FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>

                                                                          For Years ended December 31,

(In thousands, except per share data)                                   2000           1999      Change
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------


OPERATING RESULTS:

<S>                                                                 <C>            <C>            <C>
Customer level revenue (1) ....................................     $ 7,677,000    $ 7,335,000    +  5%
Operating revenue .............................................       5,970,615      5,703,535    +  5%
Operating income ..............................................         416,899        383,174    +  9%
OPERATING INCOME BEFORE NET NON-RECURRING ITEMS(3) ............         416,899        468,674    - 11%
Net income ....................................................         173,827        173,563       -
PROFORMA NET INCOME BEFORE NET NON-RECURRING
 ITEMS AND ASSUMING THE CHANGE IN ACCOUNTING
 PRINCIPLE IS APPLIED RETROACTIVELY(2),(3) ....................         184,988        219,637    - 16%

   Per share: (4)
       Diluted as reported ....................................     $      0.57    $      0.55    +  4%
       PRO FORMA DILUTED BEFORE NET NON-RECURRING ITEMS AND
         ASSUMING THE CHANGE IN ACCOUNTING PRINCIPLE IS APPLIED
         RETROACTIVELY(2),(3) .................................     $      0.61    $      0.70    - 13%
         Cash Dividends Per Share .............................     $      0.38    $      0.36    +  6%


FINANCIAL POSITION:

Total assets ..................................................     $ 3,967,668    $ 3,870,215
Long-term debt ................................................       1,756,757      1,697,582
Shareholders' equity ..........................................       1,161,588      1,205,716


SHARE PRICE RANGE :

(Traded on the New York Stock Exchange under the symbol SVM)
High price ....................................................     $     14.94   $      22.00
Low price .....................................................     $      8.25   $      10.13
Closing price .................................................     $     11.50   $      12.31


</TABLE>


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

(2)  In 2000, the Company  changed its method of accounting for revenue from its
     termite baiting contracts.  The cumulative effect of this accounting change
     as of January 1, 2000, was $11.1 million ($18.9 million pretax). The impact
     of adopting the new accounting method compared to the previous  methodology
     was not  material in 2000.  The pro forma impact in 1999 was a reduction of
     $0.02 per diluted share.

(3)  In 1999,  the Company  realized  an  after-tax  gain of $30 million  ($50.1
     million pretax)  relating to the sales of its Premier  automotive  business
     and its remaining 15 percent interest in ServiceMaster  Energy  Management,
     and recorded a one-time  after-tax  charge of $81 million  ($135.6  million
     pretax) relating to its Diversified Health Services business.

(4)  Diluted  earnings per share is calculated based on 305,518 shares in 2000
     and 314,406 shares in 1999.



                                       1
<PAGE>




                     MANAGEMENT DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
          (ALL SHARE AND PER SHARE DATA REFLECT THE THREE-FOR-TWO SHARE
                              SPLIT IN AUGUST 1998)

2000 COMPARED WITH 1999

  Revenues in 2000 exceeded $5.9 billion,  an increase of five percent.  Revenue
from  continuing  operations,  excluding  the impact  from sold or  discontinued
operations, increased nine percent. This growth reflects the full year impact of
the  LandCare  and  American  Residential  Services   acquisitions  and  tuck-in
acquisitions offset, in part, by the sale of discontinued businesses.  Operating
income before  non-recurring  unusual items recorded in the prior year decreased
11 percent to $417 million.  Operating income margins on this basis decreased to
7.0  percent of  revenues  from 8.2  percent in 1999.  The costs  related to the
WeServeHomes.com Internet initiative accounted for three percent of the decrease
in  operating  income and about 20 basis  points of the  decrease  in  operating
margins.  These costs have been allocated to the Company's  minority  partner in
WeServeHomes.com,  Kleiner Perkins Caufield & Byers (Kleiner  Perkins),  and are
offset in net minority  interest  income below the  operating  income line.  The
remaining 100 basis point decrease in operating margins  primarily  reflects the
impact of  significantly  lower  operating  margins at  TruGreen  LandCare  (the
commercial landscape operations) and reduced margins in the lawn care operations
of TruGreen ChemLawn and in Management Services.  Pro forma diluted earnings per
share, before the non-recurring items and assuming that the change in accounting
principle  discussed  below was applied  retroactively,  decreased 13 percent to
$.61  compared  to $.70 last year.  Net income on this same basis  decreased  16
percent to $185 million from $220 million in 1999.

The Staff of the  Securities  and Exchange  Commission  issued Staff  Accounting
Bulletin (SAB) No. 101 "Revenue  Recognition,"  leading the Company to change in
2000 its method of accounting  for revenue from its termite  baiting  contracts.
The  cumulative net income effect of  retroactively  applying the new accounting
method as of January 1, 2000 totaled $11.1 million,  or $.04 per share,  and was
recognized  entirely in 2000,  resulting  in reported net income of $174 million
and diluted  earnings per share of $.57 for 2000. In the second quarter of 1999,
the Company  realized an after-tax  gain of $30 million  relating to the sale of
certain non-core businesses and the Company recorded a one-time after-tax charge
of $81 million relating to its Diversified Health Services business. These items
reduced net income from  ongoing  operations  by $51 million.  As a result,  the
Company reported net income of $174 million,  with diluted earnings per share of
$.55 for 1999.

  During 2001, the Company will be making  investments  in technology,  systems,
and  marketing to expand its channels for access to and from the customer and to
realize  greater  benefits  from  its  multiple  service  offerings  and  strong
fulfillment  system.  Profit  growth in 2001 will be affected by added  interest
costs and some added pressure on operating margins, especially in the first half
of the year. The Company anticipates earnings per share to be in a range of $.61
to $.65 for 2001 and a return to double-digit growth in 2002.

  The TruGreen  business unit includes lawn care operations  performed under the
TruGreen  ChemLawn  brand  name and  landscaping  services  provided  under  the
TruGreen  LandCare  brand name.  This  combined  unit  reported  revenue of $1.6
billion, an increase of 12 percent, reflecting one additional quarter of revenue
from the LandCare USA acquisition,  smaller regional acquisitions completed last
year,  and  internal  growth.  Operating  income  decreased  25  percent to $173
million,  primarily  due to  the  slower  than  anticipated  integration  of the
individual landscape companies and higher production costs such as labor, health
care,  fuel and other  costs.  In the  landscaping  operations,  the  process of
bringing over 100 separate business units into one company has taken longer than
anticipated. The Company experienced particularly significant operational issues
in five of the fifteen regions it serves. TruGreen has addressed these issues by
strengthening the management infrastructure in these regions,  integrating these
operations  with the lawn care  business,  and making  significant  progress  in
establishing greater operating  disciplines and in improving the cost structure.
Many  year-end  lawn care  services  that were  scheduled to be  completed  were
canceled due to the severe winter and snow  conditions in several regions of the
country.  This caused the  Company to report  dramatically  lower than  expected
profits in the fourth  quarter.  Capital  employed by TruGreen  increased  three
percent to $1.5 billion,  lower than the 12 percent revenue growth,  as a result
of tighter working capital management.

 The  Terminix  business  unit (which  includes  the  domestic  termite and pest
control  services)  reported a nine percent  increase in revenue to $734 million
and operating  income of $91 million,  12 percent  above last year.  This growth
reflects  acquisitions as well as solid  increases in new termite  contracts and
contract  renewals,  bolstered by productivity  improvements and strong overhead
controls.  Capital  employed by Terminix  decreased  one percent to $526 million
with strong working capital management offsetting the impact of acquisitions. In
January 2001,  the Company  acquired the Allied Bruce  Terminix  companies,  the
Company's 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,  which is exchangeable into eight million ServiceMaster
common shares and cash payments due over nine years totaling $25 million.

 The  Home   Maintenance  and  Improvement   business  unit  includes   heating,
ventilation, air conditioning, and plumbing services provided under the American
Residential  Services  (ARS) and Rescue  Rooter  brand  names,  home systems and
appliance  warranty  contracts  offered  through  American Home Shield,  and the
franchised  operations,  ServiceMaster Clean and Merry Maids. This business unit
achieved  a 34 percent  increase  in revenue  to $1.2  billion  reflecting  good
internal  growth  at all of the  companies  and an  additional  four  months  of
operations from the ARS acquisition (which closed in late April 1999). Operating
income  grew 19 percent to $106  million,  reflecting  lower  margins  primarily
attributable  to the full  year  inclusion  of ARS  which  currently  has  lower
operating  margins than the rest of this unit and, to a lesser extent,  from the
increase in claim costs at American  Home  Shield.  The  integration  of ARS has
continued in line with expectations and management has made


                                       2
<PAGE>

significant progress in improving the financial condition, controls and employee
morale at many of the ARS branch  locations that were  performing  poorly at the
time of the acquisition. Progress continues to be made in fulfilling the service
needs of American Home Shield  customers  through ARS and Rescue Rooter,  with a
threefold increase in completed service  transactions during 2000. The franchise
operations,  ServiceMaster  Clean and Merry Maids,  achieved  solid  revenue and
profit  increases,  reflecting  strong growth in  Company-owned  operations  and
productivity  improvements.  Capital employed by this unit increased six percent
to $624 million,  reflecting  acquisition  activity partially offset by improved
working capital management.

  The  Management  Services  business  unit serves  institutional  health  care,
education and commercial facilities. This business unit reported revenue of $1.9
billion,  comparable to 1999, and a 15 percent  decrease in operating  income to
$67  million.  The  decrease  in  profits  reflects  pricing  issues on  certain
contracts,  the loss of several  profitable  contracts and incremental  costs to
unwind these contracts.  The Company also continues to invest in the SiteService
outsourcing  initiative and is encouraged by its progress.  Capital  employed by
Management  Services  decreased 19 percent to $99 million reflecting the payment
of a significant note receivable and other working capital reductions.

  Other  Operations  consists of the Company's  international  operations  which
includes  Terminix  Europe;   Employer   Services  (the  professional   employer
organization);   WeServeHomes.com,   the  Company's  Internet  initiative;   the
Company's  headquarters  operations;  and certain non-core  businesses that have
been sold or discontinued. Revenues declined, primarily reflecting the impact of
sold and discontinued  operations.  Operating profits before non-recurring items
in this  segment  decreased  from  1999,  reflecting  the  impact of costs  ($14
million)  relating  to the  WeServeHomes.com  initiative.  These costs have been
allocated  to  the  Company's  minority  partner  in  WeServeHomes.com,  Kleiner
Perkins,  and are offset in minority  interest income below the operating income
line.

  On a  consolidated  basis,  costs  of  services  rendered  and  products  sold
increased  five  percent,   primarily  due  to  general   business   growth  and
acquisitions.  Cost of services  increased  as a  percentage  of revenue to 78.7
percent from 78.2 percent in 1999. This growth primarily  reflects  increases in
direct materials and service related costs, including labor, insurance and fuel.

  Selling and  administrative  expenses  increased  10  percent,  due to general
business growth and acquisitions as well as increased investments, including the
Internet  initiatives.  These costs increased as a percentage of revenue to 14.4
percent from 13.6 percent in 1999.

 Interest expense increased from the prior year, primarily due to increased debt
levels  associated  with  acquisitions  and share  repurchases and higher rates.
Interest  and  investment  income  increased  over the prior year  levels due to
additional gains realized on financial investments and marketable securities.

 Minority interest income includes the allocation of losses totaling $14 million
related to WeServeHomes.com to the Company's minority partner. The tax provision
reflects a higher  effective  tax rate  compared to 1999,  primarily  due to the
non-deductibility of goodwill from acquisitions completed in 1999.

  In January 2000,  the Company  announced the formation and initial  funding of
WeServeHomes.com,  a separate  company  that  offers  comprehensive  on-line and
off-line solutions for the consumer market by offering home services,  products,
and information from a single point of purchase.  ServiceMaster  initially owned
84 percent of  WeServeHomes.com  through the  contribution of its 1-800-WE SERVE
call center and the assets of its Internet business. In addition,  ServiceMaster
supports  WeServeHomes.com  through extensive co-branding efforts, access to its
customer base and third-party contractor relationships, fulfillment support, and
licensing the use of certain  trademarks.  Kleiner Perkins,  one of the nation's
most respected and successful venture capital firms,  initially  contributed $15
million for a 16 percent ownership  interest.  In February 2001, Kleiner Perkins
exercised a warrant to purchase additional capital stock for $5 million, and the
Company  purchased  additional  capital  stock  for  $10  million.  The  Company
currently  has an 81 percent  ownership  interest and Kleiner  Perkins has an 18
percent  interest.  Kleiner  Perkins  also has a warrant to purchase  additional
capital stock for $6.5 million.

 As also  described in the Notes to the  Consolidated  Financial  Statements,  a
lawsuit is currently pending in Atlanta, Georgia wherein the plaintiff, a former
salesman,  claimed  that  the  Company  had not  paid  him the  full  amount  of
commissions  due to him. In  September  1999,  the jury  awarded  the  plaintiff
compensatory  damages and fees of  approximately $1 million and punitive damages
of $135  million.  In October  1999,  the  Company  filed a motion for  judgment
notwithstanding the verdict or, in the alternative,  for a new trial. On June 1,
2000,  the trial  court  entered a new  judgment  in the amount of  $461,440  in
compensatory damages and $45 million in punitive damages, as well as amounts for
attorney fees and interest.  The Company filed a notice of appeal that same day.
On June 13, 2000,  the  plaintiff  filed a notice of  cross-appeal.  The Company
expects that the appeal will be fully briefed and argued in the court of appeals
in May of 2001.  The Company  believes that the award of $45 million in punitive
damages is not supported by the facts of the case or by applicable state law and
that the judgment will be reversed by the court of appeals. Under Georgia law, a
judgment  accrues  interest  at the rate of 12 percent  per annum.  The  Company
continues to be unable to reasonably estimate the ultimate outcome of this case,
and  accordingly,  minimal  expense  has been  recorded.  In the event  that the
existing judgment is sustained, or the original judgment is reinstated (which is
not anticipated by the Company),  it would be likely that the Company's  results
of  operations  for a  particular  year may be  materially  adversely  affected.
However,  the Company  believes,  based on advice from legal  counsel,  that the
ultimate  outcome of this litigation is not expected to have a material  adverse
effect on the Company's financial condition or results of operations.

1999 COMPARED WITH 1998

 Revenues  increased 21 percent to $5.7 billion,  reflecting  strong growth from
acquisitions and increases in base operations.  Approximately six percent of the
revenue increase resulted from internal growth and small tuck-in acquisitions in
established  businesses,  while the newer  initiatives,  including  landscaping,
plumbing,  and  heating/air  conditioning  services,  provided 21 percent of the
growth.   This  growth  was  partially   offset  by  the  sale  of  Premier  and
ServiceMaster  Energy  Management  and the  wind-down  of the Home  Health  Care
business.  Operating income before non-recurring items increased 18 percent over


                                       3
<PAGE>


the prior year.  Margins decreased to 8.2 percent of revenue from 8.4 percent in
1998,  resulting  from  a  shift  in  business  mix as the  new  initiatives  in
landscaping,  heating/air conditioning and plumbing represented a higher portion
of revenue.  Operating margins,  excluding these operations,  increased 10 basis
points.  Diluted  earnings per share,  before  non-recurring  items and assuming
restatement for the change in accounting principle adopted in 2000, increased 11
percent to $.70,  compared with $.63 in 1998. Net income on this same basis grew
18 percent to $220  million  from $186  million  in 1998.  Net income  grew at a
faster rate than  earnings  per share due to an increase in shares  outstanding,
resulting  from the full year impact of shares issued for  acquisitions  and the
Company's equity offering in May 1998.

  The TruGreen  business unit reported a 56 percent increase in revenues to $1.4
billion and a 19 percent increase in operating income to $229 million.  TruGreen
ChemLawn, the Company's lawn care operations, reported modest revenue growth but
lower profits due to the effects of the extreme drought in the Northeast and the
Mid-Atlantic regions of the country. Solid revenue growth in commercial accounts
helped support the weaker growth in residential lawn care services.  Through the
acquisitions  of  LandCare  USA and other  smaller  businesses,  the Company has
become the largest  provider of  commercial  landscape  services in the country.
TruGreen LandCare,  the Company's  landscape  operations,  achieved  significant
increases through acquisitions but also realized double-digit internal growth.

 The Terminix business unit reported revenue of $676 million,  11 percent higher
than 1998 and a 16 percent  increase in operating  income to $81 million.  These
results  reflect  solid  increases  in  revenue  from  termite  completions  and
renewals,  improved  branch  efficiencies,  and the  successful  integration  of
acquisitions.  Growth in termite revenues reflects a continued strong demand for
higher-priced termite baiting systems.

 The Home  Maintenance  and  Improvement  business  unit  achieved a 115 percent
increase  in revenue to $904  million,  reflecting  good  growth in  established
businesses, as well as contributions from the Company's heating/air conditioning
and  plumbing  initiatives.  Operating  income  grew 66 percent to $88  million,
reflecting  increases at all of the  companies.  American  Home Shield  achieved
double-digit  growth in revenues and profits,  reflecting  increases in warranty
contracts  sold  through  all  distribution  channels.  In  addition,  a greater
percentage  of its  revenues  was derived from  customer  renewals,  which carry
higher  margins and  retention  rates.  The combined  Rescue Rooter and American
Residential  Services operations reported strong growth in revenues and profits.
American  Residential  Services,  which was  acquired  in April  1999,  provides
comprehensive   maintenance,   repair  and  replacement  services  for  heating,
ventilation and air conditioning (HVAC); plumbing, electrical and other systems;
and  major  appliances  in homes  and  commercial  buildings.  This  acquisition
established  the  Company as one of the  country's  leading  providers  of these
services and also complements the Company's  established  plumbing business.  In
addition,  it  significantly  expanded  the  Company's  service  offerings  on a
nationwide  basis and provides added support for American Home Shield.  Both the
HVAC and plumbing  operations  achieved  good internal  growth and  productivity
gains. The franchise  operations,  ServiceMaster Clean and Merry Maids, achieved
solid   increases  in  revenues  and  profits  based  on  continued   growth  of
Company-owned   operations,    increased   license   sales,   and   productivity
improvements.

  The Management Services business unit reported revenue growth of three percent
to $1.9 billion and operating  income of $78 million,  three percent above 1998.
The  traditional  Healthcare  market  reported a modest decrease in revenues and
reduced profits  compared to the prior.  The Company  achieved solid revenue and
profit  increases  in both  the  Business  &  Industry  and  Education  markets,
reflecting increased volume and lower overhead spending.  The base of annualized
revenue  from  continuing  operations  grew  two  percent  for the  year,  which
reflected a strong sales year and an increased number of contracts served.

  Revenue and operating  income before  non-recurring  items in Other Operations
decreased from 1998,  reflecting the impact of sold and discontinued  operations
and reduced profitability in the Diversified Health Services business.

  On a consolidated basis, cost of services rendered and products sold increased
21 percent,  primarily due to  acquisitions  and general  business  growth,  and
increased as a percentage  of revenues to 78.2 percent in 1999 from 77.9 percent
in 1998. The landscaping,  heating/air  conditioning  and plumbing  acquisitions
have significantly  affected this comparison because their cost of services as a
percentage of revenues is higher than the average for the enterprise.  Excluding
these  platform  acquisitions,  cost of  services  rendered  and  products  sold
decreased as a percentage of revenues to 76.0 percent from 77.7 percent in 1998.
This  decrease  primarily  reflects the changing mix of the business as TruGreen
ChemLawn and Terminix  increase in size in relationship to the overall  business
of the Company.  The TruGreen ChemLawn and Terminix 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 revenues.

 Consolidated selling and administrative expenses increased 20 percent over 1998
and, as a percentage  of  revenues,  decreased to 13.6 percent in 1999 from 13.7
percent in 1998.  The platform  initiatives  noted above have lower  selling and
administrative expenses, as a percentage of revenues, than the Company average.

  Interest  expense  increased  over 1998,  primarily  due to higher debt levels
associated  with  acquisitions.  The increase in interest and investment  income
primarily resulted from additional gains realized on financial investments.  The
tax provision reflects a higher effective tax rate compared with 1998, primarily
due to the  non-deductibility  of goodwill related to several large acquisitions
completed in 1999.

2000 FINANCIAL POSITION

  Net cash provided from  operations  of $401 million was  significantly  higher
than  last  year.  There  are two  unusual  tax  timing  items in the cash  flow
statements:  (i) a $39 million tax refund  realized in 2000 and (ii) the payment
of 1998 taxes in the first quarter of 1999.  Excluding  these unusual tax items,
cash from operations increased eight percent to $362 million,  reflecting higher
non-cash  expenses and lower working  capital usage,  especially in the platform
initiatives.

  Cash and marketable  securities totaled approximately $101 million at December
31,  2000.  Debt levels  increased,  reflecting  a  significant  amount of share
repurchases  combined  with the effects of  acquisitions,  capital  spending and
dividends. The Company is a party to a number of long-term debt agreements

                                       4
<PAGE>


which  require  it  to  comply  with  certain  financial  covenants,   including
limitations on indebtedness,  restricted payments,  fixed charge coverage ratios
and net worth. The Company is in compliance with the covenants  related to these
debt  agreements.  Management  believes that funds generated from operations and
other existing  financial  resources will continue to be adequate to satisfy the
ongoing  operating  needs of the  Company.  In  addition,  the  Company had $520
million of unused  commitment  on its  revolving  bank  facility at December 31,
2000.

  In April 2000,  the Company  completed a $250 million  senior  unsecured  debt
offering with a 8.45 percent coupon, priced to yield 8.505 percent and due April
15,  2005.  The net  proceeds  were  used to repay a  portion  of the  Company's
borrowings  under its  revolving  bank credit  facility,  thereby  reducing  the
Company's exposure to short term interest rate fluctuations.

 Accounts  receivable  decreased,  primarily  reflecting the sale of Diversified
Health Services and improved receivable collections,  especially at the platform
initiatives.  Prepaid  expenses  and  other  assets  increased,  due to  general
business  growth and the  capitalization  of sales  commissions and other direct
contract  acquisition  costs  relating to termite  baiting  and pest  contracts.
Property and equipment decreased, reflecting general business growth offset by a
reduced  level of  technology  projects.  The Company does not have any material
capital commitments at this time.

  The  Company  completed  a number of  acquisitions  in 2000,  which  primarily
included lawn care, HVAC/plumbing and pest control companies. Total acquisitions
were  approximately  $214 million and were mostly financed through cash payments
and seller financing.

 In September 2000, the Company completed the sales of two non-core  businesses.
The Company's  interior plant care business was sold for $44 million in cash. In
addition, the Company sold its Diversified Health Services unit, a business that
manages long-term care facilities, to a company which is owned and operated by a
group of former senior  managers of  Diversified  Health  Services.  The charges
recorded  in the prior  year  related to this  business  were  considered  to be
appropriate  and  adequate.  Neither  transaction  had a material  impact on the
Company's operating results.

 Other accrued  liabilities  decreased due to the timing of various payments and
amounts  relating  to  acquisition-related  payments  as  well  as the  sale  of
Diversified Health Services.  Deferred revenues increased  primarily as a result
of the change in method of  accounting  for termite  baiting  contracts,  strong
growth in warranty  contracts  written at American  Home Shield and increases in
customer prepayments for pest control services.

  Total  shareholders'  equity decreased  slightly to $1.16 billion,  reflecting
shareholders  dividends and share repurchases,  partially offset by current year
net income.  In July 2000,  the Company  announced  that its Board of  Directors
authorized the repurchase of $350 million in shares over time in the open market
or  in  privately  negotiated  transactions.  This  authorization  replaces  the
Company's  previous  authorization  of $150 million  announced in October  1999.
Approximately $136 million in shares were repurchased in 2000.

  Cash dividends paid directly to shareholders totaled $114 million, or $.38 per
share,  from  $.36  per  share in the  prior  year.  The  total  amount  of cash
distributions  increased  two percent  from the prior year,  reflecting  the per
share increase  offset by a reduced level of shares  outstanding  resulting from
shares repurchased.

  In January  2001,  the Company paid a cash  dividend for the first  quarter of
$.10 per share. This quarterly  dividend payment is consistent with the dividend
rate paid for the prior two quarters and would provide for an annual payment for
the year 2001 of $.40 per share,  a five percent  increase over 2000.  While the
Company has historically increased its dividend payment annually, the timing and
amount of future  dividend  increases  will be at the discretion of the Board of
Directors  and will  depend  on,  among  other  things,  the  Company's  capital
structure objectives and cash requirements.

  Earnings before interest,  taxes,  depreciation and amortization (EBITDA) is a
commonly-used  supplemental  measurement of a company's ability to generate cash
flow and is used by many of the  Company's  investors  and  lenders.  Management
believes  that  EBITDA is another  measure  that  demonstrates  the  exceptional
cash-generating  abilities of the Company's  businesses.  EBITDA in 2000 of $613
million, decreased three percent but exceeded net income by over $420 million or
230 percent.  EBITDA should not be considered  an  alternative  to net income in
measuring the Company's  performance or be used as an exclusive  measure of cash
flow, because it does not consider the impact of working capital growth, capital
expenditures,  debt principal reductions or other sources and uses of cash which
are disclosed in the Consolidated Statements of Cash Flows.

THE COMPANY  NOTES THAT  STATEMENTS  THAT LOOK  FORWARD IN TIME,  WHICH  INCLUDE
EVERYTHING OTHER THAN HISTORICAL  INFORMATION,  INVOLVE RISKS AND  UNCERTAINTIES
THAT  AFFECT THE  COMPANY'S  RESULTS OF  OPERATIONS.  FACTORS  WHICH COULD CAUSE
ACTUAL  RESULTS  TO DIFFER  MATERIALLY  FROM  THOSE  EXPRESSED  OR  IMPLIED IN A
FORWARD-LOOKING   STATEMENT  INCLUDE  THE  FOLLOWING  (AMONG  OTHERS):   WEATHER
CONDITIONS ADVERSE TO CERTAIN OF THE COMPANY'S CONSUMER AND COMMERCIAL  SERVICES
BUSINESSES;  THE ENTRY OF ADDITIONAL COMPETITORS IN ANY OF THE MARKETS SERVED BY
THE COMPANY;  LABOR  SHORTAGES;  CONSOLIDATION  OF  HOSPITALS IN THE  HEALTHCARE
MARKET; THE COST AND LENGTH OF TIME TO INTEGRATE ACQUIRED BUSINESSES; UNEXPECTED
CHANGES IN OPERATING COSTS; THE CONDITION OF THE U.S. ECONOMY; AND OTHER FACTORS
LISTED  FROM  TIME TO TIME IN THE  COMPANY'S  FILINGS  WITH THE  SECURITIES  AND
EXCHANGE COMMISSION.



                                       5
<PAGE>


ELEVEN YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>

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

 (In thousands, except per share and percentage data)                2000          1999          1998
---------------------------------------------------------------------------------------------------------


OPERATING RESULTS

<S>                                                               <C>           <C>           <C>
Operating revenue .............................................   $5,970,615    $5,703,535    $ 4,724,119
Cost of services rendered and products sold ...................    4,696,467     4,459,035      3,679,612
Selling and administrative expenses ...........................      857,249       775,826        648,085
Other, net  (2) ...............................................            -        85,500              -
                                                                 -----------    ----------    -----------
Operating income ..............................................      416,899       383,174        396,422
                                                                 -----------    ----------    -----------
OPERATING INCOME BEFORE NET NON-RECURRING ITEMS(2) ............      416,899       468,674        396,422
    Percentage of operating revenue ...........................          7.0%          8.2%           8.4%
Non-operating expense  (income) ...............................       98,592        86,981         77,644
Provision for income taxes (3) ................................      133,319       122,630        128,786
Cumulative effect of change in accounting principle, net(1) ...       11,161             -              -
                                                                 -----------    ----------    -----------
Net income (pro forma corporate form prior to 1998)(3) ........   $  173,827    $ 1 73,563    $   189,992
                                                                 ===========    ==========    ===========
PRO FORMA NET INCOME BEFORE NET NON-RECURRING ITEMS
  and assuming the change in accounting principle is
  applied retroactively(1),(2) ................................   $  184,988    $  219,637    $   186,021
                                                                  ==========    ==========    ===========
     Percentage of operating revenue ..........................          3.1%          3.9%           3.9%
Earnings per share (pro forma corporate form prior to 1998):(3)
    Basic .....................................................   $     0.57    $     0.56    $      0.66
    Diluted as REPORTED .......................................   $     0.57    $     0.55    $      0.64
    PRO FORMA DILUTED BEFORE NET NON-RECURRING ITEMS AND
      assuming the change in accounting principle is
      applied retroactively (1),(2) ...........................   $     0.61    $     0.70    $      0.63

Shares used to compute basic net income per share .............      302,487       307,637        289,315
Shares used to compute diluted net income per share ...........      305,518       314,406        298,887
Shares outstanding, net of treasury shares ....................      298,474       307,530        298,030

Cash distributions per share ..................................   $     0.38    $     0.36    $      0.33
Share price range:
    High price ................................................   $    14.94    $    22.00    $     25.50
    Low price .................................................   $     8.25    $    10.13    $     16.00

Financial Position (at year end):

Current assets ................................................   $  984,759    $  959,238    $   670,202
Current liabilities ...........................................      833,414       845,804        753,697
Working capital ...............................................      151,345       113,434        (83,495)
Current ratio .................................................        1.2-1         1.1-1           .9-1
Total assets ..................................................   $3,967,668    $3,870,215    $ 2,914,851
Non-current liabilities .......................................    1,972,666     1,818,695      1,204,668
Minority interest/deferred gain ...............................            -             -              -
Shareholders' equity ..........................................    1,161,588     1,205,716        956,486
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY ....           15%           19%            25%

</TABLE>


(1)  In 2000, the Company  changed its method of accounting for revenue from its
     termite baiting contracts.  The cumulative effect of this accounting change
     as of January 1, 2000 was $11.1 million ($18.9 million pretax).  The impact
     of  adopting  of  the  new  accounting  method  compared  to  the  previous
     methodology  was not material in 2000.  The pro forma impact in 1999,  1998
     and 1997 of this change was to reduce diluted  earnings per share by $0.02,
     $0.01, and $0.01, respectively.

(2)  In the above  presentation,  the operating results in 1999 and 1990 through
     1993 have been  stated to exclude  the impact of  non-recurring  items.  In
     1999, the Company  realized an after-tax gain of $30 million ($50.1 million
     pretax)  relating to the sale of its Premier  automotive  business  and its
     remaining  15 percent  interest in  ServiceMaster  Energy  Management,  and
     recorded a one-time after-tax charge of $81 million ($135.6 million pretax)
     relating to its  Diversified  Health Services  business.  In the years 1990
     through 1993, the Company recorded gains on issuance of subsidiary  shares,
     restructuring  charges,  and a change  in  accounting  for  post-retirement
     benefits.



                                       6
<PAGE>


ELEVEN YEAR FINANCIAL SUMMARY

<TABLE>
<CAPTION>
(In thousands, except per share and percentage data)                     1997          1996          1995          1994
---------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS

<S>                                                                   <C>           <C>           <C>           <C>
Operating revenue .................................................   $3,961,502    $3,458,328    $3,202,504    $2,985,207
Cost of services rendered and products sold .......................    3,058,160     2,681,008     2,499,700     2,356,435
Selling and administrative expenses ...............................      559,409       482,102       450,937       414,746
Other, net  (2) ...................................................            -             -             -             -
                                                                      ----------    ----------    ----------    ----------
Operating income ..................................................      343,933       295,218       251,867       214,026
                                                                      ----------    ----------    ----------    ----------
OPERATING INCOME BEFORE  NET NON-RECURRING ITEMS(2) ...............      343,933       295,218       251,867       214,026
    Percentage of operating revenue................................          8.7%          8.5%          7.9%          7.2%
Non-operating expense (income) ....................................       69,654        42,821        74,260        71,388
Provision for income taxes (3) ....................................      110,809       101,968        71,753        57,626
Cumulative effect of change in accounting principle net (1) .......            -             -             -             -
                                                                      ----------    ----------    ----------    ----------
Net income (pro forma corporate form prior to 1998)(3) ............   $  163,470    $  150,429    $  105,854    $   85,012
                                                                      ==========    ==========    ==========    ==========
PRO FORMA NET INCOME BEFORE NET NON-RECURRING ITEMS
  and assuming the change in accounting principle is
  applied retroactively(1),(2) ....................................   $  161,506    $  150,429    $  105,854    $   85,012
                                                                      ==========    ==========    ==========    ==========
     Percentage of operating revenue...............................          4.1%          4.3%          3.3%          2.8%
Earnings per share (pro forma corporate form prior to 1998):(3)
    Basic..........................................................   $     0.57    $     0.47    $     0.41    $     0.33
    Diluted as REPORTED............................................   $     0.55    $     0.46    $     0.39    $     0.32
    PRO FORMA DILUTED BEFORE NET NON-RECURRING ITEMS
    and assuming the change in accounting principle is
    applied retroactively (1),(2)..................................   $     0.54    $     0.46    $     0.39    $     0.32

SHARES USED TO COMPUTE BASIC NET INCOME PER SHARE .................      285,944       317,381       260,382       255,650
Shares used to compute diluted net income per share ...............      299,640       330,429       273,203       266,892
Shares outstanding, net of treasury shares ........................      279,944       320,396       321,341       256,419

Cash distributions per share.......................................   $     0.31    $     0.29    $     0.28    $     0.27
Share price range:
    High price.....................................................   $    19.67    $    11.83    $     9.00    $     8.41
    Low price......................................................   $    10.92    $     8.61    $     6.37    $     6.37

FINANCIAL POSITION (at year end):

Current assets ....................................................   $  594,084    $  499,334    $  393,239    $  331,045
Current liabilities ...............................................      558,177       425,552       372,930       304,395
Working capital ...................................................       35,907        73,782        20,309        26,650
Current ratio......................................................        1.1-1         1.2-1         1.1-1         1.1-1
Total assets ......................................................   $2,475,224    $1,846,841    $1,649,890    $1,230,839
Non-current liabilities ...........................................    1,392,609       607,614       517,603       483,906
Minority interest/Deferred gain ...................................            -        16,908        12,697       135,272
Shareholders' equity ..............................................      524,438       796,767       746,660       307,266
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY ........           26%           19%           24%           28%
</TABLE>





<TABLE>
<CAPTION>

                                                                         1993          1992          1991          1990
                                                                     ------------------------------------------------------
OPERATING RESULTS

<S>                                                                   <C>           <C>           <C>           <C>
Operating revenue .................................................   $2,758,859    $2,488,854    $2,109,941    $1,825,750
Cost of services rendered and products sold .......................    2,192,684     2,021,010     1,762,700     1,545,527
Selling and administrative expenses ...............................      393,131       326,477       225,814       177,941
Other, net  (2) ...................................................            -        78,935             -         6,500
                                                                      ----------    ----------    ----------    ----------
Operating income ..................................................      173,044        62,432       121,427        95,782
                                                                      ----------    ----------    ----------    ----------
OPERATING INCOME BEFORE  NET NON-RECURRING ITEMS(2) ...............      173,044       141,367       121,427       102,282
    Percentage of operating revenue ...............................          6.3%          5.7%          5.8%          5.6%
Non-operating expense (income) ....................................       24,952       (68,367)       34,020        10,398
Provision for income taxes (3) ....................................       59,829        52,843        35,312        34,495
Cumulative effect of change in accounting principle net (1)........            -         4,470             -             -
                                                                      ----------    ----------    ----------    ----------
Net income (pro forma corporate form prior to 1998)(3).............   $   88,263    $   73,486    $   52,095    $   50,889
                                                                      ==========    ==========    ==========    ==========
PRO FORMA NET INCOME BEFORE NET NON-RECURRING ITEMS
  and assuming the change in accounting principle is
  applied retroactively(1),(2) ....................................   $   70,264    $   56,994    $   48,614    $   42,843
                                                                      ==========    ==========    ==========    ==========
     Percentage of operating revenue ..............................          2.5%          2.3%          2.3%          2.3%
Earnings per share (pro forma corporate form prior to 1998):(3)
    Basic .........................................................   $     0.35    $     0.29    $     0.22    $     0.21
    Diluted as REPORTED ...........................................   $     0.34    $     0.28    $     0.21    $     0.21
    PRO FORMA DILUTED BEFORE NET NON-RECURRING ITEMS
    and assuming the change in accounting principle is
    applied retroactively (1),(2) .................................   $     0.27    $     0.22    $     0.20    $     0.18

SHARES USED TO COMPUTE BASIC NET INCOME PER SHARE .................      253,919       249,828       240,276       239,730
Shares used to compute diluted net income per share ...............      266,231       262,941       252,579       243,038
Shares outstanding, net of treasury shares ........................      257,901       255,386       243,527       242,939

Cash distributions per share ......................................   $     0.26    $     0.26    $     0.25    $     0.24
Share price range:
    High price ....................................................   $     9.19    $     5.90    $     5.13    $     3.13
    Low price .....................................................   $     5.22    $     4.35    $     2.89    $     2.60

FINANCIAL POSITION (at year end):

Current assets ....................................................   $  291,325    $  257,542    $  217,517    $  237,262
Current liabilities ...............................................      244,552       206,755       157,458       158,046
Working capital ...................................................       46,773        50,787        60,059        79,216
Current ratio .....................................................        1.2-1         1.2-1         1.4-1         1.5-1
Total assets ......................................................   $1,122,461    $1,005,531    $  843,660    $  796,935
Non-current liabilities ...........................................      471,177       511,211       376,638       372,052
Minority interest/Deferred gain ...................................      117,513        77,906       187,583       170,831
Shareholders' equity ..............................................      289,219       209,659       121,981        96,006
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY ........           28%           33%           45%           80%
</TABLE>


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(3)  The Company  converted from partnership to corporate form in a tax-free
     exchange for  shareholders  on December 26, 1997.  Prior to the conversion,
     the  partnership  was not  subject to federal  income  taxes as its taxable
     income was  allocated  to the  partnership's  partners.  As a result of the
     conversion,  the Company has been a taxable entity and has been responsible
     for such payments. The results shown above for the years ended December 31,
     1997 and  before  have  been  restated  to  adjust  the  actual  historical
     partnership   information   to  a  pro  forma  basis  that   assumes   that
     reincorporation  had  occurred as of the  beginning  of that year.  The pro
     forma  provision  for income taxes has been  calculated  assuming  that the
     Company's  effective tax rate had been  approximately  40 percent of pretax
     earnings.  Actual historical net income per share as a partnership for 1997
     and 1996 was as follows:

                  1997 (a)     1996
                  --------   --------
    Net Income    $264,076   $245,140
    EPS:  Basic       $.92       $.77
    Diluted           $.89       $.75


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

                                       7
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF  CONSOLIDATION:  The  consolidated  financial  statements  include  the
accounts of ServiceMaster  and its  majority-owned  subsidiary  partnerships and
corporations, collectively referred to as the Company. Intercompany transactions
and balances have been eliminated in consolidation.  Certain immaterial 1999 and
1998 amounts have been reclassified to conform with the 2000 presentation.

  The preparation of the consolidated  financial  statements requires management
to make certain  estimates and  assumptions  required under  generally  accepted
accounting  principles  which  may  differ  from the  actual  results.  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,  the
possible  outcomes  of  outstanding   litigation,   and  the  useful  lives  for
depreciation and amortization expense.

REVENUES:  Revenues from lawn care, pest control,  heating/air  conditioning and
plumbing  services are  recognized as the services are  provided.  Revenues from
landscaping  services are recognized based upon agreed monthly contract payments
or when services are performed for non-contractual  arrangements.  Revenues from
the Company's commercial installation contracts,  primarily relating to HVAC and
landscape,  are recognized on the  percentage of completion  method in the ratio
that total incurred costs bear to total estimated costs.

  Fees from home  warranty  and termite  baiting  contracts  are  recognized  as
revenues  over the life of the contract  while the service costs are expensed as
incurred.  Franchised  services revenues (which in aggregate represent less than
two percent of consolidated  totals) consist of initial  franchise fees received
from the sales of licenses,  sales of products to  franchisees,  and  continuing
monthly fees based upon franchise revenue.

  Revenues from management  services are recognized as services are rendered and
consist of contract fees, which reflect the total price of such services.  Where
the  Company  act as  principal  and  manages  people who are  employees  of the
facility,  the contract fee is  recognized as revenue by the Company and payroll
costs for such employees are included in "Cost of services rendered and products
sold" in the Consolidated Statements of Income.  Receivables from the facilities
are reflected in the  Consolidated  Statements of Financial  Position at the net
amount due, after  deducting  from the contract price all amounts  chargeable to
the Company.

  Revenues from the  professional  employer  organization  are recognized as the
services are rendered.  Consistent with industry practice,  revenues include the
gross amount billed to clients, which includes payroll and other direct costs.

INVENTORY  VALUATION:  Inventories  are  valued at the lower of cost  (first-in,
first-out basis) or market.  Inventory costs include  material,  labor,  factory
overhead and related  handling  costs.  Raw materials  represent less than three
percent of the inventory value at December 31, 2000. The remaining  inventory is
finished goods to be used on the customers' premises or sold to franchisees.

DEPRECIATION AND AMORTIZATION:  Buildings and equipment used in the business are
stated at cost and  depreciated  over their  estimated  useful  lives  using the
straight-line  method for financial  reporting  purposes.  The estimated  useful
lives  for  building  and  improvements  range  from 10 to 40  years,  while the
estimated  useful lives for equipment  range from three to 10 years.  Intangible
assets  consist  primarily  of trade names ($250  million)  and  goodwill  ($2.3
billion).  These  assets  are  amortized  on a  straight-line  basis  over their
estimated useful lives,  which are  predominately 40 years.  Long-lived  assets,
including  fixed assets and  intangible  assets,  are  periodically  reviewed to
determine  recoverability by comparing their carrying values to the undiscounted
future cash flows  expected to be realized from their use. No recovery  problems
have  been  indicated  by  these  comparisons.  Based on the  reviews,  when the
undiscounted  future cash flows are less than the carrying  amount of the asset,
an  impairment  loss is  recognized  based on the asset's  fair  value,  and the
carrying amount of the asset is reduced accordingly.

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

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

CHANGE IN ACCOUNTING  PRINCIPLE:  In December  1999, the Staff of the Securities
and Exchange  Commission issued Staff Accounting Bulletin (SAB) No. 101 "Revenue
Recognition,"  which provides additional guidance in applying generally accepted
accounting  principles  for revenue  recognition  in financial  statements.  The
Company's  interpretation of the requirements of SAB No. 101 resulted in changes
to the Company's  accounting  policies for revenue  recognition  on sales of its
termite  baiting  contracts.  Prior to the  adoption of SAB No. 101, the Company
recognized  approximately  80% of the termite baiting revenue at the time of the
sale and  installation  of the baiting  station,  while the remaining 20% of the
revenue was recognized over the life of the contract as follow-up inspections of
the stations were performed. As a result of SAB No. 101, the Company's policy is
to  recognize  revenue  over  the  life  of the  contract.  In  addition,  sales
commissions  and  other  direct  contract  acquisition  costs are  deferred  and
amortized on a straight-line basis over the life of the contract.


                                       8
<PAGE>


The change in method of accounting  for termite  baiting  contracts is effective
January 1, 2000. The cumulative  effect of the accounting  change, as of January
1, 2000,  resulted  in a non-cash  charge  that  reduced net income for the year
ended December 31, 2000 by $11.1 million, ($18.9 million pretax). The cumulative
after-tax effect on both basic and diluted earnings per share was a reduction of
$.04. The impact of adopting the new accounting  method compared to the previous
methodology  was not material in 2000.  The pro forma impact in 1999 and 1998 of
this  change  was to reduce  diluted  earnings  per  share by $0.02  and  $0.01,
respectively.

NEWLY  ISSUED  ACCOUNTING  STATEMENTS  AND  POSITIONS:  In 1998,  the  Financial
Accounting  Standards Board issued Statement of Financial  Accounting  Standards
No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities." This
Statement  was  subsequently  amended to defer its effective  date.  The Company
adopted this  Statement  in January  2001 as required by the amended  Statement.
Adoption  of this  Statement  did not have a  material  impact on the  Company's
financial statements.



                                       9
<PAGE>




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF
THE SERVICEMASTER COMPANY

  We have audited the accompanying consolidated statements of financial position
of THE SERVICEMASTER COMPANY (organized under the laws of the State of Delaware,
formerly ServiceMaster Limited Partnership) AND SUBSIDIARIES, as of December 31,
2000 and 1999, and the related consolidated statements of income,  shareholders'
equity,  and cash flows for each of the three years in the period ended December
31, 2000.  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.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

  In our  opinion,  the  consolidated  financial  statements  referred  to above
present  fairly,  in  all  material  respects,  the  financial  position  of The
ServiceMaster Company and Subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of operations and cash flows for each of the three years in
the period ended  December 31, 2000, in conformity  with  accounting  principles
generally accepted in the United States.

  As explained in the Summary of Significant  Accounting Policies section of the
Notes to the Consolidated  Financial Statements,  effective January 1, 2000, the
Company changed certain of its accounting  principles for revenue recognition as
a  result  of the  adoption  of  Staff  Accounting  Bulletin  No.  101  "Revenue
Recognition."

ARTHUR ANDERSEN LLP
Chicago, Illinois
January 23, 2001



                                       10
<PAGE>


<TABLE>
<CAPTION>





STATEMENTS OF INCOME
(In thousands, except per share data)
                                                                                Years Ended December 31,

                                                                           2000            1999            1998
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------


<S>                                                                   <C>             <C>             <C>
OPERATING Revenue.............................................        $  5,970,615    $  5,703,535    $  4,724,119

OPERATING COSTS AND EXPENSES:

Cost of services rendered and products sold...................           4,696,467       4,459,035       3,679,612
Selling and administrative expenses...........................             857,249         775,826         648,085
Other, net (1)................................................                   -          85,500              --
                                                                      ------------    ------------    ------------

Total operating costs and expenses............................           5,553,716       5,320,361       4,327,697
                                                                      -----------    ------------     ------------
OPERATING Income..............................................             416,899         383,174         396,422

NON-OPERATING EXPENSE (INCOME):

Interest expense..............................................             136,831         108,955          92,945
Interest and investment income................................             (25,002)        (21,974)        (15,301)
Minority interest income......................................             (13,237)              -               -
                                                                       -----------     -----------    ------------
INCOME BEFORE INCOME Taxes....................................             318,307         296,193         318,778

Provision for income taxes ...................................             133,319         122,630         128,786



INCOME BEFORE CUMULATIVE EFFECT OF
   CHANGE IN ACCOUNTING Principle.............................             184,988         173,563         189,992

Cumulative effect of change in accounting
    for revenue recognition on termite baiting contracts (1)..              11,161               -               -

                                                                      ------------    -------------   ------------

NET INCOME (1)................................................        $    173,827    $    173,563    $    189,992
                                                                      ============    =============   ============


PER SHARE (1), (2)
      Basic earnings per share, before cumulative effect of
          change in accounting principle......................        $       0.61    $       0.56    $       0.66
      Cumulative effect  of changing revenue recognition on
        termite baiting contracts                                            (0.04)              -               -
                                                                      ------------    ------------    ------------

   BASIC EARNINGS PER share...................................        $       0.57    $       0.56    $       0.66
                                                                      ============    ============    ============

   Diluted earnings per share, before cumulative effect of
       change in accounting principle.........................        $       0.61    $       0.55    $       0.64
    Cumulative effect of changing revenue recognition on
    termite baiting contracts                                                (0.04)              -               -
                                                                      ------------    ------------    ------------

   DILUTED EARNINGS PER share.................................        $       0.57    $       0.55    $       0.64
                                                                      ============    ============    ============

</TABLE>


     (1) In 2000, the Company  changed its method of accounting for revenue from
     its termite  baiting  contracts.  The cumulative  effect of this accounting
     change as of January 1, 2000,  was $11.1 million,  ($18.9 million  pretax).
     The impact of adopting the new accounting  method  compared to the previous
     methodology was not material in 2000. The pro forma impact in 1999 and 1998
     of this change was to reduce diluted earnings per share by $0.02 and $0.01,
     respectively.

     In 1999,  the Company  realized  an  after-tax  gain of $30 million  ($50.1
     million pretax)  relating to the sales of its Premier  automotive  business
     and its remaining 15 percent interest in ServiceMaster  Energy  Management,
     and recorded a one-time  after-tax  charge of $81 million  ($135.6  million
     pretax) relating to its Diversified Health Services business. Excluding the
     impact of the above  items,  net  income  and  earnings  per share  were as
     follows:
<TABLE>
<CAPTION>

                                                                                  2000              1999              1998
                                                                             ---------------    --------------     -----------
      <S>                                                                      <C>                <C>               <C>
      Pro forma net income before net  non-recurring  items and
      assuming  the change in  accounting  principle is applied
      retroactively...............................................             $ 184,988          $ 219,637         $ 186,021

      Pro forma diluted  earnings per share before net non-recurring items and
      assuming the change in accounting principle is applied
      retroactively...............................................             $    0.61          $    0.70         $   0 .63
                                                                               =========          =========         =========
</TABLE>

(2)  Basic  earnings per share is  calculated  based on 302,487  shares in 2000,
     307,637 shares in 1999, and 289,315 shares in 1998,  while diluted earnings
     per share is calculated based on 305,518 shares in 2000, and 314,406 shares
     in 1999 and 298,887  shares in 1998.  All share and per share data  reflect
     the three-for-two share split in August 1998.

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


                                       11
<PAGE>

<TABLE>
<CAPTION>

STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)

                                                                     As of December 31,

                                                                                   2000            1999
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:

<S>                                                                          <C>              <C>
Cash and cash equivalents.................................................   $    44,386      $    59,834
Marketable securities .....................................................       56,531           54,376
Receivables, less allowances of $37,970 in 2000 and $39,011 in 1999              556,941          558,842
Inventories................................................................       88,152           82,861
Prepaid expenses and other assets.........................................       168,403          140,690
Deferred taxes and tax receivables.........................................       70,346           62,635
                                                                                ---------        ---------
   Total current assets...................................................       984,759          959,238
                                                                                ---------        ---------

PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land and buildings.........................................................       73,248           71,972
Equipment.................................................................       608,321          587,838
                                                                                ---------        ---------
                                                                                 681,569          659,810
Less:  accumulated depreciation...........................................       375,585          341,712
                                                                                ---------        ---------
Net property, plant, and equipment.......................................        305,984          318,098
                                                                                ---------        ---------

OTHER ASSETS:

Intangible assets, primarily trade names and goodwill,
   less accumulated amortization of $422,899 in 2000 and $343,316 in 1999      2,521,633        2,461,389
Notes receivable, long-term securities, and other assets..................       155,292          131,490
                                                                               ----------       ----------
   Total Assets........................................................      $ 3,967,668      $ 3,870,215
                                                                             ===========      ============


LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:

Accounts payable.........................................................    $   147,788      $   160,237
Accrued liabilities:
   Payroll and related expenses............................................      100,651           99,910
   Insurance and related expenses..........................................       54,990           53,412
   Income taxes payable....................................................        1,235            6,479
   Other...................................................................      142,144          196,529
Deferred revenues..........................................................      325,246          257,521
Current portion of long-term debt..........................................       61,360           71,716
                                                                             ----------        -----------
   Total current liabilities..............................................       833,414          845,804
                                                                             ----------        -----------

LONG-TERM DEBT...........................................................      1,756,757        1,697,582
DEFERRED TAX LIABILITY.....................................................      115,150           19,800
OTHER LONG-TERM OBLIGATIONS................................................      100,759          101,313

COMMITMENTS AND CONTINGENCIES (see Notes)


SHAREHOLDERS' EQUITY:

Common stock $0.01 par value, authorized 1 billion shares; issued and
   outstanding of 298,474 shares in 2000 and 307,530 shares in 1999.......         2,985            3,075
Additional paid-in capital...............................................      1,030,399        1,033,568
Retained earnings..........................................................      301,207          241,701
Accumulated other comprehensive income ....................................       (2,832)          (1,821)
Restricted stock...........................................................       (1,829)          (2,577)
Treasury stock, at cost...................................................      (168,342)         (68,230)
                                                                             ----------         ----------
   Total shareholders' equity...........................................       1,161,588        1,205,716
                                                                             -----------        ----------
Total Liabilities and Shareholders' Equity.............................      $ 3,967,668      $ 3,870,215
                                                                             ===========      ============
</TABLE>



                                       12
<PAGE>

<TABLE>
<CAPTION>


STATEMENTS OF CASH FLOWS
(In thousands)
                                                                                  Years Ended December 31,

                                                                               2000          1999         1998
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------

<S>                                                                         <C>          <C>         <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1...................................   $  59,834    $  66,400   $  64,876

CASH FLOWS FROM OPERATIONS:

NET Income...............................................................     173,827      173,563     189,992
    Adjustments to reconcile net income to
    net cash provided from operations:
      Cumulative effect of accounting change.............................      11,161            -           -
      Depreciation ......................................................      78,108       67,382      50,644
      Amortization.......................................................      79,583       71,062      53,961
      Non-recurring items, net...........................................           -       85,500           -
      Deferred 1998 tax payment..........................................           -      (78,500)     78,500
      Tax refunds from 1999 payments.....................................      39,000            -           -
      Deferred income tax expense........................................      54,218       20,300      36,400
    Change in working capital, net of acquisitions:
      Receivables........................................................     (14,210)     (49,130)    (46,205)
      Inventories and other current assets...............................      (4,754)     (32,368)     (2,360)
      Accounts payable...................................................     (13,241)      (2,703)     18,475
      Deferred revenues..................................................      19,140       28,026      22,033
      Accrued liabilities................................................     (20,564)     (25,022)      2,472
    Other, net...........................................................      (1,244)      (1,535)      1,627
                                                                            ----------   ----------  ----------

NET CASH PROVIDED FROM Operations........................................     401,024      256,575     405,539
                                                                              -------      -------     -------
    MEMO: NET CASH PROVIDED FROM OPERATIONS EXCLUDING UNUSUAL TAX ITEMS       362,024      335,075     327,039

CASH FLOWS FROM INVESTING ACTIVITIES:
    Property additions...................................................     (76,603)     (88,754)    (75,297)
    Sale of equipment and other assets...................................      14,720        8,021       6,941
    Business acquisitions, net of cash acquired..........................    (152,306)    (510,512)   (222,452)
    Proceeds from sale of businesses.....................................      44,784       70,344      45,893
    Net purchases of investment securities...............................      (6,940)     (12,474)    (11,011)
    Notes receivable and financial investments...........................      (5,401)     (19,357)    (10,645)
    Payments to sellers of acquired businesses...........................     (21,546)     (12,664)    (10,271)
                                                                              --------     --------    --------
NET CASH USED FOR INVESTING Activities...................................    (203,292)    (565,396)   (276,842)
                                                                              ---------    ---------   ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

    Borrowings, net......................................................     571,339    1,263,427     310,190
    Payment of borrowings and other obligations..........................    (547,247)    (776,183)   (564,448)
    Proceeds from stock offering.........................................           -            -     208,561
    Shareholders' dividends..............................................    (114,321)    (111,702)    (75,152)
    Purchase of ServiceMaster stock......................................    (135,633)     (93,046)    (18,310)
    Proceeds from employee share plans...................................      12,730       19,259      12,638
    Other................................................................         (48)         500        (652)
                                                                            ----------   ----------  ----------

NET CASH PROVIDED FROM (USED FOR) FINANCING Activities...................    (213,180)     302,255    (127,173)
                                                                            ----------   ----------  ----------


CASH INCREASE (DECREASE) DURING THE Year.................................     (15,448)      (6,566)      1,524

CASH AND CASH EQUIVALENTS AT DECEMBER 31.................................    $ 44,386     $ 59,834    $ 66,400
                                                                            ==========   =========== ==========
</TABLE>

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


                                       13
<PAGE>

<TABLE>
<CAPTION>



STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)


                                                                         ADDITIONAL                    ACCUMULATED
                                                              COMMON      PAID-IN        RETAINED     COMPREHENSIVE
                                                              STOCK       CAPITAL        EARNINGS        INCOME
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>            <C>            <C>            <C>
BALANCE, DECEMBER 31, 1997 ..........................   $     2,799    $   513,148    $    65,000    $     5,343
                                                        ============================================================


Net income 1998 .....................................                                     189,992
Other comprehensive income, net of tax:
   Unrealized gains on securities, net
      of reclassification adjustment ................                                                       (485)
   Foreign currency translation ($640 tax expense) ..                                                       (947)
                                                        ------------------------------------------------------------
Total comprehensive income ..........................                                     189,992         (1,432)
Shareholder dividends ...............................                                     (75,152)
Shares issued in public offering (11,400 shares) ....           114        208,447
Shares issued under option, debentures,
   grant plans and other (2,514 shares) .............            25          9,403
Treasury shares purchased and related costs
   (888 shares) .....................................            (9)
Shares  issued for acquisitions (5,059 shares) ......            51         57,126
                                                        ------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ..........................   $     2,980    $   788,124    $   179,840    $     3,911
                                                        ============================================================



Net income 1999 .....................................                                     173,563
Other comprehensive income, net of tax:
   Unrealized gains on securities, net
      of reclassification adjustment ................                                                     (3,730)
   Foreign currency translation ($1,424 tax expense)                                                      (2,002)
                                                        -------------------------------------------------------------
Total comprehensive income ..........................                                     173,563         (5,732)
Shareholder dividends ...............................                                    (111,702)
Shares issued under option, debentures,
   grant plans and other (1,979 shares) .............            20          5,076
Treasury shares purchased and related costs
   (7,049 shares) ...................................           (70)
Shares  issued for acquisitions (14,570 shares) .....           145        240,368
                                                        --------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 ..........................   $     3,075    $ 1,033,568    $   241,701    $    (1,821)
                                                        ==============================================================

Net income 2000 .....................................                                     173,827
Other comprehensive income, net of tax:
   Unrealized gains on securities, net
      of reclassification adjustment ................                                                      2,845
   Foreign currency translation ($2,741 tax expense)                                                      (3,856)
                                                        --------------------------------------------------------------
Total comprehensive income ..........................                                     173,827         (1,011)
Shareholder dividends ...............................                                    (114,321)
Shares issued under option, debentures,
   grant plans and other (2,099 shares) .............            21         (1,655)
Treasury shares purchased and related costs
   (12,637 shares) ..................................          (126)
Shares  issued for acquisitions (1,482 shares) ......            15         (1,514)
                                                        --------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 ..........................   $     2,985    $ 1,030,399    $   301,207    $    (2,832)
                                                        ==============================================================
</TABLE>

<TABLE>
<CAPTION>


                                                            TREASURY     RESTRICTED       TOTAL
                                                             STOCK          STOCK        EQUITY
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>
BALANCE, DECEMBER 31, 1997 ..........................   $   (57,582)   $    (4,270)   $   524,438
                                                        ==========================================

Net income 1998 .....................................                                     189,992
Other comprehensive income, net of tax:
   Unrealized gains on securities, net
      of reclassification adjustment ................                                        (485)
   Foreign currency translation ($640 tax expense) ..                                        (947)
                                                        ------------------------------------------
Total comprehensive income ..........................                                     188,560
Shareholder dividends ...............................                                     (75,152)
Shares issued in public offering (11,400 shares) ....                                     208,561
Shares issued under option, debentures,
   grant plans and other (2,514 shares) .............       13,507            887          23,822
Treasury shares purchased and related costs
   (888 shares) .....................................      (18,301)                       (18,310)
Shares  issued for acquisitions (5,059 shares) ......       47,390                        104,567
                                                        ------------------------------------------
BALANCE, DECEMBER 31, 1998 ..........................   $  (14,986)   $    (3,383)    $   956,486
                                                        ==========================================


Net income 1999 .....................................                                     173,563
Other comprehensive income, net of tax:
   Unrealized gains on securities, net
      of reclassification adjustment ................                                      (3,730)
   Foreign currency translation ($1,424 tax expense)                                       (2,002)
                                                        ------------------------------------------
Total comprehensive income ..........................                                     167,831
Shareholder dividends ...............................                                    (111,702)
Shares issued under option, debentures,
   grant plans and other (1,979 shares) .............        13,630            806         19,532
Treasury shares purchased and related costs
   (7,049 shares) ...................................       (92,976)                      (93,046)
Shares  issued for acquisitions (14,570 shares) .....        26,102                       266,615
                                                        ------------------------------------------
BALANCE, DECEMBER 31, 1999 ..........................   $   (68,230)   $    (2,577)   $ 1,205,716
                                                        ==========================================

Net income 2000 .....................................                                     173,827
Other comprehensive income, net of tax:
   Unrealized gains on securities, net
      of reclassification adjustment ................                                       2,845
   Foreign currency translation ($2,741 tax expense).                                      (3,856)
                                                        ------------------------------------------
Total comprehensive income ..........................                                     172,816
Shareholder dividends ...............................                                    (114,321)
Shares issued under option, debentures,
   grant plans and other (2,099 shares) .............        18,866            748         17,980
Treasury shares purchased and related costs
   (12,637 shares) ..................................      (135,507)                     (135,633)
Shares  issued for acquisitions (1,482 shares) ......        16,529                        15,030
                                                        ------------------------------------------
BALANCE, DECEMBER 31, 2000 ..........................   $  (168,342)   $    (1,829)   $ 1,161,588
                                                        ==========================================



</TABLE>


All share data reflect the three-for-two share split in August 1998.

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

                                       2000        1999        1998
                                       ----        ----        ----
Unrealized holding gains arising in  $ 12,100   $   555   $   3,295
period
Less: gains realized                   (9,255)   (4,285)     (3,780)
                                       ------   -------   ---------
Net unrealized gains (losses) on
securities                           $  2,845   $(3,730)  $    (485)
                                     ========   ========  ==========

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



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


BUSINESS UNIT REPORTING

  The business of the Company is  primarily  conducted  through  four  operating
segments:  TruGreen,  Terminix, Home Maintenance and Improvement, and Management
Services. In accordance with Statement of Financial Accounting Standards No. 131
(SFAS 131), the Company's  reportable segments are strategic business units that
offer different services.  The TruGreen unit provides residential and commercial
lawn care and landscaping  services  through the TruGreen  ChemLawn and TruGreen
LandCare companies. The Terminix unit provides domestic termite and pest control
services to  residential  and commercial  customers.  The Home  Maintenance  and
Improvement unit includes American Residential  Services,  American Home Shield,
ServiceMaster Clean and Merry Maids. This unit provides heating, ventilation and
air conditioning,  plumbing, and cleaning services to residential and commercial
customers as well as home warranties to consumers.  The Management Services unit
provides a variety of supportive  management services to health care,  education
and commercial accounts.

  The Other Operations unit includes  entities that are managed  separately from
the four major units and aggregated  together in accordance with SFAS 131 due to
their size or developmental  nature.  This unit includes the Company's  European
pest  control  operations;   ServiceMaster  Employer  Services,  a  professional
employer  organization that provides clients with  administrative  processing of
payroll,  workers'  compensation  insurance,   health  insurance,   unemployment
insurance and other employee  benefit plans;  WeServeHomes.com,  a joint venture
offering  home  services  through  the  Internet;   the  Company's  headquarters
operations; and certain non-core businesses that have been sold or discontinued.

Information  regarding the accounting  policies used by the Company is described
in  the  Summary  of  Significant   Accounting  Policies.  The  Company  derives
substantially  all of its revenues from customers in the United States with less
than five  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.
The Company's  headquarters  facility and other  investments are included in the
identifiable assets of Other Operations.





                                       15
<PAGE>



<TABLE>
<CAPTION>


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
                                                                               %                               %
                                                              2000           Change         1999            Change           1998
                                                      -----------------------------------------------------------------------------
<S>                                                       <C>                   <C>   <C>                     <C>        <C>
Operating Revenue:
    TruGreen                                              $ 1,563,704           12%    $ 1,393,917             56%       $ 892,639
    Terminix                                                  733,654            9%        675,813             11%         607,583
    Home Maintenance and Improvement                        1,211,674           34%        903,970            115%         419,658
    Management Services                                     1,906,138            0%      1,897,299              3%       1,838,268
    Other Operations                                          555,445           N/A        832,536             N/A         965,971
                                                      ---------------- -------------  -------------  --------------  --------------
TOTAL OPERATING REVENUE                                   $ 5,970,615            5%    $ 5,703,535             21%     $ 4,724,119
                                                      ================ =============  =============  ==============  ==============

OPERATING INCOME:
    TruGreen                                                $ 172,615          -25%      $ 228,665             19%       $ 192,548
    Terminix                                                   90,594           12%         80,933             16%          69,809
    Home Maintenance and Improvement                          105,588           19%         88,393             66%          53,131
    Management Services                                        66,806          -15%         78,178              3%          75,583
    Other Operations                                          (18,704)          N/A        (92,995)            N/A           5,351
OTHER OPERATIONS EXCLUDING NON-RECURRING ITEMS(1)             (18,704)          N/A         (7,495)            N/A           5,351
                                                      ---------------- -------------  -------------  --------------  --------------
TOTAL OPERATING INCOME                                      $ 416,899            9%      $ 383,174             -3%       $ 396,422
                                                      ================ =============  =============  ==============  ==============
TOTAL OPERATING INCOME, EXCLUDING
  NON-RECURRING ITEMS(1)                                    $ 416,899          -11%      $ 468,674             18%       $ 396,422

CAPITAL EMPLOYED:
    TruGreen                                              $ 1,475,655            3%    $ 1,430,255             67%       $ 857,311
    Terminix                                                  525,913           -1%        532,476             12%         477,389
    Home Maintenance and Improvement                          624,421            6%        590,303            123%         264,968
    Management Services                                        98,829          -19%        121,978             -2%         123,946
    Other Operations                                          254,887          -15%        300,002            -17%         360,654
                                                      ---------------- -------------  -------------  --------------  --------------
TOTAL CAPITAL EMPLOYED                                    $ 2,979,705            0%    $ 2,975,014             43%     $ 2,084,268
                                                      ================ =============  =============  ==============  ==============

IDENTIFIABLE ASSETS:
    TruGreen                                              $ 1,581,523            0%    $ 1,584,460             63%       $ 974,921
    Terminix                                                  694,968            6%        655,790             11%         588,523
    Home Maintenance and Improvement                          980,861           10%        891,971             84%         484,393
    Management Services                                       222,117           -1%        224,694             -6%         237,924
    Other Operations                                          488,199           -5%        513,300            -18%         629,090
                                                      ---------------- -------------  -------------  --------------  --------------
TOTAL IDENTIFIABLE ASSETS                                 $ 3,967,668            3%    $ 3,870,215             33%     $ 2,914,851
                                                      ================ =============  =============  ==============  ==============

DEPRECIATION AND AMORTIZATION EXPENSE:
    TruGreen                                                 $ 64,505           26%       $ 51,222             65%        $ 30,954
    Terminix                                                   28,392            5%         27,045             17%          23,037
    Home Maintenance and Improvement                           29,116           27%         22,867            108%          10,979
    Management Services                                        21,222            9%         19,424            -12%          22,023
    Other Operations                                           14,456          -19%         17,886              2%          17,612
                                                      ---------------- -------------  -------------  --------------  --------------
TOTAL DEPRECIATION AND AMORTIZATION EXPENSE                 $ 157,691           14%      $ 138,444             32%       $ 104,605
                                                      ================ =============  =============  ==============  ==============

CAPITAL EXPENDITURES:
    TruGreen                                                 $ 28,056           18%       $ 23,732             88%        $ 12,608
    Terminix                                                    7,084            9%          6,483             -2%           6,607
    Home Maintenance and Improvement                           14,522           -9%         15,993              3%          15,551
    Management Services                                        15,345          -49%         30,370              2%          29,757
    Other Operations                                           11,596           -5%         12,176             13%          10,774
                                                      ---------------- -------------  -------------  --------------  --------------
TOTAL CAPITAL EXPENDITURES                                   $ 76,603          -14%       $ 88,754             18%        $ 75,297
                                                      ================ =============  =============  ==============  ==============
</TABLE>
(1)  In 1999, the Other Operations  segment included the $50 million pretax gain
     related to the sales of the Premier  automotive  business and the Company's
     remaining 15 percent interest in ServiceMaster  Energy Management,  and the
     $136 million  pretax  charge  related to the  Diversified  Health  Services
     operation,  which included  write-downs  for the  impairment of assets.  In
     1998,  the Other  Operations  segment  included a $38  million  pretax gain
     related to the formation of a strategic  venture which  acquired 85% of the
     assets of ServiceMaster  Energy  Management and pretax charges totaling $38
     million  related  primarily  to the  home  health  care  operations,  which
     included a write-down  for the  impairment of assets and costs  relating to
     exiting customer arrangements.


                                       16
<PAGE>




NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

REINCORPORATION

  Most  operations  of  ServiceMaster  and  its  subsidiary   partnerships  were
conducted from 1986 through 1997 in partnership  form, free of federal corporate
income tax. Had ServiceMaster remained a partnership,  the Internal Revenue Code
would have imposed a federal corporate tax on ServiceMaster operations beginning
in 1998. In anticipation of this change,  the  shareholders  approved a tax-free
plan of reorganization  to return to corporate form. The  ServiceMaster  Company
was  created as part of this plan and it became  the  successor  entity  through
which the public invests in ServiceMaster. At the time of reincorporation,  each
outstanding   limited   partnership  share  was  converted  into  one  share  of
ServiceMaster  par value common stock.  No federal  income taxes were imposed on
the shareholders as a result of the reincorporation.

INCOME TAXES

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

                                       2000      1999      1998
                                       ----      ----      ----
Tax at U.S. federal statutory rate     35.0%     35.0%      35.0%

State and local income taxes,
   net of U.S. federal benefit          4.2%      4.2%       4.4%
Non-deductible amortization             1.9%      1.5%         -
Other                                   0.8%      0.7%       1.0%
                                       -----     -----       -----
Effective rate                         41.9%     41.4%      40.4%
                                       =====     =====      =====


Income tax expense is as follows:

                                          2000
                          --------------------------------------
(In thousands)               CURRENT       DEFERRED      TOTAL
                            ---------     ----------   ---------
U.S. federal                 $ 42,300      $64,200     $106,500
State and local                 6,800       12,200       19,000
                             --------     --------     --------
                             $ 49,100      $76,400     $125,500
                             ========      =======     ========

                                          1999
                          --------------------------------------
(In thousands)              CURRENT     DEFERRED       TOTAL
                            -------     --------       -----
U.S. federal                 $ 76,830    $26,400     $103,230
State and local                14,000      5,400       19,400
                            ---------   ---------    --------
                             $ 90,830    $31,800     $122,630
                             ========    =======     ========

                                          1998
                          --------------------------------------
(In thousands)              CURRENT     DEFERRED       TOTAL
                            -------     --------       -----
U.S. federal                 $ 76,646    $30,200     $106,846
State and local                15,740      6,200       21,940
                             --------   ---------  -----------
                             $ 92,386    $36,400     $128,786
                             ========    =======     ========



 Deferred income tax expense 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.  As a result of the reincorporation at the end of 1997, the
Company  recognized a step-up in the tax basis of its intangible  assets.  These
assets are amortized over 15 years with the associated book assets assuming a 40
year life.  Management  believes  that,  based upon its lengthy  and  consistent
history of  profitable  operations,  it is probable that its deferred tax assets
will be realized on future tax returns,  primarily from the generation of future
taxable  returns,  primarily  from  the  operation  of  future  taxable  income.
Significant components of the Company's deferred tax balances are as follows:

                                                  2000            1999
                                                  ----            ----
(In thousands)

Deferred tax assets (liabilities):

  Current:
  Prepaid expenses and other                   $ (21,500)       $ (26,700)
  Accounts receivable allowance                   15,100           12,900
  Accrued insurance and
    related expenses                              22,000           24,900
  Other accrued expenses                            (250)          33,600
                                               ----------       -----------
        Total current asset                       15,350           44,700

  Long-Term:
  Long-term assets                              (130,800)         (43,100)
  Insurance expenses                              32,600           32,300
  Other long-term obligations                    (16,950)          (9,000)
                                               ----------       -----------
   Total long term (liability)                  (115,150)         (19,800)
                                               ----------       -----------

Net deferred tax asset (liability)             $ (99,800)       $  24,900
                                               =========        =========

Total tax payments in 2000, net of refunds, were $38 million. In 1999 there were
$177 million of tax  payments,  which  included $79 million for the 1998 federal
taxes that were deferred into 1999. Total tax payments in 1998 were $8 million.



                                       17
<PAGE>

ACQUISITIONS

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

CURRENT YEAR

  During 2000, the Company acquired many small companies,  primarily in the lawn
care,  heating/air  conditioning  and  plumbing,  pest  control and  landscaping
businesses.  The aggregate fair market value of the net assets acquired was $214
million, with approximately $162 million of goodwill.

  In January 2001, the Company acquired the Allied Bruce Terminix companies, the
Company's 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,  which is exchangeable into eight million ServiceMaster
common shares and  longer-term  cash  payments due over nine years  totaling $25
million.  This  transaction  is not  expected  to have a material  impact on the
Company's 2001 earnings per share.

 PRIOR YEARS

 During 1999, the Company completed two significant acquisitions. In March 1999,
the Company  acquired  LandCare USA  (LandCare)  which,  when  combined with the
existing  landscape  operations of the Company,  created the largest  commercial
landscaping  company in the United States.  In April 1999, the Company  acquired
American  Residential  Services  (ARS),  establishing  the Company as one of the
nation's  leading  providers  of  heating,  ventilation,  and  air  conditioning
services. The fair market values of the assets acquired less liabilities assumed
for  LandCare  and  ARS  acquisitions   were  $331  million  and  $292  million,
respectively.  The excess of the  consideration  paid over the fair value of the
tangible  assets  relating to LandCare and ARS  businesses  was $251 million and
$225 million, respectively,  which was recorded as goodwill and trade names that
are being amortized over 40 years.

  As of the acquisition dates, certain members of management  acquired,  at fair
market value, equity interests in the landscaping operations and the heating/air
conditioning and plumbing  operations.  As a result of the decision to integrate
the landscape and lawn care operations,  the equity interests in the landscaping
operations were repurchased in 2000 at fair market value. In early 2001,  equity
interests in the combined  TruGreen segment were offered for sale at fair market
value to management investors. The Company and the holders of minority interests
in the combined  TruGreen  business  unit and in  heating/air  conditioning  and
plumbing  operations  have  respective  options to acquire or sell the  minority
interests in the future at a price to be determined  based on fair market value.
The  future  acquisition  of  these  minority  interests  will  be  recorded  as
additional purchase cost at the time of payment.

  Also during 1999, the Company  acquired many smaller  companies,  primarily in
the  landscaping,  lawn care and pest control  businesses.  The  aggregate  fair
market value of the assets acquired less liabilities assumed for these purchases
was $315 million, including approximately $278 million of goodwill.

  In 1998,  the Company  completed a number of  acquisitions,  including  Rescue
Industries,  Inc.  (Rescue),  Ruppert  Landscape  Company  (Ruppert),   National
Britannia and other lawn care,  landscape and pest control  businesses.  Rescue,
which  operates  under the Rescue  Rooter  trade  name,  was one of the  largest
plumbing  and  drain  cleaning  companies  in  America.  Ruppert  was one of the
Mid-Atlantic's  largest commercial landscape  companies.  National Britannia was
the third largest pest control company in the United Kingdom. The aggregate fair
market  value  of  the  assets  acquired  less  liabilities  assumed  for  these
acquisitions  was $143 million,  which  consisted  almost  entirely of goodwill.
During 1998, the Company  acquired a number of smaller  companies,  primarily in
the lawn care,  landscaping  and pest control  businesses.  The  aggregate  fair
market  value  of  the  net  assets   acquired  was  $293   million,   including
approximately $249 million of goodwill.

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




 (In thousands)                          2000           1999            1998
                                         ----           ----            ----
 Fair value of assets acquired       $   253,669    $ 1,078,105    $   459,400
 Less liabilities assumed                (40,149)      (140,477)       (23,167)
                                     ------------    -----------    -----------
 Net assets acquired                 $   213,520    $   937,628    $   436,233


 Net cash paid for acquisitions      $   152,306    $   510,512    $   222,452
 Shares issued                            15,030        266,615        104,567
 Seller financed and assumed debt         46,184        160,501        109,214
                                     -----------    -----------    ------------
 Payment for acquisitions            $   213,520    $   937,628    $   436,233
                                     ===========    ===========    ============


                                       18
<PAGE>



DISPOSITIONS

CURRENT YEAR

  In September  2000,  the Company sold its interior plant care business for $44
million  in cash.  The  transaction  did not  materially  impact  the  Company's
operating  results for the year.  This sale  represents the Company's  continued
focus on the growth and investment in its core businesses.

  Also in September 2000, the Company  announced the sale of Diversified  Health
Services,  a company that manages long-term care facilities,  to a company which
is owned and operated by a group of former senior managers of Diversified Health
Services.  ServiceMaster  has retained its  ownership  interest in five assisted
living facilities;  however, these facilities will be operated by the new owners
of the Diversified  Health  Services  business.  The sale of Diversified  Health
Services is  consistent  with the  Company's  previously  announced  strategy to
reduce its  operational  involvement in the long-term care industry.  Last year,
the Company  completed a strategic  review and  assessment  of the services that
comprised the Diversified Health Services operation,  considering the changes in
reimbursement  and  compliance  policies  as  well  as the  resulting  financial
difficulties  of a number of its customers.  Based on the review of the business
and the credit risks involved,  the Company  substantially  reduced the scope of
the  services it offered.  As a result of this review,  the Company  recorded an
after-tax  charge of $81  million in the  second  quarter  of 1999  relating  to
Diversified  Health  Services.  The following  summarizes  the components of the
charge:

(AFTER-TAX, IN MILLIONS)

Write-down of impaired assets,
  primarily goodwill                                  $ 51
Write-down of receivables,
  loans, and investments in nursing homes               19
Provisions for losses on contractual requirements
  and exit costs of certain ancillary services          11
                                                      ----
Total                                                 $ 81
                                                      ====

  Substantially all of the reserves that were in 1999 were appropriately used in
2000 and were deemed to have been  adequate.  No gain or loss was realized  from
the final sale transaction in 2000. The results of operations of the Diversified
Health Services business were not material to the Company's financial statements
for the periods presented.

PRIOR YEARS

  On April 21, 1999,  the Company sold its Premier  business  unit to Durr AG of
Germany for $76 million. Premier provides cleaning services for paint booths and
other  related  maintenance  services in the  automotive  industry.  The Company
believes that alliances or significant  incremental  investments would have been
required to remain  competitive  in this industry.  The sale of Premier  allowed
ServiceMaster  to realize the significant  appreciation in its investment and to
reinvest  the  proceeds  in  initiatives  more  central  to the  Company's  core
strategies.  The sale resulted in an after-tax gain of approximately $25 million
($42 million pretax).

In 1998, the Company formed a strategic venture with Texas Utilities Company for
the ownership and operation of the ServiceMaster Energy Management business. The
venture  acquired all of the assets of ServiceMaster  Energy  Management and was
owned 85  percent by Texas  Utilities  and 15  percent  by  ServiceMaster.  This
transaction  resulted in a pretax gain of $38 million.  During 1999, the Company
sold its remaining 15% interest in the venture,  which resulted in and after-tax
gain of $5 million ($8 million pretax).

  In late 1998, the Company completed a strategic review of its
Home Health Care operations and concluded that, without significant  investment,
it could not profitably  provide high quality service in the future and continue
to  satisfy  all  the  changes  and  the   requirements   of  new   governmental
reimbursement  programs.  Consequently,  in late 1998, the Company determined to
discontinue  its  activities  in the Home Health Care  business  and  recognized
certain  impairment  losses and wrote off certain  accounts  receivable.  At the
time, the Company also established  after-tax  reserves of $5 million related to
the costs  associated with exiting certain  customer  arrangements.  The Company
substantially  completed  the exit of direct Home Health Care  operations in the
first  quarter  of 1999,  and  determined  that the  reserve  was  adequate  and
appropriate. The results of operations of the Home Health Care business were not
material to the Company's financial results for the periods presented.

COMMITMENTS AND CONTINGENCIES

  The Company carries insurance policies on insurable risks which it believes to
be appropriate.  The Company generally has self-insured retention limits and has
obtained  fully insured  layers of coverage  above such  self-insured  retention
limits.  Accruals  for self  insurance  losses 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.

                                       19
<PAGE>

  In June 1996,  Ray D.  Martin,  a former  salesman  employed by  ServiceMaster
Management  Services,  filed a  lawsuit  in the State  Court of  Fulton  County,
Georgia.  The complaint as originally filed,  contended that the Company had not
paid him the  full  amount  of  commissions  due to him.  In the  course  of the
pre-trial  proceedings,  the trial court entered a default  judgment against the
Company,  leaving the  question  of damages to be  considered  at the trial.  In
September 1999, the jury awarded the plaintiff  compensatory damages and fees of
approximately $1 million and punitive damages of $135 million.  In October 1999,
the Company filed a motion for judgment  notwithstanding  the verdict or, in the
alternative,  for a new trial.  On June 1, 2000,  the trial court  entered a new
judgment in the amount of $461,440  in  compensatory  damages and $45 million in
punitive damages, as well as amounts for attorney fees and interest. The Company
filed a notice of appeal that same day. On June 13,  2000,  Mr.  Martin  filed a
notice of  cross-appeal.  The  Company  expects  that the  appeal  will be fully
briefed and argued in the court of appeals in May of 2001. The Company  believes
that the award of $45 million in punitive  damages is not supported by the facts
of the case or by applicable state law and that the judgment will be reversed by
the court of appeals. Under Georgia law, a judgment accrues interest at the rate
of 12 percent  per  annum.  The  Company  continues  to be unable to  reasonably
estimate the ultimate outcome of this case, and accordingly, minimal expense has
been  recorded.  In the event that the existing  judgment is  sustained,  or the
original  judgment is reinstated  after all appeals (which is not anticipated by
the Company),  it would be likely that the Company's results of operations for a
particular  year may be  materially  adversely  affected.  However,  the Company
believes,  based on advice from legal counsel, that the ultimate outcome of this
litigation  is not expected to have a material  adverse  effect on the Company's
financial condition or results of operations.

EMPLOYEE BENEFIT PLANS

  Contributions  to qualified  profit  sharing  plans were made in the amount of
$11.7 million in 2000, $11.6 million in 1999 and $9.9 million in 1998. Under the
Employee Share Purchase Plan, the Company contributed $1.2 million in 2000, $1.3
million in 1999 and $1.2 million in 1998.  These funds defrayed part of the cost
of the shares purchased by employees.



                                       20
<PAGE>




LONG-TERM DEBT

<TABLE>
<CAPTION>


          Long-term debt includes the following:

          (In thousands)                                                     2000                    1999
         --------------------------------------------------------------------------------------------------
          <S>                                                         <C>                   <C>
          Notes Payable:
            10.57%, maturing in 2000..................................$         -           $        9,000
             8.38%, maturing in 2001..................................       10,000                 20,000
            10.81%, maturing in 2001 - 2002...........................       36,700                 55,000
             6.65%, maturing in 2002 - 2004...........................       70,000                 70,000
             8.45%, maturing in 2005..................................      250,000                    -
             7.40%, maturing in 2006..................................      125,000                125,000
             6.95%, maturing in 2007..................................      100,000                100,000
             7.88%, maturing in 2009..................................      250,000                250,000
             7.10%, maturing in 2018..................................      149,000                150,000
             7.45%, maturing in 2027..................................      200,000                200,000
             7.25%, maturing in 2038..................................      150,000                150,000
          Revolving credit facilities ................................      248,615                382,500
          International borrowings....................................       90,979                 93,048
          Other.......................................................      137,823                164,750
          Less current portion.........................................     (61,360)               (71,716)
                                                                       -------------         --------------

          Total long-term debt........................................$   1,756,757         $    1,697,582
                                                                       ============          =============
</TABLE>



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

  Since August 1997,  ServiceMaster  has issued $1.1 billion of senior unsecured
debt securities  pursuant to registration  statements  filed with the Securities
and Exchange Commission.

  As of  year-end,  ServiceMaster  had $550  million  of senior  unsecured  debt
securities and equity interests  available for issuance under an effective shelf
registration statement.

  The Company has a committed  revolving  credit facility for up to $750 million
maturing in April 2002. The facility can be used for general  Company  purposes.
The  revolving  credit  facility  had $520  million of unused  commitment  as of
December 31, 2000.

  The Company is exposed to interest  rate  fluctuations  on its  floating  rate
debt.  As of year-end,  the Company had  approximately  $215 million in floating
rate borrowings after considering swap agreements. The Company has, from time to
time,  entered into interest rate swap or similar  arrangements  to mitigate its
exposure to  interest  rate  fluctuations,  and does not, as a matter of policy,
enter into hedging contracts for trading or speculative  purposes.  In May 1999,
the Company  entered into a three-year  interest rate swap  agreement to fix the
interest  rate on $175 million of floating  rate bank  borrowings  at an average
rate of 5.88 percent. As of December 2000, $50 million of this swap was unwound,
leaving the remaining $125 million at an average rate of 5.97 percent.

  Cash interest payments were $131 million in 2000, $97 million in 1999, and $88
million in 1998.  Average rates paid on the revolving  credit  facility were 6.6
percent in 2000, 5.5 percent in 1999, and 5.9 percent in 1998.  Future scheduled
long-term debt payments are $61.4 million in 2001 (average rate of 5.4 percent),
$62.6  million in 2002  (average  rate of 6.1  percent),  $51.9  million in 2003
(average  rate of 4.8  percent),  $47.0  million  in 2004  (average  rate of 5.3
percent) and $259.5  million in 2005 (average  rate of 8.3 percent).  The $248.6
million  revolving  credit facility balance as of year-end has not been included
in the scheduled  payments above as the Company  expects to extend the revolving
credit facility beyond 2005.

  Based  upon  the  borrowing  rates  currently  available  to the  Company  for
long-term  borrowings  with  similar  terms and  maturities,  the fair  value of
long-term debt is approximately $1.5 billion.

  Future long-term  noncancelable  operating lease payments are $59.8 million in
2001, $49.6 million in 2002, $41.0 million in 2003, $32.3 million in 2004, $22.8
million in 2005 and $60.8 million thereafter. Rental expense for 2000, 1999, and
1998 was $160.3 million, $137.9 million, and $103.8 million, respectively.

  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 lease up to 82  percent  of the fair  market  value at the
commencement  of the lease.  The Company  does not expect to be required to make
residual  value  payments and,  therefore,  no amounts have been included in the
future  payments  above.  At December  31, 2000,  approximately  $79 million was
funded under these facilities.

CASH AND MARKETABLE SECURITIES

  Marketable  securities  held at December 31, 2000 and 1999, 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.  The
Company's  investments  consist  primarily  of  publicly-traded  debt and common
equity  securities.


                                       21
<PAGE>

As of December 31, 2000, the aggregate  market value of the Company's short- and
long-term  investments in debt and equity  securities was $126.4 million and the
aggregate cost basis was $114.8 million.

  Interest and dividend  income  received on cash and marketable  securities was
$10.0  million,  $9.0  million  and $8.9  million,  in  2000,  1999,  and  1998,
respectively.  Gains and  losses on sales of  investments,  as  determined  on a
specific  identification  basis, are included in investment income in the period
they are realized.

COMPREHENSIVE INCOME

  The  Company  reports  all  changes in equity  during a period,  except  those
resulting from investment by owners and  distribution  to owners.  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.

(in thousands)                  2000        1999         1998
                                ----        ----         ----
Unrealized holding gains
  arising in period           $20,578       $1,026      $5,529
Tax expense                     8,478          471       2,234
                                -----       ------      ------
Net of tax amount             $12,100       $  555      $3,295
                              =======       ======      ======

Gains realized                $15,713       $7,239      $6,342
Tax expense                     6,458        2,954       2,562
                              -------       ------      ------
Net of tax amount              $9,255       $4,285      $3,780
                              =======       ======      ======

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

(in thousands)                     2000         1999          1998
                                   ----         ----          ----
Unrealized gain on
  securities                  $    6,868    $    4,023     $   7,753
Foreign currency
  translation                     (9,700)       (5,844)       (3,842)
                              -----------   -----------    ----------
Total                         $   (2,832)   $   (1,821)    $   3,911
                              ===========   ===========    ==========



SHAREHOLDERS' EQUITY

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

  The Company has an effective shelf  registration  statement to issue shares of
common stock in connection with future,  unidentified acquisitions.  This filing
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 strategic  acquisitions.  There were
approximately 4.7 million shares available at year end.

  As of December 31, 2000,  there were 39.9 million Company shares available for
issuance upon the exercise of employee  options  outstanding  and future grants.
Share  options are issued at a price not less than the fair market  value on the
grant date.  Certain  options  may permit the holder to pay the option  exercise
price by  tendering  Company  shares that have been owned by the holder  without
restriction for an extended period.  Share grants carry a vesting period and are
restricted as to the sale or transfer of the shares.



                                       22
<PAGE>

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

(In  thousands,  except per share     2000       1999       1998
 data)                                ----       ----       ----

Net Income:
   As reported                      $173,827   $173,563   $189,992
   SFAS 123 pro forma               $165,657   $166,601   $185,555

Net Income Per Share:
   Basic:     As reported             $.57       $.56       $.66
              SFAS 123 pro forma      $.55       $.54       $.64


   Diluted:  As reported              $.57       $.55       $.64
             SFAS 123 pro forma       $.54       $.53       $.62


  The SFAS 123 pro forma net income  reflects  options granted in 2000, 1999 and
1998.  Had awards been  granted in earlier  years that carried  similar  vesting
requirements as the current  options,  then the pro forma  compensation  expense
presented would have been higher. Consequently,  the pro forma disclosure is not
indicative of pro forma results which may be expected in future years.

  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 2000,  1999, and 1998:  risk-free  interest rates of 6.1 percent,
5.4 percent and 5.6 percent,  respectively;  volatility rates of 29 percent,  25
percent and 22 percent,  respectively;  distribution yields of 4.1 percent,  2.5
percent and 1.9  percent,  respectively;  and average  expected  lives of six to
seven  years.  The  options  granted to  employees  in 2000,  1999 and 1998 have
weighted-average  fair values of $2.19, $4.15, and $5.17,  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.


                                       23
<PAGE>




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




<TABLE>
<CAPTION>


                                           Share             Price            Weighted Average          Share             Price
                                          Options            Range             Exercise Price           Grants            Range
===================================================================================================================================
===================================================================================================================================

<S>                                        <C>          <C>                    <C>                    <C>           <C>
Total exercisable, December 31, 1997        6,919,718   $    0.73 - 10.78      $     6.05               --                    --
Total outstanding, December 31, 1997       15,320,157   $    0.73 - 18.42      $     8.65             1,256,106     $  2.86 - 7.96

TRANSACTIONS DURING 1998

     Granted to employees                   3,574,376   $   15.74 - 22.77      $     18.29              --                    --
     Exercised, paid, or vested            (1,604,784)  $    2.25 - 11.22      $     6.29              (293,376)    $  2.86 - 7.96
     Terminated or resigned                  (377,023)  $    0.73 - 18.26      $     8.57               --                    --

Total exercisable, December 31, 1998        7,269,279   $    0.73 - 22.33      $     7.51               --                    --
Total outstanding, December 31, 1998       16,912,726   $    0.73 - 22.77      $     10.89              962,730     $  2.86 - 7.96

TRANSACTIONS DURING 1999

     Granted to employees                   6,599,732   $   11.50 - 21.16      $     15.55              --                    --
     Assumed in acquisitions                1,779,395   $    6.48 - 45.79      $     19.02              --                    --
     Exercised, paid, or vested            (1,355,345)  $    0.73 - 18.26      $     7.61              (248,900)    $  2.86 - 7.96
     Terminated or resigned                  (435,069)  $    0.73 - 45.79      $     19.32              --                    --

Total exercisable, December 31, 1999       10,006,644   $    2.24 - 45.79      $     10.37              --                    --
Total outstanding, December 31, 1999       23,501,439   $    2.24 - 45.79      $     12.85               713,830     $  2.86 - 7.96

TRANSACTIONS DURING 2000

     Granted to employees                   4,326,164   $    8.48 - 12.55      $     9.71               --                    --
     Exercised, paid, or vested              (591,517)  $    2.24 - 14.55      $     9.31              (231,474)    $  2.86 - 7.96
     Terminated or resigned                  (966,857)  $    2.25 - 37.61      $     12.86              --                    --

Total exercisable, December 31, 2000       11,985,121   $    2.24 - 45.79      $     11.57              --                    --
Total outstanding, December 31, 2000       26,269,229   $    2.24 - 45.79      $     12.43              482,356     $  2.86 - 7.96

===================================================================================================================================
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>

Options outstanding at December 31, 2000:

                               Number
         Range of            Outstanding        Remaining       Weighted-Average       Number Exercisable        Weighted-Average
        Exercise Prices     at 12/31/00           Life           Exercise Price           at 12/31/00             Exercise Price
===================================================================================================================================
===================================================================================================================================

    <S>                         <C>             <C>                  <C>                   <C>                      <C>
    $  2.24  -   6.44           2,052,204       3.0 years            $     5.59            2,052,204                $     5.59
        6.48 -  10.78           7,584,324       5.0 years                  8.93            3,565,686                      8.83
       11.22 -  15.94           9,200,850       8.0 years                 11.68            3,823,012                     12.00
       16.12 -  22.77           7,121,916       8.0 years                 18.19            2,298,520                     18.27
       27.20 -  45.79             309,935       6.0 years                 32.99              245,699                     31.58
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
    $    2.24 - 45.79          26,269,229       7.0 years            $    12.43            11,985,121               $    11.57
===================================================================================================================================
===================================================================================================================================

</TABLE>

                                       24
<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. Diluted earnings per share reflects
the potential dilution of convertible  securities and options to purchase common
stock.

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



<TABLE>
<CAPTION>


                                                   For year ended 2000          For year ended 1999       For year ended 1998
                                             ---------------------------------------------------------- -------------------------
(In thousands, except per share data)         Income     Shares       EPS      Income   Shares   EPS     Income   Shares    EPS
                                             ---------- ---------- ---------- ------------------------- ------------------ ------

<S>                                          <C>          <C>         <C>     <C>       <C>     <C>     <C>       <C>      <C>
BASIC EPS                                    $ 173,827    302,487     $ 0.57  $ 173,563 307,637 $ 0.56  $ 189,992 289,315  $ 0.66
EFFECT OF DILUTIVE SECURITIES, NET OF TAX:

    Options                                                 3,031                         6,769                     9,391
    Convertible debentures                           -          -                     -       -                32     181
                                             ---------- ----------            ---------- --------        ---------- --------

DILUTED EPS                                  $ 173,827    305,518     $ 0.57  $ 173,563 314,406 $ 0.55  $ 190,024 298,887  $ 0.64
                                             ========== ==========    ======= ========== ======= ====== ========= =======  ======


</TABLE>





                                       25
<PAGE>




QUARTERLY OPERATING RESULTS

Quarterly  operating  results  and  related  growth for the last three  years in
revenues,  gross profit,  net income, and basic and diluted net income per share
are shown in the table below.  For interim  accounting  purposes,  certain costs
directly  associated  with the  generation  of lawn care  revenues are initially
deferred and recognized as expense as the related revenues are recognized.  Full
year results are not affected.

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

As discussed in the "Change in Accounting  Principle"  note, the Company adopted
SAB 101 effective  January 1, 2000. The impact of this accounting change on 2000
is below.
<TABLE>
<CAPTION>

                                                   AS PREVIOUSLY REPORTED                   ADJUSTED TO RETROACTIVELY APPLY SAB 101
                                              --------------------------------------------------------------------------------------
                                              --------------------------------------------------------------------------------------
(Unaudited, in thousands, except per share data)   2000             1999          1998          2000           1999         1998
-------------------------------------------------------------- ---------------------------------------------------------------------
-------------------------------------------------------------- ---------------------------------------------------------------------

OPERATING REVENUE:

<S>                                               <C>             <C>            <C>           <C>          <C>            <C>
First Quarter                                     $ 1,346,505     $ 1,115,062    $ 981,788     $ 1,340,884  $ 1,109,491    $ 976,620
Second Quarter                                      1,626,359       1,537,074    1,244,627       1,614,695    1,520,352    1,231,953
Third Quarter                                       1,586,260       1,584,225    1,273,093       1,591,484    1,588,798    1,275,026
Fourth Quarter                                          N/A        1,467,174    1,224,611       1,423,552    1,475,157    1,230,559
                                                                   ----------   ----------      ----------   ----------   ---------
                                                                  $ 5,703,535   $4,724,119     $ 5,970,615  $ 5,693,798  $ 4,714,158
GROSS PROFIT:

First Quarter                                       $ 261,089       $ 215,247    $ 186,991       $ 256,068    $ 209,140    $ 182,086
Second Quarter                                        394,481         368,237      293,261         389,652      355,423      284,031
Third Quarter                                         348,407         359,885      316,718         354,013      364,818      319,371
Fourth Quarter                                            N/A         301,131      247,537         274,415      307,742      252,355
                                                                     --------     --------        --------     --------     -------
                                                                  $ 1,244,500   $1,044,507     $ 1,274,148  $ 1,237,123  $ 1,037,843
NET INCOME:

First Quarter                                        $ 39,011        $ 35,609     $ 29,270        $ 36,054     $ 31,994     $ 26,347
Second Quarter                                         69,371          18,035       56,404          66,315       10,449       50,904
   BEFORE NON-RECURRING ITEMS                          69,371          69,335       56,404          66,315       61,749       50,904
Third Quarter                                          47,484          66,637       56,352          50,786       69,557       57,933
Fourth Quarter                                            N/A          53,282       47,966          31,833       56,337       50,837
                                                                      -------      -------         -------      -------      ------
Net income                                                          $ 173,563    $ 189,992       $ 184,988    $ 168,337    $ 186,021

   BEFORE NET NON-RECURRING ITEMS                                   $ 224,863     $189,992       $ 184,988    $ 219,637    $ 186,021

BASIC NET INCOME PER SHARE:

First Quarter                                          $ 0.13          $ 0.12       $ 0.11          $ 0.12       $ 0.11       $ 0.10
Second Quarter                                           0.23            0.06         0.20            0.22         0.03         0.18
   BEFORE NON-RECURRING ITEMS                            0.23            0.22         0.20            0.22         0.19         0.18
Third Quarter                                            0.16            0.21         0.19            0.17         0.22         0.20
Fourth Quarter                                            N/A            0.17         0.16            0.11         0.18         0.17
                                                                        -----        -----           -----        -----        ----
Basic net income per share                                             $ 0.56       $ 0.66          $ 0.62       $ 0.54       $ 0.65

   BEFORE NET NON-RECURRING ITEMS                                      $ 0.73       $ 0.66          $ 0.62       $ 0.71       $ 0.65

DILUTED NET INCOME PER SHARE:

First Quarter                                          $ 0.13          $ 0.12       $ 0.10          $ 0.12       $ 0.11       $ 0.09
Second Quarter                                           0.22            0.06         0.19            0.21         0.03         0.17
   BEFORE NON-RECURRING ITEMS                            0.22            0.22         0.19            0.21         0.19         0.17
Third Quarter                                            0.16            0.21         0.19            0.17         0.22         0.20
Fourth Quarter                                            N/A            0.17         0.16            0.11         0.18         0.17
                                                                        -----        -----           -----        -----        ----
Diluted net income per share                                           $ 0.55       $ 0.64          $ 0.61       $ 0.53       $ 0.63

   BEFORE NET NON-RECURRING ITEMS                                      $ 0.72       $ 0.64          $ 0.61       $ 0.70       $ 0.63


CASH DIVIDENDS PER SHARE:

First Quarter                                          $ 0.09          $ 0.09       $ 0.08
Second Quarter                                           0.09            0.09         0.08
Third Quarter                                            0.10            0.09         0.08
Fourth Quarter                                           0.10            0.09         0.09
                                                        -----           ------       -----
                                                       $ 0.38          $ 0.36       $ 0.33
PRICE PER SHARE:

First Quarter                                        $14.94 - 10.69        $  22.00 - 17.50   $ 19.63 - 16.50
Second Quarter                                        13.75 - 10.63           20.94 - 17.31     25.50 - 17.92
Third Quarter                                         11.50 -  8.38           18.56 - 14.00     24.75 - 19.75
Fourth Quarter                                        11.50 -  8.25           16.25 - 10.13     23.81 - 16.00


</TABLE>


All share and per share data  reflect  the  three-for-two  share split in August
1998.



                                       26
<PAGE>