
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|56
|--



|has been within the last three years, an employee of ServiceMaster or an immediate family member of
the director is, or has been within the last three years, an executive officer of ServiceMaster;
(2) the director or an immediate family member of the director has received, during any 12-month
period within the last three years, more than $100,000 in direct compensation from ServiceMaster
(other than director and committee fees and pension or other forms of deferred compensation for prior
service (provided such compensation is not contingent in any way on continued service)); (3) the
director or an immediate family member of the director is a partner of a firm that is ServiceMasters
internal or external auditor; the director is an employee of such firm; an immediate family member
of the director is an employee of such a firm and participates in the firms audit, assurance
or tax compliance practice; or the director, or an immediate family member was within the last three
years (but is no longer) a partner or employee of such a firm and personally worked on ServiceMasters
audit within that time; (4) the director or an immediate family member is, or has been within the
last three years, employed as an executive officer of another company where any of ServiceMasters
executive officers at the same time serves or served on that companys compensation committee;
or (5) the director is an employee, or an immediate family member is an executive officer, of a company
that has made payments to, or received payments from, ServiceMaster for property or services in an
amount which, in any of the last three fiscal years, exceeds the greater or $1 million, or 2% of
such other companys consolidated gross revenues.
In February 2007, the Committee reviewed the independence of all directors and furnished a report
to the Board. The Board determined that each of Louis Giuliano, Brian Griffiths, Sidney Harris, Roberto
Herencia, Betty Jane Hess, Eileen Kamerick, James McLennan, Coleman Peterson and David Wessner has
no material relationship with ServiceMaster and that each director, except J. Patrick Spainhour,
ServiceMasters Chairman and Chief Executive Officer, is independent under New York Stock Exchange
listing standards. The Board also determined that each member of the Audit and Finance, Compensation
and Leadership Development and Governance and Nominating Committees of the Board meets the independence
and other requirements applicable to those Committees. In making these determinations, the Board
considered the following relationships and transactions in determining that each of Brian Griffiths
and Eileen Kamerick does not have a material relationship with ServiceMaster. Brian Griffiths is
a Vice Chairman of Goldman, Sachs & Co. and we have a banking relationship with Goldman Sachs.
Furthermore, ServiceMaster has retained Goldman Sachs to advise it in connection with ServiceMasters
exploration of strategic alternatives announced in November 2006. In 2006 we did not pay any fees
to Goldman Sachs for any services. Consequently, Mr. Griffiths could not have received any compensation
as a direct result of our relationship with Goldman Sachs. In addition, Mr. Griffiths does not have
an arrangement with Goldman Sachs where his compensation is determined by reference to the amount
of fees ServiceMaster pays to Goldman Sachs. Eileen Kamerick is the executive vice president, chief
financial officer and chief administrative officer of Heidrick & Struggles International, Inc.
We had retained Heidrick in previous years to conduct executive searches prior to Eileen Kamerick
commencing service on our Board in 2005. In 2006, we retained Heidrick to conduct a search for a
vice president level position and we paid Heidrick less than $100,000 for this search. The amount
paid was also less than 1% of Heidricks revenues and Ms. Kamerick did not receive any compensation
as a direct result of our relationship with Heidrick.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit and Finance Committee has selected Deloitte & Touche LLP as our independent
auditors for 2007.
Audit and Non-Audit Fees
The Audit and Finance Committee has a Public Accounting Firm Policy that includes requiring approval
of all audit, audit-related and non-audit related services to be provided by our independent auditors.
The policy requires that all services provided to ServiceMaster by our independent auditors, Deloitte &
Touche LLP, such as audit services and permitted audit-related and non-audit related services,
be pre-approved by the Committee. The Committee pre-approved all audit, audit-related and non-audit-related
services provided by Deloitte & Touche LLP during 2006.
The following table presents, for 2006 and 2005, fees for professional services rendered by Deloitte &
Touche LLP for the audit of our annual financial statements, audit-related services, tax services
and all other services rendered by Deloitte & Touche LLP. In accordance with the Securities
and Exchange Commissions definitions and rules, audit fees are fees ServiceMaster
paid Deloitte & Touche LLP for professional services for the audit of ServiceMasters
consolidated financial statements included in ServiceMasters annual report on Form 10-K,
review of the financial statements included in ServiceMasters quarterly reports on Form 10-Q
and services that are normally provided by Deloitte & Touche LLP in connection with
statutory and regulatory filings or engagements; audit-related fees are fees for assurance
and related services that are reasonably related to the performance of the audit or review of ServiceMasters
financial statements; tax fees are fees for tax compliance, tax advice and tax planning;
and all other fees are fees for any products and services provided by Deloitte &
Touche LLP not included in the first three categories.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                            |   | 2006      |  |   | 2005     
| | -------------------------- | - | --------- |  | - | ---------
| |                            |   |           |  |   |          
| | (1) Audit Fees             | $ | 3,816,990 |  | $ | 3,756,365
| | (2) Audit-Related Fees (a) |   | 102,929   |  |   | 45,616   
| | (3) Tax Fees (b)           |   | 428,868   |  |   | 692,200  
| | (4) All other Fees         |   |          |  |   |         

|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Principally represents fees paid in connection with the audits of the employee benefit plan and other
  services, primarily related to discontinued operations.
|    |                                                                                                                                                                
|(b) | Includes $64,400 and $108,002 related to services rendered in connection with tax compliance and tax
  return preparation fees for 2006 and 2005, respectively.

|57
|--



|PART IV
ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements, Schedules and Exhibits.
1. Financial Statements
|--------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                      

| |  | Report 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, 2006 and 2005 contained in Part II,
  Item 8 of this Form 10-K.                      
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                       
| | Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 contained
  in Part II, Item 8 of this Form 10-K.          
| |                                                                                                                                                       
| | Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 contained
  in Part II, Item 8 of this Form 10-K.          
| |                                                                                                                                                       
| | Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2005 and
  2004 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 Schedules                                                                                                                                                
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                               
|   | The 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 Schedules                                                                                      
|   |                                                                                                                                                                               
|   | Schedule IIValuation and Qualifying Accounts                                                                                                                                 
|   |                                                                                                                                                                               
|3. | Exhibits                                                                                                                                                                      
|   |                                                                                                                                                                               

| | The exhibits filed with this report are listed on pages 62-64 (the Exhibits Index). Entries
  marked by an asterisk next to the exhibits number identify management contracts, compensatory
  plans, or arrangements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|58
|--



|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 COMPANY
|----------------------- | -------------------------
|                        |                          
|Date: February 27, 2007 | By                       
|                        |                          
|                        |                          

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

|Signature                |  | Title                                |  | Date             
|------------------------ |  | ------------------------------------ |  | -----------------
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ J. PATRICK SPAINHOUR |  | Chairman and Chief Executive         |  | February 27, 2007
|                         |  | Officer and Director (Principal      |  |                  
|J. Patrick Spainhour     |  | Executive Officer)                   |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ ERNEST J. MROZEK     |  | Vice Chairman and Chief Financial    |  | February 27, 2007
|                         |  | Officer (Principal Financial Officer |  |                  
|Ernest J. Mrozek         |  | and Principal Accounting Officer)    |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ LOUIS J. GIULIANO    |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|Louis J. Giuliano        |  |                                      |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ BRIAN GRIFFITHS      |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|Brian Griffiths          |  |                                      |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ SIDNEY E. HARRIS     |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|Sidney E. Harris         |  |                                      |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ ROBERTO R. HERENCIA  |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|Roberto R. Herencia      |  |                                      |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ BETTY JANE HESS      |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|Betty Jane Hess          |  |                                      |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ EILEEN A. KAMERICK   |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|Eileen A. Kamerick       |  |                                      |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ JAMES D. MCLENNAN    |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|James D. McLennan        |  |                                      |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ COLEMAN H. PETERSON  |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|Coleman H. Peterson      |  |                                      |  |                  
|                         |  |                                      |  |                  
|                         |  |                                      |  |                  
|/s/ DAVID K. WESSNER     |  | Director                             |  | February 23, 2007
|                         |  |                                      |  |                  
|David K. Wessner         |  |                                      |  |                  

|59
|--



|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, 2006 and 2005, and for each of the three years in the
  period ended December 31, 2006, managements assessment of the effectiveness of the Companys
  internal control over financial reporting as of December 31, 2006, and the effectiveness of the Companys
  internal control over financial reporting as of December 31, 2006, and have issued our reports thereon
  dated February 26, 2007; 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 26, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|60
|--



|SCHEDULE IITHE SERVICEMASTER COMPANYVALUATION AND QUALIFYING ACCOUNTS(In thousands)
|-----------------------------------------------------------------------------------
|                                                                                   

|                                                                                           |                                                 |        |                                                                 |  
|------------------------------------------------------------------------------------------ | ----------------------------------------------- | ------ | --------------------------------------------------------------- | -
|                                                                                           | **Balance at 
      Beginning of
      Period** |        | **Additions 
      Charged to
      Costs and 
      Expenses** |  
|                                                                                           |                                                 |        |                                                                 |  
|AS OF AND FOR THE YEAR ENDING DECEMBER 31, 2006                                            |                                                 |        |                                                                 |  
|Continuing Operations -                                                                    |                                                 |        |                                                                 |  
|Allowance for doubtful accounts                                                            |                                                 |        |                                                                 |  
|Accounts receivable                                                                        | $                                               | 16,456 |                                                                 | $
|Notes receivable                                                                           |                                                 | 1,246  |                                                                 |  
|                                                                                           |                                                 |        |                                                                 |  
|Reserves related to strategic actions in the fourth quarter of 2001 (2)                    |                                                 | 7,345  |                                                                 |  
|Reserves related to Project Accelerate and consolidation of corporate
    headquarters (3) |                                                 |       |                                                                 |  
|                                                                                           |                                                 |        |                                                                 |  
|Remaining liabilities from discontinued operations (5)                                     |                                                 |        |                                                                 |  
|LandCare Construction                                                                      |                                                 | 3,112  |                                                                 |  
|LandCare utility line clearing business                                                    |                                                 | 3,238  |                                                                 |  
|Certified Systems, Inc. and other                                                          |                                                 | 9,686  |                                                                 |  
|                                                                                           |                                                 |        |                                                                 |  
|**AS OF AND FOR THE YEAR ENDING DECEMBER 31, 2005**                                        |                                                 |        |                                                                 |  
|Continuing Operations -                                                                    |                                                 |        |                                                                 |  
|Allowance for doubtful accounts                                                            |                                                 |        |                                                                 |  
|Accounts receivable                                                                        | $                                               | 19,526 |                                                                 | $
|Notes receivable                                                                           |                                                 | 2,213  |                                                                 |  
|                                                                                           |                                                 |        |                                                                 |  
|Reserves related to strategic actions in the fourth quarter of 2001 (2)                    |                                                 | 6,795  |                                                                 |  
|                                                                                           |                                                 |        |                                                                 |  
|Remaining liabilities from discontinued operations                                         |                                                 |        |                                                                 |  
|LandCare Construction                                                                      |                                                 | 4,492  |                                                                 |  
|LandCare utility line clearing business                                                    |                                                 | 6,616  |                                                                 |  
|Certified Systems, Inc. and other                                                          |                                                 | 8,485  |                                                                 |  
|International businesses                                                                   |                                                 | 11,000 |                                                                 |  
|                                                                                           |                                                 |        |                                                                 |  
|**AS OF AND FOR THE YEAR ENDING DECEMBER 31, 2004**                                        |                                                 |        |                                                                 |  
|Continuing Operations -                                                                    |                                                 |        |                                                                 |  
|Allowance for doubtful accounts                                                            |                                                 |        |                                                                 |  
|Accounts receivable                                                                        | $                                               | 19,770 |                                                                 | $
|Notes receivable                                                                           |                                                 | 3,149  |                                                                 |  
|                                                                                           |                                                 |        |                                                                 |  
|Reserves related to strategic actions in the fourth quarter of 2001 (2)                    |                                                 | 10,786 |                                                                 |  
|                                                                                           |                                                 |        |                                                                 |  
|Remaining liabilities from discontinued operations                                         |                                                 |        |                                                                 |  
|LandCare Construction                                                                      |                                                 | 7,152  |                                                                 |  
|LandCare utility line clearing business                                                    |                                                 | 9,011  |                                                                 |  
|Certified Systems, Inc. and other                                                          |                                                 | 11,307 |                                                                 |  
|International businesses                                                                   |                                                 | 21,306 |                                                                 |  

|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                             
|    |                                                                                                                                                                                             
|(3) | Includes severance, employee retention incentives and third party professional fees and expenses directly related to implementing the organizational changes.                               
|    |                                                                                                                                                                                             
|(4) | Includes $4 million not charged to expense in 2006, but acquired as part of InStars opening balance sheet.                                                                                 
|    |                                                                                                                                                                                             
|(5) | At December 31, 2006, there were approximately $4 million of liabilities of ARS and AMS, consisting of severance and wind-down costs that are expected to be paid in the early part of 2007.

|61
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|                    
|--------------------
|Exhibit Index       
|                    
|Descripiton 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   | 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).                                                                                                                                                                                                                         
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.2   | 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).                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.3   | 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).                                                                                                                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.4   | 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).                                                                                                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.5   | 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).                                                                                                                                                                                           
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.6   | 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.                                                                                                                                                                                                           
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.7   | 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).                                                                                                                                                                           
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.8   | 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.                                                                                                                                                                                                                                                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.9   | Form of 7.10% Note due March 1, 2018 is incorporated by reference to Exhibit 4.1 to the 1998 8-K.                                                                                                                                                                                                                                                                                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.10  | Form of 7.25% Note due March 1, 2038 is incorporated by reference to Exhibit 4.2 to the 1998 8-K.                                                                                                                                                                                                                                                                                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.11  | Form of 7.875% Note due August 15, 2009 is incorporated by reference to Exhibit 4 to the 1999 8-K.                                                                                                                                                                                                                                                                                                                                                                                               
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.12  | Form of 7.875% Note due August 15, 2009 is incorporated by reference to Exhibit 5 to the 1999 8-K.                                                                                                                                                                                                                                                                                                                                                                                               
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.13  | $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).                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.14  | 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s Annual Report
  on Form 10-K for the year ended December 31, 1999 (File No. 1-14762).                                                                                                                                                                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.2* | 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).                                                                                                                                                                                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.3* | Form of Option Agreement for the 1997 Share Option Plan is incorporated by reference to Exhibit 10.29
  to the 1996 10-K.                                                                                                                                                                                                                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.4* | 1998 Equity Incentive Plan is incorporated by reference to Exhibit 10.15 to the 1997 10-K.                                                                                                                                                                                                                                                                                                                                                                                                       

|62
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|                    
|--------------------
|Exhibit Index       
|                    
|Descripiton of Index
|                    

|10.5*  | 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.                                                                              
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                           
|10.6*  | 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.                                                                                   
|       |                                                                                                                                                                                                                                           
|10.7*  | 1998 Non-Employee Directors Discounted Stock Option Plan is incorporated by reference to Exhibit 10.21
  to the 1997 10-K.                                                                                                                
|       |                                                                                                                                                                                                                                           
|10.8*  | 1998 Long-Term Performance Award Plan is incorporated by reference to Exhibit 10.22 to the 1997 10-K.                                                                                                                                     
|       |                                                                                                                                                                                                                                           
|10.9*  | 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).                                            
|       |                                                                                                                                                                                                                                           
|10.10* | 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).
|       |                                                                                                                                                                                                                                           
|10.11* | 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.                                                                                           
|       |                                                                                                                                                                                                                                           

|10.12* | 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).                                                     
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |                                                                                                                                                                                                                                                                                        
|10.13* | 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.                                                                                                                        
|       |                                                                                                                                                                                                                                                                                        
|10.14* | 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.                                                                                                                      
|       |                                                                                                                                                                                                                                                                                        
|10.15* | 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).                         
|       |                                                                                                                                                                                                                                                                                        
|10.16* | 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.                                                                    
|       |                                                                                                                                                                                                                                                                                        
|10.17* | 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).
|       |                                                                                                                                                                                                                                                                                        
|10.18* | Form of Change in Control Severance Agreement is incorporated by
    reference to Exhibit 10.30 to the 2001 10-K.                                                                                                                                                                      
|       |                                                                                                                                                                                                                                                                                        
|10.19* | 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.                                                                                     
|       |                                                                                                                                                                                                                                                                                        
|10.20* | 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).                            
|       |                                                                                                                                                                                                                                                                                        
|10.21* | 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.                                                                                                                          
|       |                                                                                                                                                                                                                                                                                        
|10.22* | 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.                                                                                                                        
|       |                                                                                                                                                                                                                                                                                        
|10.23* | Form of Restricted Stock Unit Award Agreement for the ServiceMaster
    2003 Equity Incentive Plan.                                                                                                                                                                                    
|       |                                                                                                                                                                                                                                                                                        
|10.24* | 2002 Directors Deferred Fees Plan, effective October 25, 2002,
    is incorporated by reference to Exhibit 10.35 to the 2002 10-K.                                                                                                                                                     
|       |                                                                                                                                                                                                                                                                                        
|10.25* | 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.                                                                               
|       |                                                                                                                                                                                                                                                                                        
|10.26* | 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.                                                              
|       |                                                                                                                                                                                                                                                                                        
|10.27* | Employment Agreement dated August 16, 2006, effective as of June
    30, 2006, between The ServiceMaster Company and J. Patrick Spainhour is incorporated by reference
    to Exhibit 10.1 to the registrants Current Report on Form 8-K dated August 15, 2006.                       
|       |                                                                                                                                                                                                                                                                                        
|10.28* | Change in Control Severance Agreement dated August 16, 2006 between
    The ServiceMaster Company and J. Patrick Spainhour is incorporated by reference to Exhibit 10.1 to
    the                                                                                                     

|63
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|                    
|--------------------
|Exhibit Index       
|                    
|Descripiton of Index
|                    

|        | registrants Current Report on Form 8-K dated August 15, 2006.                                                                                                                                                                                        
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                       
|10.29*  | Separation Agreement and General Release dated as of March 1, 2006
    between The ServiceMaster Company and Steve C. Preston is incorporated by reference to Exhibit 10.1
    to the registrants Current Report on Form 8-K dated February 24, 2006.
|        |                                                                                                                                                                                                                                                       
|10.30*  | Letter dated May 15, 2006 from the ServiceMaster Company to Jonathan
    P. Ward is incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form
    8-K dated May 15, 2006.                                                  
|        |                                                                                                                                                                                                                                                       
|10.31*  | 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.                                                                            
|        |                                                                                                                                                                                                                                                       
|10.32*  | Agreement dated as of November 15, 2006 between The ServiceMaster
    Company and Ernest J. Mrozek is incorporated by reference to 10.1 to the registrants current
    report on Form 8-K dated November 16, 2006.                                   
|        |                                                                                                                                                                                                                                                       
|10.33* | Separation Agreement and General Release dated as of February 26, 2007
    between The ServiceMaster Company and Jim Kaput.                                                                                                                           
|        |                                                                                                                                                                                                                                                       
|10.34* | Separation Agreement and General Release dated as of February 26, 2007
    between The ServiceMaster Company and Mitchell T. Engel.                                                                                                                   
|        |                                                                                                                                                                                                                                                       
|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.                     
|      |                                                                                                                                                                                                                    
|99   | Letter dated February 15, 2007 from Newcastle Partners, L.P. to The ServiceMaster Company regarding
  notice of intention to nominate individuals for election as directors and to submit a shareholder
  proposal.
|      |                                                                                                                                                                                                                    

| | *  Indicates compensatory plan, contract or arrangement.
| | --------------------------------------------------------
| |                                                         
| |   Filed herewith                                       

|64
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