EXHIBIT 13

Management Discussion and Analysis of Financial Condition 
and Results of Operations

(All share and per share data reflect the  three-for-two  share splits in August
1998, June 1997 and June 1996)

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

1998 Compared with 1997

Revenues  increased  19  percent  to  $4.7  billion  through  a  combination  of
acquisitions and solid growth from base operations.  Approximately eight percent
of the  revenue  increase  resulted  from  internal  growth  and  small  tuck-in
acquisitions  in existing  service lines,  primarily lawn care and pest control,
with another six percent coming from platform acquisitions primarily in plumbing
and  landscaping.  The remaining five percent of the revenue growth  represented
the  acquisition of a  professional  employer  organization  in August 1997. The
professional  employer  organization  has a  significant  impact on revenues and
margins,  because the entire employee payroll of the customer is recognized both
as revenue and operating cost. As a result, the margins are low in this business
and  reduce the  Company's  consolidated  operating  margins.  Operating  income
increased 15 percent to $396 million,  while margins decreased to 8.4 percent of
revenue from 8.7 percent in 1997.  Operating  margins excluding the professional
employer  organization  improved 10 basis points over last year,  reflecting the
continued strong growth of higher margin businesses,  productivity  improvements
and the successful integration of acquisitions at Consumer Services.

Pro forma  information  is presented for 1997 and 1996 to compare the continuing
results of  operations as if the Company had been a taxable  corporation  in all
years.  On this  basis,  net income grew 16 percent to $190  million.  Basic and
diluted earnings per share increased 16 percent to $.66 and $.64, respectively.

The Consumer  Services  business unit achieved a 23 percent increase in revenue,
reflecting strong growth from both internal sources and acquisitions,  including
the Rescue Rooter plumbing business and commercial  landscaping  companies.  Net
income increased 27 percent,  reflecting solid double-digit  profit increases at
all of the companies.  TruGreen-ChemLawn  reported strong growth in revenues and
profits,  reflecting  base  business  growth and the entry  into the  commercial
landscape  market through the acquisition of several  companies.  The successful
integration of acquisitions and other cost initiatives helped offset the effects
of severe summer  weather  conditions  in many regions of the country.  Terminix
achieved  strong  double-digit  growth in revenues and profits,  resulting  from
excellent  increases in termite  completions and renewals and improved  margins.
Higher customer retention levels and efficiency improvements  contributed to the
increased  margins.  American Home Shield  continued to  experience  exceptional
momentum with very strong  double-digit  increases in warranty contracts written
due to excellent growth in real estate and direct-to-consumer  sales, as well as
strong renewal growth.  This volume increase was partially affected by increased
service orders relating to expensive air conditioning repairs due to the extreme
heat  experienced  in many  parts  of the  country.  The  franchise  operations,
ServiceMaster  Residential/Commercial  and Merry Maids,  achieved  solid revenue
increases  and  higher  margins,   reflecting   improvements  in   company-owned
operations and cost controls.  The Rescue Rooter  operations  reported very good
results,  reflecting improved marketing efforts,  productivity  improvements and
effective cost controls.

The traditional  Management Services business,  achieved a seven percent revenue
increase as a result of  acquisitions  and modest  growth in the base  business.
Profits increased significantly due to a $38 million pretax gain relating to the
formation  of a strategic  venture  between  ServiceMaster  and Texas  Utilities
Company.  The new venture has  acquired all the assets of  ServiceMaster  Energy
Management  and will be owned 85  percent by Texas  Utilities  and 15 percent by
ServiceMaster.  This new business  combination  will provide the Company with an
expanded  ability  to  provide  comprehensive  energy  solutions  to  customers.
Excluding  this gain,  profits  were one  percent  below the prior year level as
increases

                                       25
<PAGE>

in the  Business  &  Industry  and  Education  markets  were  offset by  reduced
profitability  in the  Healthcare  market.  The  traditional  Healthcare  market
reported a slight  decline in revenues  with lower  profits  than last year as a
result  of  continued  industry  pressures  and  additional  investments  in the
business compared with the prior year. The Company achieved  significant revenue
and  profit  increases  in  the  Business  &  Industry  market,  reflecting  the
successful integration of acquisitions and increased sales in the base business.
The Education  market  reported  strong growth in profits due to better customer
retention  and the  favorable  effect of  eliminating  costs  incurred last year
related to unwinding a large contract.

Other operations include primarily  Diversified Health Services,  which provides
services and products to the long term care market and  Employer  Services,  the
professional employer organization. Revenues increased significantly as the 1998
results include a full year of the professional  employer  organization that was
acquired in August 1997.  Operating income was down significantly from the prior
year,  reflecting  a large  charge  related  primarily  to the home  health care
operations  and  operational  losses.  In late 1998,  the  Company  completed  a
strategic  review of its home health care business and concluded  that,  without
significant  investment to make home health care one of its core businesses,  it
could not profitably  provide high quality service in the future and continue to
satisfy all the changes and the requirements of new  governmental  reimbursement
programs.  The Company  plans to sell its direct  operations of home health care
agencies  and  certain  support   operations.   In  addition,   the  Company  is
discontinuing its outsourced  management contracts of home health care agencies,
but will  continue  to  provide  consulting  services  to  hospitals  and  other
providers of home health care. The Company incurred and established  reserves of
approximately $32 million (pre-tax) relating to home health care, which included
a write-down for the impairment of assets and costs relating to exiting customer
arrangements.  An  additional  $6 million  pretax  charge was recorded  that was
specifically  designated for other Diversified Health Services reserve needs. In
addition  to these  charges  and losses in home  health  care,  the  decrease in
operating income reflects margin reductions in other Diversified Health Services
operations and the  non-recurrence  of transaction gains recognized in the prior
year.

On a consolidated  basis,  cost of services rendered and products sold increased
20 percent and increased as a percentage of revenue to 77.9 percent in 1998 from
77.2  percent in 1997.  The  addition of Employer  Services had an impact on the
overall  increase in costs as this  business  line  carries a lower gross margin
level than the rest of the  enterprise.  Excluding  Employer  Services,  cost of
services rendered and products sold decreased 10 basis points as a percentage of
revenue.  This reflects the changing mix of the enterprise as Consumer  Services
increased in size relative to the overall business of the Company.  The Consumer
Services  unit  operates at a higher  gross  profit  margin than the  Management
Services  business  unit,  but incurs  relatively  higher  levels of selling and
administrative costs.

Consolidated  selling and administrative  expenses increased 16 percent over the
prior year, and as a percentage of revenue,  decreased from 14.1 percent in 1997
to 13.7 percent in 1998.

Interest expense increased over the prior year, reflecting increased debt levels
in the first quarter  associated with the 1997  repurchase of shares  previously
held by Waste  Management,  Inc.  The  impact  of  larger  seasonal  borrowings,
primarily due to  acquisitions  and higher  interest rates  associated  with the
refinancing of  floating-rate  bank debt with longer term,  fixed-rate debt, was
partially offset by proceeds from the May 1998 equity offering.

Interest  and  investment  income  increased  over the prior year  levels due to
growth in the  investment  portfolio at American  Home Shield,  as well as gains
realized on sales of marketable securities.

Minority interest expense  decreased as the General  Partners'  interests in the
parent entities were eliminated upon reincorporation.

1997 Compared with 1996

Revenues  increased  15  percent  to  $4  billion,   reflecting  the  effect  of
acquisitions  and growth from base  operations.  Operating  income  increased 17
percent to $344 million,  while margins increased to 8.7 percent of revenue from
8.5 percent in 1996,  reflecting  the  continued  strong growth of higher margin
businesses,  productivity  improvements,  and the  integration  of the  acquired
Barefoot operations. These improvements were offset in part by the impact of the
acquired  professional  employer  organization,  which has  significantly  lower
margins than the rest of the  Company's  businesses.  Operating  income  margins
would have improved 50 basis points excluding this acquisition.

                                       26
<PAGE>

Pro forma  information is presented  which  compares the  continuing  results of
operations as if the Company had been a taxable corporation in 1997 and 1996. On
this basis,  net income grew nine percent to $163  million.  Basic  earnings per
share  increased  21 percent to $.57 and diluted  earnings  per share were up 20
percent to $.55. Earnings per share grew at a higher rate than net income due to
the  transaction  with  Waste  Management,  Inc.  (WMX)  in  which  the  Company
repurchased WMX's 19 percent ownership  interest in ServiceMaster  (61.1 million
shares) for $626 million on April 1, 1997. This transaction  increased  interest
expense significantly and reduced shares outstanding.

Historical  partnership  net  income,  which  did not  include a  provision  for
corporate taxes, was $329 million,  including a one-time tax gain of $65 million
realized  upon  reincorporation.  The  resulting  historical  basic and  diluted
earnings per share were $1.15 and $1.10, respectively. This gain represented the
difference  between  the tax and  book  basis  of the  enterprise's  assets  and
liabilities,   which  was  recognized  as  a  result  of  the   reincorporation.
Partnership  net income  excluding  this gain  increased  eight  percent to $264
million. On this basis, basic and diluted earnings per share were $.92 and $.89,
reflecting increases of 19 percent.

The Consumer  Services  business unit achieved a 14 percent  increase in revenue
and a 21 percent  increase in pro forma net income,  reflecting  the  successful
integration  of the Barefoot  business  (which was  acquired in February  1997),
combined  with good  growth from base  operations  and other  acquisitions.  The
TruGreen-ChemLawn operations achieved strong double-digit growth in revenues and
profits,  reflecting the Barefoot  acquisition,  increases in the customer base,
improved branch  efficiencies,  strong sales of ancillary products and favorable
weather conditions  throughout most of the year.  Terminix achieved solid growth
in revenue and profits for the year.  Strong growth in renewals and productivity
improvements  offset  the  effects  of  adverse  weather  conditions  on termite
operations  and  increased  termite  remediation  costs.  American  Home  Shield
achieved very strong double-digit  increases in both revenues and profits,  with
excellent increases in contract renewals and  direct-to-consumer  sales. This is
consistent  with an overall  strategy to expand channels of distribution in this
business,  which have historically  been concentrated in the residential  resale
market.  ServiceMaster  Residential/Commercial  and Merry Maids reported  modest
profit growth and solid revenue  growth for the year,  reflecting the conversion
of certain franchises and distributors to company-owned operations.

The  traditional  Management  Services  business  segment  achieved five percent
growth  in  revenue,  reflecting  the  Premier  Manufacturing  Support  Services
(Premier)  acquisition  completed in 1996 and, to a lesser degree, growth in the
base business. The base business growth resulted from improvements in Healthcare
and Business & Industry, offset by reductions in Education. Pro forma net income
was  up  three  percent  compared  with  the  prior  year.   Despite  continuing
competitive  pressures and industry  consolidation in the acute care market, the
Company achieved solid revenue increases and improved customer  retention in the
Healthcare market.  Reported profits in this market were comparable to the prior
year.  Within the acute care sector,  good growth was realized from sales of the
IntegratedService  product,  which provides  comprehensive  service solutions to
clients.  The Company achieved  significant  revenue and profit increases in the
Business & Industry market, largely as a result of the successful integration of
the Premier acquisition and modest growth in the base business. In the Education
market,  revenues  and profits  declined due to the  discontinuation  of certain
large accounts and margin pressures in certain accounts.

Revenues in other operations increased significantly, reflecting the August 1997
acquisition  of Certified  Systems,  Inc. (CSI) which added  approximately  $155
million in revenue and minimal profits after acquisition-related costs. CSI is a
professional  employer  organization  that provides clients with  administrative
processing  of  payroll,  workers'  compensation  insurance,  health  insurance,
unemployment  insurance,  and other  employee  benefit plans.  Other  operations
primarily  include CSI and  Diversified  Health  Services.  Pro forma net income
reflects the additional  interest  expense incurred at the parent level relating
to the WMX share repurchase.

On a consolidated  basis,  cost of services rendered and products sold increased
14 percent and decreased  slightly as a percentage of revenue to 77.2 percent in
1997 from 77.5 percent in 1996. This reflects the changing mix of the enterprise
as Consumer  Services  increased in size relative to the overall business of the
Company.  The Consumer  Services  unit  operates at a higher gross profit margin
than the Management  Services business unit, but incurs relatively higher levels
of selling and administrative  costs. However, much of this reduction in cost of
goods sold was offset by the acquisition of CSI, which operates at significantly
lower gross margins than the Company's  other  businesses.  Without CSI, cost of
goods sold would have been 76.5 percent of revenue in 1997.

                                       27
<PAGE>

Consolidated  selling and administrative  expenses increased 16 percent over the
prior year, and as a percentage of revenue,  increased from 13.9 percent in 1996
to 14.1 percent in 1997,  reflecting  the  changing  business mix of the Company
described above.

Interest  expense  increased over the prior year primarily due to increased debt
levels  associated  with the  repurchase  of shares  previously  held by WMX and
acquisitions.

Interest and investment income increased over the prior
year due to growth in, and strong  returns  from,  the  investment  portfolio at
American Home Shield,  as well as a gain associated with the sale of an interest
in an international joint venture.

Minority interest expense decreased due to the repurchase of minority  ownership
interests in subsidiary entities.

1998 Financial Position

The Company  reported a nine percent  increase in cash flows from  operations to
$406 million and a two percent increase in free operating cash flows (defined as
cash flows from  operations less net property  additions) to $337 million.  Cash
flows grew at a lower rate than net income, primarily due to the acceleration of
customer  prepayments at  TruGreen-ChemLawn  into 1997, the full year funding of
preseason  investments for Barefoot,  and the timing of interest payments.  Free
operating  cash flow  represents  the cash  available for enhancing  shareholder
value (e.g., acquisitions,  dividends and share repurchases) after financing the
growth of existing  business units. The Company's free operating cash flows have
consistently exceeded recurring net income as a result of relatively low working
capital  and fixed  asset  requirements,  combined  with the  effects of noncash
charges for depreciation and amortization.

In the first year following  reincorporation,  the Company was able to defer the
payment of its federal taxes until March 1999. At that time the Company will pay
its 1998  obligation  and will  begin  making  estimated  payments  for its 1999
liability.  Reported cash from operations reflects the deferral of this 1998 tax
payment which is approximately  $83 million.  Since the Company is able to defer
its 1998 tax payment,  the cash flow is fairly  comparable to last year when the
Company was in partnership  form and paid no federal  taxes.  As a result of the
reincorporation,  the Company also  recognized a step-up in the tax basis of its
assets, which is being amortized against taxable income. The step-up resulted in
a  reduction  of the  Company's  cash tax  payments in excess of $25 million per
annum for the current year and for the ensuing 14 years.

Cash and marketable  securities  totaled  approximately $120 million at December
31, 1998.  Debt levels  decreased,  reflecting  the use of proceeds from the May
1998 equity  offering to pay down debt,  as well as strong cash from  operations
partially  offset by  acquisitions,  capital  spending  and  distributions.  The
Company is a party to a number of long-term debt agreements  which require it to
comply with certain financial covenants,  including limitations on indebtedness,
restricted payments,  fixed charge coverage ratios and net worth. The Company is
in compliance with the covenants related to these debt agreements.  In addition,
the Company had $700 million of unused commitment on its revolving bank facility
at December 31, 1998.  Management  believes that funds generated from operations
and other existing  financial  resources will continue to be adequate to satisfy
the ongoing operating needs of the Company.

During the year,  the Company filed a Form S-3  registration  statement and 21.2
million   Company   shares  were  sold  at  $19.17  per  share.   This  included
approximately  11.4  million of  newly-issued  shares  from the  Company and 9.8
million  shares sold by existing  shareholders.  The net proceeds to the Company
after the underwriting  discount and offering expenses were  approximately  $209
million  and were used to reduce  outstanding  debt under  existing  bank credit
facilities,  thereby  reducing  interest  expense and  increasing  the Company's
financial flexibility.

ServiceMaster also filed a Form S-1 shelf registration  statement to issue up to
5.3  million  shares of common  stock in  connection  with  future  unidentified
acquisitions. As of December 31, 1998, approximately 3.5 million shares had been
issued with 1.8 million shares remaining available for future acquisitions.

                                       28
<PAGE>

In February 1998,  the Company also  completed a $300 million  senior  unsecured
dual-tranche  debt  offering.  The  offering  consisted  of $150 million at 7.10
percent  due March 1, 2018 and $150  million at 7.25  percent due March 1, 2038.
The net proceeds were used to refinance borrowings under bank credit facilities,
reducing the Company's exposure to short-term interest rate fluctuations.

The Company completed a number of acquisitions in 1998, which included primarily
lawn care, commercial landscape and pest control companies. Three of the largest
transactions  were  Rescue  Industries,  Inc.,  National  Britannia  and Ruppert
Landscape Company. Rescue Industries,  Inc., which operates under the trade name
Rescue Rooter,  was acquired in January 1998 and is one of the largest companies
in America  specializing  in plumbing and drain cleaning  services.  The October
1998 acquisition of National  Britannia,  the third largest pest control company
in the United Kingdom,  further  strengthens  the company's  ability to grow its
Terminix  business in Europe and  continues  the strategy of the  enterprise  to
expand  internationally.  Ruppert Landscape Company was purchased in August 1998
and represents one of the Mid-Atlantic's largest commercial landscape companies.

In March 1999,  the Company is expected to complete the  acquisition of LandCare
USA, Inc.  (LandCare) in a stock-for-stock  merger. The acquisition of LandCare,
one of the nation's leading commercial landscape  companies,  will significantly
broaden the Company's  landscape  initiative and will provide  TruGreen-ChemLawn
the opportunity to fully  integrate its traditional  fertilizer and weed control
services with landscape maintenance and installation.

Accounts   receivable   increased,   reflecting   general  business  growth  and
acquisitions.  Property and equipment  increased primarily due to investments in
computer  systems and technology  upgrades  throughout the enterprise as well as
general  business  growth.  The  Company  does  not have  any  material  capital
commitments at this time. The increase in intangible  assets  reflects the above
mentioned  acquisitions as well as various  commercial  landscape  companies and
other smaller companies.

Accounts payable and other accrued liabilities increased due to general business
growth and the effects of  acquisitions.  As  previously  discussed,  there is a
significant  current  liability  relating  to the income  taxes  payable on 1998
earnings.  Deferred revenues increased primarily as a result of strong growth in
warranty contracts written at American Home Shield.

Total  shareholders'  equity increased to $956 million in 1998 from $524 million
at December 31, 1997, reflecting the May 1998 equity offering,  strong growth in
earnings and shares issued for  acquisitions,  partially  offset by  shareholder
distributions.  The Company continues to repurchase shares in the open market or
in privately negotiated  transactions  pursuant to the authorization  previously
granted by the Board of Directors.

At year end, the  aggregate  market value of the  Company's  outstanding  shares
exceeded $6.5 billion.  ServiceMaster  shareholders have experienced  compounded
total  returns  exceeding  20 percent  annually  over the last  three-,  10- and
20-year periods.

Cash  distributions paid directly to shareholders  totaled $96 million,  or $.33
per share,  a six percent  per share  increase  over the prior  year.  The total
amount of cash distributions, including payments made to the shareholders' trust
described  below,  decreased  52  percent  from the  prior  year,  reflecting  a
substantial  reduction in payments to the shareholders' trust,  partially offset
by the six percent increase in direct shareholder distributions.

The  shareholders'   trust  was  established  for  the  benefit  of  Partnership
shareholders.  Each year, the trust was allocated a portion of the Partnership's
taxable  income and  received  cash  payments in amounts  sufficient  to pay its
income tax obligations resulting from this income allocation. Cash distributions
made to the trust in 1997 totaled $65  million.  The trust was  terminated  upon
reincorporation   and  had  no  residual   resources.   In  1998,   it  received
approximately $20 million in tax refunds relating to its final 1997 tax return.

Several  years  ago,  the  Company  adopted a pattern  of  annual  increases  in
dividends  to  shareholders  for  the  remaining  term  of the  Partnership.  In
corporate form, the Company has increased,  and expects to continue to increase,
its  dividend  payment  each year.  The  timing  and  amount of future  dividend
increases  will be at the  discretion  of the Board of Directors and will depend
on, among other things,  the Company's  corporate  finance  objectives  and cash
requirements.  The Company has announced its intended cash dividends for 1999 of
$.36 per share.

                                       29
<PAGE>

Earnings before interest,  taxes,  depreciation  and amortization  (EBITDA) is a
commonly-used  supplemental  measurement of a company's ability to generate cash
flow and is used by many of the  Company's  investors  and  lenders.  Management
believes  that EBITDA is another  measure  which  demonstrates  the  exceptional
cash-generating  abilities of the Company's  businesses.  EBITDA in 1998 of $516
million has grown 16  percent,  comparable  to the growth in net income.  EBITDA
should not be considered an alternative to net income in measuring the Company's
performance, or be used as an exclusive measure of cash flow because it does not
consider  the impact of  working  capital  growth,  capital  expenditures,  debt
principal  reductions  or other  sources and uses of cash which are disclosed in
the Consolidated Statements of Cash Flows.

Year 2000 Status

Year 2000 Compliance.  Certain computer programs use two digits rather than four
to define the applicable year, and consequently may not function properly beyond
the year 1999 unless they are remediated.  In addition,  some computer  programs
are unable to recognize  the year 2000 as a leap year.  These  problems may also
exist in chips embedded in various types of equipment. The Company has long been
aware of this Year 2000 (Y2K)  problem.  The  Company  is  dealing  with the Y2K
problem in part  through  system  upgrades,  which were  planned to occur in the
normal  course of business.  In other cases,  the Company has put programs  into
place which the Company  believes  will result in the  completion  of  necessary
remediation efforts prior to the year 2000.

State of Readiness.  The Company has initiated a program (the "Y2K  program") to
address  Y2K issues as they affect the  Company's  information  technology  (IT)
systems, electronic data interfaces and its non-IT hardware. The Y2K program was
set up to  use  the  following  steps  as  appropriate:  inventory,  assessment,
planning, renovation, testing and implementation. In addition, the program calls
for  inquiries  of the  Company's  major  suppliers  of goods  and  services  to
determine their Y2K status and a review of the Company's  relationships with its
customers to determine if the Company has any  responsibility  for the status of
the customers' IT and/or non-IT systems and hardware.

In 1998,  the  Company  began to monitor  its  progress  on the Y2K program on a
consolidated  basis and completed an inventory  which covered both IT and non-IT
items  for  all  operating   companies  and  administrative   units  within  the
ServiceMaster enterprise.  All items in the inventory were placed in one of four
categories:  mission  critical,  critical,  important  and  ordinary  within the
context of the operating  company or administrative  unit involved.  (A "mission
critical" or "critical"  designation for an item within an operating  company or
administrative unit does not necessarily hold the same level of criticality from
the perspective of the entire ServiceMaster enterprise).

Remediation  plans have been  developed  for the mission  critical  and critical
matters,  with milestones  established for each plan which enable  management to
measure  the  progress  made in  respect  of a plan  against  the work  schedule
established  for that plan.  Although  these  plans  encompass  many  separately
identifiable items, from a ServiceMaster  enterprise standpoint,  there are nine
projects (the "Key Projects")  which management has identified as either mission
critical or critical and which will require a measurable  amount of attention to
remediate.  Although all of the Key Projects are scheduled for completion before
the end of the year 1999,  most of the Key Projects are scheduled for completion
by June 30, 1999. As of February 28, 1999,  work on each of the Key Projects was
on schedule and the Company  believes that all Key Projects will be completed in
accordance with their scheduled completion dates.

The Company has  utilized  the  services  of an outside  consultant  for the Y2K
program to help  identify Y2K issues and to develop a system to closely  monitor
remediation work. In early 1998, the Company  established a Y2K committee in the
parent unit with  responsibility  for  monitoring the Y2K program in each of the
Company's  operating  units and for  providing  status  reports  to the Board of
Directors.

Year 2000 Costs.  Several of the Key Projects are upgrades of systems  which the
Company would have undertaken  irrespective  of the Y2K problem.  In some cases,
including a new accounting and financial reporting system for the parent company
and  its  Management  Services  subsidiary,  work  on  these  systems  has  been
accelerated  in view of Y2K issues.  Other  upgrades or new systems were already
scheduled for  completion  prior to the year 2000,  such as a new support system
for the  Company's  American Home Shield  subsidiary  and a new  accounting  and
billing system for the recently- developed  commercial landscape business within
the Company's TruGreen-ChemLawn  subsidiary.  References to "Year 2000 costs" in
this report do not include the costs of projects  for which no  acceleration  is
occurring due to Y2K issues.

                                       30
<PAGE>

The Company's Year 2000 costs to date are not material to the Company's  results
of operations  or financial  position and the Company does not expect its future
Year 2000  costs to be  material  to the  Company's  results  of  operations  or
financial position.  All Year 2000 costs (as well as the costs of installing the
system  upgrades  referred to above) have been,  and are expected to continue to
be, funded with cash from operations.

Year 2000 Risks.  The Company  believes that its greatest  Year 2000  compliance
risk, in terms of magnitude of risk, is that key third party  suppliers of goods
or  services  may fail to  complete  their own  remediation  efforts in a timely
manner and thereby  provoke an interruption in the ability of one or more of the
operating  segments  of the Company to provide  uninterrupted  services to their
customers.  Utility services  (electrical,  water and gas),  telephone  service,
banking services and, to a much lesser degree, the delivery of chemical products
are the critical items in this regard.  Based on the Company's  inquiries to its
providers  of goods  and  services  and on the  basis of the  Company's  general
knowledge  of the state of  readiness  of the utility  companies  and banks with
which it does  business,  the  Company  does not expect to suffer  any  material
interruption in the services on which the Company depends.

The  Company  has  reviewed  its  agreements   with  its  customers,   including
particularly the customers of its Management  Services units for whom such units
provide facility  management  services.  The Company is satisfied that it is not
responsible, contractually or otherwise, for the Y2K readiness of the customers'
IT and  non-IT  systems  and  hardware,  and the  Company  is in the  process of
notifying all of its customers to this effect where, in the Company's  judgment,
the nature of the customers' business or facility warranted such notices.

Where the Company uses its own  software in the course of  providing  management
services,  the Company is responsible  to make such software Y2K compliant.  The
Company  is  confident  that such  software  is  already,  or soon will be,  Y2K
compliant.  For those  units of the  Company  which  sell  franchises  and which
provide software to the franchisees,  such software is already, or soon will be,
fully Y2K  compliant  or,  alternatively,  provision  has been  made for  making
available  to  franchisees  software  from  third-party   developers  from  whom
appropriate Y2K compliance assurances have been or will be received.

Contingency  Plans.  At this time, the Company fully expects all of its internal
key IT and non-IT  systems to be Y2K compliant well in advance of the end of the
year 1999.  If it appears  that  timely  delivery  of any Key  Projects  becomes
questionable,  the Company  will  immediately  develop  appropriate  contingency
plans.

The  Company  presently  expects  that its  significant  providers  of goods and
services are or will be Y2K  compliant by the end of the year 1999.  The Company
will continue to make  inquiries of its key suppliers for the purpose of testing
this expectation.  Insofar as the Company is exposed to risks originating in Y2K
problems at key suppliers, the Company will utilize short-term solutions, but no
practical  long-term  contingency  plans for these  external  Y2K  problems  are
possible.

Although  the  Company  believes  that  critical  remediation  efforts  will  be
completed  prior to the Year 2000,  the  untimely  completion  of these  efforts
could,  in  certain  circumstances,  have  a  material  adverse  effect  on  the
operations of the Company.

IN ACCORDANCE  WITH THE PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF 1995, THE
COMPANY  NOTES  THAT  STATEMENTS  THAT  LOOK  FORWARD  IN  TIME,  WHICH  INCLUDE
EVERYTHING OTHER THAN HISTORICAL  INFORMATION,  INVOLVE RISKS AND  UNCERTAINTIES
THAT MAY AFFECT THE COMPANY'S ACTUAL RESULTS OF OPERATIONS.  FACTORS WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY  INCLUDE THE FOLLOWING (AMONG OTHERS):
WEATHER  CONDITIONS  ADVERSE  TO  CERTAIN  OF THE  COMPANY'S  CONSUMER  SERVICES
BUSINESSES,  LABOR SHORTAGES,  THE ENTRY OF ADDITIONAL COMPETITORS IN ANY OF THE
MARKETS  SERVED BY THE COMPANY,  CONSOLIDATION  OF  HOSPITALS IN THE  HEALTHCARE
MARKET,  THE  CONDITION OF THE U.S.  ECONOMY,  THE INABILITY OF KEY SUPPLIERS TO
ACHIEVE TIMELY Y2K COMPLIANCE IN THEIR DELIVERY  SYSTEMS OR THE INABILITY OF THE
COMPANY TO MAKE ITS OWN SYSTEMS Y2K  COMPLIANT,  AND OTHER  FACTORS  LISTED FROM
TIME  TO  TIME  IN THE  COMPANY'S  FILINGS  WITH  THE  SECURITIES  AND  EXCHANGE
COMMISSION.

                                       31
<PAGE>

Eleven Year Financial Summary
(In thousands, except per share and percentage data)

      All share and per share data  reflect the  three-for-two  share  splits in
      1998, 1997, 1996, 1993 and 1992.

                                       1998             1997              1996

      Operating Results:

      Operating revenue . . . .  $4,724,119       $3,961,502        $3,458,328
      Cost of services rendered
          and products sold . .   3,679,612        3,058,160         2,681,008
      Selling and administrative
          expenses  . . . . . .     648,085          559,409           482,102

      Operating income(2) . . .     396,422          343,933           295,218

        Percentage of operating
          revenue . . . . . . .         8.4%             8.7%              8.5%
      Non-operating expense . .      77,644           69,654            42,821
      Provision for income
          taxes(1)  . . . . . .     128,786          110,809           101,968
      Net income (pro forma
          prior to 1998)(1),(2)    $189,992         $163,470          $150,429

        Percentage of operating
          revenue . . . . . . .         4.0%             4.1%              4.3%

      Earnings per share (pro
          forma prior to 1998):(1),(2)

          Basic . . . . . . . .       $0.66            $0.57             $0.47
          Diluted . . . . . . .       $0.64            $0.55             $0.46

      Shares used to compute
          basic net income
          per share . . . . . .     289,315          285,944           317,381
      Shares used to compute
          diluted net income
          per share . . . . . .     298,887          299,640           330,429
      Cash distributions per
          share . . . . . . . .       $0.33            $0.31             $0.29
      Share price range:
        High price  . . . . . .      $25.50           $19.67            $11.83
        Low price . . . . . . .      $16.00           $10.92             $8.61

      Financial Position (at year end):
      Current assets . . . . .     $670,202         $594,084          $499,334
      Current liabilities  . .      753,697          558,177           425,552
      Working capital  . . . .      (83,495)          35,907            73,782
      Current ratio  . . . . .         .9-1            1.1-1             1.2-1
      Total assets . . . . . .   $2,914,851       $2,475,224        $1,846,841
      Non-current liabilities.    1,204,668        1,392,609           607,614
      Minority interest/
          Deferred gain  . . .          ---              ---            16,908
      Shareholders' equity . .      956,486          524,438           796,767
      Percentage return on
          weighted-average
          shareholders' equity           25%              26%               19%
      Shares outstanding, net
          of treasury shares .      298,030          279,944           320,396

(1) The Company  converted  from  partnership  to  corporate  form in a tax-free
exchange for  shareholders on December 26, 1997.  Prior to the  conversion,  the
Partnership  was not subject to federal  income taxes as its taxable  income was
allocated to the  Company's  shareholders.  As a result of the  conversion,  the
Company is a taxable  entity and is responsible  for such payments.  The results
shown above for the years ended  December 31, 1997 and before have been restated
to adjust the actual  historical  partnership  information  to a pro forma basis
that assumes that reincorporation had occurred as of the beginning of that year.
The pro forma provision for income taxes has been  calculated  assuming that the
Corporation's  effective  tax rate had been  approximately  40 percent of pretax
earnings.  Actual  historical net income per share as a partnership for the four
prior periods was as follows:


                  1997 (a)    1996     1995      1994

    Net Income    $264,076  $245,140  $172,019 $139,883
    EPS:  Basic     $.92      $.77     $.66      $.55
    Diluted         $.89      $.75     $.64      $.53


(a) Including the one-time tax gain related to  reincorporation,  net income was
$329,076  and  basic  and  diluted  earnings  per  share  were  $1.15  and $1.10
respectively.

                                       32
<PAGE>
<TABLE>
<CAPTION>


  1995         1994             1993             1992             1991             1990             1989               1988


<S>          <C>             <C>               <C>             <C>               <C>              <C>              <C>       
$3,202,504   $2,985,207      $2,758,859        $2,488,854      $2,109,941        $1,825,750       $1,609,267       $1,531,276
 2,499,700    2,356,435       2,192,684         2,021,010       1,762,700         1,545,527        1,387,448        1,327,128
   450,937      414,746         393,131           326,477         225,814           177,941          129,035          118,275
   251,867      214,026         173,044           141,367         121,427           102,282           92,784           85,873
       7.9%         7.2%            6.3%              5.7%            5.8%              5.6%             5.8%             5.6%
    74,260       71,388          55,151            45,740          39,860            30,397           24,016           21,247
    71,753       57,626          47,629            38,633          32,953            29,042           27,782           26,109
  $105,854      $85,012         $70,264           $56,994         $48,614           $42,843          $40,986          $38,517

       3.3%         2.8%            2.5%              2.3%            2.3%              2.3%             2.5%             2.5%

     $0.41        $0.33            $0.28            $0.23           $0.20             $0.18            $0.17            $0.16
     $0.39        $0.32            $0.27            $0.22           $0.20             $0.18            $0.17            $0.16
   260,382      255,650          253,919          249,828         240,276           239,730          245,058          240,290
   273,203      266,892          266,231          262,941         252,579           243,038          249,219          245,658
     $0.28        $0.27            $0.26            $0.26           $0.25             $0.24            $0.23            $0.22

     $9.00        $8.41            $9.19            $5.90           $5.13             $3.13            $3.19            $3.71
     $6.37        $6.37            $5.22            $4.35           $2.89             $2.60            $2.78            $2.93

  $393,239     $331,045         $291,325         $257,542        $217,517          $237,262         $219,661         $203,925
   372,930      304,395          244,552          206,755         157,458           158,046          135,375           76,908
    20,309       26,650           46,773           50,787          60,059            79,216           84,286          127,017
     1.1-1        1.1-1            1.2-1            1.2-1           1.4-1             1.5-1            1.6-1            2.7-1
$1,649,890   $1,230,839       $1,122,461       $1,005,531        $843,660          $796,935         $593,693         $485,492
   517,603      483,906          471,177          511,211         376,638           372,052          410,056          346,970
    12,697      135,272          117,513           77,906         187,583           170,831            9,174           10,186
   746,660      307,266          289,219          209,659         121,981            96,006           39,088           51,428
        24%          28%              28%              33%             45%               80%              84%              81%
   321,341      256,419           257,901         255,386         243,527           242,939          230,396          236,966

</TABLE>

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


                                        1993      1992      1991      1990
Operating income                    $173,044   $62,432  $121,427   $95,782
Pro forma corporate net income       $88,263   $73,486   $52,095   $50,889
EPS:  Basic                            $0.35     $0.29     $0.22     $0.21
      Diluted                          $0.34     $0.28     $0.21     $0.21


                                       33
<PAGE>


Notes to the Consolidated Financial Statements

Summary of Significant Accounting Policies

BASIS OF  CONSOLIDATION:  The  consolidated  financial  statements  include  the
accounts of ServiceMaster  and its  majority-owned  subsidiary  partnerships and
corporations, collectively referred to as the Company. Intercompany transactions
and  balances   have  been   eliminated   in   consolidation.   Investments   in
unconsolidated  subsidiaries  representing ownership of at least 20 percent, but
less  than 50  percent,  are  accounted  for under the  equity  method.  Certain
immaterial 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation.  The preparation of the consolidated financial statements requires
management to make certain  estimates and  assumptions  required under generally
accepted accounting principles which may differ from the actual results.

REVENUES:  Revenues from lawn care, termite, pest control, and plumbing services
are recognized as the services are provided.  Revenues from franchised  services
(which in  aggregate  represent  less than 10  percent of  consolidated  totals)
consist of initial franchise fees received from the sales of licenses,  sales of
products  to  franchisees,  and  continuing  monthly  fees based upon  franchise
revenue.

Home warranty  contract fees are recognized as revenues ratably over the life of
the contract while the contract costs are expensed as incurred.

Revenues from  management  services are  recognized as services are rendered and
consist of contract fees which reflect the total price of such  services.  Where
the Company  principally  manages people who are employees of the facility,  the
payroll costs for such  employees are  recognized by the Company and included in
"Cost of services rendered and products sold" in the Consolidated  Statements of
Income.  Receivables  from the  facilities  are  reflected  in the  Consolidated
Statements of Financial Position at the net amount due, after deducting from the
contract  price  all  amounts  chargeable  to the  Company.  Revenues  from  the
professional  employer  organization  (PEO) are  recognized  as the services are
rendered.  Consistent  with PEO industry  practice,  revenues  include the gross
amount billed to clients, which includes payroll and other direct costs.

INVENTORY  VALUATION:  Inventories  are  valued at the lower of cost  (first-in,
first-out basis) or market. Inventory costs include material, labor, and factory
overhead and related  handling  costs.  Raw materials  represent less than three
percent of the inventory value at December 31, 1998. The remaining  inventory is
finished goods to be used on the customers' premises or sold to franchisees.

DEPRECIATION AND AMORTIZATION:  Buildings and equipment used in the business are
stated at cost and  depreciated  over their  estimated  useful  lives  using the
straight-line  method for financial  reporting  purposes.  The estimated  useful
lives  for  building  and  improvements  range  from 10 to 40  years,  while the
estimated  useful lives for equipment  range from three to 10 years.  Intangible
assets  consist  primarily  of trade names ($177  million)  and  goodwill  ($1.7
billion).  These  assets  are  amortized  on a  straight-line  basis  over their
estimated useful lives,  which are  predominately 40 years.  Long-lived  assets,
including  fixed assets and  intangible  assets,  are  periodically  reviewed to
determine  recoverability by comparing their carrying values to the undiscounted
future cash flows expected to be realized from their use. No recovery  problems,
other than that noted in the discontinued Home Health Care operations, have been
indicated by these comparisons. Based on the reviews, if the undiscounted future
cash flows are less than the carrying amount of the asset, an impairment loss is
recognized based on the asset's fair value, and the carrying amount of the asset
is reduced accordingly.

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

EARNINGS PER SHARE:  Basic  earnings per share is based on the  weighted-average
number of common shares outstanding during the year. Shares potentially issuable
under  options  have been  considered  outstanding  for  purposes of the diluted
earnings per share calculation.

NEWLY-ISSUED ACCOUNTING STATEMENTS AND POSITIONS: In 1998, Statement of Position
No. 98-1,  "Accounting for the Costs of Computer Software  Developed or Obtained
for Internal  Use," and Statement of Position No. 98-5,  "Reporting on the Costs
of Start Up and Preoperating  Activities,"  were issued.  The Company intends to
adopt  these  policies  beginning  in 1999 as required  by the  Statements.  The
Company  does not expect the  adoption  of these  Statements  to have a material
impact on the  financial  statements.  Also in 1998,  the  Financial  Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 133,
"Accounting  for Derivative  Instruments  and Hedging  Activities."  The Company
intends to adopt this  Statement in January  2000 as required by the  Statement.
Adoption of this  Statement  is not  expected  to have a material  impact on the
Company's financial statements.

                                       34
<PAGE>


Report of Independent Public Accountants



TO THE SHAREHOLDERS OF 
THE SERVICEMASTER COMPANY

We have audited the accompanying  consolidated  statements of financial position
of THE SERVICEMASTER COMPANY (organized under the laws of the State of Delaware,
formerly ServiceMaster Limited Partnership) AND SUBSIDIARIES, as of December 31,
1998 and 1997, and the related consolidated statements of income,  shareholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1998.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We  conducted  our audits in  accordance  with
generally accepted auditing standards.  Those standards require that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of The ServiceMaster
Company and  Subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of  operations  and cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.

ARTHUR ANDERSEN LLP
Chicago, Illinois
January 25, 1999

                                       35
<PAGE>

Statements of Income

   Years Ended December 31,
      (In thousands, except per share data)
                                      1998           1997              1996

      Operating Revenue . . . . .  $4,724,119     $3,961,502        $3,458,328

      Operating Costs and Expenses:

      Cost of services rendered
          and products sold . . .   3,679,612      3,058,160         2,681,008
      Selling and administrative
          expenses  . . . . . . .     648,085        559,409           482,102
      Total operating costs and
          expenses  . . . . . . .   4,327,697      3,617,569         3,163,110
      Operating Income  . . . . .     396,422        343,933           295,218

      Non-operating Expense (Income):

      Interest expense  . . . . .      92,945         76,447            38,298
      Interest and investment
          income  . . . . . . . .     (15,301)       (14,304)          (10,183)
      Minority interest . . . . .         ---          7,511            14,706
      Income before Income
          Taxes . . . . . . . . .     318,778        274,279           252,397

      Provision for income taxes
      (pro forma corporate 
      form in 1997 and 1996)(1) .     128,786        110,809           101,968
      Net Income (pro forma
          corporate form in 1997
          and 1996)(1)  . . . . .    $189,992       $163,470          $150,429

      Per Share (pro forma
          corporate form in 1997
          and 1996):(1), (2)
        Basic . . . . . . . . . .       $0.66          $0.57             $0.47
        Diluted . . . . . . . . .       $0.64          $0.55             $0.46

      (1) The Company converted from partnership to corporate form in a tax-free
   exchange for shareholders on December 26, 1997. Prior to the conversion,  the
   Partnership was not subject to federal income taxes as its taxable income was
   allocated to the Company's shareholders.  As a result of the conversion,  the
   Company is a taxable entity and is responsible for such payments. The results
   shown above for the years ended December 31, 1997 and 1996 have been restated
   to adjust the actual historical partnership  information to a pro forma basis
   that assumes  that  reincorporation  had occurred as of the  beginning of the
   year. Upon reincorporation,  the Company recognized a significant increase in
   the tax basis of certain  assets and  recorded a $65 million tax gain related
   to  reincorporation,  which represented the difference  between the tax basis
   and book value of its assets.  The  Company's  historical  net income and net
   income per share as a partnership were as follows:
<TABLE>
<CAPTION>


                                                                                           Before One-Time
                                                                                         --------------------
                                                                                             Tax Benefit             Actual
                                                                                         --------------------  --------------------
<S>                                         <C>          <C>          <C>                  <C>        <C>        <C>        <C> 
Partnership Information as Recorded:        1997         1996         Earnings Per         1997       1996       1997       1996
                                                                      Share:
                                         -----------  -----------                        ---------  ---------  ---------  ---------
Income before income                      $ 274,279     $252,397      Basic                $.92       $.77      $1.15       $.77
taxes..........................
Partnership tax                              10,203        7,257      Diluted              $.89       $.75      $1.10       $.75
provision......................
Tax benefit relating to change in tax                  
status                                       65,000            -
                                         ===========  ===========
Net                                       $ 329,076     $245,140
income.........................
                                         ===========  ===========

</TABLE>

      (2) Basic  earnings per share are  calculated  based on 289,315  shares in
   1998,  285,944  shares in 1997,  and 317,381  shares in 1996,  while  diluted
   earnings per share are calculated  based on 298,887  shares in 1998,  299,640
   shares in 1997,  and  330,429  shares in 1996.  All share and per share  data
   reflect the  three-for-two  share splits in August  1998,  June 1997 and June
   1996.

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

                                       36
<PAGE>

Statements of Financial Position

   As of December 31,
      (In thousands)                                                          
                                                    1998                1997

      Assets:
      Current Assets:
      Cash and cash equivalents . . . . .       $    66,400        $    64,876
      Marketable securities . . . . . . .            54,022             59,248
      Receivables, less allowances of
          $38,988 in 1998 and $32,22
          in 1997 . . . . . . . . . . . .           372,375            299,138
      Inventories . . . . . . . . . . . .            49,770             48,157
      Prepaid expenses and other assets .           127,635            122,665
      Total current assets  . . . . . . .           670,202            594,084
      Property, Plant, and Equipment, at Cost:
      Land and buildings  . . . . . . . .            53,068             46,632
      Equipment . . . . . . . . . . . . .           388,141            316,021

                                                    441,209            362,653

      Less: accumulated depreciation  . .           229,049            204,383
      Net property, plant, and equipment.           212,160            158,270

      Other Assets:
      Intangible assets,  primarily trade names and goodwill,  less  accumulated
          amortization of $272,254 in 1998 and $218,293
          in 1997   . . . . . . . . . . .         1,884,002          1,563,309
      Notes receivable, long-term
          securities, and other assets  .           148,487            159,561
      Total Assets  . . . . . . . . . . .    $    2,914,851         $2,475,224

      Liabilities and Shareholders' Equity:

      Current Liabilities:
      Accounts payable  . . . . . . . . .    $      110,523         $   84,673
      Accrued liabilities:
        Payroll and related expenses  . .            96,199             85,315
        Insurance and related expenses  .            56,748             55,909
        Income taxes payable  . . . . . .            84,165              8,423
        Other . . . . . . . . . . . . . .           149,477            121,020
      Deferred revenues . . . . . . . . .           204,969            181,298
      Current portion of long-term debt .            51,616             21,539
      Total current liabilities . . . . .           753,697            558,177
      Long-Term Debt  . . . . . . . . . .         1,076,167          1,247,845
      Other Long-Term Obligations . . . .           128,501            144,764

      Commitments and Contingencies (see Notes)

      Shareholders' Equity:

      Common stock  $0.01 par value,  authorized  1 billion  shares;  issued and
          outstanding of 298,030 shares in 1998 and
          279,944 shares in 1997 . . . . .            2,980              2,799
      Additional paid-in capital . . . . .          788,124            513,148
      Retained earnings  . . . . . . . . .          179,840             65,000
      Accumulated other comprehensive
          income . . . . . . . . . . . . .            3,911              5,343
      Restricted stock . . . . . . . . . .           (3,383)            (4,270)
      Treasury stock . . . . . . . . . . .          (14,986)           (57,582)
      Total shareholders' equity . . . . .          956,486            524,438
      Total Liabilities and Shareholders'
          Equity . . . . . . . . . . . . .   $    2,914,851         $2,475,224

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

                                       37
<PAGE>

Statements of Cash Flows


   Years Ended December 31,
      (In thousands)                                                          
                                        1998          1997              1996

      Cash and Cash Equivalents
          at January 1 . . . . . .     $64,876       $72,009           $23,113 
      Cash Flows from Operations:
      Net Income . . . . . . . . .     189,992       329,076           245,140
        Adjustments  to  reconcile   net  income  to  net  cash   provided  from
          operations:

          Depreciation . . . . . .      50,644        45,392            41,658
          Amortization . . . . . .      53,961        47,670            37,348 
          Tax asset recorded upon
               reincorporation . .         ---       (65,000)              ---
        Change in working capital,
          net of acquisitions:
          Receivables  . . . . . .     (46,205)       (6,853)          (19,084)
          Inventories and other
               current assets  . .      (2,360)      (14,210)          (12,666)
          Accounts payable . . . .      18,475         5,603            10,302
          Deferred revenues  . . .      22,033        30,012            17,602
          Deferred 1998 tax
                payment  . . . . .      83,000           ---               ---
          Deferred income tax
               expense . . . . . .      36,400           ---               ---
          Accrued liabilities  . .      (2,028)          (82)           13,140
        Other, net . . . . . . . .       1,627           281             7,946

      Net Cash Provided from
          Operations . . . . . . .     405,539       371,889           341,386

      Cash Flows from Investing Activities:

        Property additions . . . .     (75,297)      (46,232)          (42,952)
        Sale of equipment and
          other assets . . . . . .       6,941         4,134             2,664
        Business acquisitions, net
          of cash acquired . . . .    (222,452)     (233,689)          (58,473)
        Proceeds from sale of
          businesses . . . . . . .      45,893           ---             4,526
        Net purchases of investment
          securities . . . . . . .     (11,011)      (16,753)          (20,075)
        Notes receivable and
          financial investments  .     (10,645)       (3,593)            3,304
        Payments to sellers of
          acquired businesses  . .     (10,271)       (4,723)           (3,742)
      Net Cash Used for Investing
          Activities . . . . . . .    (276,842)     (300,856)         (114,748)

      Cash Flows from Financing Activities:

        Borrowings, net  . . . . .     310,190       888,528           123,732
        Payment of borrowings and
          other obligations  . . .    (564,448)     (160,155)          (82,857)
        Proceeds from stock
          offering . . . . . . . .     208,561           ---               ---
        Distributions to
          shareholders and
          shareholders' trust  . .     (75,152)     (155,883)         (146,520)
        Purchase of ServiceMaster
          stock  . . . . . . . . .     (18,310)     (657,191)          (76,556)
        Proceeds from employee
           share plans . . . . . .      12,638         6,526             6,835
        Distributions to holders
          of minority interests  .         ---          (542)           (3,074)
        Other  . . . . . . . . . .        (652)          551               698
      Net Cash Used for Financing
          Activities . . . . . . .    (127,173)      (78,166)         (177,742)

      Cash Increase (Decrease)
          During the Year  . . . .       1,524        (7,133)           48,896 
      Cash and Cash Equivalents at
          December 31  . . . . . .     $66,400       $64,876           $72,009 

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

                                       38
<PAGE>

Statements of Shareholders' Equity
<TABLE>
<CAPTION>

                                                  Corporate Equity
                                           -----------------------------
                                                     Additional           Limited    Accumulated
                                            Common    Paid-in   Retained  Partners'  Comprehensive  Treasury   Restricted   Total
      (In thousands)                         Stock    Capital   Earnings  Equity     Income         Stock      Stock        Equity
------------------------------------       --------  ---------  --------  --------   ----------     --------   ---------    -------
<S>                                        <C>       <C>        <C>       <C>            <C>        <C>          <C>       <C>     
      Balance, December 31, 1995 . .       $    ---  $     ---  $    ---  $761,710       $5,904     $(13,405)    $(7,549)  $746,660

      Net income 1996  . . . . . . .                                       245,140                                          245,140
      Other comprehensive income,
          net of tax:

          Unrealized gains on
          securities, net of
          reclassification
          adjustment . . . . . . . .                                                      1,452                               1,452
    Foreign currency translation
          ($678 tax expense) . . . .                                                       (999)                               (999)
      Total comprehensive income . .                                       245,140          453                             245,593
      Shareholder distributions  . .                                      (146,520)                                        (146,520)
      Shares issued under option,
          subscription, grant plans
          and other (3,667 shares) .                                        (7,166)                    2,506       1,691     (2,969)
      Treasury shares purchased and
          related costs (7,825
          shares)  . . . . . . . . .                                                                 (76,556)               (76,556)
      Shares issued for acquisitions
          (3,213 shares) . . . . . .                                         3,104                    27,455                 30,559
      Balance, December 31, 1996 . .       $    ---  $     ---  $    ---  $856,268       $6,357     $(60,000)    $(5,858)  $796,767

      Net income 1997  . . . . . . .                              65,000   264,076                               329,076
      Other comprehensive income,
          net of tax: Unrealized
          gains on securities, net 
          of reclassification
          adjustment . . . . . . . .                                                      4,269                               4,269
      Foreign currency translation ($3,580 tax expense)                                  (5,283)                             (5,283)

      Total comprehensive income . .                              65,000   264,076       (1,014)                            328,062
      Shareholder distributions  . .                                      (155,883)                                        (155,883)
      Shares issued under option,
          debentures, grant plans
          and other (6,552 shares) .                                        21,165                     3,511       1,588     26,264
      Treasury shares repurchased from WMX 
          (61,112 shares)  . . . . .                                      (625,978)                                        (625,978)
      Treasury shares purchased
          and related costs 
          (2,051 shares) . . . . . .                                                                 (31,213)               (31,213)
      Shares issued for the
          acquisition of Barefoot 
          Inc. and other
          acquisitions (16,161 shares)                                     156,299                    30,120                186,419
      Conversion to corporate form .           2,799   513,148            (515,947)

      Balance, December 31, 1997 . .          $2,799  $513,148   $65,000  $    ---       $5,343     $(57,582)    $(4,270)  $524,438

      Net income 1998  . . . . . . .                             189,992                                                    189,992

      Other comprehensive income,
          net of tax: Unrealized
          gains on securities, net
          of reclassification
          adjustment . . . . . . . .                                                       (485)                               (485)
     Foreign currency translation
          ($640 tax expense)                                                               (947)                               (947)
      Total comprehensive income . .                             189,992                 (1,432)                            188,560
      Shareholder distributions  . .                             (75,152)                                                   (75,152)
      Shares issued in public
          offering (11,400 shares) .             114   208,447                                                              208,561
      Shares issued under option,
          debentures, grant plans
          and other (2,514 shares) .              25     9,403                                        13,507         887     23,822
      Treasury shares purchased and
          related costs (888 shares)              (9)                                                (18,301)               (18,310)
      Shares issued for acquisitions
          (5,059 shares)                          51    57,126                                        47,390                104,567

      Balance, December 31, 1998 . .          $2,980  $788,124  $179,840  $    ---       $3,911     $(14,986)    $(3,383)  $956,486

</TABLE>

      All share data reflect the three-for-two share splits in August 1998, June
   1997 and June 1996.

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


                                           1998           1997            1996

      Unrealized holding gains
          arising in period . . .        $ 3,295        $ 5,904         $ 2,795
      Less: gains realized  . . .         (3,780)       (1,635)          (1,343)
      Net unrealized gains on
          securities  . . . . . .         $ (485)      $ 4,269          $ 1,452

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

                                       39
<PAGE>

Notes to the Consolidated Financial Statements

Business Unit Reporting

The business of the Company is  primarily  conducted  through the  ServiceMaster
Consumer  Services and  ServiceMaster  Management  Services  operating units. In
accordance  with  Statement  of  Financial  Accounting  Standards  No. 131,  the
Company's  reportable  segments  are  strategic  business  segments  that  offer
different  services.  They are managed separately because each business requires
different  technology  and  marketing  strategies.  The Consumer  Services  unit
provides  a  variety  of  specialty   services  to  residential  and  commercial
customers.  The  Management  Services  unit  provides  a variety  of  supportive
management  services to health care,  education  and  commercial  accounts.  The
Company derives  substantially  all of its revenues from customers in the United
States with less than five percent generated in foreign markets.

The other operations group includes primarily ServiceMaster Employer Services, a
professional  employer  organization  that provides clients with  administrative
processing  of  payroll,  workers'  compensation  insurance,  health  insurance,
unemployment  insurance and other employee benefit plans, and Diversified Health
Services,  which provides  services and products to the long-term care industry.
In  the  previous  year,  Diversified  Health  Services  was  reflected  in  the
Management  Services operating unit. It is now reflected in the other operations
group for all years.  The Company has reclassified  Diversified  Health Services
into the other  operations  segment due to the unique  nature of the services it
provides and the industry factors which affect its performance. It also operates
in a highly regulated  industry and is managed separately from the other service
lines.

Information  regarding the accounting  policies used by the Company is described
in the Summary of Significant  Accounting  Policies.  Operating  expenses of the
business units consist primarily of direct costs and a royalty payable to Parent
based on the revenues or profits of the business unit.

Identifiable  assets  are  those  used in  carrying  out the  operations  of the
business unit and include  intangible assets directly related to its operations.
The Company's  headquarters  facility and other  investments are included in the
identifiable assets of other operations.

The following  information prior to 1998 is presented on a pro forma basis as if
the Company had been a taxable  corporation in all years and corporate taxes had
been allocated to the segments.

<TABLE>
<CAPTION>

(In thousands)  

                                        Consumer          Management         Other
                                        Services          Services           Operations    Consolidated
                                        ------------      -------------      -----------   ------------
1998

<S>                                     <C>                <C>                 <C>           <C>       
Operating revenue . . . . . . .         $2,048,185         $2,040,948          $634,986      $4,724,119

Operating income  . . . . . . .            305,408            112,919           (21,905)        396,422
Net interest expense (income) .             42,259             (1,882)           37,267          77,644
Income before income taxes  . .            263,149             114,801          (59,172)        318,778
Provision for income taxes  . .            106,309              46,380          (23,903)        128,786

Net income  . . . . . . . . . .           $156,840             $68,421         $(35,269)       $189,992

Net income, excluding unusual
     items (Note) . . . . . . .           $156,840             $45,774         $(12,622)       $189,992

Identifiable assets . . . . . .         $2,244,652            $237,924         $432,275      $2,914,851
Depreciation and amortization
     expense  . . . . . . . . .            $71,369             $22,023          $11,213        $104,605
Capital expenditures  . . . . .            $36,206             $29,757           $9,334         $75,297


1997

Operating revenue . . . . . . .         $1,662,519          $1,905,291         $393,692      $3,961,502
Operating income  . . . . . . .            235,064              76,224           32,645         343,933
Net interest and non-operating
     expense (income) . . . . .             27,740              (1,264)          43,178          69,654
Income before income taxes  . .            207,324              77,488          (10,533)        274,279
Corporate provision for
     income taxes . . . . . . .             83,759              31,304           (4,254)        110,809
Net income (pro forma
     corporate form)  . . . . .           $123,565             $46,184          $(6,279)       $163,470

Identifiable assets . . . . . .         $1,783,186            $212,727         $479,311      $2,475,224
Depreciation and amortization
     expense  . . . . . . . . .            $63,010             $21,315           $8,737         $93,062
Capital expenditures  . . . . .            $16,778             $21,232           $8,222         $46,232


1996

Operating revenue . . . . . . .         $1,461,696          $1,816,953         $179,679      $3,458,328
Operating income  . . . . . . .            185,895              75,577           33,746         295,218
Net interest and non-operating
     expense  . . . . . . . . .             14,233                 276           28,312          42,821
Income before income taxes  . .            171,662              75,301            5,434         252,397
Corporate provision for
     income taxes . . . . . . .             69,352              30,422            2,194         101,968
Net income (pro forma
     corporate form)  . . . . .           $102,310             $44,879           $3,240        $150,429

Identifiable assets . . . . . .         $1,394,177            $236,038         $216,626      $1,846,841
Depreciation and amortization
     expense. . . . . . . . . .            $52,446             $21,304           $5,256         $79,006
Capital expenditures  . . . . .            $19,915             $17,852           $5,185         $42,952

</TABLE>

Note: This line excludes the $38 million pretax gain in the Management  Services
segment  related to the  formation  of a strategic  venture  which  acquired the
assets of  ServiceMaster  Energy  Management and the pretax charges totaling $38
million in the Other  Operations  segment  related  primarily to the home health
care  operations,  which  included a write-down for the impairment of assets and
costs relating to exiting customer arrangements.

                                       40
<PAGE>

Reincorporation

Most operations of ServiceMaster and its subsidiary  partnerships were conducted
from 1986 through 1997 in partnership  form,  free of federal  corporate  income
tax. Had ServiceMaster  remained a partnership,  the Internal Revenue Code would
have imposed  federal  corporate tax on  ServiceMaster  operations  beginning in
1998.  In January  1992,  in  anticipation  of this  change,  the  Partnership's
shareholders  approved a tax-free plan of  reorganization to return to corporate
form.

The ServiceMaster  Company was created as part of this plan. The  reorganization
became effective  December 26, 1997, and was structured as a merger in which The
ServiceMaster  Company became the successor  entity through which the public now
invests in ServiceMaster.  (The terms "the Company" and "ServiceMaster" are used
to  collectively  refer to the Partnership  and its successor  corporation,  The
ServiceMaster Company.) At the time of reincorporation, each outstanding limited
partnership  share was converted into one share of $0.01 par value common stock.
No federal income taxes were imposed on the shareholders of the Partnership as a
result of the reincorporation.

Pro  forma  information  has  been  presented  in  the  accompanying   financial
statements  in order to compare the  continuing  results of operations as if the
Company had been a taxable  entity in 1997 and 1996. The pro forma tax provision
has been  calculated  assuming  that the  Company's  effective tax rate had been
approximately 40 percent of pretax earnings.

Prior to December 26, 1997, The  ServiceMaster  Limited  Partnership held as its
only asset a 99 percent interest in the profits, losses and distributions of The
ServiceMaster Company Limited Partnership,  which through subsidiaries owned and
operated  the   ServiceMaster   business.   The  Managing  General  Partner  was
ServiceMaster  Management Corporation,  which held a one percent interest in the
income  of  both  Partnerships.   As  a  result  of  the   reorganization,   The
ServiceMaster  Company owns all of the general and limited partnership interests
in the  Partnership.  No payment  or equity  issuance  was made to the  Managing
General Partner in connection with the  reorganization  except for the payout of
any income allocated to its capital account prior to reincorporation.

Income Taxes
Prior to  reincorporation  at the end of 1997, most operations  conducted by the
Company and its  subsidiary  partnerships  were exempt  from  federal  corporate
income  tax  since  1986.  As a  result  of  the  reincorporation,  the  Company
recognized  a step-up in the tax basis of its assets,  which is being  amortized
against  taxable  income.  The step-up  resulted in a reduction of the Company's
cash tax  payments in excess of $25  million per annum for the current  year and
for the ensuing 14 years.

The reconciliation of income tax for 1998 computed at the U.S. federal statutory
tax rate to the Company's effective income tax rate is as follows:

Tax at U.S. federal statutory rate . . . . . . . . . . . . . . .           35.0%
State and local income taxes,
  net of U.S. federal benefit  . . . . . . . . . . . . . . . . .            4.4%
Other  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            1.0%
Effective rate . . . . . . . . . . . . . . . . . . . . . . . . .           40.4%

Income tax expense for 1998 consists of:

(In thousands)              Current        Deferred           Total
-----------------------     -------        --------         -------
U.S. federal. . . . .       $76,646         $30,200        $106,846
State and local. . . .       15,740           6,200          21,940
                            -------        --------        --------
                            $92,386         $36,400        $128,786

Deferred  income tax expense of $36.4  million for the year ended  December  31,
1998 results from timing  differences  in the  recognition of income and expense
for income tax and financial reporting purposes.

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

(In thousands)                                    1998           1997
------------------------------               --------------  ---------------
Deferred tax assets (liabilities):

Current:
Prepaid expenses and other . . . .                $(23,400)    $(11,500)
Accounts receivable allowance . . .                  7,400       12,000
Accrued insurance and 
  related expenses . . . . . . . .                  24,100       18,000
Other accrued expenses . . . . . .                  16,700       18,100

Long-Term:
Long-term assets . . . . . . . . .                    (500)      13,000
Insurance expenses . . . . . . . .                  32,500       32,000
Other long-term obligations . . . .                (11,600)         ---
                                                  --------     --------
Net deferred tax assets . . . . . .               $ 45,200     $ 81,600

There were no federal taxes paid in 1998 and  approximately  $5 million of state
tax payments  were made in the year.  In the first year of corporate  form,  the
Company was able to defer the remaining 1998 tax payments into 1999.

Acquisitions

Current Year -

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

In 1998,  the  Company  completed  a number of  acquisitions,  including  Rescue
Industries,  Inc.  (Rescue),  Ruppert  Landscape  Company  (Ruppert),   National
Britannia and other lawn care,  landscape and pest control  businesses.  Rescue,
which  operates  under the  Rescue  Rooter  trade  name,  is one of the  largest
plumbing  and  drain  cleaning  companies  in  America.  Ruppert  is  one of the
Mid-Atlantic's largest commercial landscape companies.  National Britannia,  the
third  largest  pest  control  company  in  the  United  Kingdom,  significantly
increases the  international  presence of Terminix.  The  aggregate  fair market
value of the assets acquired less liabilities assumed for these acquisitions was
$139 million,  which consisted almost entirely of intangible  assets,  primarily
goodwill. During the year, the

                                       41
<PAGE>

Company  acquired  a number of  smaller  companies  primarily  in the lawn care,
landscaping and pest control businesses.  The aggregate fair market value of the
assets  acquired less seller  financed notes and  liabilities  assumed for these
purchases was $194 million, including approximately $249 million of goodwill.

On November 1, 1998, the Company  entered into an agreement to acquire  LandCare
USA, Inc., one of the leading commercial landscape companies in the country. The
transaction is expected to be consummated in March 1999.

Prior Years -

On February 24, 1997, the Company acquired Barefoot Inc.,  (Barefoot) the second
largest  professional  residential  lawn care  services  company  in the  United
States.  The Company  paid  approximately  $237  million by issuing 12.9 million
shares and paying $91 million in cash in exchange for all of the Barefoot stock.
The  excess  of the  consideration  paid  over  the fair  value of the  Barefoot
business of $254 million was recorded as goodwill, which is being amortized on a
straight-line basis over 40 years.

During 1997,  the Company  made  several  smaller  acquisitions  which  included
Certified  Systems,  Inc.  one of the  nation's  largest  professional  employer
organizations, Orkin's lawn care and plantscaping division and a number of other
lawn care and pest control  businesses.  The Company also purchased the minority
interests  of  Management   Services  and  Diversified  Health  Services  for  a
combination of cash and Company shares,  totaling approximately $25 million. The
aggregate fair market value of the assets acquired less liabilities  assumed for
these  smaller  acquisitions  was $196  million,  including  approximately  $267
million of intangible assets, primarily goodwill.

During 1996, the Company  acquired Premier  Manufacturing  Support  Services,  a
provider of management  services to the automotive  industry,  and several other
smaller companies, predominately pest control, lawn care and pharmacy management
businesses. The aggregate fair value of assets acquired less liabilities assumed
was $91 million,  including approximately $96 million of intangible assets which
are being amortized on a straight-line basis over 40 years.

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

(In thousands)                                                                
                                              1998         1997         1996
                                           --------     --------     --------

Fair value of assets acquired  . . . . . . $465,380     $590,600     $134,377
Less liabilities assumed . . . . . . . . . (132,381)    (157,741)     (43,781)
                                           --------     --------     --------
Net assets acquired  . . . . . . . . . . .  332,999      432,859       90,596
Less shares issued . . . . . . . . . . . . (104,567)    (186,419)     (30,559)
Less cash acquired . . . . . . . . . . . .   (5,980)     (12,751)      (1,564)
                                           --------      -------     --------
Business acquisitions,
   net of cash acquired  . . . . . . . . . $222,452     $233,689      $58,473

Other Events

The Company  formed a strategic  venture  with Texas  Utilities  Company for the
ownership and operation of the ServiceMaster Energy Management business. The new
venture  acquired all of the assets of  ServiceMaster  Energy  Management and is
owned 85  percent by Texas  Utilities  and 15  percent  by  ServiceMaster.  This
transaction resulted in a pretax gain of $38 million.

In late 1998, the Company  completed a strategic  review of its Home Health Care
operations and concluded  that,  without  significant  investment,  it could not
profitably  provide high  quality  service in the future and continue to satisfy
all the changes and the requirements of new governmental reimbursement programs.
The Company has decided to sell its direct  operations and is discontinuing  its
outsourced  management operation of home health care agencies.  The Company will
continue to provide consulting services to hospitals and other providers of home
health care.

During the course of the  Company's  strategic  review of its Home  Health  Care
operations, the Company assessed the recoverability of the carrying value of the
intangible assets and fixed assets which resulted in pretax impairment losses of
$13  million and $3 million,  respectively.  In  accordance  with  Statement  of
Financial  Accounting  Standards  No. 121,  these losses  reflect the amounts by
which the carrying  values of these assets  exceed their  estimated  fair values
determined by their future  discounted cash flows. In addition,  the Company has
recorded a pretax  charge of $8 million  related  to the costs  associated  with
exiting customer  arrangements in the Home Health Care business.  In response to
the impact that changes in  governmental  reimbursement  programs  have begun to
have on the financial condition of certain customers of the Home Health Care and
Diversified Health Services  businesses,  the Company increased its reserves for
accounts receivable by $8 million and $6 million, respectively.

Employee Benefit Plans

Contributions  to qualified profit sharing plans were made in the amount of $9.9
million in 1998,  $8.2  million  in 1997,  and $6.9  million in 1996.  Under the
Employee Share Purchase Plan, the Company contributed $1.2 million in 1998, $1.1
million in 1997, and $1.0 million in 1996. These funds defrayed part of the cost
of the shares purchased by employees.

                                       42
<PAGE>

Long-Term Debt 

Long-term debt includes the following:
(In thousands, except per share data)
                                              1998                1997
                                           ----------          ----------
Notes Payable:
  10.57%, maturing in 1999-2000 . .           $18,000             $27,000
   8.38%, maturing in 1999-2001 . .            30,000              40,000
  10.81%, maturing in 2000-2002 . .            55,000              55,000
   6.65%, maturing in 2002-2004 . .            70,000              70,000
   7.40%, maturing in 2006  . . . .           125,000             125,000
   6.95%, maturing in 2007  . . . .           100,000             100,000
   7.10%, maturing in 2018  . . . .           150,000                 ---
   7.45%, maturing in 2027  . . . .           200,000             200,000
   7.25%, maturing in 2038  . . . .           150,000                 ---
   6.00%, subordinated, convertible
          at $5.53 per share  . . .               ---               3,581
Revolving credit facilities . . . .            50,000             550,000
International borrowings  . . . . .            48,272              29,856
Other . . . . . . . . . . . . . . .           131,511              68,947
Less current portion  . . . . . . .           (51,616)            (21,539)
Total long-term debt  . . . . . . .        $1,076,167          $1,247,845

The Company is party to a number of long-term debt  agreements  which require it
to  comply  with  certain   financial   covenants,   including   limitations  on
indebtedness,  restricted payments,  fixed charge coverage ratios and net worth.
The Company has been and currently is in compliance  with the covenants  related
to these debt agreements.

ServiceMaster  filed a shelf  registration  statement  with the  Securities  and
Exchange  Commission for the sale of up to $950 million in unsecured senior debt
securities  or equity  interests  in June 1997.  As of year end, the Company had
$350 million of securities  available for issuance under this shelf registration
statement.  The first debt issuance  from the shelf  occurred in August 1997. It
included two tranches of debt  totaling $300  million.  The Company  completed a
second $300 million dual-tranche  offering of unsecured senior notes in February
1998, that consisted of $150 million,  7.10 percent notes due March 1, 2018, and
$150 million,  7.25 percent  notes due March 1, 2038.  The net proceeds of these
offerings  reduced  borrowings under bank credit  facilities and thereby reduced
exposure to short-term interest rate fluctuations.

In May 1998,  the Company filed a Form S-3  registration  statement  under which
11.4 million newly-issued shares were sold at $19.17 per share. The net proceeds
to the  Company  were  approximately  $209  million  and  were  used  to  reduce
outstanding debt under existing bank credit facilities.

The Company has a committed  revolving  credit  facility  for up to $750 million
maturing in April 2002. The facility can be used for general  Company  purposes.
The  revolving  credit  facility  had $700  million of unused  commitment  as of
December 31, 1998.

The Company is exposed to interest rate  fluctuations on its floating rate debt.
As of year end,  the Company had  approximately  $100  million in floating  rate
borrowings.  The Company has, from time to time, entered into interest rate swap
or similar  arrangements to mitigate its exposure to interest rate fluctuations,
and does not, as a matter of policy, enter into hedging contracts for trading or
speculative  purposes.  As of year  end,  the  Company  was  not a party  to any
interest rate swaps.

Cash interest  payments were $88 million in 1998,  $63 million in 1997,  and $34
million in 1996.  Average rates paid on the revolving  credit  facility were 5.9
percent in 1998, 6.0 percent in 1997 and 5.6 percent in 1996.  Future  scheduled
long-term debt payments are $51.6 million in 1999 (average rate of 4.2 percent),
$67.7  million in 2000  (average  rate of 6.0  percent),  $44.3  million in 2001
(average  rate of 6.7  percent),  $45.9  million  in 2002  (average  rate of 6.6
percent), and $34.8 million in 2003 (average rate of 5.4 percent). Notes payable
of $19  million  due in 1999 are  intended  to be  refinanced  by the long  term
revolving  credit  facility in 1999 and  therefore are not included in the $51.6
million  of current  liabilities.  The $50  million  revolving  credit  facility
balance as of year end has not been included in the scheduled  payments above as
the Company expects to extend the revolving credit facility beyond 2003.

Based upon the borrowing rates currently  available to the Company for long-term
borrowings with similar terms and  maturities,  the fair value of long-term debt
is approximately $1.1 billion.

Future  long-term  noncancelable  operating  lease payments are $33.4 million in
1999,  $25.5 million in 2000, $17.9 million in 2001, $11.3 million in 2002, $6.6
million in 2003, and $7.4 million thereafter. Rental expense for 1998, 1997, and
1996 was $103.8 million, $83.9 million, and $74.8 million, respectively.

The Company  maintains an $80 million operating lease facility with a bank which
provides for the  acquisition  and development of properties to be leased by the
Company.  The Company has guaranteed the residual value of the properties  under
the lease up to 82 percent of the fair market value at the  commencement  of the
lease.  The  Company  does not  expect to be  required  to make  residual  value
payments and  therefore,  no amounts have been  included in the future  payments
above.  At December  31, 1998,  approximately  $38 million was funded under this
facility.

Cash and Marketable Securities

Marketable  securities  held at December  31, 1998 and 1997,  with a maturity of
three months or less,  are  included in the  Statements  of  Financial  Position
caption "Cash and Cash  Equivalents."  Marketable  securities  are designated as
available for sale and recorded at current market value,  with unrealized  gains
and losses reported in a separate component of shareholders' equity.  Marketable
securities  available for current  operations  are  classified as current assets
while  securities  held for  noncurrent  uses are  classified as long-term.  The
Company's  investments  consist  primarily  of  publicly-traded  debt and common
equity  securities.  As of December 31, 1998, the aggregate  market value of the
Company's short- and long-term investments in debt and equity securities was $97
million  and the  aggregate  cost basis was $84  million.  In 1998,  the Company
entered into a hedging  arrangement in a notional amount of $40 million expiring
November 1999, designed to protect its equity portfolio against a decline in the
equity market. This arrangement, which is

                                       43
<PAGE>

linked to the  Standard  & Poor's 500 Index,  provides  protection  for a market
decline of up to 15  percent,  while it caps the  potential  appreciation  at 15
percent.  At  year  end,  the  fair  market  value  of this  arrangement  was an
immaterial  net  liability to the  Company.  There was no  participation  in the
trading of derivative securities in 1998 or 1997.

Interest and dividend income received on cash and marketable securities was $8.9
million,  $8.3 million and $8.0 million,  in 1998, 1997 and 1996,  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.

Comprehensive Income

The  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 130,
"Reporting Comprehensive Income," which requires the reporting of all changes in
equity during a period,  except those  resulting  from  investment by owners and
distribution to owners. The Company has chosen to disclose Comprehensive Income,
which encompasses net income, unrealized gains on marketable securities, and the
effect of  foreign  currency  translation,  in the  Statement  of  Shareholders'
Equity.
                                               1998        1997         1996
                                             ---------   --------     --------
Unrealized holding gains
  arising in period . . . . . . . . .           $5,529     $9,908       $4,690
Tax expense . . . . . . . . . . . . .            2,234      4,004        1,895

Net of tax amount . . . . . . . . . .           $3,295     $5,904       $2,795

Gains realized  . . . . . . . . . . .           $6,342     $2,743       $2,254
Tax expense . . . . . . . . . . . . .            2,562      1,108          911

Net of tax amount . . . . . . . . . .           $3,780     $1,635       $1,343


Accumulated  comprehensive  income  included  the  following  components  as  of
December 31:
                                               1998        1997         1996
                                             ---------   --------     --------

Unrealized gain on securities                   $7,753     $8,238       $3,969
Foreign currency translation                    (3,842)    (2,895)       2,388

Total . . . . . . . . . . . .                   $3,911     $5,343       $6,357


Shareholders' Equity

The Company has  authorized  one billion shares of common stock with a par value
of $.01 and 11  million  shares  of  preferred  stock.  There  were no shares of
preferred stock issued or outstanding. In December 1997, ServiceMaster converted
from a publicly  traded limited  partnership  to a  corporation.  At the time of
reincorporation,  each outstanding  limited partnership share was converted into
one  share  of  common  stock on a  tax-free  basis  to the  shareholders.  Upon
reincorporation,  all Limited  Partners'  equity was transferred to common stock
and additional paid-in capital. The shares underlying the obligations and rights
relating to the  employee  option  plans were also  converted  from  partnership
shares to corporate stock on a one-for-one basis.

In 1997, the Company filed a $950 million shelf registration  statement with the
Securities  and  Exchange  Commission  for the  sale of  unsecured  senior  debt
securities and equity  interests.  On May 15, 1998, the Company filed a Form S-3
registration statement,  and 21.2 million Company shares were sold at $19.17 per
share. This included  approximately 11.4 million of newly-issued shares from the
Company and 9.8 million shares sold by existing  shareholders.  The net proceeds
to the Company,  after the  underwriting  discount and offering  expenses,  were
approximately  $209  million  and were used to  reduce  outstanding  debt  under
existing bank credit facilities.

On July 23, 1998, the Company filed a Form S-1 shelf  registration  statement to
issue up to 5.3  million  shares  of common  stock in  connection  with  future,
unidentified acquisitions. The S-1 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 roll-up acquisitions
and small strategic  acquisitions.  There were  approximately 3.5 million shares
issued at year end.

On April 1, 1997,  the Company  bought  Waste  Management,  Inc.'s  (WMX) entire
ownership  interest  in  ServiceMaster  for  approximately  $626  million.  This
transaction  resulted in the Company  acquiring the 61.1 million  Company shares
held by WMX and  canceling  WMX's option to purchase an  additional  4.2 million
Company shares.

As of December 31, 1998,  there were 18.1 million  Company shares  available for
issuance upon the exercise of employee  options  outstanding  and future grants.
Share  options are issued at a price not less than the fair market  value on the
grant date and expire  within ten years of the grant date.  Certain  options may
permit the holder to pay the option  exercise price by tendering  Company shares
that have been owned by the holder without  restriction for an extended  period.
Share  grants  carry a  vesting  period  and are  restricted  as to the  sale or
transfer of the shares.

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

(In thousands, except per share data)
                                          1998           1997          1996
                                        --------       --------      --------
Net Income: 
 As reported(1)  . . . . . . .          $189,992       $163,470      $150,429
 SFAS 123 pro forma. . . . . .          $185,555       $160,966      $149,480
Net Income Per Share:
 Basic:    As reported(1)                   $.66           $.57          $.47
           SFAS 123 pro forma               $.64           $.56          $.47
 Diluted:  As reported(1)                   $.64           $.55          $.46
           SFAS 123 pro forma               $.62           $.54          $.45

(1) Pro forma corporate form prior to 1998.

The SFAS 123 pro forma net income  reflects  options  granted in 1998,  1997 and
1996.  Since SFAS 123 does not apply to options  granted prior to 1995,  the pro
forma  disclosure  is not likely to be indicative of pro forma results which may
be expected in future  years.  This  primarily  relates to the fact that options
vest over several  years and pro forma  compensation  cost is  recognized as the
options vest. In addition,  awards may have been granted in earlier years, which
would have resulted in pro forma compensation cost in 1998.

The fair value of each  option is  estimated  on the date of grant  based on the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions in 1998, 1997 and 1996: risk-free interest rates of 5.6 percent, 6.3
percent  and 5.6  percent,  respectively;  volatility  rates of 22  percent,  21
percent and 27 percent,  respectively;  distribution yields of 1.9 percent,  3.2
percent  and 3.2  percent,  respectively;  and average  expected  lives of seven
years.   The  options   granted  to  employees  in  1998,  1997  and  1996  have
weighted-average  fair values of $5.17,  $2.81 and $2.40,  respectively and vest
ratably over five years.  The Company has  estimated  the value of these options
assuming a single weighted-average expected life for the entire award.

                                       44
<PAGE>

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

<TABLE>
<CAPTION>
                                                       Share         Price      Weighted-Avg.      Share          Price
                                                      Options        Range      Exercise Price     Grants         Range
                                                      -------    -------------  --------------   ----------   -------------

<S>                                                <C>           <C>                <C>          <C>           <C>
Total exercisable, December 31, 1995 . . . .       14,033,661    $0.73 -  7.63      $ 5.46              ---             ---
Total outstanding December 31, 1995  . . . .       18,252,411    $0.73 -  9.78       $6.46        2,205,738    $2.86 - 7.96

Transactions during 1996

  Granted to employees . . . . . . . . . . .        4,154,625   $ 9.26 - 10.78       $9.40              ---             ---
  Exercised, paid, or vested . . . . . . . .       (5,470,646)  $ 0.73 -  7.63       $5.56         (398,997)   $2.86 - 7.96
  Terminated or resigned . . . . . . . . . .         (360,274)  $ 2.79 -  7.63       $3.89              ---             ---
Total exercisable, December 31, 1996 . . . .        8,202,741   $ 0.73 -  7.63      $ 5.49              ---             ---
Total outstanding, December 31, 1996 . . . .       16,576,116   $ 0.73 - 10.78      $ 7.56        1,806,741    $2.86 - 7.96

Transactions during 1997

  Granted to employees . . . . . . . . . . .        5,295,785   $11.23 - 18.42      $11.62              ---             ---
  Exercised, paid, or vested . . . . . . . .       (1,892,034)  $ 2.17 -  9.26       $5.17         (430,460)   $2.86 - 7.96
  Cancelled, related to WMX  . . . . . . . .       (4,218,750)  $         9.78       $9.78              ---             ---
  Terminated or resigned . . . . . . . . . .         (440,960)  $ 1.97 - 11.22       $7.11         (120,175)   $2.86 - 7.96
Total exercisable, December 31, 1997 . . . .        6,919,718    $0.73 - 10.78      $ 6.05              ---             ---
Total outstanding, December 31, 1997 . . . .       15,320,157    $0.73 - 18.42      $ 8.65        1,256,106    $2.86 - 7.96

Transactions during 1998

  Granted to employees . . . . . . . . . . .        3,574,376   $15.74 - 22.77      $18.29              ---             ---
  Exercised, paid, or vested . . . . . . . .       (1,604,784)  $ 2.25 - 11.22       $6.29         (293,376)   $2.86 - 7.96
  Terminated or resigned . . . . . . . . . .         (377,023)  $ 0.73 - 18.26       $8.57              ---             ---
Total exercisable, December 31, 1998 . . . .        7,269,279    $0.73 - 22.33      $ 7.51              ---             ---
Total outstanding, December 31, 1998 . . . .       16,912,726    $0.73 - 22.77      $10.89          962,730    $2.86 - 7.96

</TABLE>

<TABLE>
<CAPTION>

Options outstanding at December 31, 1998:

    Range of      Number Outstanding       Remaining         Weighted-Average      Number Exercisable   Weighted-Average
Exercise Prices      at 12/31/98              Life            Exercise Price           at 12/31/98       Exercise Price
---------------   ------------------       ---------         ----------------      ------------------   ----------------

<S>                    <C>                 <C>                     <C>                  <C>                   <C>   
$0.73 -  5.14          1,896,782           3.0 years               $3.74                1,896,782             $ 3.74
 6.44 -  9.33          6,040,722           6.5 years                8.27                4,048,253               7.78
10.78 - 22.77          8,975,222           8.5 years               14.17                1,428,808              12.50

$0.73 - 22.77         16,912,726           7.0 years              $10.89                7,373,843              $7.65
</TABLE>


Earnings Per Share

Basic  earnings  per share is computed by dividing  income  available  to common
stockholders  by the  weighted-average  number  of  shares  outstanding  for the
period.   Diluted  earnings  per  share  reflects  the  potential   dilution  of
convertible securities and options to purchase common stock.

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

<TABLE>
<CAPTION>

                                           For year ended 1998          For year ended 1997         For year ended 1996
(In thousands, except per share data)    Income    Shares    EPS      Income   Shares     EPS     Income    Shares    EPS
                                       --------- ---------- -----   --------- ---------- -----  --------- ---------- -----
<S>                                    <C>        <C>       <C>     <C>       <C>        <C>    <C>        <C>       <C>
Basic EPS
  (pro forma corporate form in
   1997 and 1996). . . . . . . . .      $189,992   289,315  $0.66    $163,470  285,944   $0.57  $150,429    317,381  $0.47
Effect of Dilutive Securities,
   net of tax

   Options . . . . . . . . . . . .                   9,391                       8,333                        7,607
   Convertible debentures  . . . .            32       181              1,114    5,363             1,115      5,441

Diluted EPS
  (pro forma corporate form in
   1997 and 1996). . . . . . . . .      $190,024   298,887  $0.64    $164,584  299,640   $0.55  $151,544    330,429  $0.46

</TABLE>

                                       45
<PAGE>

Quarterly Operating Results

Quarterly  operating  results  and  related  growth for the last three  years in
revenues,  gross profit,  net income, and basic and diluted net income per share
are shown in the table below. Net income and earnings per share amounts for 1997
and 1996 have been restated to a basis that assumes reincorporation had occurred
as of the beginning of each year. For interim accounting purposes, certain costs
directly  associated  with the  generation  of lawn care  revenues are initially
deferred and recognized as expense as the related revenues are recognized.  Full
year results are not affected.

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

<TABLE>
<CAPTION>

                                                              Percent Incr.             Percent Incr.
(Unaudited, in thousands, except per share data)      1998       '98-'97        1997       '97-'96         1996
                                                    --------  -------------   --------  -------------    --------
      <S>                                         <C>              <C>      <C>              <C>      <C>
      Operating Revenue:
      First Quarter . . . . . . . . . . . . .       $981,788        20%       $817,136       10%         $740,299
      Second Quarter  . . . . . . . . . . . .      1,244,627        23       1,010,794       10           916,931
      Third Quarter . . . . . . . . . . . . .      1,273,093        17       1,090,114       18           927,227
      Fourth Quarter  . . . . . . . . . . . .      1,224,611        17       1,043,458       19           873,871

                                                  $4,724,119        19%     $3,961,502       15%       $3,458,328

      Gross Profit:
      First Quarter . . . . . . . . . . . . .       $186,991        17%       $159,991       13%         $142,116
      Second Quarter  . . . . . . . . . . . .        293,261        14         257,260       16           221,505
      Third Quarter . . . . . . . . . . . . .        316,718        23         257,449       17           219,127
      Fourth Quarter  . . . . . . . . . . . .        247,537         8         228,642       18           194,572

                                                  $1,044,507        16%       $903,342       16%         $777,320

      Net Income:
      (pro forma in 1997 and 1996):
      First Quarter . . . . . . . . . . . . .        $29,270         1%      $28,982         15%          $25,188
      Second Quarter  . . . . . . . . . . . .         56,404        21        46,707          8            43,326
      Third Quarter . . . . . . . . . . . . .         56,352        20        46,793         11            42,262
      Fourth Quarter  . . . . . . . . . . . .         47,966        17        40,988          3            39,653

                                                    $189,992        16%     $163,470          9%         $150,429

      Basic Net Income Per Share:
      (pro forma in 1997 and 1996):
      First Quarter . . . . . . . . . . . . .          $0.11        22%        $0.09         13%            $0.08
      Second Quarter  . . . . . . . . . . . .           0.20        18          0.17         21              0.14
      Third Quarter . . . . . . . . . . . . .           0.19        12          0.17         31              0.13
      Fourth Quarter  . . . . . . . . . . . .           0.16         7          0.15         25              0.12

                                                       $0.66        16%        $0.57         21%            $0.47

      Diluted Net Income Per Share:
      (pro forma in 1997 and 1996):
      First Quarter . . . . . . . . . . . . .          $0.10        11%        $0.09         13%            $0.08
      Second Quarter  . . . . . . . . . . . .           0.19        19          0.16         23              0.13
      Third Quarter . . . . . . . . . . . . .           0.19        19          0.16         23              0.13
      Fourth Quarter  . . . . . . . . . . . .           0.16        14          0.14         17              0.12

                                                       $0.64        16%        $0.55         20%            $0.46

      Cash Distributions Per Share:
      First Quarter . . . . . . . . . . . . .          $0.08         7%        $0.07 1\2      5%            $0.07 1\8
      Second Quarter  . . . . . . . . . . . .           0.08         7          0.07 1\2      5              0.07 1\8
      Third Quarter . . . . . . . . . . . . .           0.08       ---          0.08          7              0.07 1\2
      Fourth Quarter  . . . . . . . . . . . .           0.09        13          0.08          7              0.07 1\2

                                                       $0.33         6%        $0.31          6%            $0.29 1\4

      Price Per Share:
      First Quarter . . . . . . . . . . . . . $19.63 - 16.50          $12.33 - 10.92               $ 9.93 -  8.61
      Second Quarter  . . . . . . . . . . . .  25.50 - 17.92           15.92 - 12.09                10.45 -  9.17
      Third Quarter . . . . . . . . . . . . .  24.75 - 19.75           19.67 - 15.17                11.00 -  9.55
      Fourth Quarter  . . . . . . . . . . . .  23.81 - 16.00           19.50 - 14.00                11.83 - 10.55
</TABLE>

      All share and per share data  reflect the  three-for-two  share  splits in
   August 1998, June 1997 and June 1996.

                                       46