<TABLE>


  FINANCIAL HIGHLIGHTS
  (In thousands, except per share data)
  AS OF AND FOR THE YEARS ENDED DECEMBER 31                                                2003          2002        CHANGE
  -------------------------------------------------------------------------------- ------------- ------------- -------------
  OPERATING RESULTS

<S>                                                                                  <C>           <C>                   <C>
  Operating revenue                                                                  $3,568,586    $3,500,721            2%

  Operating income (loss) (1)                                                         (166,243)       335,393

  Income (loss) from continuing operations (1,2)                                      (221,975)       157,303

  Loss from discontinued operations (3)                                                 (2,712)         (309)
                                                                                   ---------------------------

  Net income (loss)                                                                  ($224,687)      $156,994

  DILUTED EARNINGS (LOSS) PER SHARE:
  Income (loss) from continuing operations (1,2)                                        $(0.75)         $0.51
  Loss from discontinued operations (3)                                                  (0.01)             -
                                                                                   ---------------------------
  Diluted earnings (loss) per share                                                     $(0.76)         $0.51

  Cash dividends per share                                                                $0.42         $0.41            2%
  -------------------------------------------------------------------------------------------------------------------------
  FINANCIAL POSITION
  Total assets                                                                       $2,956,426    $3,414,938
  Total debt                                                                            819,271       835,475
  Shareholders' equity                                                                  816,517     1,218,700
  -------------------------------------------------------------------------------------------------------------------------

  CASH FLOWS
  Cash from operating activities                                                       $283,538      $374,191         (24%)
  -------------------------------------------------------------------------------------------------------------------------
  SHARE PRICE RANGE
  (TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL SVM)
  High price for the year                                                                $12.10        $15.50
  Low price for the year                                                                   8.95          8.89
  Closing price as of December 31,                                                        11.65         11.10

</TABLE>


(1)  The  Company's  goodwill and  intangible  assets that are not amortized are
     subject  to at least an annual  assessment  for  impairment  by  applying a
     fair-value  based  test.  During  the third  quarter of 2003,  the  Company
     recorded  a  non-cash   impairment  charge  associated  with  goodwill  and
     intangible assets at its American Residential Services, American Mechanical
     Services and TruGreen LandCare business units of $481 million pre-tax ($383
     million after-tax). The impact on diluted earnings per share of this charge
     was $1.30.

(2)  In 2003, the Company adopted  Statement of Financial  Accounting  Standards
     (SFAS) 145, which  eliminated the  requirement to report all material gains
     and losses from the extinguishment of debt as extraordinary items. In 2002,
     the Company recorded an  extraordinary  loss of $.03 per diluted share ($15
     million pre-tax,  $9 million  after-tax) from the early  extinguishment  of
     debt. As a result of the Company's  adoption of SFAS 145 in 2003, this loss
     has been reclassified into continuing operations interest expense,  thereby
     reducing the previously reported 2002 income from continuing operations and
     related diluted  earnings per share from continuing  operations by the same
     amount.

(3)  In the third  quarter of 2003,  the  Company  sold the  assets and  related
     operational obligations of the utility line clearing operations of TruGreen
     LandCare.  The results of the utility line  clearing  operations  have been
     reclassified as "Discontinued operations" for all periods presented and are
     not included in continuing  operations.  Earnings per share from continuing
     operations in 2002 were reduced $.01 and correspondingly earnings per share
     from  discontinued  operations  were  increased  by  $.01  to  reflect  the
     reclassification   of  the  divested  utility  line  clearing  business  as
     discontinued operations.



                                       1
<PAGE>



                     MANAGEMENT DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS



RESULTS OF OPERATIONS
CONSOLIDATED REVIEW
ServiceMaster  ("the Company") faced challenging weather and economic conditions
and 10 year lows in consumer confidence in the first half of 2003. Late snow and
cooler  temperatures  early in the year in many  regions of the country  delayed
TruGreen's  lawn care  production  season and  impeded  the  development  of the
termite swarm,  negatively impacting the volume of termite services in Terminix.
The Company  responded to these  challenges by  implementing  an aggressive cost
reduction program which resulted in the elimination of over 600 jobs, enacting a
wage and hiring freeze, reducing significantly incentive compensation for senior
management,  and enforcing tighter  management of field labor.  These actions as
well as more normal  weather  conditions in the fourth  quarter  contributed  to
improved results in the second half of the year.

Going into 2004, the Company is focused on four key areas across the enterprise:

1.   BRAND  DEVELOPMENT  AND  DELIVERY - Continued  development  and delivery of
     clear and  distinctive  brand  propositions  derived from  listening to the
     customer, which will involve changing,  aligning and refining the Company's
     offerings to be more valuable to its customers. This includes enhancing the
     visible  results of lawn care services at TruGreen  through the use of more
     effective weed control; providing customers with greater choice in the type
     and timing of  services  provided by  Terminix;  and  providing  guaranteed
     on-time technician arrival within a two-hour window at American Residential
     Services (ARS).

2.   ENHANCING SERVICE CAPABILITIES - Use of technology and Six Sigma to improve
     the customer  service  capabilities  and  efficiency  of the  organization,
     especially relating to the branches.

3.   COMPLIANCE   AND  SAFETY  -  Continued   focus  on  compliance  and  safety
     initiatives which includes adding  professional  safety and loss-prevention
     managers in the field;  increasing  employee  communication  and  training;
     improving  the  Company's  measurement  and tracking  systems;  and tying a
     portion of incentive pay of operating leadership to improvements in safety.

4.   TRAINING - Development and training of employees, including the launch of a
     company-wide branch manager training school.

As the Company  looks  toward 2004 it will  maintain a strong  focus on top-line
sales growth,  increased pricing discipline,  continued improvements in customer
retention and employee  satisfaction and improving margins in TruGreen LandCare,
ARS and  American  Mechanical  Services  (AMS).  The Company  expects its profit
growth in 2004 to be  partially  offset by higher  safety and  insurance-related
costs and a return  to a more  normal  level of  incentive  compensation.  These
factors,  combined with the current  economic and employment  outlook,  lead the
Company to expect  revenue  growth to be in the  mid-single  digits in 2004 with
earnings  per share  growing  slightly  faster.  Earnings  per  share  growth is
typically  faster than revenue  growth due to the Company's  ability to leverage
its cost base on the  incremental  volume.  The  Company  expects to  experience
continued  pressure from insurance costs,  which grew by approximately  $.03 per
share in 2003 and are expected to increase  approximately another $.03 per share
in 2004. In addition, there was a reduced level of incentive compensation earned
during the year for senior,  and to a lesser  degree,  middle  management of the
Company in 2003. The impact of  potentially  funding the total amount that could
be  earned  in  2004  based  on  improved  operating  results  could  result  in
approximately $.05 - $.06 per share of incremental expense. This impact however,
should be offset by the effect of the cost reduction initiatives  implemented in
late 2003.

2003 COMPARED WITH 2002
Revenue for 2003 was $3.6 billion,  two percent above 2002. The Company reported
a net loss from continuing  operations in 2003 of ($222) million and a loss from
discontinued  operations of ($3) million. The net loss of ($225) million in 2003
compared with net income of $157 million in 2002. Diluted earnings per share was
a ($.76) loss in 2003 and $.51 in 2002.

Diluted  earnings per share from  continuing  operations was a loss of ($.75) in
2003  compared  with  $.51 in 2002.  The  diluted  earnings  per  share for 2003
includes a non-cash  goodwill and intangible  assets  impairment charge of $1.30
per share ($481 million pre-tax,  $383 million after-tax).  Operating income for
2003 was a loss of ($166) million, compared with income of $335 million in 2002.
The 2003 results include the $481 million non-cash  impairment  charge.  The net
change in operating  income  reflects  strong growth at American Home Shield and
ServiceMaster Clean and increased profits in TruGreen's lawn care operations and
Terminix,  offset by the impact of the impairment charge,  reduced profitability
in TruGreen's landscaping operations as well as at AMS. There was also increased
spending at the headquarters level.

The diluted earnings per share from continuing operations amount of $.51 in 2002
includes $.03 of expense relating to the early  extinguishment of debt. This was
previously reported as an extraordinary item in 2002 and not part of income from
continuing  operations.  In 2003, the Company adopted a new accounting  standard
which required the 2002 expense to be reclassified into continuing operations as
interest expense.

In the third quarter of 2003, the Company recorded a non-cash  impairment charge
associated with the goodwill and intangible  assets at its ARS, AMS and TruGreen
LandCare business units of $481 million pre-tax, which is $383 million after-tax
or $1.30 per share. In accordance with SFAS 142,  "Goodwill and Other Intangible
Assets",  goodwill and  intangible  assets that are not amortized are subject to
assessment for impairment by applying



                                       2
<PAGE>



a fair-value  based test on an annual basis or more frequently if  circumstances
indicate a potential impairment. The Company's annual assessment date is October
1.

Based on events  and  underlying  trends in its HVAC,  plumbing  and  commercial
landscape  business,  the Company determined that these businesses were unlikely
to generate the necessary  cash flows to support the recorded  value of goodwill
and intangible  assets.  There were several  factors leading up to the resulting
impairment charge.  Throughout the first half of the year,  management  believed
that the significant  declines in operating results in these businesses were due
to temporary conditions and that the operations, with an anticipated good summer
season,  would  show  ongoing  improvement  which  would  support  the amount of
goodwill and intangible  assets on the balance sheet.  The Company had discussed
such  events and trends in its press  releases  and  periodic  filings  with the
Securities  and Exchange  Commission.  In the third quarter of 2003, the results
did not improve. In addition,  the Company identified certain branch closures at
ARS and announced  the sale of its utility line clearing  operations at TruGreen
LandCare.   The  lack  of  a  good  summer   season,   combined  with  declining
profitability  in the base  businesses,  led  management  to  conclude  that the
businesses  were unlikely to meet the previous  projections  which had supported
the carrying  value.  As a result,  the Company  recorded a non-cash  impairment
charge  to  reduce  the  carrying  value of the  assets  to $56  million,  their
estimated fair value.

During the fourth quarter of 2003,  the Company  recorded a reduction in revenue
and  operating  income as a result of a correction in its  historical  method of
recognizing  renewal  revenues  from certain  Terminix and American  Home Shield
customers who have prepaid.  The effects of the adjustment  were not material to
prior  years.  This  adjustment  reduced  operating  and  pre-tax  income by $12
million,  or $.02 per share in the fourth  quarter  of 2003.  The  Company  also
recorded a  favorable  adjustment  as a result of  positive  trending in certain
termite damage claim costs.  This resulted in a pre-tax  reduction in expense of
$7 million in the fourth  quarter and $13  million,  or $.03 per share,  for the
full year. Combined,  these items reduced revenues for the fourth quarter by $14
million  and  reduced  operating  and  pre-tax  income in the fourth  quarter by
approximately $5 million.  In addition,  the Company incurred severance and shut
down costs  primarily  associated  with branch  closures and had lower incentive
compensation  expense  than the prior year;  the net effect of these  latter two
other items was immaterial.

Cost of services  rendered and products sold  increased one percent  compared to
the prior year and  decreased as a percentage of revenue to 68.1 percent in 2003
from  68.5  percent  in 2002.  This  decrease  reflects  a change  in the mix of
business as TruGreen ChemLawn,  Terminix,  and American Home Shield increased in
size in relationship to the overall  business of the Company.  These  businesses
generally  operate at higher gross margin  levels than the rest of the business,
but  also  incur  somewhat  higher  selling  and  administrative  expenses  as a
percentage  of revenue.  Selling and  administrative  expenses  increased  seven
percent and  increased  as a  percentage  of revenue to 22.9  percent  from 21.7
percent in 2002. The increase in selling and  administrative  expenses primarily
reflects  the change in  business  mix  described  above,  as well as  increased
expenditures for sales and marketing and higher  technology and compliance costs
at the headquarters level.

Net interest expense decreased $35 million from 2002,  reflecting the payment in
2002 of a $15 million premium to repurchase public bonds, lower interest expense
from reduced debt balances,  as well as higher investment income from securities
gains in the American Home Shield investment portfolio.

Comparability  of the  effective tax rate is impacted by the  impairment  charge
recorded  in the third  quarter of 2003 and the use of prior year net  operating
losses in 2002. The effective tax rate of continuing  operations  reflects a one
percent  benefit  in 2003 and a 35 percent  provision  in 2002.  The  impairment
charge  recorded in 2003 included a portion of goodwill that was not  deductible
for tax purposes, resulting in a tax benefit of $98 million, or approximately 20
percent  of the  pre-tax  impairment  charge  of  $481  million.  Excluding  the
impairment charge the tax rate was 37 percent. The 2002 rate included a one-time
benefit from utilizing the prior year net operating losses of the  ServiceMaster
Home  Service  Center  operations,  which  resulted  in a  reduction  in the tax
provision.  The  Company  anticipates  the  effective  tax  rate  of  continuing
operations  to  increase   slightly  in  2004  to  a  more  normalized  rate  of
approximately 39 percent.

SEGMENT REVIEW (2003 VS. 2002)

KEY PERFORMANCE INDICATORS
As of December 31,

                                            2003           2002
                                        -----------    -----------
TRUGREEN -
   Growth in Full Program Contracts             4%             2%
   Customer Retention Rate                   59.5%          59.3%

TERMINIX -
   Growth in Pest Control Customers             2%             2%
   Pest Control Customer Retention Rate      77.1%          75.8%


   Growth in Termite Customers                 -2%             -%
   Termite Customer Retention Rate           88.1%          89.0%

AMERICAN HOME SHIELD -
   Growth in Warranty Contracts                 5%            15%
   Customer Retention Rate                   55.1%        55.0% *

* Restated to conform with the 2003 calculation

TRUGREEN SEGMENT
The TruGreen  segment  includes lawn care services  performed under the TruGreen
ChemLawn  brand  name and  landscape  maintenance  services  provided  under the
TruGreen LandCare brand name. During the third quarter of 2003, the Company sold
the assets and related  operational  obligations  of the utility  line  clearing
operations  of TruGreen  LandCare  for  approximately  $20 million in cash.  The
impact of this sale was not  material to the  Company's  consolidated  financial
statements  for 2003.  The results of the sold utility line clearing  operations
have been  reclassified  as  discontinued  operations  and are not  included  in
continuing operations.


                                       3
<PAGE>


The TruGreen  segment  reported  revenues of $1.3 billion in 2003,  five percent
above the prior year.  The segment  reported an operating loss of ($34) million,
compared with operating income of $165 million in 2002. During the third quarter
of 2003,  the  Company  recorded a non-cash  impairment  charge of $189  million
pre-tax,  relating to goodwill and  intangible  assets of its TruGreen  LandCare
operations.  For a further discussion of the impairment charge see the "Goodwill
and  Intangible   Assets"  section  in  the  Notes  to  Consolidated   Financial
Statements.  The decrease in segment  operating  income  primarily  reflects the
impact of the impairment  charge as well as a $15 million  decline in profits in
the  landscaping  operations,  partially  offset  by a $5  million  increase  in
operating income in the lawn care operations.

Revenue in the lawn care operations increased six percent over 2002 reflecting a
four percent  increase in the number of customers,  which has been  supported by
tuck-in  acquisitions,  and  growth in  revenue  from  commercial  accounts  and
ancillary  services  (e.g.,  add-on  services  such as lawn  aeration  and  grub
control).  The Company has responded to increased state and federal restrictions
on   telemarketing  by  broadening  its  marketing   approach,   with  increased
expenditures on direct mail and other advertising. A 10 percent decline in sales
through the traditional  telemarketing channel was offset by a doubling of sales
through   other   channels,    most   notably   direct   mail.   Sales   through
non-telemarketing  channels comprised 20 percent of new sales in 2003. Continued
development  of these  other  channels  will be a critical  focus in 2004 as the
Company continues to work through the effects of the national  Do-Not-Call list.
Telemarketing  is a cost  effective  sales channel  relative to other  channels.
Therefore, as a result of this shift, the Company has experienced an increase in
its marketing costs.

As the Company continues to reduce its dependency on  telemarketing,  there will
be a  change  in the  timing  of when new  customers  are  obtained.  Typically,
telemarketing is a preseason  activity that is particularly heavy in January and
February.  Therefore,  the shift to more  non-telemarketing  sales will move the
addition of new customers from preseason  activity to sales from direct mail and
other  channels  which are "in  season".  As a result,  the  Company  expects to
experience  a slight  decline  in lawn care  customer  counts  during  the first
quarter of 2004,  followed  by  increases  in  subsequent  quarters.  Quality of
service  initiatives  have resulted in the customer  retention rate improving 20
basis points to 59.5 percent  compared to 59.3 percent in 2002. This improvement
follows a 160 basis point  increase  in  retention  achieved  in 2002.  Customer
feedback  indicates  that  cancellations  due to quality  issues have  decreased
relative to the prior year,  whereas those due to economic  considerations  have
increased. The Company believes this trend is a result of its increased focus on
customer service and problem resolution.

Operating income in the lawn care operations increased three percent.  Favorable
weather in the fourth quarter partially offset the impact of poor weather in the
first quarter of the year.  Margins  declined  slightly,  reflecting  the higher
marketing costs discussed above as well as increased insurance costs.

Revenue in the landscape  maintenance business increased two percent compared to
2002,  consisting of modest growth in base  contract  maintenance  volume and an
increase in first  quarter snow removal  revenue,  offset by a reduced  level of
enhancement  sales (e.g.,  add-on services such as seasonal  flower  plantings).
Enhancement  sales  activity was depressed due to the weak economy and increased
pricing  pressure  from   competitors.   Operating  income  in  the  landscaping
operations  declined in 2003,  reflecting the impact of the impairment charge as
well  as a  decreased  level  of  higher  margin  enhancement  sales,  increased
insurance and labor costs, and  approximately  $1.5 million of costs incurred to
consolidate  branch  locations.  In 2004,  the Company  expects  improvement  in
operating  income  from  the  landscaping   operations   resulting  from  adding
management   depth  and  industry   experience,   improving   pricing  and  cost
disciplines,   consolidating   sub-scale  branches,  and  expanding  its  safety
professionals and programs.

Capital  employed  in the  TruGreen  segment  decreased  16  percent,  primarily
reflecting  the impact of the  impairment  charge,  partially  offset by tuck-in
acquisitions. Capital employed is a non-U.S. GAAP measure that is defined as the
segment's total assets less liabilities, exclusive of debt balances. The Company
believes this  information is useful to investors in helping them compute return
on capital  measures and therefore  better  understand  the  performance  of the
Company's business segments.

TERMINIX SEGMENT
The Terminix segment, which includes termite and pest control services, reported
a two percent  increase in revenue to $945 million from $924 million in 2002 and
operating  income of $131 million  compared to $127 million in the prior year, a
3%  increase.  The growth in revenue  reflects  higher  revenue in both  termite
renewals and pest control. Cooler temperatures earlier in the year that impacted
many regions of the country significantly impeded the development of the termite
swarm.  This  resulted in fewer sales of new  termite  contracts  and also had a
dampening effect on renewals.  Operating performance improved in the second half
of the year as termite revenue stabilized, customer retention rates improved and
strong cost controls were  implemented.  Renewal revenues  increased,  resulting
from  favorable  mix and  pricing.  Pest  control  volume  increased,  driven by
improved customer retention and stronger commercial sales.

Operating  income  margins  improved   slightly  compared  to  the  prior  year,
reflecting  lower than  expected  damage  claims in the acquired  Sears  termite
customer base,  partially offset by incremental costs associated with the unit's
new branch operating system.  The roll-out of this system to all of the Terminix
branches  is  expected  to be  completed  in the  spring of 2004.  In the fourth
quarter of 2003,  Terminix  corrected its method of recognizing  renewal revenue
from certain  customers who have prepaid.  A cumulative  adjustment was recorded
reducing  fourth  quarter  revenue  by $9  million  and  operating  income by $7
million.  The Company also continued to experience  positive  trending in damage
claim costs associated with its acquired Sears termite customer base,  resulting
in a $7 million  reduction in expense in the fourth  quarter and $13 million for
the full year.

The Company will be entering 2004 with an enhanced  segmented  termite  offering
for  consumers.  With the improved


                                       4
<PAGE>


efficacy of liquid termite  treatments,  the Company is providing consumers with
the choice of receiving  termite  services  through  baiting  stations or liquid
treatments.  The Company believes that providing  consumers a choice in services
will  increase  the number of sales leads  closed and result in  improved  price
realization. The Company estimates the mix of its new termite sales to move from
80 percent bait and 20 percent  liquid at the end of 2003 to 35 percent bait and
65 percent liquid in 2004. The Company's  analyses indicate that lifetime values
of its liquid and bait termite customers are comparable;  however,  the earnings
cycles are different with liquid customers having less first year  profitability
and more  profitability  in  subsequent  years.  The  Company  anticipates  that
increased  termite volume from a more normal swarm in 2004 and improved  pricing
will help offset the first year effect of this change in mix.

Capital employed in the Terminix segment was comparable to the level in 2002.

AMERICAN HOME SHIELD SEGMENT
The American Home Shield  segment,  which provides home  warranties to consumers
that cover  HVAC,  plumbing  and other  systems and  appliances,  reported a six
percent  increase in revenue to $450  million,  from $424  million in 2002,  and
operating income growth of 21 percent, to $58 million compared to $48 million in
2002. Contract sales increased eight percent, driven by strong growth in renewal
activity,  reflecting  both a larger base of  renewable  customers  and improved
customer  loyalty,  as well as the impact of price  increases.  Retention  rates
improved  10  basis  points  despite  increased   cancellations   from  mortgage
refinancings. Sales from the direct-to-consumer channel increased modestly, with
the  timing  of  sales  coming  later  in the year as  third-party  direct  mail
solicitations were delayed. Real estate sales increased slightly for the year as
a whole,  but were  adversely  impacted  later in the year by a decline  in home
listings,  particularly in California and Texas,  which are two of the Company's
largest warranty usage states.

In the fourth quarter of 2003,  AHS corrected its method of recognizing  revenue
from  customers  who  have  prepaid.  A $5  million  cumulative  adjustment  was
recorded,  reducing fourth quarter revenue and operating  income by that amount.
Operating  margins  improved 40 basis  points due to a reduction  in the current
year claims  incidence  rate and  favorable  trending of prior year claims.  The
claims  incidence  rate is expected to increase  slightly in 2004.  AHS has been
successful  in  implementing  programs  to reduce low cost  claims,  control the
prices paid to its contractor  network,  and utilize  technology to improve both
productivity and customer convenience.

Capital employed  increased 34 percent  reflecting a higher level of investments
due to the  growth  in the  business  and  improved  market  performance  of the
investments.  The  calculation of capital  employed for the American Home Shield
segment includes approximately $221 million and $172 million of cash, short-term
and  long-term  securities  at  December  31, 2003 and 2002,  respectively.  The
interest  and  realized  gains/losses  on  these  investments  are  reported  as
non-operating income/expense.


ARS/AMS SEGMENT
The ARS/AMS segment primarily provides HVAC and plumbing installation and repair
services under the ARS Service Express,  Rescue Rooter, and American  Mechanical
Services  (for large  commercial  accounts)  brand names.  The segment  reported
revenue of $674 million,  a decrease of six percent  compared to $719 million in
2002. The segment  reported an operating  loss of ($282)  million  compared with
operating  income of $17 million in 2002.  During the third quarter of 2003, the
Company recorded a non-cash  impairment  charge of $292 million pre-tax relating
to  goodwill  and  intangible  assets  of its  ARS/AMS  segment.  For a  further
discussion on the  impairment  charge see the "Goodwill and  Intangible  Assets"
section in the Notes to the Consolidated Financial Statements.

Within ARS Service Express, revenue declined five percent,  primarily reflecting
an  industry-wide  reduction  in  plumbing  service  calls  and the  effects  of
discontinued  branches.  HVAC replacement sales from ongoing  operations were up
slightly,  despite less favorable temperatures and the weak economy. The Company
is encouraged by its progress with specific  initiatives to increase replacement
sales through  third-party  retail channels,  and to increase  residential sewer
line  repairs.  In addition,  ARS achieved a 98 percent  success rate on its new
two-hour  arrival  guarantee in its HVAC service  line,  which was rolled out in
October  in  certain  markets.  As part of its  efforts  to offset  the  revenue
shortfalls  it has  been  experiencing  and to  improve  profitability,  ARS has
strengthened  its  management  team  and  industry  experience  at  all  levels,
emphasized  higher  margin  sales,  tightened  control over  indirect  costs and
overheads,  and sold or closed 12  under-performing  branches or service  lines.
Those  operations  had $35 million in revenues in 2002 and $20 million  prior to
their closure in 2003. Operating profits at ARS Service Express, declined due to
the  third-quarter  impairment  charge as well as a decrease of $.7 million from
operations.  These  results,  however,  include  incremental  shutdown costs and
operating losses prior to disposition of approximately $1.8 million.

AMS' revenues decreased nine percent,  reflecting reduced levels of project work
due to depressed conditions in the commercial construction industry. The project
backlog  increased  substantially  by  year-end,  but bid pricing  remains  very
competitive with longer lead-times for projects to start.

Capital  employed in the ARS/AMS segment  declined  reflecting the impact of the
impairment charge.

OTHER OPERATIONS SEGMENT
The Other  Operations  segment  includes the Company's  ServiceMaster  Clean and
Merry Maids  operations as well as its headquarters  functions.  Revenue in this
segment increased two percent to $152 million in 2003 compared with $149 million
in the prior year. The combined  ServiceMaster  Clean and Merry Maids  franchise
operations  reported  revenue  growth  of eight  percent,  driven  primarily  by
continued excellent results in disaster restoration services.  The impact of the
franchise  operations  revenue  growth  was  partially  offset by $6  million of
licensing  fees  recorded in the third  quarter of 2002 related to the Company's
former Terminix United Kingdom operations.


                                       5
<PAGE>


The segment  reported an operating loss of ($40) million in 2003 compared with a
loss of ($23) million in 2002.  Continued  strong growth in operating  income of
ServiceMaster  Clean was more than  offset by higher  costs at the  headquarters
level related to insurance,  marketing and compliance,  and the effect of the $6
million of  non-recurring  licensing  fee income  earned in 2002, as well as the
compensation  expense  related  to a  deferred  compensation  trust.  Accounting
standards  require that  appreciation on investments in a deferred  compensation
trust be reflected as compensation expense in computing operating income, with a
corresponding   amount  of   investment   income   included   in   non-operating
income/expense.

Total  initial  and  recurring  franchise  fees  (excluding  trade name  license
agreements)  represented  2.6 percent of  consolidated  revenue in both 2003 and
2002,  respectively,  and related franchise  operating expenses were 1.6 percent
and 1.7  percent of  consolidated  operating  expenses  in 2003 and 2002.  Total
franchise  fee  income   (excluding  the   aforementioned   trade  name  license
agreements) comprised 13 percent and 11 percent of consolidated operating income
before impairment charges in 2003 and 2002,  respectively.  The portion of total
franchise  fee  income  related  to  initial  fees  received  from the  sales of
franchises was not material to the Company's  consolidated  financial statements
for all periods.

DISCONTINUED  OPERATIONS
During  the third  quarter of 2003,  the  Company  sold the  assets and  related
operational  obligations of Trees, Inc., the utility line clearing operations of
TruGreen LandCare, for approximately $20 million in cash. The impact of the sale
was not material to the Company's  Consolidated  Financial  Statements for 2003.
Earnings  per share from  continuing  operations  were  reduced $.01 in 2002 and
2001, respectively, to reflect the reclassification of the divested utility line
clearing business as discontinued operations.

During the third  quarter of 2002,  the Company sold its Terminix  operations in
the United Kingdom. The impact of this sale was not material to the consolidated
financial statements.

In 2001 the Company sold its Management Services business to ARAMARK Corporation
for approximately $800 million.  The all-cash transaction closed on November 30,
2001 and the Company  recorded an after-tax gain of $404 million from this sale.
(A division of Management  Services was not sold as part of this transaction and
the  Company  recorded a $15 million  loss upon  disposition  of this unit).  In
addition,   the  Company  exited  several   non-strategic  and  under-performing
businesses  including  TruGreen  LandCare  Construction,  Certified Systems Inc.
(CSI), and certain Terminix Europe operations.


The components of discontinued operations are as follows:

(In thousands)                2003           2002           2001
------------------------------------------------------------------

Management
  Services income *            $ -            $ -        $33,172
Income (loss) from
  other discontinued
  operations               (2,107)          4,531       (67,782)
Gain on sale of
  Management Services,
  net of losses
  from disposition of
  other entities             (605)        (4,840)        323,213
------------------------------------------------------------------
Discontinued
  operations              $(2,712)         $(309)       $288,603
==================================================================
* This  business was sold on November 30,  2001,  consequently  the 2001 results
reflect eleven months of operations.

RESULTS OF OPERATIONS - 2002 COMPARED WITH 2001
CONSOLIDATED REVIEW
Revenues  for 2002 were $3.5  billion,  one  percent  above  2001.  The  Company
reported  income from  continuing  operations in 2002 of $157 million and a loss
from  discontinued  operations  of less than $1  million.  Net  income  was $157
million in 2002 and $116  million in 2001 and  diluted  earnings  per share were
$.51 in 2002 and $.39 in 2001.

Diluted earnings per share from continuing  operations was $.51 in 2002 compared
with a loss of ($.58) in 2001. There were three  significant  items in 2001 that
impact the  comparability of the reported amounts with the 2002 figures.  First,
diluted earnings per share from continuing operations for 2001 includes a charge
of $.94 per share ($345 million pre-tax) primarily related to goodwill and asset
impairments and other items.  Second,  as discussed  further in the Notes to the
Consolidated  Financial  Statements,  SFAS No. 142, "Goodwill earnings and Other
Intangible Assets", requires that beginning in 2002, goodwill and trade names no
longer be amortized.  SFAS 142 does not permit the restatement of 2001 financial
information to reflect the impact of this  Statement.  The reduced  amortization
expense for 2001 is $60 million  pre-tax  ($.14 per diluted  share  equivalent).
Third, in the fourth quarter of 2001, the Company  received  approximately  $740
million of after-tax  proceeds,  net of expected cash  payments  relating to the
sale and exit of discontinued businesses.

In the third  quarter  of 2003,  the  Company  sold its  utility  line  clearing
operations of TruGreen LandCare. As a result, the 2002 and 2001 diluted earnings
per share from continuing operations were reduced $.01, respectively, to reflect
the divested business as discontinued operations. In 2003, the Company adopted a
new accounting standard which required extraordinary gains/losses from the early
extinguishment of debt to be reclassified  into interest  expense.  The reported
earnings (loss) per share from continuing  operations of $.51 in 2002 and ($.58)
in 2001 includes $.03 and $.01,  respectively,  of expense  related to the early
extinguishment of debt which were previously reported as extraordinary items and
not part of income from continuing operations.

In 2002 operating  income was $335 million  compared to an operating loss of $30
million in 2001.  The 2001  figure  includes

                                       6
<PAGE>

a $345 million charge  primarily  related to goodwill and asset  impairments and
other items.  Additionally,  the reduced amortization expense under SFAS 142 was
$60 million.  Operating income margins  declined  reflecting the above items and
reduced  volume in the  heating,  ventilation  and air  conditioning  (HVAC) and
plumbing  businesses of ARS and AMS,  increased workers  compensation and health
insurance costs, as well as increased  expenditures  related to  enterprise-wide
initiatives, partially offset by strong growth at American Home Shield.

Cost of services rendered and products sold were unchanged compared to the prior
year and  decreased as a percentage of revenue to 68.5 percent in 2002 from 69.1
percent  in 2001.  This  decrease  reflects a change in the mix of  business  as
TruGreen  ChemLawn,  Terminix,  and  American  Home Shield  increased in size in
relationship to the overall business of the Company.  Selling and administrative
expenses  increased 11 percent and  increased as a percentage of revenue to 21.7
percent from 19.8 percent in 2001.  This increase in selling and  administrative
expenses  reflects  increased  expenditures  for marketing  leadership and sales
initiatives, as well as enterprise-wide expenditures in procurement,  technology
and initiatives to measure and improve customer and employee satisfaction.

Interest expense  decreased from the prior year,  primarily  reflecting  reduced
debt levels resulting from the pay down of debt with the proceeds  received from
the  sales  of  the  Management  Services  and  certain  European  pest  control
businesses, strong cash flows from operating activities,  partially offset by $6
million more in premium  payments to repurchase  public bonds in 2002.  Interest
income  declined as a result of net investment  losses  recorded on the American
Home Shield investment portfolio in 2002 compared with net investment gains from
this  portfolio  as well as venture  capital  gains  realized in 2001.  Minority
interest and other  expense  increased in 2002  because 2001  included  minority
interest income related to the ServiceMaster Home Service Center initiative.  In
the  first  quarter  of 2001  and  until  May  2001,  the  operating  losses  of
ServiceMaster  Home Service  Center had been offset  through  minority  interest
income because of investments in the venture made by Kleiner Perkins  Caufield &
Byers (Kleiner  Perkins).  In December  2001, the Company  acquired the minority
interest in the ServiceMaster Home Service Center held by Kleiner Perkins.

The tax provision in 2002 reflects a lower  effective tax rate based on benefits
received through the consolidation  for tax purposes of the  ServiceMaster  Home
Service  Center.  As a  result  of the  Company's  acquisition  of the  minority
interest,  it was able to  reorganize  the  subsidiary in 2002 and utilize prior
year net operating losses of this subsidiary operation.

SEGMENT REVIEW (2002 VS. 2001)
2001 RESULTS HAVE BEEN  PRESENTED ON A PROFORMA BASIS AS IF SFAS 142 HAD BEEN IN
EFFECT FOR 2001 THEREBY  EXCLUDING THE AMORTIZATION  EXPENSE AFFECTED BY THE NEW
ACCOUNTING STANDARD.  (SEE THE "BUSINESS SEGMENT REPORTING" NOTE IN THE NOTES TO
THE FINANCIAL STATEMENTS).  MANAGEMENT'S  DISCUSSION AND ANALYSIS FOCUSES ON THE
2002 REPORTED AND 2001 PROFORMA  AMOUNTS.

TRUGREEN  SEGMENT
The TruGreen  segment reported  revenues of $1.3 billion,  consistent with 2001.
Operating  income was $165 million,  a decrease of five percent compared to $173
million (proforma) in 2001.

Revenue  in the lawn care  business  increased  one  percent  over  2001,  which
included a two percent  increase in customer  contracts over 2001. This increase
compares with a four percent decline in customer  contracts in 2001. The Company
is realizing  the benefit of improved  customer  retention as well as the impact
from new marketing strategies.  Quality and other satisfaction  initiatives have
resulted in the  customer  retention  rate  improving  160 basis  points to 59.3
percent in 2002  compared  with 57.7  percent in 2001.  Margins in the lawn care
operations declined slightly, reflecting increased expenditures in marketing and
customer  retention   initiatives,   partially  offset  by  margin  improvements
resulting  from  revenue  growth  and the  quality  of  service  and  Six  Sigma
initiatives.

Revenue in the landscape maintenance business declined three percent as a softer
economic  environment  contributed to a decline in the core maintenance business
as well as a  decline  in  enhancement  services.  Despite  the  decline  in the
maintenance business,  the contract base is more profitable reflecting lower job
costs,  improved pricing, and a stronger customer base. Operating income margins
in the  landscaping  business  declined  primarily as a result of higher workers
compensation  claims and increased  expenditures for field operations  training.
Management continued to focus on labor efficiency and margin improvement through
Six Sigma projects.

Capital employed decreased four percent,  primarily  reflecting improved working
capital management resulting from increased customer prepayments and elimination
of excess equipment.

TERMINIX SEGMENT
The Terminix segment reported a nine percent increase in revenue to $924 million
from $845 million in 2001 and  operating  income  growth of four percent to $127
million from $123 million  (proforma) in 2001.  Revenue growth was driven by the
acquisition  in October 2001 of Sears Termite & Pest Control as well as internal
growth.  As expected by the Company,  there has been a  substantial  decrease in
profitable Sears pest control  customers in certain markets.  New sales in these
markets have not kept pace with cancellations and as a result,  overall customer
retention  rates have shown a  decline.  In  addition,  operating  margins  were
impacted by the expenses  associated  with the rollout of Terminix's  new branch
information  system.  Operating  margins for the year  decreased 80 basis points
reflecting  the  expenses  related  to the  new  information  system  as well as
increased  expenditures for marketing and health insurance,  partially offset by
improved branch efficiencies.

Capital employed increased one percent to support overall business growth.


                                       7
<PAGE>


AMERICAN HOME SHIELD SEGMENT
The American Home Shield  segment  reported a 15 percent  increase in revenue to
$424 million from $369 million in 2001 and operating income growth of 84 percent
to $48 million  compared  to $26  million  (proforma)  in 2001.  Revenue  growth
reflected  increases in all sales channels,  complemented  by improved  customer
retention.  Operating  margins  improved  as the segment  benefited  from strong
volume  growth,  improved  management of service costs and reduced  incidence of
claims resulting, in part, from less extreme weather trends.

Capital  employed  increased  21 percent  reflecting  the  volume  growth in the
business resulting in an increased level of required regulatory investments.

ARS/AMS SEGMENT
The ARS/AMS segment reported  revenue of $719 million,  a decrease of 12 percent
compared with $820 million in 2001. Operating income decreased 65 percent to $17
million,  compared with $49 million (proforma) in the prior year.  Industry wide
there is a growing  trend by consumers to repair  rather than replace  defective
equipment,  reflecting  uncertainties  in  the  economy,  as  well  as a  marked
reduction in construction activity. A decline in call volume for residential air
conditioning and plumbing service resulted in the Company's  decrease in revenue
and profit.  Margins  declined  in part due to higher  marketing  and  insurance
costs.  In  addition,  lower  revenue led to reduced  leverage of the fixed cost
structure.   ARS  and  AMS  continued  their  efforts  towards  a  comprehensive
rebuilding of marketing  and sales  strategies  and hired a marketing  leader as
well as expanded the sales force and sales  training.  Management  realigned its
field operating structure to narrow the span of control.

Capital employed  decreased eight percent,  reflecting  improved working capital
management from a reduction in accounts receivable days sales outstanding.

OTHER OPERATIONS SEGMENT
The Other  Operations  segment reported segment revenues of $149 million in 2002
compared with $158 million in 2001.  The segment  reported an operating  loss of
$23 million  compared with a loss of $342 million  (proforma) in 2001.  The 2001
results include a charge of $345 million related primarily to goodwill and asset
impairments and other items.

The 2002  results  reflected  growth in profit  from the  franchise  businesses,
offset by higher costs related to enterprise  initiatives and lower profits from
trade name licensing.  Revenues from the franchise  operations  decreased by one
percent.  ServiceMaster  Clean revenue in 2001 included  direct  management of a
significant  disaster  restoration project at the Pentagon,  which was, in part,
offset  in  2002 by  growth  in the  remaining  franchise  disaster  restoration
business and acquisitions at Merry Maids.  Operating  margin  improvement in the
franchise  operations  reflected  the impact of prior year work at the  Pentagon
which  was at a  lower  margin  and  higher  fee  income,  offset  in part by an
increased mix of direct owned branches at Merry Maids, which carry lower margins
than the base  franchise  business.  Total initial and recurring  franchise fees
(excluding trade name license agreements)  represented 11 percent and 10 percent
of consolidated  operating  income before  impairment  charges in 2002 and 2001,
respectively.  The portion of total franchise fee income related to initial fees
received  from  the  sales  of  franchises  was not  material  to the  Company's
consolidated financial statements for all periods.

Operating  income in the Other  Operations  segment included income from license
agreements for the use of Company-owned  trade names in certain markets.  In the
third  quarter of 2002,  the Company sold its Terminix  operations in the United
Kingdom and entered into a two year  licensing  agreement with the buyer for the
use of the Terminix trade name in the United Kingdom.  This agreement was valued
at $6 million and  accordingly,  a like amount was  allocated  from the purchase
price.  In the fourth quarter of 2001, the Company sold its Management  Services
business unit and the Company entered into a three-year licensing agreement with
ARAMARK for the use of the  ServiceMaster  trade name in certain  markets.  This
agreement was valued at $15 million and accordingly, a like amount was allocated
from the  purchase  price.  The Company  recorded  the license fee income in the
fourth quarter of 2001 related to this agreement.

The Other Operations  segment  increased  expenditures in 2002 on technology and
major operational  initiatives to improve operating efficiency and build greater
customer and employee satisfaction.

Capital  employed in this  segment  included  the  discontinued  operations  and
therefore  is  significantly   reduced  from  the  prior  year,  reflecting  the
divestitures of businesses.

2003 FINANCIAL POSITION AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided from operating activities was $284 million in 2003 compared to
$374 million in 2002.  The majority of the  difference  was  experienced  in the
first quarter and was largely  attributed to the timing of customer  prepayments
and the timing of insurance, incentive compensation and vendor payments, with an
increased  level  of  payments  in 2003  compared  to  2002.  TruGreen  ChemLawn
typically receives prepayments from certain customers for the full season in the
first and  fourth  quarters.  In  preparation  for the 2003  season,  prepayment
programs were launched  earlier than the prior year resulting in an acceleration
of  prepayments  (and cash  flow)  from the first  quarter of 2003 to the fourth
quarter of 2002.  The Company  also  lowered the  prepayment  discount it offers
customers,  resulting in fewer customers prepaying overall. The Company believes
the profit  benefit from a lower  discount  outweighed  the temporary  cash flow
benefit from  receiving  payments  earlier.  The Company also had an outstanding
year in 2002  relating  to  receivable  collections.  Although  most  businesses
maintained or improved their days sales  outstanding in 2003,  there was not the
same level of incremental  improvement that was experienced in 2002,  especially
relating to both TruGreen  LandCare and ARS. The Company  believes that the cash
flow pattern  experienced in 2003 is more indicative of a normalized pattern. In
2004 the Company expects cash from operating  activities to increase  consistent
with earnings and to continue to substantially exceed net income.

Net cash provided from operating activities has historically exceeded net income
and in 2003 net cash provided from

                                       8
<PAGE>

operating  activities  was 175% of net income.  Three factors  contribute to the
Company's  strength in its annual cash provided  from  operating  activities:  a
solid earnings base,  businesses that need relatively  little working capital to
fund growth in their operations,  and significant annual deferred taxes. The tax
deferral is expected  to remain near its current  level for another  nine years.
Much of this  benefit is due to a large base of  amortizable  intangible  assets
which exist for income tax  reporting  purposes,  but not for book  purposes,  a
significant portion of which arose in connection with the 1997 conversion from a
limited partnership to a corporation.

In the ordinary course, the Company is subject to review by domestic and foreign
taxing  authorities,  including the Internal Revenue Service ("IRS").  From 1986
through 1997 most operations of the Company were conducted in partnership  form,
free of federal  corporate  income tax. During that period,  the Company was not
reviewed by the IRS. In 1997 the Company converted from partnership to corporate
form.  In 2003,  the IRS notified the Company that it will examine the Company's
consolidated income tax returns for 2002, 2001 and 2000. The Company expects the
IRS to complete its examination in 2005. As with any review of this nature,  the
outcome of the IRS  examination is not known at this time. The Company  believes
it has recorded the appropriate tax provision,  tax liabilities and deferred tax
balances.

CASH FLOWS FROM INVESTING ACTIVITIES
Capital  expenditures,  which include  recurring  capital needs and  information
technology  projects,  were  below  prior  year  levels.  In 2002,  there  was a
significant  payment  relating to the residual  value  guarantees  for leases on
assisted  living  facilities  that were  subsequently  sold.  In addition,  2002
capital  additions  included the new Terminix  operating system as well as costs
associated with the Company's headquarters  relocation.  The Company anticipates
approximately  $60 million of capital  expenditures in 2004  reflecting  systems
enhancements and other initiatives.

In 2003,  acquisitions  totaled  $38  million  with  the  majority  at  TruGreen
ChemLawn. The cash funding relating to the acquisitions was $29 million with the
remaining amount seller financed.

CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to  shareholders  in 2003 amounted to $.42 per share, a 2.4%
increase  over  2002.  This was the 33rd  consecutive  year of annual  growth in
dividends for the Company.  Cash  dividends in 2003 totaled $125 million,  a one
percent increase over 2002, reflecting the per share increase,  partially offset
by the impact of share  repurchases.  The Company records its dividend liability
in the consolidated  financial statements on the record date. As of December 31,
2003,  the  Company  had  declared  a  cash  dividend  of  $.105  per  share  to
shareholders of record on January 9, 2004. In March 2004, the Company declared a
cash dividend of $.105 per share to shareholders of record on April 9, 2004. The
timing and amount of future  dividend  increases  are at the  discretion  of the
Board of Directors and will depend on, among other things, the Company's capital
structure objectives and cash requirements.

In July  2000,  the  Board  of  Directors  authorized  $350  million  for  share
repurchases.  In 2003, the Company repurchased $86 million of its shares.  There
remains approximately $143 million available for repurchases under the July 2000
authorization.  The Company  expects to repurchase $40 million to $50 million of
shares early in 2004, and then review its operating trends, business acquisition
opportunities  and capital  needs to  determine  the  subsequent  level of share
repurchases.  Decisions  relating to any future share repurchases will depend on
various factors such as the Company's  commitment to maintain  investment  grade
credit ratings and other strategic investment opportunities.

LIQUIDITY
Cash and short and long-term  marketable  securities totaled  approximately $411
million at December 31, 2003, with  approximately $221 million of that amount at
American Home Shield to support regulatory  requirements.  As a result of strong
cash flows and the net proceeds received from company  dispositions,  total debt
represents  the lowest level in over six years.  Total debt at December 31, 2003
was $819  million,  down  slightly from the 2002 year end level of $835 million.
Approximately  65 percent of the Company's debt matures beyond five years and 35
percent  beyond  fifteen  years.  The Company's next public debt maturity is not
until 2005.

The Company is party to a number of debt agreements which require it to maintain
certain  financial and other  covenants,  including  limitations on indebtedness
(debt cannot exceed 3.25 times EBITDA,  as defined) and interest  coverage ratio
(EBITDA needs to exceed four times interest expense). In addition, under certain
circumstances,  the agreements may limit the Company's  ability to pay dividends
and repurchase shares of common stock.  These limitations are not expected to be
a factor in the Company's future dividend and share repurchase plans. Failure by
the Company to maintain these covenants could result in the  acceleration of the
maturity of the debt. At December 31, 2003,  the Company was in compliance  with
the covenants and based on its operating  outlook for 2004 expects to be able to
maintain  compliance in the future.  The non-cash  impairment  charge associated
with goodwill and other intangible  assets recorded in the third quarter of 2003
does not affect the Company's  compliance  with its lending  arrangements as its
covenants  are not affected by unusual  non-cash  charges.  The Company does not
have any debt agreements that contain put rights or provide for  acceleration of
maturity as a result of a change in credit rating.

Management  believes that funds  generated from  operating  activities and other
existing  resources  will  continue to be adequate  to satisfy  ongoing  working
capital  needs of the  Company.  The Company has a  committed  revolving  credit
facility  for $490  million,  which will  expire in December  2004.  The Company
expects to replace this facility prior to maturity. As of December 31, 2003, the
Company had issued  approximately  $153  million of letters of credit  under the
facility and had unused commitments of approximately  $337 million.  The Company
also has $550 million of senior unsecured debt and equity  securities  available
for issuance under an effective shelf registration  statement.  In addition, the
Company has an arrangement  enabling it to sell, on a revolving  basis,  certain
receivables to unrelated third party purchasers.  At December 31, 2003 and 2002,
there were no receivables  outstanding that had been sold to third parties.  The
agreement  is a  364-day  facility  that  is  renewable  at  the  option  of the
purchasers.  The Company may sell up to $65 million of its  receivables to these
purchasers in the future and  therefore  has  immediate  access to

                                       9
<PAGE>

cash proceeds from these sales.  The amount of the eligible  receivables  varies
during the year based on seasonality of the business and will at times limit the
amount available to the Company.

The Company maintains operating lease facilities with banks totaling $95 million
which provide for the  acquisition  and  development of branch  properties to be
leased by the Company.  There are residual value  guarantees of these properties
for up to 82 percent of their fair market value. At December 31, 2003, there was
approximately  $73 million  funded  under these  facilities.  Approximately  $20
million of these leases have been  included on the balance  sheet as assets with
related debt as of December 31, 2003 ($15 million as of December 31,  2002).  Of
the $95 million  available,  $80 million expires in October 2004 and $15 million
expires in January 2008. If the Company does not renew the facility that expires
in October  2004,  it may be required to purchase the leased  assets which total
approximately $53 million.

The  majority  of the  Company's  fleet and some  equipment  is  leased  through
operating leases.  The lease terms are non-cancelable for the first twelve month
term, and then are month-to-month, cancelable at the Company's option. There are
residual value  guarantees  (ranging from 70 percent to 87 percent  depending on
the  agreement) on these  vehicles and equipment,  which  historically  have not
resulted in significant net payments to the lessors. At December 31, 2003, there
was approximately $241 million of residual value relating to the Company's fleet
and equipment leases.

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

(IN MILLIONS)            Total   < 1 Yr  2-3 Yrs  4-5 Yrs  > 5 Yrs
------------------------------------------------------------------
Debt balances *            $819     $34     $162      $83    $540
Non-cancelable
 operating leases           290      72      112       63      43
Purchase
 obligations:
   Telecommunications        48      24       24        -       -
   Supply agreements and
    other                    38      24        7        5       2
Other long-term
 liabilities: *
   Insurance claims         138      48       49       19      22
   Discontinued
     operations and other    61      16       10        5      30
------------------------------------------------------------------
Total amount             $1,394    $218     $364     $175    $637
==================================================================

* These items are reported in the consolidated statements of financial position.

Not  included  in the table  above are  deferred  income  taxes and the  related
interest  payments on the Company's  long-term  debt.  Deferred taxes total $276
million  and  are  discussed  in the  footnotes  to the  consolidated  financial
statements.  The majority of the Company's  debt is fixed rate debt.  Therefore,
the Company has calculated the expected interest  payments,  to be approximately
$60 million, $51 million, $47 million, $45 million, $42 million and $506 million
in 2004, 2005, 2006, 2007, 2008 and thereafter, respectively.


FINANCIAL POSITION - CONTINUING OPERATIONS
Receivables  and  inventories  are slightly above prior year levels,  reflecting
general  business  growth.   Deferred  customer   acquisition  costs  decreased,
reflecting  decreased  volume of  baiting  contracts  written at  Terminix.  The
Company  capitalizes  sales  commissions and other direct  contract  acquisition
costs relating to termite baiting and pest  contracts,  as well as home warranty
agreements.  Property  and  equipment  decreased  slightly,  reflecting  general
business  growth  offset by  depreciation  expense  on  larger-scale  technology
projects.  Deferred revenue  increased,  reflecting growth in warranty contracts
written at American Home Shield and an increased volume of customer  prepayments
in the lawn  care  business.  The  Company  does not have any  material  capital
commitments at this time.

The Company has minority investors in Terminix. This minority ownership reflects
an interest issued to the prior owners of the Allied Bruce Terminix Companies in
connection with that acquisition. This equity security is convertible into eight
million  ServiceMaster  common shares. The ServiceMaster  shares are included in
the shares used for the calculation of diluted earnings per share.

Total  shareholders'  equity was $817 million and $1.22  billion at December 31,
2003 and 2002, respectively. The decrease reflects the aforementioned charge for
impaired assets,  cash dividends and share repurchases,  partially offset by net
income from all other operating sources.

Dividends  paid in 2003 on the  Company's  common  stock  were  not  taxable  to
shareholders  as dividend  income for federal  income tax purposes,  but instead
were  treated as a  non-taxable  return of  capital.  Under  federal  tax rules,
dividends are  considered  taxable only when paid out of current or  accumulated
earnings  and  profits as defined  under  federal  tax laws.  As a result of its
December  1997  reincorporation,  the Company  only began  generating  corporate
earnings and profits for tax purposes in 1998. Since 1998,  earnings and profits
for tax  purposes  have been  reduced  by  dividend  payments,  amortization  of
intangible  assets for tax reporting,  deductions  relating to business closures
and the timing of certain other tax-related items. The Company currently expects
that  approximately 70% of its 2004 dividends on common stock will be taxable as
dividend income for federal income tax purposes.  The Company  currently expects
that the taxable portion of its dividend income will grow to be fully taxable by
the year 2007.

FINANCIAL POSITION - DISCONTINUED OPERATIONS
The  assets  and  liabilities  related  to  discontinued  businesses  have  been
classified  in separate  captions on the  Consolidated  Statements  of Financial
Position. Assets from the discontinued operations have declined, reflecting cash
collections  on  receivables.  The  decrease in  liabilities  from  discontinued
operations  represents  a cash  adjustment  to the  selling  price  of the  2001
disposition  of the  Company's  European  pest  control  and  property  services
operations  as  well  as  certain  other  payments.  The  remaining  liabilities
primarily represent obligations related to long-term self-insurance claims.


                                       10
<PAGE>

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The economy and its impact on discretionary consumer spending, labor wages, fuel
prices,  insurance  costs and medical  inflation  rates could be  significant to
future operating earnings.

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

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

The Company generally  maintains the majority of its debt at fixed rates.  After
the effect of the interest swap  agreements,  approximately  77 percent of total
debt at December 31, 2003 was at a fixed rate. The payments on the approximately
$73 million of funding  outstanding  under the Company's  real estate  operating
lease   facilities  as  well  as  its  fleet  and  equipment   operating  leases
(approximately  $241  million in residual  value) are tied to floating  interest
rates.  The Company's  exposure to interest  expense based on floating  rates is
partially  offset  by  floating  rate  investment  income  earned  on  cash  and
marketable  securities.  The Company  believes its overall  exposure to interest
rate fluctuations is not material to its overall results of operations.

The Company has several debt and lease  agreements  where the  interest  rate or
rent payable under the agreements  automatically adjusts based on changes in the
Company's credit ratings.  While the Company is not currently expecting a change
in its credit ratings,  based on amounts outstanding at December 31, 2003, a one
rating category  improvement in the Company's credit ratings would reduce annual
expense by approximately  $0.7 million.  A one rating category  reduction in the
Company's  credit  ratings  would  increase  expense on an  annualized  basis by
approximately $1.4 million.

The following table summarizes  information  about the Company's fixed rate debt
as of December 31,  2003,  including  the  principal  cash  payments and related
weighted-average  interest rates by expected  maturity dates.  The fair value of
the  Company's  fixed rate debt was  approximately  $862 million at December 31,
2003.

                      Expected Maturity Date
                 ----------------------------------
                                                    There-
 (In millions)   2004   2005  2006   2007   2008    after  Total
-----------------------------------------------------------------
Fixed rate debt  $28    $151  $12    $60     $8     $540   $799
Avg. rate        4.8%   8.3%  6.0%   6.7%   6.1%    7.7%   7.6%
-----------------------------------------------------------------

As  previously  discussed,  the  Company  has entered  into  interest  rate swap
agreements,  the impact of which was to convert  $165  million of the  Company's
2009 maturity debt from a fixed rate of 7.88% to a variable rate based on LIBOR.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the financial  statements requires management to make certain
estimates  and  assumptions   required  under  generally   accepted   accounting
principles  which may differ from actual  results.  The more  significant  areas
requiring  the  use  of  management   estimates  relate  to  the  allowance  for
receivables,  accruals for  self-insured  retention  limits  related to medical,
workers compensation,  auto and general liability insurance claims, accruals for
home warranty claims, the possible outcomes of outstanding litigation,  accruals
for income tax  liabilities  as well as deferred tax accounts,  useful lives for
depreciation  and  amortization  expense  and  the  valuation  of  tangible  and
intangible  assets. In 2003, there have been no changes in the significant areas
that require estimates or in the  methodologies  which underlie these estimates.
As discussed in the "Goodwill and  Intangible  Assets" note to the  consolidated
financial  statements,  in the third  quarter of 2003,  the  Company  recorded a
charge to reduce the carrying value of its goodwill and intangible assets.

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

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

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


                                       11
<PAGE>


reflect those changes in the period that the difference is identified.

Fixed assets,  and  intangible  assets with finite lives,  are  depreciated  and
amortized on a  straight-line  basis over their  estimated  useful lives.  These
lives are based on the Company's  previous  experience for similar  assets,  the
potential market  obsolescence and other industry and business data. The Company
also periodically reviews the assets for impairment and a loss would be recorded
if and when the Company determined that the book value of the asset exceeded its
fair value. Changes in the estimated useful lives or in asset values would cause
the Company to adjust its book value or future expense accordingly.  The Company
also reviews its  goodwill and trade names at least once a year for  impairment.
An impairment loss would be recorded if and when the Company determines that the
expected  present  value of the future cash flows  deemed to be derived from the
asset is less than its corresponding book value.

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

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

NEWLY ISSUED ACCOUNTING STATEMENTS AND POSITIONS:
In January 2003,  the Financial  Accounting  Standards  Board (FASB) issued FASB
Interpretation  No. 46,  "Consolidation of Variable Interest Entities" (FIN 46).
Under  this  Interpretation,   certain  entities  known  as  "variable  interest
entities" (VIE) must be consolidated by the "primary beneficiary" of the entity.
The primary beneficiary is generally defined as having the majority of the risks
and  rewards  arising  from the VIE.  In  December  2003,  the FASB  issued FASB
Interpretation  No. 46,  Revised  December  2003 (FIN 46R),  which  revised  the
originally issued document to include,  among other items,  additional exclusion
provisions  for which an entity  would not be required to apply FIN 46.  Certain
requirements  of FIN 46R are  required  to be  applied  no later  than the first
quarter of 2004.  The Company is currently  assessing  the impact of FIN 46R and
does not  expect its  adoption  to have a  material  impact on the  Consolidated
Financial Statements.




FORWARD-LOOKING STATEMENTS


THE COMPANY'S  ANNUAL REPORT CONTAINS OR  INCORPORATES  BY REFERENCE  STATEMENTS
CONCERNING   FUTURE  RESULTS  AND  OTHER  MATTERS  THAT  MAY  BE  DEEMED  TO  BE
"FORWARD-LOOKING  STATEMENTS"  WITHIN  THE  MEANING  OF THE  PRIVATE  SECURITIES
LITIGATION  REFORM ACT OF 1995. THE COMPANY  INTENDS THAT THESE  FORWARD-LOOKING
STATEMENTS,  WHICH  LOOK  FORWARD  IN TIME AND  INCLUDE  EVERYTHING  OTHER  THAN
HISTORICAL  INFORMATION,  BE  SUBJECT  TO  THE  SAFE  HARBORS  CREATED  BY  SUCH
LEGISLATION.  THE COMPANY NOTES THAT THESE  FORWARD-LOOKING  STATEMENTS  INVOLVE
RISKS AND UNCERTAINTIES  THAT COULD AFFECT ITS RESULTS OF OPERATIONS,  FINANCIAL
CONDITION  OR CASH  FLOWS.  FACTORS  THAT COULD CAUSE  ACTUAL  RESULTS TO DIFFER
MATERIALLY  FROM  THOSE  EXPRESSED  OR IMPLIED  IN A  FORWARD-LOOKING  STATEMENT
INCLUDE THE FOLLOWING (AMONG OTHERS):  WEATHER CONDITIONS THAT AFFECT THE DEMAND
FOR THE COMPANY'S  SERVICES;  COMPETITION  IN THE MARKETS SERVED BY THE COMPANY;
LABOR  SHORTAGES OR INCREASES IN WAGE RATES;  UNEXPECTED  INCREASES IN OPERATING
COSTS, SUCH AS HIGHER INSURANCE AND SELF-INSURANCE  COSTS,  HIGHER HEALTHCARE OR
FUEL PRICES; INCREASED GOVERNMENTAL REGULATION, INCLUDING TELEMARKETING; GENERAL
ECONOMIC  CONDITIONS  IN THE UNITED  STATES,  ESPECIALLY AS THEY MAY AFFECT HOME
SALES OR CONSUMER SPENDING LEVELS; TIME AND EXPENSES ASSOCIATED WITH INTEGRATING
AND WINDING DOWN  BUSINESSES;  AND OTHER FACTORS  DESCRIBED FROM TIME TO TIME IN
DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.




                                       12
<PAGE>




<TABLE>

FIVE YEAR FINANCIAL SUMMARY

(In thousands, except per share data)                           2003          2002          2001            2000           1999
                                                                                                                         unaudited
---------------------------------------------------------- ------------- ------------- ------------- --------------- --------------
OPERATING RESULTS:
<S>                                                          <C>           <C>           <C>             <C>            <C>
Operating revenue                                            $3,568,586    $3,500,721    $3,476,811      $3,347,114     $3,008,115
Operating income (loss)                                       (166,243)       335,393      (30,400)         313,762        237,089
   PERCENTAGE OF OPERATING REVENUE                               (4.7%)          9.6%        (0.9%)            9.4%           7.9%
Non-operating expense                                            58,394        93,152       127,527         103,733         86,981
Provision (benefit) for income taxes                            (2,662)        84,938        14,292          90,008         64,195
                                                           ------------------------------------------------------------------------
Income (loss) from continuing operations                      (221,975)       157,303     (172,219)         120,021         85,913

Income (loss) from discontinued operations, net of
  income taxes                                                  (2,712)         (309)       288,603          44,821         66,776
Cumulative effect of accounting change,
  net of income taxes                                                 -             -             -        (11,161)              -
                                                           ------------------------------------------------------------------------
Net income (loss)                                            $(224,687)      $156,994      $116,384        $153,681       $152,689

Earnings (loss) per share:
   Basic                                                        $(0.76)         $0.52         $0.39           $0.51          $0.50
   Diluted:
      Income (loss) from continuing operations                  $(0.75)         $0.51       $(0.58)           $0.39          $0.27
      Income (loss) from discontinued operations                 (0.01)             -          0.97            0.15           0.21
      Cumulative effect of accounting change                          -             -             -          (0.04)              -
                                                           ------------------------------------------------------------------------
         Diluted earnings (loss) per share                      $(0.76)         $0.51         $0.39           $0.50          $0.49

Shares used to compute basic earnings per share                 295,610       300,383       298,659         302,487        307,637
Shares used to compute diluted earnings per share               295,610       305,912       298,659         305,518        314,406
SHARES OUTSTANDING, NET OF TREASURY SHARES                      292,868       298,253       300,531         298,474        307,530

Cash dividends per share                                          $0.42         $0.41         $0.40           $0.38          $0.36
Share price range:
   High price                                                    $12.10        $15.50        $14.20          $14.94         $22.00
   Low price                                                      $8.95         $8.89         $9.84           $8.25         $10.13

FINANCIAL POSITION:
Current assets                                                 $890,774      $925,496    $1,126,266        $701,898       $714,540
Current liabilities                                             818,240       839,064       805,298         675,902        712,520
Working capital                                                  72,534        86,432       320,968          25,996          2,020
Current ratio                                                   1.1 - 1       1.1 - 1       1.4 - 1         1.0 - 1        1.0 - 1

Total assets                                                 $2,956,426    $3,414,938    $3,621,245      $3,939,710     $3,819,687
Total liabilities                                             2,039,600     2,095,929     2,311,381       2,753,226      2,567,372
TOTAL DEBT OUTSTANDING                                          819,271       835,475     1,155,193       1,833,556      1,769,298
Minority interest                                               100,309       100,309       102,677           5,933          2,934
Shareholders' equity                                            816,517     1,218,700     1,207,187       1,180,551      1,249,381

</TABLE>



                                       13
<PAGE>
<TABLE>


CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

For years ended December 31,                                                             2003             2002             2001
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>              <C>              <C>
OPERATING REVENUE                                                                     $3,568,586       $3,500,721       $3,476,811
OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold                                            2,430,523        2,398,952        2,403,197
Selling and administrative expenses                                                      817,719          760,934          688,293
Amortization expense (1)                                                                   5,917            7,442           70,890
Charge (credit) for impaired assets and other items (2)                                  480,670          (2,000)          344,831
-----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses                                                     3,734,829        3,165,328        3,507,211
-----------------------------------------------------------------------------------------------------------------------------------

OPERATING INCOME (LOSS)                                                                (166,243)          335,393         (30,400)

NON-OPERATING EXPENSE (INCOME)
Interest expense (3)                                                                      65,255           92,901          133,842
Interest and investment income                                                          (15,012)          (6,431)         (11,972)
Minority interest and other expense, net                                                   8,151            6,682            5,657
-----------------------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                           (224,637)          242,241        (157,927)
Provision (benefit) for income taxes                                                     (2,662)           84,938           14,292
-----------------------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                                               (221,975)          157,303        (172,219)
Income (loss) from discontinued operations, net of income taxes (4)                      (2,712)            (309)          288,603
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                                                     $(224,687)         $156,994         $116,384
===================================================================================================================================

BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations                                                 $(0.75)            $0.52          ($0.58)
Income (loss) from discontinued operations (4)                                            (0.01)                -             0.97
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE                                                          $(0.76)            $0.52            $0.39
===================================================================================================================================

DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations                                                 $(0.75)            $0.51          ($0.58)
Income (loss) from discontinued operations (4)                                            (0.01)                -             0.97
-----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE                                                        $(0.76)            $0.51            $0.39
===================================================================================================================================
</TABLE>


(1)  The Company adopted Statement of Financial  Accounting Standards (SFAS) No.
     142,  "Goodwill  and  Other  Intangible   Assets",   which  eliminates  the
     amortization  of  goodwill  and  intangible  assets with  indefinite  lives
     beginning  in 2002.  Had the  provisions  of SFAS 142 been applied to 2001,
     amortization  expense  would have been  reduced by $60 million ($42 million
     after-tax, $0.14 per diluted share).

(2)  In accordance with SFAS 142, the Company's  goodwill and intangible  assets
     that are not  amortized  are subject to at least an annual  assessment  for
     impairment by applying a fair-value based test. During the third quarter of
     2003, the Company  recorded a non-cash  impairment  charge  associated with
     goodwill  and  intangible  assets  at its  American  Residential  Services,
     American  Mechanical  Services and TruGreen LandCare business units of $481
     million pre-tax ($383 million  after-tax).  The impact on diluted  earnings
     per share of this  charge  was  $1.30.  See the  "Goodwill  and  Intangible
     Assets"  note in the Notes to the  Consolidated  Financial  Statements.  In
     addition,  the  Company  recorded a pre-tax  charge of $345  million  ($279
     million,  after-tax)  or $.94 per  diluted  share in the fourth  quarter of
     2001,  related primarily to goodwill and asset impairments as well as other
     items.

(3)  In 2003, the Company adopted SFAS 145. The primary impact to the Company of
     SFAS 145 is that it rescinds SFAS 4 which  required all material  gains and
     losses from the  extinguishment  of debt to be classified as  extraordinary
     items.  In 2002,  the Company  recorded an  extraordinary  loss of $.03 per
     diluted share ($15.4  million  pre-tax,  $9.2 million  after-tax)  from the
     early extinguishment of debt. In 2001 the Company recorded an extraordinary
     loss  of $.01  per  diluted  share  ($5.9  million  pre-tax,  $3.4  million
     after-tax)  on  the  early  extinguishment  of  debt.  As a  result  of the
     Company's  adoption  of SFAS  145 in 2003,  these  gains/losses  have  been
     reclassified  into  continuing  operations  as  interest  expense,  thereby
     adjusting  the  previously  reported  2002 and 2001 income from  continuing
     operations  and  related   diluted   earnings  per  share  from  continuing
     operations by the same aforementioned amounts.

(4)  In the third  quarter of 2003,  the  Company  sold the  assets and  related
     operational obligations of the utility line clearing operations of TruGreen
     LandCare.  The  impact  of the  sale  was  not  material  to the  Company's
     Consolidated Financial Statements for 2003. The results of the utility line
     clearing operations have been reclassified as "Discontinued operations" for
     all  periods  presented  and are not  included  in  continuing  operations.
     Earnings per share from  continuing  operations for 2002 and 2001 were both
     reduced by $.01, to reflect the  reclassification  of the divested  utility
     line clearing business as discontinued operations.

     In the fourth quarter of 2001, the Company's Board of Directors  approved a
     series of  actions  related to the  strategic  review of its  portfolio  of
     businesses that commenced  earlier in 2001. These actions included the sale
     in November 2001 of the Company's  Management  Services business as well as
     the  decision  to  exit  non-strategic  and   under-performing   businesses
     including TruGreen LandCare  Construction and Certified  Systems,  Inc., as
     well as certain Terminix operations in Europe.  During the third quarter of
     2002, the Company sold its remaining  European Terminix  operations.  These
     operations  are  classified in  "Discontinued  operations"  for all periods
     presented.



     See accompanying Notes to the Consolidated Financial Statements.



                                       14
<PAGE>


<TABLE>


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except per share data)
As of December 31,                                                                    2003             2002
------------------------------------------------------------------------------------------------------------
ASSETS:

CURRENT ASSETS:
<S>                                                                               <C>              <C>
Cash and cash equivalents                                                         $228,161         $227,177
Marketable securities                                                               90,540           75,194
Receivables, less allowances of $26,220 and $27,616, respectively                  333,834          322,954
Inventories                                                                         70,163           67,187
Prepaid expenses and other assets                                                   33,408           38,879
Deferred customer acquisition costs                                                 41,806           48,419
Deferred taxes and income taxes receivable                                          87,589          123,100
Assets of discontinued operations                                                    5,273           22,586
------------------------------------------------------------------------------------------------------------
Total Current Assets                                                               890,774          925,496
------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
At cost                                                                            387,569          388,582
Less:  accumulated depreciation                                                  (208,054)        (200,027)
------------------------------------------------------------------------------------------------------------
Net Property and Equipment                                                         179,515          188,555
------------------------------------------------------------------------------------------------------------

OTHER ASSETS:
Goodwill                                                                         1,516,206        1,919,780
Intangible assets, primarily trade names                                           216,453          257,781
Notes receivable                                                                    46,441           55,770
Long-term marketable securities                                                     92,562           54,455
Other assets                                                                        14,475           13,101
------------------------------------------------------------------------------------------------------------
   TOTAL ASSETS                                                                 $2,956,426       $3,414,938
============================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY:

CURRENT LIABILITIES:
Accounts payable                                                                    86,963           90,876
Accrued liabilities:
   Payroll and related expenses                                                     89,427           97,819
   Self-insured claims and related expenses                                         73,320           83,225
   Other                                                                           100,454          102,095
Deferred revenues                                                                  419,915          397,290
Liabilities of discontinued operations                                              14,380           36,624
Current portion of long-term debt                                                   33,781           31,135
------------------------------------------------------------------------------------------------------------
Total Current Liabilities                                                          818,240          839,064
------------------------------------------------------------------------------------------------------------

LONG-TERM DEBT                                                                     785,490          804,340

LONG-TERM LIABILITIES
   Deferred taxes                                                                  276,000          312,500
   Liabilities of discontinued operations                                           34,396           30,682
   Other long-term obligations                                                     125,474          109,343
------------------------------------------------------------------------------------------------------------
   Total Long-Term Liabilities                                                     435,870          452,525
------------------------------------------------------------------------------------------------------------

MINORITY INTEREST                                                                  100,309          100,309

COMMITMENTS AND CONTINGENCIES (See Note)

SHAREHOLDERS' EQUITY
Common stock $0.01 par value, authorized 1,000,000 shares; issued
   317,315 and 316,024, respectively                                                 3,173            3,160
Additional paid-in capital                                                       1,061,640        1,054,272
Retained earnings                                                                    6,365          355,893
Accumulated other comprehensive income (loss)                                        7,932            (849)
Restricted stock                                                                   (4,368)          (1,988)
Treasury stock                                                                   (258,225)        (191,788)
------------------------------------------------------------------------------------------------------------
   Total Shareholders' Equity                                                      816,517        1,218,700
------------------------------------------------------------------------------------------------------------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                   $2,956,426       $3,414,938
============================================================================================================
</TABLE>


See accompanying Notes to the Consolidated Financial Statements


                                       15
<PAGE>



CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>


                                                       Additional                Accumulated
                                             Common      Paid-in      Retained   Comprehensive   Treasury    Restricted   Total
                                             Stock       Capital      Earnings      Income        Stock        Stock      Equity
                                                                                    (Loss)
===================================================================================================================================

<S>                                           <C>        <C>           <C>           <C>         <C>           <C>       <C>
BALANCE DECEMBER 31, 2000                     $3,137     $1,032,287    $324,727      $(9,277)    $(168,494)    $(1,829)  $1,180,551
===================================================================================================================================
Net income 2001                                                         116,384                                             116,384
Other comprehensive income, net of tax:
  Net unrealized (loss) on securities,
    net of reclassification adjustment (1)                                            (4,359)                               (4,359)
  Foreign currency translation                                                         11,140                                11,140
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                                              116,384         6,781                               123,165

Shareholder dividends                                                 (119,008)                                           (119,008)
Shares issued under options
  debentures, grant plans and
  other (2,142 shares)                             8          6,941                                  15,590       1,248      23,787
Treasury shares purchased (124 shares)                                                              (1,308)                 (1,308)
===================================================================================================================================
BALANCE DECEMBER 31, 2001                     $3,145     $1,039,228    $322,103      $(2,496)    $(154,212)      $(581)  $1,207,187
===================================================================================================================================
Net income 2002                                                         156,994                                             156,994
Other comprehensive income, net of tax:
  Net unrealized (loss) on securities,
    net of reclassification adjustment (1)                                            (3,869)                               (3,869)
  Foreign currency translation                                                          5,516                                 5,516
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                                              156,994         1,647                               158,641

Shareholder dividends                                                 (123,204)                                           (123,204)
Shares issued under options,
  debentures, grant plans and
  other (2,706 shares)                            15         15,044                                  14,482     (1,407)      28,134
Treasury shares purchased (4,985 shares)                                                           (52,058)                (52,058)
===================================================================================================================================
BALANCE DECEMBER 31, 2002                     $3,160     $1,054,272    $355,893        $(849)    $(191,788)    $(1,988)  $1,218,700
===================================================================================================================================
Net loss 2003                                                         (224,687)                                           (224,687)
Other comprehensive income, net of tax:
  Net unrealized gain on securities,
    net of reclassification adjustment (1)                                              7,022                                 7,022
  Foreign currency translation                                                          1,759                                 1,759
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss)                                     (224,687)         8,781                             (215,906)

Shareholder dividends                                                 (124,841)                                           (124,841)
Shares issued under options,
  debentures, grant plans and
  other (2,700 shares)                            13          7,368                                  19,144     (2,380)      24,145
Treasury shares purchased (8,084 shares)                                                           (85,581)                (85,581)
===================================================================================================================================
BALANCE DECEMBER 31, 2003                     $3,173     $1,061,640      $6,365        $7,932    $(258,225)    $(4,368)    $816,517
===================================================================================================================================
</TABLE>


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

<TABLE>

                                                                                                    2003       2002          2001
===================================================================================================================================
<S>                                                                                               <C>        <C>           <C>
Unrealized holding gains (losses) arising                                                         $ 9,335    $(4,745)      $(1,219)
in period
Less:  (Gains) losses realized                                                                    (2,313)         876       (3,140)
-----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities                                                       $ 7,022    $(3,869)      $(4,359)
===================================================================================================================================

See accompanying Notes to the Consolidated Financial Statements.
</TABLE>



                                       16
<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For years ended December 31,                                                           2003             2002             2001
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>              <C>               <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1                                             $227,177         $402,642          $42,834
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)                                                                 (224,687)          156,994          116,384
   Adjustments to reconcile net income (loss) to net cash
     provided from operating activities:
   (Income) loss from discontinued operations                                         2,712              309        (288,603)
   Charge (credit) for impaired assets and other items, net of tax                  383,152          (1,200)          279,393

   Depreciation expense                                                              49,861           48,866           48,020
   Amortization expense                                                               5,917            7,442           70,890
   Deferred income tax expense                                                       65,256           65,799           88,470

Change in working capital, net of acquisitions:
   Receivables                                                                     (17,640)           14,408          (2,370)
   Inventories and other current assets                                               5,946          (7,694)         (14,650)
   Accounts payable                                                                 (4,168)          (4,233)          (4,762)
   Deferred revenues                                                                 22,773           49,849           35,750
   Accrued liabilities                                                              (6,884)           33,699           23,004
   Other, net                                                                         1,300            9,952            4,623
==============================================================================================================================
NET CASH PROVIDED FROM OPERATING ACTIVITIES                                         283,538          374,191          356,149
==============================================================================================================================

CASH FLOWS FROM INVESTING ACTIVITIES:
   Property additions                                                              (39,243)         (60,113)         (41,504)
   Sale of equipment and other assets                                                11,090            4,565            9,777
   Business acquisitions, net of cash acquired                                     (28,875)         (13,003)         (55,842)
   Proceeds from business sales                                                      21,106           30,500          857,166
   Notes receivable, financial investments and securities                          (23,499)          (2,117)         (15,361)
==============================================================================================================================
NET CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES                             (59,421)         (40,168)          754,236
==============================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net payments of debt                                                            (31,216)        (345,142)        (719,963)
   Shareholders' dividends                                                        (124,841)        (123,204)        (119,008)
   Purchase of ServiceMaster stock                                                 (85,581)         (52,058)          (1,308)
   Other, net                                                                        16,330           19,140           13,970
==============================================================================================================================
NET CASH USED FOR FINANCING ACTIVITIES                                            (225,308)        (501,264)        (826,309)
==============================================================================================================================
NET CASH PROVIDED FROM (USED FOR) DISCONTINUED OPERATIONS                             2,175          (8,224)           75,732
==============================================================================================================================
CASH INCREASE (DECREASE) DURING THE YEAR                                                984        (175,465)          359,808
==============================================================================================================================
CASH AND CASH EQUIVALENTS AT DECEMBER 31                                           $228,161         $227,177         $402,642
==============================================================================================================================

See accompanying Notes to the Consolidated Financial Statements.

</TABLE>

                                       17
<PAGE>




SIGNIFICANT ACCOUNTING POLICIES
SUMMARY:   The  consolidated   financial  statements  include  the  accounts  of
ServiceMaster and its majority-owned  subsidiary  partnerships and corporations,
collectively referred to as the Company.  Intercompany transactions and balances
have been eliminated.

The preparation of the consolidated  financial statements requires management to
make  certain  estimates  and  assumptions  required  under  generally  accepted
accounting  principles  ("GAAP") which may differ from actual results.  The more
significant  areas  requiring  the use of  management  estimates  relate  to the
allowance for receivables, accruals for self-insured retention limits related to
medical,  workers compensation,  auto and general liability insurance,  accruals
for home  warranty  claims,  the possible  outcomes of  outstanding  litigation,
accruals for income tax  liabilities  as well as deferred tax  accounts,  useful
lives for depreciation and amortization  expense,  and the valuation of tangible
and intangible  assets.  In 2003,  there have been no changes in the significant
areas that  require  estimates  or in the  methodologies  which  underlie  these
estimates.  As discussed in the  "Goodwill  and  Intangible  Assets" note to the
consolidated  financial statements,  the Company recorded a charge to reduce the
carrying value of its goodwill and intangible  assets.  This  impairment  charge
represented  the excess of the book  values over their  corresponding  estimated
fair values.

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

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

The Company records deferred income tax balances based on the net tax effects of
temporary  differences  between the carrying value of assets and liabilities for
financial  reporting  purposes and income tax  purposes.  There are  significant
amortizable  intangible  assets for tax  reporting  purposes  (not for financial
reporting  purposes)  which arose as a result of the  Company's  reincorporation
from partnership to corporate form in 1997. The Company records its deferred tax
items based on the estimated  ultimate value of the tax basis. The Company's tax
estimates are adjusted when required to reflect changes based on factors such as
changes in tax laws, results of tax authority reviews and statutory limitations.
In the event that actual results differ from these estimates,  the Company would
reflect those changes in the period that the difference is identified.

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

The  Company  does not  amortize  its  goodwill or  indefinite-lived  intangible
assets.  The Company  tests these  assets for  impairment,  at a minimum,  on an
annual basis by applying a fair-value  based test. An  impairment  loss would be
recorded if and when the Company  determines that the expected  present value of
the future cash flows is less than the book value.

REVENUES:  Revenues from lawn care, pest control,  liquid and fumigation termite
applications,  as well as  heating/air  conditioning  and plumbing  services are
recognized as the services are provided.  Revenues from landscaping services are
recognized  as they are earned based upon monthly  contractual  arrangements  or
when services are performed for non-contractual arrangements.  Revenues from the
Company's  commercial  installation  contracts,  primarily relating to HVAC, are
recognized  using the  percentage of  completion  method based on the ratio that
total  costs  incurred  to date  bear to  total  estimated  costs.  The  Company
eradicates  termites  through  the use of baiting  stations,  as well as through
non-baiting methods (e.g.,  fumigation or liquid  treatments).  Termite services
using  baiting  stations as well as home  warranty  services  typically are sold
through annual contracts for a one-time,  upfront payment. Direct costs of these
contracts  (service  costs for termite  contracts  and claim costs for  warranty
contracts)  are expensed as incurred.  The Company  recognizes  revenue over the
life of these contracts in proportion to the expected direct costs. Revenue from
trade name licensing arrangements is recognized when earned. Franchised revenues
(which in the  aggregate  represent  less than  three  percent  of  consolidated
revenue)  consist   principally  of  continuing  monthly  fees  based  upon  the
franchisee's customer level revenue.  Monthly fee revenue is recognized when the
related customer level revenue is reported by the franchisee and  collectibility
is assured. Franchise revenue also includes initial fees resulting from the sale
of a  franchise.  These  fees are  fixed  and are  recognized  as  revenue  when
collectibility  is assured and all material  services or conditions  relating to
the  sale  have  been  substantially  performed.   Total  franchise  fee  income
(excluding trade name licensing) comprised 13 percent, 11 percent and 10 percent
of consolidated  operating  income before  impairment  charges in 2003, 2002 and
2001, respectively. The portion of total franchise fee income related to initial
fees  received  from the sale of a franchise  were  immaterial  to the Company's
consolidated financial statements for all periods.


                                       18
<PAGE>


The Company had $420 million and $397  million of deferred  revenues at December
31, 2003 and 2002,  respectively,  which consist  primarily of payments received
for annual  contracts  relating to home warranty,  termite baiting and lawn care
services.  The revenue related to these services is recognized as the service is
performed over the contractual period.

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

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

ADVERTISING:  As  discussed in the "Interim  Reporting"  note above,  TruGreen's
pre-season  advertising  costs are  deferred  and  recognized  approximately  in
proportion to the contract  revenue over the year.  The cost of  direct-response
advertising at Terminix is capitalized and amortized over its expected period of
future  benefits.   This  direct-response   advertising  consists  primarily  of
direct-mail promotions, for which the cost is capitalized and amortized over the
one-year customer contract life. For all other advertising, the Company expenses
the cost of advertising  the first time the  advertising  takes place.  Terminix
also defers its  advertising  costs in the first quarter and recognizes  expense
over the year. These costs are not deferred beyond the calendar year-end.

INVENTORY  VALUATION:  Inventories  are  valued at the lower of cost  (first-in,
first-out basis) or market. The inventory primarily represents finished goods to
be used on the customers' premises or sold to franchisees.

PROPERTY AND EQUIPMENT,  INTANGIBLE ASSETS AND GOODWILL: Buildings and equipment
used in the business  are stated at cost and  depreciated  over their  estimated
useful lives using the straight-line  method for financial  reporting  purposes.
The  estimated  useful lives for building and  improvements  range from 10 to 40
years,  while the estimated  useful lives for  equipment  range from three to 10
years. Leasehold improvements relating to leased facilities are depreciated over
the remaining  life of the lease.  Technology  equipment as well as software and
development  have an estimated  useful life of three to seven years.  Intangible
assets consist primarily of goodwill ($1.5 billion),  trade names ($205 million)
and other intangible assets ($12 million).  As required by SFAS 142 beginning in
2002,  goodwill  is not  subject to  amortization  and  intangible  assets  with
indefinite  useful  lives  are  not  amortized  until  their  useful  lives  are
determined to no longer be indefinite.  Goodwill and intangible  assets that are
not subject to  amortization  are subject to an  assessment  for  impairment  by
applying  a  fair-value  based  test on an annual  basis or more  frequently  if
circumstances indicate a potential impairment. As discussed in the "Goodwill and
Intangible  Assets" note to the consolidated  financial  statements,  during the
third quarter of 2003 the Company recorded a pre-tax non-cash  impairment charge
of $481 million relating to TruGreen LandCare, ARS and AMS.

As discussed in the "Portfolio  Review and  Dispositions in 2001" section in the
Notes to  Consolidated  Financial  Statements,  in the course of completing  its
portfolio  review,  the Company recorded  impairment  charges in 2001 related to
goodwill of TruGreen  LandCare and the United Kingdom Terminix  operations.  The
impairment  losses  recorded  were the excess of the  recorded  book values over
their corresponding estimated fair values.

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

FAIR VALUE OF FINANCIAL  INSTRUMENTS  AND CREDIT RISK:  The carrying  amounts of
receivables,  accounts payable,  and accrued liabilities  approximate fair value
because of the short  maturity of these  instruments.  The  carrying  amounts of
long-term  receivables  approximate  fair value as the effective rates for these
instruments  are comparable to market rates at year-end.  The carrying amount of
current and long-term  marketable  securities also approximate fair value,  with
unrealized  gains and losses  reported  net-of-tax as a component of accumulated
comprehensive  income (loss).  The carrying amount of total debt is $819 million
and $835 million and the estimated fair value is approximately  $882 million and
$880 million at December 31, 2003 and 2002,  respectively.  The  estimated  fair
value of debt is based upon borrowing rates  currently  available to the Company
for long-term borrowings with similar terms and maturities.

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

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


                                       19
<PAGE>


Financial  instruments,  which potentially  subject the Company to financial and
credit risk,  consist  principally of investments and  receivables.  Investments
consist  primarily of publicly  traded debt and common  equity  securities.  The
Company  periodically  reviews its portfolio of investments to determine whether
there has been an other than temporary  decline in the value of the  investments
from factors such as deterioration  in the financial  condition of the issuer or
the market(s) in which it competes.  Receivables  have little  concentration  of
credit risk due to the large number of customers with relatively  small balances
and their  dispersion  across  geographical  areas.  The  Company  maintains  an
allowance for losses based upon the expected collectibility of receivables.

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

EARNINGS PER SHARE:  Basic  earnings per share is based on the  weighted-average
number of common shares outstanding during the year. The weighted average number
of common shares used in the diluted earnings per share calculation  include the
incremental  effect  related to  outstanding  options  whose  market price is in
excess of the  exercise  price,  as well as shares  potentially  issuable  under
convertible  securities.  In computing diluted earnings per share, the after-tax
interest  expense related to convertible  debentures is added back to net income
in the numerator, while the number of shares used in the denominator include the
shares issuable upon  conversion of the debentures.  Due to the fact that losses
from continuing operations were incurred in 2003 and 2001, diluted shares do not
include the effects of options, because doing so would result in a less dilutive
computation.  Shares potentially issuable under convertible  securities have not
been considered  outstanding in the diluted  earnings per share  computation for
all  periods  presented  as  the  inclusion  would  result  in a  less  dilutive
computation.

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

Prior to 2003,  the Company had accounted  for employee  share options under the
intrinsic  method of Accounting  Principles Board Opinion 25, as permitted under
GAAP. Had  compensation  expense for employee  options been determined under the
fair-value  based  method of SFAS 123 for all  periods,  proforma  reported  net
income and net earnings per share would reflect the following:




(In thousands, except per share data)      2003        2002      2001
------------------------------------------------------------------------
Net income (loss) as reported          $(224,687)    $156,994  $116,384
  Add back:  Stock-based
  compensation expense included in
  reported net income, net of related
  tax effects                                609           -         -

  Deduct:  Stock-based
  compensation expense determined
  under fair-value method, net
  of related tax effects                  (6,179)     (7,576)   (7,613)
------------------------------------------------------------------------

Proforma net income (loss)             $(230,257)    $149,418  $108,771


Basic Earnings Per Share:
  As reported                             $(0.76)       $0.52     $0.39
   Proforma                                (0.78)        0.50      0.36

Diluted Earnings Per Share:
  As reported                             $(0.76)       $0.51     $0.39
   Proforma                                (0.78)        0.49      0.36
========================================================================
SEE THE "SHAREHOLDERS' EQUITY" NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR
A  DESCRIPTION  OF THE  ASSUMPTIONS  USED  TO  COMPUTE  THE  ABOVE  STOCK  BASED
COMPENSATION EXPENSE.

NEWLY ADOPTED  ACCOUNTING  PRINCIPLES:  In April 2002, the Financial  Accounting
Standards  Board (FASB) issued SFAS 145,  "Rescission of FASB  Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".  The
primary impact to the Company of this Statement is that it rescinds SFAS 4 which
required all  material  gains and losses from the  extinguishment  of debt to be
classified as extraordinary  items.  SFAS 145 requires that the more restrictive
criteria of APB Opinion No. 30 will be used to  determine  whether such gains or
losses are extraordinary.  Beginning in 2003, the Company adopted the provisions
of this statement and as such has reclassified the extraordinary  losses in 2002
and 2001 into income from continuing operations in the accompanying Consolidated
Statements of Operations. In the second quarter of 2002, the Company recorded an
extraordinary  loss of $.03 per  diluted  share  ($15.4  million  pre-tax,  $9.2
million  after-tax) from the early  extinguishment of debt. In the first quarter
of 2001 the Company  recorded an  extraordinary  gain of $.02 per diluted  share
($10.1 million pre-tax,  $6.0 million after-tax) on the early  extinguishment of
debt. In the fourth quarter of 2001 the Company recorded an  extraordinary  loss
of $.03 per diluted share ($16.0 million pre-tax, $9.4 million after-tax) on the
early  extinguishment of debt. As a result of the Company's adoption of SFAS 145
in 2003, these gains/losses have been reclassified into continuing operations as
interest expense,  thereby adjusting the previously reported 2002 and 2001 basic
and  diluted  earnings  per  share  from  continuing   operations  by  the  same
aforementioned amounts.

During 2003, the Company adopted SFAS 146, "Accounting for Costs Associated With
Exit or Disposal Activities". This Statement requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. The adoption of this Statement did not have a material impact on the
Consolidated Financial Statements.

In January 2003,  the Financial  Accounting  Standards  Board (FASB) issued FASB
Interpretation  No. 46,  "Consolidation of Variable Interest Entities" (FIN 46).
Under  this  Interpretation,

                                       20
<PAGE>


certain   entities  known  as  "variable   interest   entities"  (VIE)  must  be
consolidated by the "primary beneficiary" of the entity. The primary beneficiary
is  generally  defined as having the  majority of the risks and rewards  arising
from the VIE. In December  2003,  the FASB  issued FASB  Interpretation  No. 46,
Revised,  which revised the originally  issued document to include,  among other
items, additional exclusion provisions for which an entity would not be required
to apply FIN 46. Certain  requirements  of FIN 46R are required to be applied no
later than the first  quarter of 2004.  The Company is currently  assessing  the
impact of FIN 46R and does not expect its adoption to have a material  impact on
the Consolidated Financial Statements.

BUSINESS SEGMENT REPORTING
The  business of the  Company is  conducted  through  five  operating  segments:
TruGreen,  Terminix,  American  Home Shield,  ARS/AMS and Other  Operations.  In
accordance  with  Statement  of  Financial  Accounting  Standards  No. 131,  the
Company's  reportable segments are strategic business units that offer different
services. The TruGreen segment provides residential and commercial lawn care and
landscaping  services  through  the  TruGreen  ChemLawn  and  TruGreen  LandCare
companies.  The Terminix  segment  provides termite and pest control services to
residential  and  commercial  U.S.  customers.  The American Home Shield segment
provides  home  warranties to consumers  that cover  heating,  ventilation,  air
conditioning  (HVAC),  plumbing  and other home  systems  and  appliances.  This
segment also  includes  home  inspection  services  provided by  AmeriSpec.  The
ARS/AMS  segment  provides HVAC and plumbing  installation  and repair  services
provided under the ARS Service Express,  American Mechanical Services and Rescue
Rooter brand names.  The Other  Operations  segment  includes the  franchise and
company-owned  operations  of  ServiceMaster  Clean,  Furniture  Medic and Merry
Maids, which provide disaster restoration,  cleaning,  furniture repair and maid
services.  This segment also  includes the  Company's  headquarters  operations,
which provide various technology,  marketing, finance and other support services
to  the  business  units.  In  the  third  quarter  of  2003  the  Company  sold
substantially  all of the  assets and  related  operational  obligations  of the
utility line clearing operations of TruGreen LandCare.  As a result, the utility
line clearing  operations are now included in "Discontinued  Operations" for all
periods presented.

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

Segment  information  for the years ended  December 31, 2003,  2002, and 2001 is
presented below.

Beginning in 2002, SFAS 142, "Goodwill and Other Intangible Assets",  eliminates
the  amortization of goodwill and intangible  assets with indefinite  lives. The
table  below  presents   "Proforma"   information  for  2001  which   eliminates
amortization  expense related to goodwill and intangible  assets with indefinite
lives, so that these periods are presented on a comparable basis to the 2003 and
2002 information.



                                       21
<PAGE>

<TABLE>


BUSINESS SEGMENT TABLE

(In thousands)                                                2003    % Change          2002    % Change           2001
===========================================================================================================================
<S>                                                         <C>            <C>        <C>            <C>         <C>
OPERATING REVENUE:
   TruGreen                                                 $1,347,400      5%        $1,284,616      0%         $1,284,136
   Terminix                                                    945,258      2            924,384      9             845,453
   American Home Shield                                        450,264      6            423,526      15            368,951
   ARS/AMS                                                     673,558     (6)           718,892     (12)           820,177
   Other Operations                                            152,106      2            149,303     N/M            158,094
---------------------------------------------------------------------------------------------------------------------------
Total Operating Revenue                                     $3,568,586      2%        $3,500,721      1%         $3,476,811
===========================================================================================================================
OPERATING INCOME (LOSS):
   TruGreen (1)                                              $(34,017)     N/M          $165,292     12%           $147,078
   Terminix                                                    131,044      3            127,441      23            103,925
   American Home Shield                                         58,154      21            47,890     104             23,512
   ARS/AMS (1)                                               (281,777)     N/M            17,342     (57)            39,978
   Other Operations (2)                                       (39,647)     N/M          (22,572)     N/M          (344,893)
---------------------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) (1,2)                         $(166,243)     N/M          $335,393     N/M          $(30,400)
===========================================================================================================================
OPERATING INCOME (LOSS) - SFAS 142 PROFORMA:
   TruGreen (1)                                              $(34,017)     N/M          $165,292     (5%)          $173,453
   Terminix                                                    131,044      3            127,441      4             122,979
   American Home Shield                                         58,154      21            47,890      84             25,993
   ARS/AMS (1)                                               (281,777)     N/M            17,342     (65)            49,210
   Other Operations (2)                                       (39,647)     N/M          (22,572)     N/M          (341,582)
---------------------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) - SFAS 142 Proforma (1,2)     $(166,243)     N/M          $335,393     N/M            $30,053
===========================================================================================================================
CAPITAL EMPLOYED: (3)
   TruGreen                                                   $821,412    (16%)         $979,932     (4%)        $1,018,223
   Terminix                                                    596,535      -            599,433      1             594,970
   American Home Shield                                        134,372      34           100,026      21             82,374
   ARS/AMS                                                      86,764     (78)          398,982     (8)            431,756
   Other Operations                                             97,014      27            76,111     (77)           337,734
---------------------------------------------------------------------------------------------------------------------------
Total Capital Employed                                      $1,736,097    (19%)       $2,154,484    (13%)        $2,465,057
===========================================================================================================================
IDENTIFIABLE ASSETS:
   TruGreen                                                   $911,958    (13%)       $1,053,099     (1%)        $1,066,001
   Terminix                                                    822,407     (2)           841,437      2             823,333
   American Home Shield                                        422,765      12           376,059      16            323,229
   ARS/AMS                                                     185,528     (62)          489,366     (6)            519,026
   Other Operations                                            613,768     (6)           654,977     (26)           889,656
---------------------------------------------------------------------------------------------------------------------------
Total Identifiable Assets                                   $2,956,426    (13%)       $3,414,938     (6%)        $3,621,245
===========================================================================================================================
DEPRECIATION & AMORTIZATION EXPENSE:
   TruGreen                                                    $22,764     (4%)          $23,595    (54%)           $51,247
   Terminix                                                     10,328     (7)            11,150     (64)            30,822
   American Home Shield                                          6,829      22             5,583     (26)             7,516
   ARS/AMS                                                       8,439     (8)             9,166     (49)            18,048
   Other Operations                                              7,418      9              6,814     (40)            11,277
---------------------------------------------------------------------------------------------------------------------------
Total Depreciation & Amortization Expense                      $55,778     (1%)          $56,308    (53%)          $118,910
===========================================================================================================================
CAPITAL EXPENDITURES:
   TruGreen                                                    $14,197     25%           $11,317     106%            $5,504
   Terminix                                                      5,169     (70)           17,013      63             10,427
   American Home Shield                                          6,619      38             4,794     (40)             8,033
   ARS/AMS                                                       6,160      9              5,658     (20)             7,093
   Other Operations                                              7,098     (67)           21,331     104             10,447
---------------------------------------------------------------------------------------------------------------------------
Total Capital Expenditures                                     $39,243    (35%)          $60,113     45%            $41,504
===========================================================================================================================
         N/M = Not meaningful
</TABLE>


(1)  In the third  quarter of 2003,  the Company  recorded a  non-cash,  pre-tax
     impairment  charge of $481 million  related to its goodwill and  intangible
     assets.  Approximately  $189 million of the charge is  associated  with the
     TruGreen  LandCare  operations  reported in the TruGreen  segment,  and the
     remaining $292 million relates to the ARS/AMS segment.
(2)  In the fourth  quarter of 2001,  the Company  recorded a pre-tax  charge of
     $345 million,  related  primarily to goodwill and asset impairments as well
     as other items reported in the Other Operations segment.
(3)  Capital  employed  represents  the segments  total assets less  liabilities
     (exclusive of debt balances).


The following table summarizes the previously  amortized  goodwill by segment at
December 31 that,  beginning on January 1, 2002 is no longer amortized.  See the
"Acquisition" and "Dispositions" Notes to the Consolidated  Financial Statements
for information relating to goodwill acquired and amounts impaired.
<TABLE>

(In thousands)                        2003     % Change           2002    % Change          2001
===================================================================================================
<S>                                 <C>          <C>            <C>           <C>         <C>
TruGreen                            $652,534     (16%)          $780,043      1%          $774,400
Terminix                             622,351       1             618,055      1            613,708
American Home Shield                  72,085       -              72,085      -             72,085
ARS/AMS                               56,171     (83)            337,491      -            337,386
Other Operations                     113,065       1             112,106      5            106,599
---------------------------------------------------------------------------------------------------
Total                             $1,516,206     (21%)        $1,919,780      1%        $1,904,178
===================================================================================================
</TABLE>


                                       22
<PAGE>





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

Throughout the first half of the year,  management believed that the significant
declines in the  operating  results of these  businesses  were due to  temporary
conditions  and that the  operations,  with an  anticipated  good summer season,
would show ongoing  improvement  which would  support the amount of goodwill and
intangible  assets on the balance  sheet.  The Company had discussed such events
and trends in its press  releases and periodic  filings with the  Securities and
Exchange Commission.  In the third quarter of 2003, the results did not improve.
In addition, the Company identified certain branch closures at ARS and announced
the sale of its utility line clearing operations at TruGreen LandCare.  The lack
of a good summer  season,  combined  with  declining  profitability  in the base
businesses, led management to conclude that the businesses were unlikely to meet
the previous  projections  which had supported the carrying  value. As a result,
the Company recorded a non-cash  impairment  charge to reduce the carrying value
of the assets to $56 million, their estimate fair value.

A valuation  was performed  during the third quarter of 2003 which  incorporated
third quarter 2003 performance.  The fair value of goodwill and other intangible
assets was determined primarily by utilizing a discounted cash flow methodology.
Based on the evaluation,  it was determined that the fair value of the Company's
goodwill and intangible  assets was less than their carrying value.  The Company
used an independent  valuation  firm to confirm the Company's  assessment of the
fair value of its goodwill and other intangible  assets. In the third quarter of
2003, the Company  recorded a non-cash  impairment  charge totaling $481 million
pre-tax or $383  million net of tax.  The charge  consisted  of $224  million at
American Residential  Services,  $68 million at American Mechanical Services and
$189 million at TruGreen  LandCare.  The impairment charge included a portion of
goodwill that was not deductible for tax purposes, resulting in a tax benefit of
$98 million or approximately 20 percent of the pre-tax charge amount.

In  accordance   with  SFAS  142,  the  following   table  provides   summarized
transitional  information  for the years ended December 31, 2003, 2002 and 2001,
with the  2001  information  presented  on an  adjusted  basis  to  reflect  the
elimination of amortization expense required under SFAS 142:


(IN THOUSANDS, EXCEPT PER SHARE DATA)            2003      2002       2001
--------------------------------------------------------------------------------

Reported operating income (loss)             $(166,243)  $335,393  ($30,400)
Add  back:  Goodwill  and trade name
  amortization                                       -         -     60,453
--------------------------------------------------------------------------------
Operating income (loss) as adjusted
  under SFAS 142                             $(166,243)  $335,393    $30,053
================================================================================

Reported income (loss)
  from continuing operations                 $(221,975)  $157,303  ($172,219)
Add  back: Goodwill and trade name
  amortization, net of tax                            -         -     41,590
--------------------------------------------------------------------------------
Income (loss) from continuing
  operations as adjusted
  under SFAS 142                              (221,975)   157,303  (130,629)
Discontinued  operations, net of taxes          (2,712)     (309)    288,603
--------------------------------------------------------------------------------
Net income (loss) as adjusted
  under SFAS 142                             $(224,687)  $156,994   $157,974
================================================================================

Reported basic earnings per share
  from continuing operations                   $(0.75)     $0.52      ($0.58)
Add back: Goodwill  and trade name
  amortization, net of tax                          -         -         0.14
--------------------------------------------------------------------------------
Basic earnings per share
  from continuing operations
  as adjusted under SFAS 142                   (0.75)      0.52        (0.44)
Discontinued operations, net                   (0.01)         -         0.97
--------------------------------------------------------------------------------
Basic earnings per share as adjusted
  under SFAS 142                             $(0.76)     $0.52         $0.53
================================================================================

Reported diluted earnings per share
  from continuing operations                $(0.75)     $0.51         ($0.58)
Add back: Goodwill and trade name
  amortization, net of tax                       -          -           0.14
--------------------------------------------------------------------------------
Diluted earnings per share
  from continuing operations
  as adjusted under SFAS 142                (0.75)      0.51           (0.44)
Discontinued operations, net                (0.01)         -            0.97
--------------------------------------------------------------------------------
Diluted earnings per share as adjusted
  under SFAS 142                           $(0.76)     $0.51           $0.53
================================================================================





                                       23
<PAGE>


The following table summarizes goodwill and intangible asset balances:



                                      2003          2002            2001
------------------------------------------------------------------------------
(In thousands)
Goodwill (1)                        $1,516,206     $1,919,780       $1,904,178
Trade names (1)                        204,793        238,550          238,550

Other intangible assets (3)             35,432         78,284           74,197
Accumulated amortization (2,3)        (23,772)       (59,053)         (51,611)
------------------------------------------------------------------------------
  Net other intangibles                 11,660         19,231           22,586
------------------------------------------------------------------------------
Total                               $1,732,659     $2,177,561       $2,165,314
==============================================================================


(1)  Not subject to amortization.
(2)  Amortization expense of $6 million, $7 million and $71 million was recorded
     in 2003,  2002 and  2001,  respectively.  Annual  amortization  expense  of
     approximately  $6 million in 2003 is expected to decline over the next five
     years.
(3)  In the first quarter of 2003, the Company reviewed its intangible  balances
     and removed the fully amortized  assets as well as the related  accumulated
     amortized balance on the financial statements.  During this process certain
     reclassifications between categories were made.



                                       24
<PAGE>



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

                                        2003        2002       2001
=====================================================================
Tax at U.S.
  Federal statutory rate              (35.0%)       35.0%    (35.0%)
  State and local income taxes
    net of U.S. federal benefit        (0.8)         3.5       0.9
  Net operating loss and
    tax credits                        (0.5)        (4.1)     (1.8)
   Impairment of  non-
    deductible goodwill                36.9           -       39.9
  Non-deductible amortization
    expense                               -           -        2.4
  Other                                (1.8)         0.7       2.7
---------------------------------------------------------------------
Effective rate                         (1.2%)       35.1%      9.1%
=====================================================================

The effective tax rate for discontinued  operations reflected a benefit of 39.5%
and 32.4%,  in 2003 and 2002,  respectively,  and a 44.6% provision in 2001. The
difference  between  these  rates  and the  federal  statutory  tax  rate of 35%
reflects state taxes, net of federal benefit,  the impairment of  non-deductible
goodwill in 2003 and 2001, and permanent items,  primarily  amortization expense
in 2001.

Income tax expense from continuing operations is as follows:

(In thousands)                         2003
                         ----------------------------------
                          CURRENT     DEFERRED     TOTAL
U.S. federal                 $9,820    $(8,963)       $857
State and local             (1,618)     (1,901)     (3,519)
-----------------------------------------------------------
                             $8,202   $(10,864)    $(2,662)
===========================================================

                                        2002
                         -----------------------------------
                          Current     Deferred     Total
U.S. federal                $26,668     $48,998     $75,666
State and local             (1,121)      10,393       9,272
------------------------------------------------------------
                            $25,547     $59,391     $84,938
============================================================

                                        2001
                         -----------------------------------
                          Current     Deferred     Total
U.S. federal                $33,489   $(21,635)     $11,854
State and local               7,027     (4,589)       2,438
------------------------------------------------------------
                            $40,516   $(26,224)     $14,292
============================================================

Deferred income tax expense  results from timing  differences in the recognition
of income and expense for income tax and financial reporting purposes.  Deferred
income tax balances reflect the net tax effects of temporary differences between
the carrying  amounts of assets and  liabilities  for  financial  reporting  and
income tax  purposes.  The deferred tax asset  primarily  reflects the impact of
future tax deductions  related to the Company's  accruals.  Management  believes
that, based upon its history of profitable  operations,  it is probable that its
deferred tax assets will be realized,  primarily  from the  generation of future
taxable  income.  The deferred tax  liability is primarily  attributable  to the
basis differences related to intangible assets. The Company records its deferred
tax items based on the estimated  ultimate value of the tax basis.  In 2002, the
Company  adopted  SFAS 142 which  eliminated  the  requirement  to record in the
financial  statements  amortization  expense  related to goodwill and intangible
assets with  indefinite  lives.  The Company is able to continue to amortize the
intangible  assets  for tax  purposes  which  yields an annual  tax  benefit  of
approximately  $50  million.  Accounting  standards  require  that  the  Company
recognize  deferred  taxes  relating to the  differences  between the  financial
reporting  and tax basis of the  assets.  As the  annual  tax  benefit  from the
amortization   expense  is  realized,   the  deferred  tax  liability  increases
reflecting  the declining tax basis  compared to the  non-amortized  book basis.
Significant components of the Company's deferred tax balances are as follows:

(In thousands)                              2003          2002
-----------------------------------------------------------------
Deferred tax assets (liabilities):
Current:
  Prepaid expenses and other              $(8,900)      $(4,500)
  Receivables allowances                    10,300        11,400
  Accrued insurance and
    related expenses                        11,400        16,800
  Other accrued expenses                    73,700        92,500
-----------------------------------------------------------------
    Total current asset                     86,500       116,200
=================================================================
  Long-Term:
  Long-term assets (1)                   (257,600)     (302,700)
  Insurance expenses                        21,000        26,800
  Other long-term obligations             (39,400)      (36,600)
-----------------------------------------------------------------
    Total long-term liability            (276,000)     (312,500)
=================================================================
Net deferred tax liability              $(189,500)    $(196,300)
=================================================================

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

At December 31, 2003,  the Company had tax effected  federal net operating  loss
carryforwards  of  approximately  $26 million,  expiring at various  dates up to
2023. The Company also had tax credit  carryforwards  of $4 million which expire
at various dates up to 2023 and tax effected federal capital loss  carryforwards
of $1 million, expiring in 2007.

In 2003,  the Company  received  net tax  refunds of $1  million.  Total net tax
payments in 2002 were $27 million,  while in 2001, the Company  received net tax
refunds of $1 million.

In the ordinary course, the Company is subject to review by domestic and foreign
taxing  authorities,  including the Internal Revenue Service ("IRS").  From 1986
through 1997 most operations of the Company were conducted in partnership  form,
free of federal  corporate  income tax. During that period,  the Company was not
reviewed by the IRS. In 1997 the Company converted from partnership to corporate
form.  In 2003,  the IRS notified the Company that it will examine the Company's
consolidated income tax returns for 2002, 2001 and 2000. The Company expects the
IRS to complete its examination in 2005. As with any review of this nature,  the
outcome of the IRS  examination is not known at this time. The Company  believes
it has recorded the appropriate tax provision,  tax liabilities and deferred tax
balances.

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

                                       25
<PAGE>

recorded in the financial  statements at their  estimated  fair values as of the
acquisition dates.

CURRENT YEAR
During 2003, the Company acquired several small companies, primarily in the lawn
care business.  The purchase price of these  acquisitions  was $45 million.  The
Company  recorded  goodwill  of $38 million  and other  intangible  assets of $4
million related to these acquisitions.  The impact of these acquisitions was not
material to the Company's Consolidated Financial Statements.

PRIOR YEARS
During 2002, the Company acquired several small companies, primarily in the pest
control and lawn care businesses.  The purchase price of these  acquisitions was
$19 million.  The Company recorded  goodwill of $12 million and other intangible
assets of $4 million related to these acquisitions.

In January 2001, the Company acquired the Allied Bruce Terminix  Companies,  the
largest  Terminix  franchise and the fourth largest pest control  company in the
United States.  The total  consideration  consisted of an equity interest in the
Terminix  subsidiary  valued at $100 million,  which is  convertible  into eight
million ServiceMaster common shares, and longer-term cash payments due over nine
years totaling $25 million.  Approximately $122 million of goodwill was recorded
related to this acquisition.

During 2001, the Company acquired several small companies, primarily in the pest
control and heating/air conditioning and plumbing businesses. The purchase price
net of assumed  liabilities of these acquisitions was $64 million.  All of these
companies  were  acquired  before  June 30,  2001 (the date that SFAS 141 became
effective). Approximately $56 million of goodwill was recorded relating to these
acquisitions.

In October 2001, the Company  acquired  certain assets of Sears Termite and Pest
Control,  Inc., a company that  provides  pest control  services and  protection
against  termite  damage  to  residential  customers  located  primarily  in the
Southeast.  The cash paid  after  assuming  the  liabilities  to  remediate  the
premises owned by current customers was not material.  Approximately $54 million
was  recorded as goodwill  and $6 million  assigned to other  intangible  assets
which will be amortized over three to seven years.

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

(in thousands)                   2003          2002          2001
==================================================================
Purchase price                $44,667       $18,850      $245,646
Less liabilities
  assumed                     (6,315)       (1,207)      (54,790)
------------------------------------------------------------------
Net purchase price            $38,352       $17,643      $190,856
==================================================================
Net cash paid
  for acquisitions            $28,875       $13,003       $55,842
Seller financed debt            9,477         4,640        35,014
Minority ownership
  in Terminix                       -             -       100,000
------------------------------------------------------------------
Payment for
  acquisitions                $38,352       $17,643      $190,856
==================================================================

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

2002 DISPOSITIONS
During  the  second  quarter  of 2002,  the  Company  completed  the sale of its
ownership  interest in five assisted living  facilities.  These  properties were
financed through an operating lease arrangement, whereby, the Company guaranteed
a portion of the  residual  value of the  properties.  In the fourth  quarter of
2001, a $13.5 million reserve was established  representing  the amount by which
the  residual  value  guarantees  exceeded  the  value of bids to  purchase  the
facilities at that time.  The final sales price was  significantly  greater than
these bid levels and the Company  realized a gain of $3.6  million from the sale
of the  assisted  living  properties  in 2002,  which is included  in  operating
income.

During the third  quarter  of 2002,  the  Company  sold its  remaining  Terminix
operations  in the United  Kingdom.  The sale was not material to the  Company's
operating  results.  Related to this sale, the Company  entered into a licensing
agreement  with the buyer for the use of the  Terminix  trade name in the United
Kingdom. This agreement was valued at $6 million and accordingly,  a like amount
was  allocated  from the purchase  price.  The entire  amount was  recognized as
income in the third quarter of 2002.

PORTFOLIO REVIEW AND DISPOSITIONS IN 2001
In October 2001, the Company's Board of Directors approved a series of strategic
actions which were the culmination of an extensive portfolio review process that
was initiated  earlier in 2001. In the fourth  quarter of 2001, the Company sold
its Management  Services business to ARAMARK  Corporation for approximately $800
million  and  recorded  an  after-tax  gain  of $404  million.  (A  division  of
Management  Services  was not sold as part of this  transaction  and the Company
recorded a $15 million loss upon  disposition  of this unit.) Also in the fourth
quarter  of  2001,  the  Company's  Board  of  Directors  approved  the  exit of
non-strategic  and  under-performing   businesses  including  TruGreen  LandCare
Construction,  Certified Systems Inc. (CSI), and certain Terminix  operations in
Europe.  The Company  sold its  TruGreen  LandCare  Construction  operations  in
certain  markets to  Environmental  Industries,  Inc.  (EII) and EII managed the
wind-down of  commercial  landscaping  construction  contracts in the  remaining
markets. In addition, the Company sold all of its customer contracts relating to
the exit of CSI (the Company's  professional employer organization) to AMS Staff
Leasing,  N.A.,  Inc. In the fourth  quarter of 2001,  the Company  sold certain
subsidiaries of its European pest control and property services operations.

In the fourth  quarter of 2002,  the  purchaser of the  Company's  European pest
control  and  property  services  operations  made a claim for a purchase  price
adjustment (relating to the 2001 sale), relating to an alleged breach of certain
conditions in the purchase agreement. In the course of responding to that claim,


                                       26
<PAGE>


the  Company  discovered  that  personnel  of the  former  operations  had  made
unsupported  monthly adjustments to certain accounts.  The Company  subsequently
agreed to an adjustment to the purchase  price  consisting of an $8 million cash
payment and the  cancellation  of a previously  reserved  note  receivable of $7
million. An $8 million charge was recorded in 2002.

Reported  "Discontinued  operations"  for  all  periods  presented  include  the
operating  results of the sold and  discontinued  businesses noted above and the
2001  results  include  the gain from the sale of  Management  Services,  net of
losses  from the  disposition  of other  entities.  The  operating  results  and
financial position of discontinued operations are as follows:


(in thousands, except per share data)
Operating Results:              2003          2002          2001
=================================================================
Operating revenue            $65,057      $129,060    $2,356,010
Income (loss) from
  discontinued
  operations before
  income taxes               (3,482)         7,543      (20,009)
Provision (benefit) for
  income taxes               (1,375)         3,012        14,601
-----------------------------------------------------------------
Income (loss) from
  discontinued
  operations                 (2,107)         4,531      (34,610)
Gain (loss) on sale of
  businesses, net (1)          (605)        (4,840)     323,213
=================================================================
Income (loss) from
  discontinued
  operations                $(2,712)        $(309)      $288,603
=================================================================
Diluted earnings
  per share from
  discontinued
  operations                 $(0.01)           $ -         $0.97
=================================================================

(1)  Net of income tax expense  (benefit) of ($.4)  million,  ($3) million,  and
     $218 million in 2003, 2002 and 2001, respectively.

Financial Position:                           2003          2002
=================================================================
Current assets                              $5,273       $15,883
Property, plant and equipment                   -          6,703
-----------------------------------------------------------------
Total assets                                $5,273       $22,586
-----------------------------------------------------------------
Current liabilities                        $14,380       $36,624
Long-term liabilities                       34,396        30,682
-----------------------------------------------------------------
Total liabilities                          $48,776       $67,306
=================================================================

At December 31, 2003, the Company has certain assets on its financial statements
relating  to  discontinued  operations,  primarily  receivables.  Management  is
actively collecting the outstanding  receivables.  The Company believes that the
remaining  assets are presented at their net realizable  value.  The table below
summarizes the activity during the twelve months ended December 31, 2003 for the
remaining  liabilities  from the discontinued  operations.  The Company believes
that the remaining reserves continue to be adequate and reasonable.


                                 Balance at      Cash                Balance at
                                   Dec. 31,    Payments   Income/     Dec. 31,
(in thousands)                      2002       or Other  (Expense)    2003
--------------------------------------------------------------------------------
Remaining liabilities
 from discontinued
 operations
   LandCare Construction          $13,974       $6,822    $    -      $7,152
   LandCare utility line
     clearing  business (1)         6,393          185    (2,803)      9,011
   Certified   Systems, Inc.       13,586        2,562         -      11,024
   Management Services              1,569        1,286         -         283
   International businesses        21,348       10,331    (1,000)     12,017
   Other                           10,436        1,147         -       9,289

(1) In  September  2003,  the Company  sold the assets and  related  operational
obligations  of Trees,  Inc.,  the utility line clearing  operations of TruGreen
LandCare.  The Company  retained  certain  liabilities and recorded  accruals in
connection with the sold operations.

2001 CHARGE
In the fourth quarter of 2001, the Company  recorded a pre-tax charge  primarily
related to goodwill and asset impairments and other items totaling $345 million.
At the end of 2001,  there  were  approximately  $36  million  of  reserves  and
accruals relating to severance,  losses on residual value guarantees,  and other
claims.  Throughout  2002  approximately  $15 million was paid relating to these
reserves. There was $5.6 million recorded as reduced expense in 2002 relating to
the favorable  settlement of several items.  In 2003 there were payments of $3.5
million  relating to these items and $1.3 million of favorable  resolution.  The
ending reserve balance is approximately  $10.5 million and relates  primarily to
long-term  severance  agreements  that extend over several years.  (Unrelated to
these reserves, the Company also recorded a $3.2 million charge in 2002 relating
to the retirement of a key executive. This severance will be paid out over three
years.)

COMMITMENTS AND CONTINGENCIES
The Company  carries  insurance  policies on insurable  risks at levels which it
believes to be appropriate,  including workers'  compensation,  auto and general
liability  risks.  The Company  has  self-insured  retention  limits and insured
layers of excess insurance  coverage above such  self-insured  retention limits.
Accruals  for  self-insurance  losses and warranty  claims in the American  Home
Shield business are made based on the Company's claims  experience and actuarial
assumptions.  The Company has certain  liabilities  with  respect to existing or
potential claims, lawsuits, and other proceedings. The Company accrues for these
liabilities  when it is  probable  that future  costs will be incurred  and such
costs can be reasonably estimated.

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

EMPLOYEE BENEFIT PLANS
Discretionary  contributions  to  qualified  profit  sharing  and  non-qualified
deferred  compensation  plans were made in the  amount of $4.5  million in 2003,
$9.2 million in 2002 and $8.9 million in 2001. Under the Employee Share Purchase
Plan, the Company

                                       27
<PAGE>

contributed  $.8  million in 2003,  $.9 million in 2002 and $.8 million in 2001.
These funds defrayed part of the cost of the shares purchased by employees.

MINORITY INTEREST OWNERSHIP AND RELATED PARTIES
The Company  continues to have  minority  investors in Terminix.  This  minority
ownership  reflects an interest  issued to the prior  owners of the Allied Bruce
Terminix  Companies in connection  with that  acquisition.  Their related equity
security is exchangeable  into eight million  ServiceMaster  common shares.  The
ServiceMaster  shares are  included  in the shares  used in the  calculation  of
diluted earnings per share.

Kleiner  Perkins  Caufield  &  Byers  (KP)  purchased  a  minority  interest  in
ServiceMaster   New  Channels   Development   (SMNCD)  (formerly  known  as  the
ServiceMaster Home Service Center) in January 2000 for $15 million and exercised
an option to purchase an  additional  $5 million in January  2001.  In May 2000,
certain members of  ServiceMaster  management  purchased a minority  interest in
SMNCD for approximately $1 million. The Company had allocated losses in SMNCD to
KP's  minority  interest  in 2000 and 2001  based on its  relative  priority  in
liquidation  until such interest was reduced to zero in 2001. In December  2001,
the Company acquired, at fair value, the minority interest SMNCD held by KP. The
entire purchase price of $20 million was allocated to goodwill. The Company also
purchased management's ownership in SMNCD for approximately $1 million.

Also in 2001,  and in connection  with the sale and  disposition of the TruGreen
LandCare  construction  operations,  the Company  repurchased  at fair value the
shares of TruGreen that were previously  purchased by management  earlier in the
year.  The purchase and sales prices of the shares were at identical  amounts of
$12 million, which was charged to the minority interest liability.

In January  2001,  Jonathan P. Ward,  President and Chief  Executive  Officer of
ServiceMaster, purchased from ServiceMaster a 5.50 percent convertible debenture
due January 9, 2011,  with a face value of $1.1 million.  The Company loaned Mr.
Ward the  entire  amount  of the  purchase  price  through a 5.50  percent  full
recourse loan due January 9, 2011. In May 2001, Mr. Ward purchased a second 5.50
percent  convertible  debenture  due May 10,  2011,  with a face  value  of $1.1
million.  The  Company  loaned 50 percent of the  purchase  price of this second
debenture  with a 5.50 percent full  recourse  loan due May 10, 2011. In October
2003, the Company redeemed and cancelled the two convertible  debentures  issued
to Mr. Ward. Mr. Ward repaid the January 9, 2001 and May 10, 2001 loans in full.
The impact of the settlement was less than $100 thousand and was not material to
the Consolidated Financial Statements.

The Company has partially guaranteed a loan by a third party bank to an employee
totaling $13.7 million,  which is fully secured as of December 31, 2003 and 2002
by employee owned shares of the Company. Payments by the Company related to this
note are not expected.



LONG-TERM DEBT
Long-term debt includes the following:

(In thousands)                              2003          2002
================================================================
8.45% maturing in 2005                    $137,499      $137,499
6.95% maturing in 2007                      49,225        49,225
7.88% maturing in 2009                     179,000       179,000
7.10% maturing in 2018                      79,473        79,473
7.45% maturing in 2027                     195,000       195,000
7.25% maturing in 2038                      82,650        82,650
Other                                       96,424       112,628
Less current portion                      (33,781)      (31,135)
----------------------------------------------------------------
Total long-term debt                      $785,490      $804,340
================================================================

The Company is party to a number of debt agreements which require it to maintain
certain  financial and other  covenants,  including  limitations on indebtedness
(debt cannot exceed 3.25 times earnings before  interest,  taxes,  depreciation,
and amortization  (EBITDA)) and a minimum interest  coverage ratio (EBITDA needs
to  exceed  four  times   interest   expense).   In  addition,   under   certain
circumstances,  the agreements may limit the Company's  ability to pay dividends
and repurchase shares of common stock.  These limitations are not expected to be
a factor in the Company's future dividend and share repurchase plans. Failure by
the Company to maintain these covenants could result in the  acceleration of the
maturity of the debt. At December 31, 2003,  the Company was in compliance  with
the  covenants  related  to these  debt  agreements  and based on its  operating
outlook for 2004, expects to be able to maintain compliance in the future.

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

Since August  1997,  ServiceMaster  has issued $1.1  billion of  unsecured  debt
securities  pursuant to  registration  statements  filed with the Securities and
Exchange Commission.  As of December 31, 2003, ServiceMaster had $550 million of
senior  unsecured debt  securities and equity  interests  available for issuance
under an effective shelf registration statement.

In  the  second  quarter  of  2002,  the  Company   recorded  a  loss  on  early
extinguishment of debt of $15.4 million pre-tax ($9.2 million after-tax, or $.03
per diluted  share),  resulting from the repurchase of a portion of its publicly
traded  debt.  Additionally,  the  Company  recorded  a  pre-tax  loss on  early
extinguishment  of debt of $16.0 million ($9.4  million  after-tax,  or $.03 per
diluted  share) in the  fourth  quarter  of 2001,  and a  pre-tax  gain on early
extinguishment  of debt of $10.2 million ($6.0  million  after-tax,  or $.02 per
diluted share) in the first quarter of 2001. In accordance  with SFAS 145, these
gain/losses  were  reclassified  from  an  extraordinary  item  into  continuing
operations as interest  expense in the accompanying  Consolidated  Statements of
Operations.  See the "Newly Adopted Accounting


                                       28
<PAGE>


Principles" section in the Notes to Consolidated Financial Statements.

The Company  has a  committed  revolving  bank  credit  facility  for up to $490
million  that  expires in December  2004.  The Company  expects to replace  this
facility  prior  to  maturity.  The  facility  can be used for  general  Company
purposes.  As of December 31, 2003,  the Company had issued  approximately  $153
million of letters of credit under the facility  and had unused  commitments  of
approximately  $337  million.  At the  Company's  current  credit  ratings,  the
interest rate under the facility is LIBOR plus 125 to 150 basis points depending
upon usage.

As of December 31, 2003,  the Company had  approximately  $5 million of annually
renewable  surety bonds  outstanding  that  primarily  support  obligations  the
Company has under insurance programs.  If the surety bonds are not renewed,  the
Company  expects to replace  them with  letters of credit  issued under its bank
credit facility.

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

Cash interest  payments  were $61 million in 2003,  $76 million in 2002 and $128
million in 2001.  Average rates paid on the revolving  credit  facility were 5.0
percent in 2001.  There were no material  borrowings  under the facility in 2002
and 2003.  Future  scheduled  long-term  debt payments are $33.8 million in 2004
(average  rate of 4.4  percent),  $150.6  million in 2005  (average  rate of 8.3
percent),  $12.1 million in 2006 (average rate of 6.0 percent), $60.0 million in
2007  (average  rate of 6.7 percent) and $22.8  million in 2008 (average rate of
3.7 percent).

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

The  majority  of the  Company's  fleet and some  equipment  are leased  through
operating leases. Lease terms are non-cancelable for the first 12 month term and
then are month-to-month  leases,  cancelable at the Company's option.  There are
residual value  guarantees  (ranging from 70 percent to 87 percent  depending on
the  agreement) on these  vehicles and equipment,  which  historically  have not
resulted in significant  net payments to the lessors.  There are no net payments
reflected in the future  minimum lease  obligation as the leases are  cancelable
and there are no expected net payments due under the guarantees. At December 31,
2003 there was  approximately  $241  million of residual  value  relating to the
Company's fleet and equipment leases.

Rental expense for 2003,  2002 and 2001 was $160 million,  $153 million and $154
million, respectively.  Future long-term non-cancelable operating lease payments
are $72.0 million in 2004,  $61.4 million in 2005,  $51.0 million in 2006, $37.9
million in 2007, $25.0 million in 2008 and $43.0 million thereafter.

The Company maintains operating lease facilities with banks totaling $95 million
which provide for the  acquisition and development of properties to be leased by
the Company.  The Company has  guaranteed  the residual  value of the properties
under the leases up to 82 percent of the fair market  value at the  commencement
of the lease. At December 31, 2003,  approximately  $73 million was funded under
these facilities. Approximately $20 million and $15 million of these leases have
been  recorded on the balance  sheet as capital  leases with related  assets and
debt  recorded as of December 31, 2003 and December 31, 2002,  respectively.  Of
the $95  million in  facilities,  $80  million  expires in October  2004 and $15
million expires in January 2008. If the Company does not renew the facility that
expires in October  2004, it may be required to purchase the leased assets which
total approximately $53 million.

CASH AND MARKETABLE SECURITIES
Cash, money market funds and certificates of deposits,  with maturities of three
months or less,  are included in the  Statements of Financial  Position  caption
"Cash and Cash Equivalents."  Marketable  securities are designated as available
for sale and recorded at current market value,  with unrealized gains and losses
reported in a separate  component of  shareholders'  equity.  As of December 31,
2003 and 2002, the Company's  investments consist primarily of domestic publicly
traded debt of $89.1 million and $73.6 million,  respectively  and common equity
securities of $94.0 million and $56.0 million, respectively.

The aggregate market value of the Company's short- and long-term  investments in
debt and  equity  securities  was $183.1  million  and  $129.6  million  and the
aggregate  cost basis was $173.2 million and $132.0 million at December 31, 2003
and 2002, respectively.

Interest and dividend income received on cash and marketable securities was $8.4
million, $10.6 million, and $9.7 million, in 2003, 2002, and 2001, respectively.
Gains  and  losses  on  sales  of  investments,  as  determined  on  a  specific
identification  basis, are included in investment  income in the period they are
realized.  The Company  periodically  reviews its  portfolio of  investments  to
determine whether there has been an other than temporary decline in the value of
the investments from factors such as deterioration in the financial condition of
the issuer or the  market(s)  in which it competes.  At December  31, 2003,  the
unrealized  gains in the  investment  portfolio  totaled $10 million,  while the
unrealized  losses in the aggregate  were  immaterial  and totaled less than $.7
million and the portion of  unrealized  losses older than one year was less than
$.2 million.

                                       29
<PAGE>



RECEIVABLE SALES
The Company has an  agreement  to provide  for the ongoing  revolving  sale of a
designated   pool  of  accounts   receivable  of  TruGreen  and  Terminix  to  a
wholly-owned,   bankruptcy-remote   subsidiary,   ServiceMaster   Funding   LLC.
ServiceMaster  Funding LLC has  entered  into an  agreement  to  transfer,  on a
revolving  basis,  an  undivided  percentage  ownership  interest  in a pool  of
accounts receivable to unrelated third party purchasers.  ServiceMaster  Funding
LLC retains an undivided  percentage interest in the pool of accounts receivable
and bad debt losses for the entire  pool are  allocated  first to this  retained
interest. The Company recorded a $3 million pre-tax loss in 2001 related to this
program which was recorded in minority  interest and other expense.  At December
31, 2003,  there were no receivables sold to third parties under this agreement.
However,  the Company may sell its receivables in the future which would provide
an  alternative  funding  source.  The  agreement is a 364-day  facility that is
renewable  at the  option  of the  purchasers.  The  Company  may sell up to $65
million of its  receivables to these  purchasers in the future and therefore has
immediate  access to cash proceeds from these sales.  The amount of the eligible
receivables varies during the year based on seasonality of the business and will
at times limit the amount available to the Company.

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

OTHER COMPREHENSIVE INCOME
(In thousands)                    2003      2002       2001
-------------------------------------------------------------
Unrealized holding
  gains (losses)
  arising in period            $15,559  $(7,941)   $(3,601)
Tax expense                      6,224   (3,196)    (2,382)
------------------------------------------------------------
Net of tax amount               $9,335  $(4,745)   $(1,219)
============================================================
Gains (losses) realized         $3,855  $(1,460)     $3,845
Tax expense                      1,542     (584)        705
------------------------------------------------------------
Net of tax amount               $2,313    $(876)     $3,140
============================================================

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

(In thousands)                    2003      2002       2001
------------------------------------------------------------
Unrealized gains
  (losses) on securities        $5,986  $(1,036)     $2,833
Foreign currency
  translation                    1,946       187    (5,329)
------------------------------------------------------------
Total                           $7,932    $(849)   $(2,496)
============================================================

SHAREHOLDERS' EQUITY
The Company has  authorized one billion shares of common stock with par value of
$.01 and 11 million shares of preferred stock. There were no shares of preferred
stock issued or outstanding.  The Company records its dividend  liability in the
consolidated  financial  statements on the record date. As of December 31, 2003,
the Company had declared a cash dividend of $.105 per share to  shareholders  of
record on January 9, 2004. In March 2004,  the Company  declared a cash dividend
of $.105 per share to shareholders of record on April 9, 2004.

The Company has an  effective  shelf  registration  statement to issue shares of
common  stock  in  connection  with  future,  unidentified  acquisitions.   This
registration  statement allows the Company to issue registered  shares much more
efficiently  when acquiring  privately held companies.  The Company plans to use
the shares over time in connection with purchases of small  acquisitions.  There
were  approximately  4.7  million  shares  available  for  issuance  under  this
registration statement at December 31, 2003.

As of December 31, 2003,  there were 44.9 million  Company shares  available for
issuance  upon the exercise of employee  stock  options  outstanding  and future
grants.  Stock options are issued at a price not less than the fair market value
on the grant date and expire within ten years of the grant date. Certain options
may  permit the holder to pay the option  exercise  price by  tendering  Company
shares that have been owned by the holder  without  restriction  for an extended
period.  Share grants and restricted stock awards carry a vesting period and are
restricted as to the sale or transfer of the shares.  Shares of restricted stock
are  non-transferable  and subject to  forfeiture  if the holder does not remain
continuously  employed  by the  Company  during the  vesting  period,  or if the
restricted  stock is  subject  to  performance  measures,  if those  performance
measures are not attained.  A holder of a restricted stock award has rights as a
shareholder  of the  Company and the Company  includes  the vested and  unvested
portions of the restricted stock awards in shares outstanding in the denominator
of its earnings per share calculations.

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

Prior to 2003,  the Company  accounted  for  employee  share  options  under the
intrinsic  method of Accounting  Principles Board Opinion 25, as permitted under
GAAP. Accordingly,  no compensation cost had been recognized in the accompanying
financial  statements  in 2002  and  2001  related  to  these  options.  See the
"Stock-Based Compensation" note in the "Significant Accounting Policies" section
for the proforma net income and  earnings per share under the  fair-value  based
method of SFAS 123. In computing  this proforma  impact,  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 2003, 2002 and
2001:  risk-free  interest  rates of 3.6  percent,  4.5 percent and 4.8 percent,
respectively;  dividend  yields of 4.2  percent  3.2  percent  and 3.7  percent,
respectively;  and average  expected  lives of six to seven  years.  The options
granted to employees in 2003, 2002 and 2001 have weighted-average fair values of
$2.14,  $3.51 and $2.41,  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.


                                       30
<PAGE>




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


                                                         Stock            Price     Weighted Avg.  Share Grants/          Price
                                                       Options        Range (1)    Exercise Price     Restricted          Range
                                                                                                           Stock
================================================================================================================================
<S>                                                 <C>           <C>                      <C>         <C>        <C>
Total exercisable, December 31, 2000                12,208,351    $2.25 - 87.55            $12.37             -               -
Total outstanding, December 31, 2000                26,515,329    $2.25 - 87.55            $12.84       482,356    $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2001
  Granted to employees                               5,184,141    $9.10 - 12.52            $10.63             -               -
  Exercised or vested                                (864,418)    $2.25 - 11.41             $6.52     (171,518)    $2.86 - 7.96
  Terminated or resigned                           (1,503,167)    $2.25 - 87.55            $17.27     (210,319)    $2.86 - 7.96
--------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2001                15,237,607    $2.25 - 77.56            $12.36             -               -
Total outstanding, December 31, 2001                29,331,885    $2.25 - 77.56            $12.40       100,519    $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2002
  Granted to employees                               4,939,141    $9.09 - 15.10            $13.08       179,000    $10.51-13.80
  Exercised or vested                              (1,586,248)    $2.25 - 14.55             $7.60      (46,632)    $2.86 - 7.96
  Terminated or resigned                             (871,439)    $5.14 - 73.53            $16.37             -               -
--------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2002                18,089,830    $2.25 - 77.56            $13.05             -               -
Total outstanding, December 31, 2002                31,813,339    $2.25 - 77.56            $12.64       232,887   $2.86 - 13.80
================================================================================================================================
TRANSACTIONS DURING 2003
  Granted to employees                               2,432,674    $8.40 - 11.21             $9.91       364,419   $9.50 - 11.97
  Exercised or vested                              (1,296,101)    $6.44 - 11.50             $7.70      (56,092)   $2.86 - 13.80
  Terminated or resigned                           (1,240,146)    $2.25 - 37.40            $13.49       (3,514)           $9.95
--------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2003                20,346,581    $6.44 - 77.56            $13.16             -               -
Total outstanding, December 31, 2003                31,709,766    $6.44 - 77.56            $12.60       537,700   $3.03 - 13.80
================================================================================================================================
</TABLE>

(1)  The options  priced at $73.53 to $87.55 are options  assumed by the Company
     as a result of business acquisitions.


Options outstanding at December 31, 2003:
<TABLE>

                                Number           Weighted Average           Weighted               Number               Weighted
       Range of              Outstanding             Remaining              Average             Exercisable              Average
    Exercise Prices          at 12/31/03               Life              Exercise Price         at 12/31/03          Exercise Price
====================================================================================================================================
     <S>                       <C>                 <C>                      <C>                <C>                       <C>
      $6.44 - 10.78            13,366,166          4.0 Years                 $9.63             7,407,729                  $9.38
     $10.80 - 15.94            12,072,574          5.0 Years                $12.26             7,279,233                 $11.88
     $16.12 - 22.33             5,919,582          5.0 Years                $18.18             5,308,175                 $18.19
     $27.20 - 77.56               351,444          3.0 Years                $43.09               351,444                 $43.09
------------------------------------------------------------------------------------------------------------------------------------
      $6.44 - 77.56            31,709,766          5.0 Years                $12.60            20,346,581                 $13.16
====================================================================================================================================

</TABLE>


                                       31
<PAGE>



EARNINGS PER SHARE
Basic  earnings  per share is computed by dividing  income  available  to common
stockholders  by the  weighted-average  number  of  shares  outstanding  for the
period.  The weighted  average common shares for the diluted  earnings per share
calculation includes the incremental effect related to outstanding options whose
market price is in excess of the exercise  price.  Shares  potentially  issuable
under  convertible  securities have been considered  outstanding for purposes of
the diluted earnings per share  calculations.  In computing diluted earnings per
share, the after-tax interest expense related to convertible debentures is added
back to net income in the numerator, while the diluted shares in the denominator
include the shares issuable upon conversion of the debentures. Due to the losses
incurred  in 2003 and 2001,  the  denominator  does not  include  the effects of
options as it would result in a less dilutive computation.  As a result, diluted
earnings  per share are the same as basic  earnings  per share.  Had the Company
recognized  income  from  continuing  operations  in 2003 and 2001,  incremental
shares  attributable to the assumed  exercise of outstanding  options would have
increased  diluted  shares  outstanding  by 3.9 million and 4.6 million  shares,
respectively.  Shares potentially issuable under convertible securities have not
been considered outstanding for all periods presented as their inclusion results
in a less dilutive computation.  Had the inclusion of convertible securities not
resulted in a less dilutive computation in 2002, incremental shares attributable
to the  assumed  conversion  of  the  debentures  would  have  increased  shares
outstanding by 8.2 million shares and the after-tax  interest expense related to
the  convertible  debentures  that  would  have been  added to net income in the
numerator would have been $4.8 million.

The following  table  reconciles  both the numerator and the  denominator of the
basic earnings per share from continuing operations computation to the numerator
and the denominator of the diluted earnings per share from continuing operations
computation.

<TABLE>


(In thousands, except per
share data)
                                        FOR YEAR ENDED 2003               For year ended 2002              For year ended 2001
CONTINUING OPERATIONS:               LOSS      SHARES      EPS       Income       Shares      EPS       Loss        Shares    EPS
===================================================================================================================================
<S>                              <C>           <C>      <C>         <C>           <C>        <C>     <C>           <C>      <C>
Basic EPS                        $(221,975)    295,610  $(0.75)     $157,303      300,383    $0.52   $(172,219)    298,659  $(0.58)
Effect of Dilutive Securities:
    Options                                          -                              5,529                                -
-----------------------------------------------------------------------------------------------------------------------------------
Diluted EPS                      $(221,975)    295,610  $(0.75)     $157,303      305,912    $0.51   $(172,219)    298,659  $(0.58)
===================================================================================================================================

</TABLE>


                                       32
<PAGE>


QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly  operating  results  and  related  growth for the last three  years in
revenues,   gross  profit,  income  from  continuing  operations,   income  from
discontinued  operations and earnings per share are shown in the table below. As
discussed  in the  "Interim  Reporting"  section in the  Significant  Accounting
Policies,  for interim accounting purposes,  TruGreen ChemLawn incurs pre-season
advertising  costs  and  annual  repair  and  maintenance  procedures  that  are
performed  in the first  quarter.  These costs are deferred  and  recognized  as
expense  in  proportion  to the  related  revenues.  Full year  results  are not
affected.  In the fourth quarter of 2003,  the Company  corrected its historical
method of recognizing  renewal  revenue from certain  Terminix and American Home
Shield customers who have prepaid. This adjustment reduced operating and pre-tax
income by $12 million, or $.02 per share in the fourth quarter of 2003.


<TABLE>


(in thousands, except per share data)
                                                      2003           Chg         2002 (1)          Chg             2001 (1)
==================================================================================================================================
CONTINUING OPERATIONS:
Operating Revenue:
<S>                                                    <C>           <C>            <C>             <C>                 <C>
First Quarter                                          $712,343      0%             $711,956        1%                  $702,445
Second Quarter                                        1,031,470       2            1,013,777        1                    998,830
Third Quarter                                         1,018,263       3              987,757        3                    959,438
Fourth Quarter                                          806,510       2              787,231       (4)                   816,098
==================================================================================================================================
                                                     $3,568,586      2%           $3,500,721        1%                $3,476,811
==================================================================================================================================
Gross Profit:
First Quarter                                          $195,989     (2%)            $200,944        5%                  $190,764
Second Quarter                                          373,587       6              353,543        5                    337,093
Third Quarter                                           347,942       8              323,111        5                    307,460
Fourth Quarter                                          220,545      (2)             224,171       (6)                   238,297
==================================================================================================================================
                                                     $1,138,063      3%           $1,101,769        3%                $1,073,614
==================================================================================================================================
Income (Loss) from Continuing Operations:
First Quarter                                            $4,843     (53%)            $10,377       79%                    $5,784
Second Quarter                                           66,329       8               61,625        27                    48,596
Third Quarter                                         (316,526)      N/M              66,015        50                    43,945
Fourth Quarter                                           23,379      21               19,286       N/M                 (270,544)
==================================================================================================================================
                                                     $(221,975)      N/M            $157,303       N/M                ($172,219)
==================================================================================================================================
Basic Earnings (Loss) Per Share:
First Quarter                                             $0.02     (33%)              $0.03       50%                     $0.02
Second Quarter                                             0.22      10                 0.20        25                      0.16
Third Quarter                                            (1.08)      N/M                0.22        47                      0.15
Fourth Quarter                                             0.08      33                 0.06       N/M                    (0.90)
==================================================================================================================================
                                                        $(0.75)      N/M               $0.52       N/M                   ($0.58)
==================================================================================================================================
Diluted Earnings (Loss) Per Share:
First Quarter                                             $0.02     (33%)              $0.03       50%                     $0.02
Second Quarter                                             0.22      10                 0.20        25                      0.16
Third Quarter                                            (1.08)      N/M                0.21        50                      0.14
Fourth Quarter                                             0.08      33                 0.06       N/M                    (0.90)
==================================================================================================================================
                                                        $(0.75)      N/M               $0.51       N/M                   $(0.58)
==================================================================================================================================
DISCONTINUED OPERATIONS:
Income (Loss) from Discontinued Operations:
First Quarter                                            ($168)      N/M              $1,264      (80%)                   $6,211
Second Quarter                                            (779)      N/M                 878       (84)                    5,364
Third Quarter                                           (1,440)      N/M               2,068       (76)                    8,587
Fourth Quarter                                            (325)      N/M             (4,519)       N/M                   268,441
==================================================================================================================================
                                                       $(2,712)      N/M              ($309)       N/M                  $288,603
==================================================================================================================================
Diluted Earnings (Loss) Per Share:
First Quarter                                               $ -      -%                  $ -      (100%)                   $0.02
Second Quarter                                                -      -%                    -      (100)                     0.02
Third Quarter                                                 -     (100)               0.01       (67)                     0.03
Fourth Quarter                                                -      100              (0.01)       N/M                      0.90
==================================================================================================================================
                                                        $(0.01)    (100%)                $ -      (100%)                   $0.97
==================================================================================================================================

         N/M = Not meaningful
</TABLE>


(1)  During  the third  quarter  of 2003,  the  Company  sold its  utility  line
     clearing  operations  of its  TruGreen  LandCare  business.  The  financial
     results  from these  operations  have been  reclassified  from  "Continuing
     Operations" to "Discontinued Operations" for all periods presented.







                                       33
<PAGE>



INDEPENDENT AUDITORS

On May 20, 2002, ServiceMaster,  with the approval of the Board of Directors and
the  Audit  and  Finance  Committee,   dismissed  Arthur  Andersen  LLP  as  its
independent  auditors and engaged  Deloitte & Touche LLP as its new  independent
auditors. The appointment of Deloitte & Touche became effective on May 22, 2002.
During the two fiscal years ended  December  31, 2001 and 2000,  and the interim
period  subsequent to December 31, 2001, and through May 20, 2002, there were no
disagreements  between  ServiceMaster  and  Arthur  Andersen  on any  matter  of
accounting  principles or practices,  financial statement disclosure or auditing
scope or procedure,  which, if not resolved to Arthur  Andersen's  satisfaction,
would have caused  Arthur  Andersen to make  reference to the subject  matter in
connection with its reports on ServiceMaster's consolidated financial statements
for such  periods.  Arthur  Andersen's  report on  ServiceMaster's  consolidated
financial  statements  for the years  ended  December  31, 2001 and 2000 did not
contain an adverse  opinion or a disclaimer of opinion,  nor was it qualified or
modified as to  uncertainty,  audit scope or accounting  principles.  During the
years ended  December 31, 2001 and 2000,  and the interim period from January 1,
2002 through May 20, 2002,  there were no reportable  events as described  under
Item  304(a)(1)(v)  of Regulation  S-K. During the years ended December 31, 2001
and 2000, and through May 20, 2002,  ServiceMaster did not consult with Deloitte
and Touche  with  respect  to the  application  of  accounting  principles  to a
specified  transaction,  either completed or proposed, the type of audit opinion
that might be rendered on ServiceMaster's  consolidated financial statements, or
any matter that was the subject of a  disagreement  or a  reportable  event,  as
described in Items 304(a)(2)(i) and (ii) of Regulation S-K.


REPORT OF INDEPENDENT AUDITORS

To the Shareholders of The ServiceMaster Company

We have audited the accompanying  consolidated  statements of financial position
of The ServiceMaster Company and subsidiaries (the "Company") as of December 31,
2003  and  2002,  and  the  related   consolidated   statements  of  operations,
shareholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 2003. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of The  ServiceMaster  Company and
subsidiaries  as of  December  31,  2003  and  2002,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting  principles  generally accepted
in the United States of America.

As discussed in the Newly Adopted Accounting Principles note to the consolidated
financial  statements,  effective January 1, 2003, the Company adopted Statement
of  Financial   Acoounting  Standards  ("SFAS")  No.  145,  RESCISSION  OF  FASB
STATEMENTS  NO. 4, 44, AND 64,  AMENDMENT OF FASB STATEMENT NO. 13 AND TECHNICAL
CORRECTIONS.  Also, as discussed in the Goodwill and  Intangible  Assets note to
the consolidated  financial  statements,  effective January 1, 2002, the Company
adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.

Deloitte & Touche LLP
Chicago, Illinois
March 15, 2004





                                       34
<PAGE>

<TABLE>


QUARTERLY CASH DIVIDENDS AND PRICE PER SHARE DATA

                                                      2003                               2002                         2001
-------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share:                                   % CHG                              % Chg
<S>                                            <C>            <C>                  <C>           <C>                  <C>
First Quarter                                  $0.105         5%                   $0.10         0%                   $0.10
Second Quarter                                  0.105         5                     0.10         0                     0.10
Third Quarter                                   0.105         0                    0.105         5                     0.10
Fourth Quarter                                  0.105         0                    0.105         5                     0.10
-------------------------------------------------------------------------------------------------------------------------------
                                                $0.42         2%                   $0.41         3%                   $0.40
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The following table sets forth the quarterly prices of ServiceMaster's common
stock, as reported on the New York Stock Exchange Composite Transactions:
<TABLE>


                                                  2003                            2002                           2001
-------------------------------------------------------------------------------------------------------------------------------
Price Per Share:                         HIGH            LOW             High            Low            High            Low
<S>                                     <C>              <C>            <C>             <C>            <C>              <C>
First Quarter                           $11.41           $8.95          $14.50          $13.16         $12.00           $9.95
Second Quarter                           10.95            8.97           15.50           12.70          12.00            9.84
Third Quarter                            10.73            9.35           13.63           10.30          12.84            9.95
Fourth Quarter                          $12.10          $10.20          $12.15           $8.89         $14.20          $10.06

</TABLE>




                                       35
<PAGE>