FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>

                                                                                For years ended December 31,

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

OPERATING RESULTS:
<S>                                                                     <C>              <C>               <C>
Customer level revenue (1) ............................................ $  7,335,000     $  6,355,000      + 15%
Operating revenue .....................................................    5,703,535        4,724,119      + 21%
Operating income ......................................................      383,174          396,422      -  3%
OPERATING INCOME BEFORE NON-RECURRING ITEMS, NET (2) ..................      468,674          396,422      + 18%

Net income ............................................................      173,563          189,992      -  9%
NET INCOME BEFORE NON-RECURRING ITEMS, NET (2).........................      224,863          189,992      + 18%


   Per share: (3)
       Basic .......................................................... $       0.56     $       0.66      - 15%
       Diluted ........................................................ $       0.55     $       0.64      - 14%
       BASIC BEFORE NON-RECURRING ITEMS, NET (2) ...................... $       0.73     $       0.66      + 11%
       DILUTED BEFORE NON-RECURRING ITEMS, NET (2) .................... $       0.72     $       0.64      + 13%
Cash dividends per share .............................................. $       0.36     $       0.33      +  9%


FINANCIAL POSITION:
Total assets .......................................................... $  3,870,215     $  2,914,851
Long-term debt ........................................................    1,697,582        1,076,167
Shareholders' equity ..................................................    1,205,716          956,486


SHARE PRICE RANGE :
(Traded on the New York Stock Exchange under the symbol SVM)
High price ............................................................ $      22.00     $      25.50
Low price ............................................................. $      10.13     $      16.00
Closing price ......................................................... $      12.31     $      22.06
</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 the second quarter of 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.

(3) Basic earnings per share are calculated  based on 307,637 shares in 1999 and
289,315 shares in 1998, while diluted earnings per share are calculated based on
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.

                                       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
                      SPLITS IN AUGUST 1998 AND JUNE 1997)


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

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
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.  The Company expects to realize  significant margin  improvements in
these businesses as they become  integrated.  Operating  margins excluding these
operations  increased  10 basis  points  even  though a  severe  drought  in the
Mid-Atlantic  and  Northeast  regions of the country in 1999 reduced  margins in
TruGreen  ChemLawn,  the Company's largest operating unit.  Diluted earnings per
share before  non-recurring  items  increased 13 percent to $.72,  compared with
$.64 last year. Net income on this same basis grew 18% to $225 million from $190
million in 1998. Net income grew at a faster rate than earnings per share due to
an increase in shares outstanding, resulting from shares issued for acquisitions
and the Company's equity offering in May 1998.

 During the year, the Company realized an after-tax gain of $30 million relating
to the sale of its Premier automotive  business and the sale of its remaining 15
percent interest in ServiceMaster  Energy Management.  In addition,  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  ($85.5 million pre tax). As a result,  the Company  reported net
income of $174 million, with diluted earnings per share of $.55.

Graph Comparison of Customer Level Revenue and Operating Revenue
for the Last 5 Years

Graph Comparison of Diluted Earnings Per Share for the Last 5 Years

  During 1999, the Company launched two new strategic business initiatives.  The
first initiative  focuses on broadening the Company's core service  capabilities
to the  consumer  market by  creating an  e-commerce  alternative  for  selling,
providing,  and bundling our service offerings and related  products.  The other
initiative  involves  expanding the  Company's  outsourcing,  site service,  and
information resources to the business and commercial market. The Company expects
earnings  per share to continue to grow at  double-digit  rates for the next two
years,  but at less than historical  levels because of the investments  that the
Company will be making to support these directives,  which are likely to be $.03
to $.05 per share in 2000.

  In January 2000,  the Company  announced the formation and initial  funding of
WeServeHomes.com,  a separate  Internet  company  that will offer  comprehensive
on-line solutions for the consumer market by providing home services,  products,
and information.  ServiceMaster owns 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  will  support the new  company  through
intensive  co-branding  efforts,  access to its  customer  base and  third-party
contractor relationships,  fulfillment support, and licensing the use of certain
trademarks.  Kleiner  Perkins  Caufield & Byers  (Kleiner  Perkins),  one of the
nation's most respected and successful  venture  capital firms,  contributed $15
million and holds a 16 percent  ownership  interest with warrants to purchase an
additional $11.5 million in stock at the same price.  The initial  investment by
Kleiner  Perkins  will help fund site  design  and  development,  infrastructure
support and promotional expenditures.  In addition,  expenses in 2000 associated
with  WeServeHomes.com  will be  reduced by the  amount of the  Kleiner  Perkins
investment.

  The Consumer  and  Commercial  Services  business  unit  achieved a 53 percent
increase in revenues to $3.1  billion,  reflecting  solid growth in  established
businesses, as well as contributions from the Company's landscaping, heating/air
conditioning,  and plumbing  initiatives.  Net income increased eight percent to
$171  million,  reflecting  profit  increases  at all of  the  companies  except
TruGreen.  TruGreen  reported a  substantial  increase in  revenues  and profits
comparable to last year,  reflecting the impact of severe weather  conditions on
the lawn care  operations  partially  offset  by  increases  from the  landscape
initiative.

                                       25
<PAGE>

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  resulting from the unfavorable summer weather conditions over the last
two  years.   Through  the  acquisitions  of  LandCare  USA  and  other  smaller
businesses,  the Company has become the largest provider of commercial landscape
services in the country. Over 20 percent of the Consumer and Commercial Services
segment's revenue growth came from this new initiative.  TruGreen LandCare,  the
Company's  landscape   operations,   achieved   significant   increases  through
acquisitions but also realized strong  double-digit  internal  growth.  Terminix
achieved  strong  growth in revenues and profits,  resulting  from  increases in
termite  completions  and  renewals,  improved  branch  efficiencies,   and  the
successful integration of acquisitions. Growth in new termite customers reflects
a continued  strong  demand for termite  baiting  systems.  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
establishes  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  expands  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    (formerly
Residential/Commercial)  and Merry Maids,  achieved solid  increases in revenues
and profits  despite an extremely tight labor market,  with continued  growth of
Company-owned   operations,    increased   license   sales,   and   productivity
improvements.

  The traditional Management Services business reported revenues of $1.9 billion
and net income of $77 million.  These  results  include a $30 million  after-tax
gain relating to the sales of its Premier  automotive  unit and its remaining 15
percent interest in  ServiceMaster  Energy  Management.  Revenues and net income
from continuing  operations  both increased three percent.  This growth includes
the benefit of overhead efficiency gains realized throughout the business units.
The  traditional  Healthcare  market  reported a modest decrease in revenues and
profits consistent with last year. 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.

  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  service 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). Also in the second quarter, the Company sold its remaining
15 percent interest in  ServiceMaster  Energy  Management to its partner,  Texas
Utilities,  which  resulted  in an  after-tax  gain of $5  million  ($8  million
pretax).

  Other  Operations  include  primarily  Employer  Services,   the  professional
employer organization,  Diversified Health Services, which provides services and
products  to  the  long-term  care  market,   and  the  Company's   headquarters
operations. Net income before non-recurring items improved from 1998, reflecting
favorable  interest  allocations  and gains on financial  investments  partially
offset by reduced profitability in the Diversified Health Services operations.

  The  long-term  care  industry  has recently  undergone a dramatic  transition
period,  largely  as  a  result  of  changes  in  government  reimbursement  and
compliance  policies.  The Company's  Diversified  Health  Services unit manages
long-term  facilities  and,  in a number  of cases,  had  helped  finance  these
facilities,  generally in return for a long-term management contract and a share
in the market appreciation of the facility.  This company's  operations had also
provided a number of ancillary services and products,  including  rehabilitation
therapy, medical supplies,  pharmacy, and design and build services.  During the
year,  the Company  announced  that it was  undertaking  a strategic  review and
assessment  of its  Diversified  Health  Services  business  due to  changes  in
reimbursement and compliance policies and the resulting  financial  difficulties
of a number of its customers. Based on the review of the business and the credit
risks  involved,  the  Company  reduced  the scope of the  services  it  offered
substantially, including ancillary services, and decided to eliminate all future
credit extension activities.  As a result of the review, the Company recorded in
the second quarter of 1999 an after-tax  charge of $81 million  ($135.6  million
pretax) for the  restructuring  and  write-down of assets related to Diversified
Health Services.  Approximately  $12 million of the charge related to provisions
for  future  expected  cash  expenditures.  Since  that time,  the  Company  has
terminated  several  customer  relationships,  with the  corresponding  overhead
structure  eliminated,  and reduced  the scope of its  ancillary  services.  The
Company  continues to believe  that the charge was  adequate  and the  remaining
provisions are sufficient to cover future requirements.

   On a  consolidated  basis,  cost  of  services  rendered  and  products  sold
increased 21 percent, primarily due to acquisitions and general business growth.
Cost of services  rendered  and  products  sold  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

                                       26
<PAGE>

revenues  is  higher  than  the  average  for the  enterprise.  Excluding  these
platforms, 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 the
prior year 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 the prior year,  primarily due to increased
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 last year,  primarily due to the  non-deductibility  of goodwill related to
several large acquisitions completed in 1999.

  As more fully 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  wrongfully  declined  to  pay  a
commission of  approximately  $180,000.  In September  1999, the jury returned a
verdict of approximately $1 million in compensatory  damages and $135 million in
punitive  damages.  The Company has filed a motion for judgment  notwithstanding
the  verdict  or, in the  alternative,  for a new trial.  If the  outcome of the
post-trial  proceedings  is not  satisfactory  to the Company,  the Company will
appeal.  The  Company  believes,  on advice of  counsel,  that the award of $135
million in punitive  damages is not  supportable  by the facts of the case or by
applicable  state law. The Company is not presently able to reasonably  estimate
the ultimate  outcome of this case, and  accordingly,  minimal  expense has been
recorded.  If the adverse  judgment is sustained after all appeals are concluded
(which is a result not  anticipated  by the Company),  the Company's  results of
operations  for a  particular  year  could  be  materially  adversely  affected.
However, the Company, based on discussions with outside legal counsel,  believes
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.

  The Company did not experience any significant computer system problems in the
transition  from  the  year  1999  to the  year  2000  and the  Company  did not
experience any  significant  year 2000 problems with its suppliers or customers.
The Company  substantially  completed all of its year 2000  remediation  efforts
before  December 31, 1999, and the costs of addressing year 2000 issues were not
material to the Company's results of operations or financial position.

1998 COMPARED WITH 1997

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

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

  The Consumer  and  Commercial  Services  business  unit  achieved a 23 percent
increase in revenues,  reflecting  strong growth from both internal  sources and
acquisitions,  including  the Rescue  Rooter  plumbing  business and  commercial
landscaping  companies.  Net  income  increased  28  percent,  reflecting  solid
double-digit profit increases at all of the companies.  TruGreen reported strong
growth in revenues and profits,  reflecting  base business  growth and the entry
into  the  commercial  landscape  market  through  the  acquisition  of  several
companies. The successful integration of acquisitions and other cost initiatives
helped offset the effects of severe summer weather conditions in many regions of
the  country.  Terminix  achieved  strong  double-digit  growth in revenues  and
profits,  resulting from excellent increases in termite completions and renewals
and  improved   margins.   Higher  customer   retention  levels  and  efficiency
improvements  contributed  to  the  increased  margins.   American  Home  Shield
continued  to  experience  exceptional  momentum  with very strong  double-digit
increases in warranty  contracts  written due to excellent growth in real estate
and  direct-to-consumer  sales,  as well as strong renewal  growth.  This volume
increase  was  partially  affected  by  increased  service  orders  relating  to
expensive air  conditioning  repairs due to the extreme heat experienced in many
parts of the country.  The franchise  operations,  ServiceMaster Clean (formerly
Residential/Commercial)  and Merry Maids,  achieved solid revenue  increases and
higher margins,  reflecting  improvements in  Company-owned  operations and cost
controls.  The Rescue Rooter operations  reported very good results,  reflecting
improved  marketing  efforts,   productivity  improvements  and  effective  cost
controls.

  The traditional  Management Services business achieved a seven percent revenue
increase as a result of  acquisitions  and modest  growth in the base  business.
Profits increased significantly due to a $38 million pretax gain relating to the
formation  of a strategic  venture  between  ServiceMaster  and Texas  Utilities
Company.  The new  venture  acquired  all the  assets  of  ServiceMaster  Energy
Management  and was  owned 85  percent  by Texas  Utilities  and 15  percent  by
ServiceMaster.

                                       27
<PAGE>

(This 15  percent  interest  was  subsequently  sold by the  Company  in  1999.)
Excluding  this gain,  profits  were one  percent  below the prior year level as
increases  in the  Business & Industry  and  Education  markets  were  offset by
reduced  profitability  in the Healthcare  market.  The  traditional  Healthcare
market  reported a slight  decline in revenues with lower profits than last year
as a result of continued  industry  pressures and additional  investments in the
business compared with the prior year. The Company achieved  significant revenue
and  profit  increases  in  the  Business  &  Industry  market,  reflecting  the
successful integration of acquisitions and increased sales in the base business.
The Education  market  reported  strong growth in profits due to better customer
retention and the favorable effect of eliminating costs incurred in 1997 related
to unwinding a large contract.

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

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

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

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

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

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

Graph Comparison of Profits and Cash from Operations before Taxes
for the Last 5 Years

1999 FINANCIAL POSITION

  Net cash provided from operations of $257 million was significantly  below the
prior year level,  primarily  reflecting  the  deferral of the 1998  federal tax
payment until March of 1999.  Federal taxes of $79 million on the Company's 1998
earnings  were accrued in the financial  statements in 1998,  but not paid until
the first  quarter of 1999.  (Excluding  all tax  payments,  cash  provided from
operations  increased  five  percent to $433  million.)  Working  capital  needs
increased over 1998, reflecting the growth in the Company's commercial services,
especially the landscaping operations,  which experienced a significant increase
in receivables.

  Cash and marketable  securities totaled approximately $114 million at December
31, 1999. Debt levels  increased,  reflecting the 1998 tax payment combined with
the effects of acquisitions,  capital spending, and dividends.  The Company is a
party to a number of long-term debt  agreements  which require it to comply with
certain financial covenants,  including limitations on indebtedness,  restricted
payments,  fixed  charge  coverage  ratios  and net  worth.  The  Company  is in
compliance  with the  covenants  related  to these debt  agreements.  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 $390 million of unused commitment on
its revolving bank facility at December 31, 1999.

  In August 1999, the Company completed a senior unsecured debt offering of $250
million,  7.875  percent  notes  priced to yield 7.98 percent and due August 15,
2009. 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.

                                       28
<PAGE>

  On March 18, 1999, the Company completed the acquisition of LandCare USA, Inc.
(LandCare)  in a  stock-for-stock  merger for $331 million.  The Company  issued
shares  valued at  approximately  $191  million  and  assumed  debt or made cash
payments of approximately $140 million. The acquisition of LandCare,  one of the
nation's leading commercial  landscape  companies,  significantly  broadened the
Company's  landscape   initiative  and  provides  TruGreen  the  opportunity  to
integrate its  traditional  fertilizer and weed control  services with landscape
maintenance  and  installation.  The  Company  installed  a  new  operating  and
financial  system  which  will  support  the  Company  in  achieving   operating
efficiencies,  coordinating  purchases,  and  monitoring  progress on receivable
collections.

  On April 27, 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  Company  acquired  ARS for
approximately $292 million in cash and assumed debt.

  Accounts  receivable   increased   reflecting  general  business  growth,  the
acquisitions  of ARS and LandCare and longer  collection  periods as the Company
increases its presence in the commercial  sector.  The net balance  reflects the
current year write-down of certain  Diversified Health Services  receivables due
from nursing homes.  Property and equipment increased,  primarily resulting from
investments  in  information  technology  throughout  the  enterprise as well as
general business growth and acquisitions. The Company does not have any material
capital commitments at this time.

  Total  acquisitions were approximately $938 million ($623 million of which was
from  the  LandCare  and ARS  acquisitions).  Approximately  28  percent  of the
acquisition  consideration  was  in the  form  of  shares.  Certain  members  of
management acquired minority ownership  interests in the landscaping  operations
and the heating/air  conditioning and plumbing operations.  The increase of $577
million in  intangible  assets  included  $251  million  from  LandCare and $225
million  from ARS, as well as amounts  from  various  other  smaller  commercial
landscape and pest control companies.  This increase was partially offset by the
write-down of impaired  goodwill  relating to the  Diversified  Health  Services
operations.

  Accounts  payable  and other  accrued  liabilities  increased  due to  general
business growth and the effects of  acquisitions.  Deferred  revenues  increased
primarily as a result of strong growth in warranty contracts written at American
Home Shield,  increases in customer  prepayments for pest control services,  and
the acquisition of ARS.

  Total shareholders' equity increased to $1.2 billion in 1999 from $956 million
at December 31, 1998,  reflecting  current year net income and shares issued for
acquisitions,  partially offset by shareholder dividends.  The Company continues
to repurchase shares in the open market or in privately negotiated  transactions
pursuant to the  authorizations  previously  granted by the Board of  Directors.
Approximately  $93 million of shares were  repurchased in 1999. In October 1999,
the Company  announced that its Board of Directors  authorized the repurchase of
$150 million in shares over time (in addition to an existing  authorization  for
funding benefit and option plans) in the open market or in privately  negotiated
transactions.   At  year-end,  the  aggregate  market  value  of  the  Company's
outstanding shares was approximately $3.8 billion.

  Cash dividends paid directly to shareholders totaled $111 million, or $.36 per
share,  a nine percent per share  increase over the prior year. The total amount
of cash distributions  increased 16 percent from the prior year, reflecting this
per share increase as well as an increase in shares  outstanding  over the prior
year.  (In  1997,  the  Company  maintained  a  shareholders'  trust  which  was
established  for the  benefit  of its  Partnership  shareholders.  The trust was
terminated upon reincorporation. However, in 1998, it received approximately $20
million in tax refunds relating to its final 1997 tax return.)

Graph Comparison of Cash Dividends Declared for the Last 5 Years

  While the Company has historically  increased its dividend payment, the timing
and amount of future  dividend  increases will be at the discretion of the Board
of Directors  and will depend on, among other things,  the  Company's  corporate
finance objectives and cash requirements. The Company has announced its intended
cash dividends for 2000 of $.38 per share.

  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   (before
non-recurring  items) in 1999 of $629 million,  grew 22 percent and exceeded net
income  by over  $400  million  or 180%.  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.


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

                                       29
<PAGE>

ELEVEN  YEAR  FINANCIAL  SUMMARY

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

(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)                         1999                   1998                  1997
----------------------------------------------------------------------------------------------------------------------------------

OPERATING RESULTS
<S>                                                                   <C>                     <C>                  <C>
Operating revenue ..................................................  $   5,703,535           $   4,724,119        $   3,961,502
Cost of services rendered and products sold.........................      4,459,035               3,679,612            3,058,160
Selling and administrative expenses ................................        775,826                 648,085              559,409
Other, net (1) .....................................................         85,500                     -                    -
                                                                            -------                 -------              -------
Operating income  ..................................................        383,174                 396,422              343,933
                                                                            -------                 -------              -------
OPERATING INCOME BEFORE NON-RECURRING ITEMS, NET (1) ...............        468,674                 396,422              343,933
    Percentage of operating revenue ................................           8.2%                    8.4%                 8.7%
Non-operating expense  (income).....................................         86,981                  77,644               69,654
Provision for income taxes (2) .....................................        122,630                 128,786              110,809
                                                                            -------                 -------              -------
Net income (pro forma prior to 1998)(2) ............................  $     173,563           $     189,992        $     163,470
                                                                      =============           =============        =============
NET INCOME BEFORE NON-RECURRING ITEMS, NET (1) .....................  $     224,863           $     189,992        $     163,470
                                                                      =============           =============        =============
     Percentage of operating revenue ...............................           3.9%                    4.0%                 4.1%
Earnings per share (pro forma prior to 1998):(2)
    Basic...........................................................  $        0.56           $        0.66        $        0.57
    Diluted.........................................................  $        0.55           $        0.64        $        0.55
    BASIC BEFORE NON-RECURRING ITEMS, NET (1).......................  $        0.73           $        0.66        $        0.57
    DILUTED BEFORE NON-RECURRING ITEMS, NET (1).....................  $        0.72           $        0.64        $        0.55

Shares used to compute basic net income per share...................        307,637                 289,315              285,944
Shares used to compute diluted net income per share.................        314,406                 298,887              299,640
Shares outstanding, net of treasury shares..........................        307,530                 298,030              279,944

Cash distributions per share........................................  $        0.36           $        0.33        $        0.31
Share price range:
    High price......................................................  $       22.00           $       25.50        $       19.67
    Low price.......................................................  $       10.13           $       16.00        $       10.92

FINANCIAL POSITION (at year end):
Current assets......................................................  $     959,238           $     670,202        $     594,084
Current liabilities.................................................        845,804                 753,697              558,177
Working capital.....................................................        113,434                 (83,495)              35,907
Current ratio.......................................................          1.1-1                    .9-1                1.1-1
Total assets........................................................  $   3,870,215           $   2,914,851        $   2,475,224
Non-current liabilities.............................................      1,818,695               1,204,668            1,392,609
Minority interest/deferred gain.....................................            -                       -                    -
Shareholders' equity................................................      1,205,716                 956,486              524,438
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY..........            19%                     25%                  26%
</TABLE>

(1) 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.

                                       30
<PAGE>

<TABLE>
<CAPTION>

ELEVEN YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)                      1996           1995         1994          1993
----------------------------------------------------------------------------------------------------------------------------

OPERATING RESULTS
<S>                                                                    <C>           <C>          <C>           <C>
Operating revenue ..................................................   $3,458,328    $3,202,504   $2,985,207    $2,758,859
Cost of services rendered and products sold.........................    2,681,008     2,499,700    2,356,435     2,192,684
Selling and administrative expenses ................................      482,102       450,937      414,746       393,131
Other, net (1) .....................................................           -             -            -             -
                                                                         --------      --------     --------      --------
Operating income  ..................................................      295,218       251,867      214,026       173,044
                                                                         --------      --------     --------      --------
OPERATING INCOME BEFORE NON-RECURRING ITEMS, NET (1) ...............      295,218       251,867      214,026       173,044
    Percentage of operating revenue ................................         8.5%          7.9%         7.2%          6.3%
Non-operating expense  (income).....................................       42,821        74,260       71,388        24,952
Provision for income taxes (2) .....................................      101,968        71,753       57,626        59,829
                                                                         --------       -------      -------       -------
Net income (pro forma prior to 1998)(2) ............................   $  150,429    $  105,854   $   85,012    $   88,263
                                                                       ==========    ==========   ==========    ==========
NET INCOME BEFORE NON-RECURRING ITEMS, NET (1) .....................   $  150,429    $  105,854   $   85,012    $   70,264
                                                                       ==========    ==========   ==========    ==========
     Percentage of operating revenue ...............................         4.3%          3.3%         2.8%          2.5%
Earnings per share (pro forma prior to 1998):(2)
    Basic...........................................................   $     0.47    $     0.41   $     0.33    $     0.35
    Diluted.........................................................   $     0.46    $     0.39   $     0.32    $     0.34
    BASIC BEFORE NON-RECURRING ITEMS, NET (1).......................   $     0.47    $     0.41   $     0.33    $     0.28
    DILUTED BEFORE NON-RECURRING ITEMS, NET (1).....................   $     0.46    $     0.39   $     0.32    $     0.27

Shares used to compute basic net income per share...................      317,381       260,382      255,650       253,919
Shares used to compute diluted net income per share.................      330,429       273,203      266,892       266,231
Shares outstanding, net of treasury shares..........................      320,396       321,341      256,419       257,901

Cash distributions per share........................................   $     0.29    $     0.28   $     0.27    $     0.26
Share price range:
    High price......................................................   $    11.83    $     9.00   $     8.41    $     9.19
    Low price.......................................................   $     8.61    $     6.37   $     6.37    $     5.22

FINANCIAL POSITION (at year end):
Current assets......................................................   $  499,334    $  393,239   $  331,045    $  291,325
Current liabilities.................................................      425,552       372,930      304,395       244,552
Working capital.....................................................       73,782        20,309       26,650        46,773
Current ratio.......................................................        1.2-1         1.1-1        1.1-1         1.2-1
Total assets........................................................   $1,846,841    $1,649,890   $1,230,839    $1,122,461
Non-current liabilities.............................................      607,614       517,603      483,906       471,177
Minority interest/deferred gain.....................................       16,908        12,697      135,272       117,513
Shareholders' equity................................................      796,767       746,660      307,266       289,219
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY..........          19%           24%          28%           28%
</TABLE>


<TABLE>
<CAPTION>

ELEVEN YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)                       1992          1991         1990          1989
---------------------------------------------------------------------------------------------------------------------------

OPERATING RESULTS
<S>                                                                    <C>           <C>          <C>           <C>
Operating revenue ..................................................   $2,488,854    $2,109,941   $1,825,750    $1,609,267
Cost of services rendered and products sold.........................    2,021,010     1,762,700    1,545,527     1,387,448
Selling and administrative expenses ................................      326,477       225,814      177,941       129,035
Other, net (1) .....................................................       78,935            -         6,500            -
                                                                         --------      --------     --------      --------
Operating income  ..................................................       62,432       121,427       95,782        92,784
                                                                          -------      --------      -------       -------
OPERATING INCOME BEFORE NON-RECURRING ITEMS, NET (1) ...............      141,367       121,427      102,282        92,784
    Percentage of operating revenue ................................         5.7%          5.8%         5.6%          5.8%
Non-operating expense  (income).....................................      (60,867)       34,020       10,398        24,016
Provision for income taxes (2) .....................................       49,813        35,312       34,495        27,782
                                                                          -------       -------      -------        ------
Net income (pro forma prior to 1998)(2) ............................   $   73,486    $   52,095   $   50,889    $   40,986
                                                                       ==========    ==========   ==========    ==========
NET INCOME BEFORE NON-RECURRING ITEMS, NET (1) .....................   $   56,994    $   48,614   $   42,843    $   40,986
                                                                       ==========    ==========   ==========    ==========
     Percentage of operating revenue ...............................         2.3%          2.3%         2.3%          2.5%
Earnings per share (pro forma prior to 1998):(2)
    Basic...........................................................   $     0.29    $     0.22   $     0.21    $     0.17
    Diluted.........................................................   $     0.28    $     0.21   $     0.21    $     0.17
    BASIC BEFORE NON-RECURRING ITEMS, NET (1).......................   $     0.23    $     0.20   $     0.18    $     0.17
    DILUTED BEFORE NON-RECURRING ITEMS, NET (1).....................   $     0.22    $     0.20   $     0.18    $     0.17

Shares used to compute basic net income per share...................      249,828       240,276      239,730       245,058
Shares used to compute diluted net income per share.................      262,941       252,579      243,038       249,219
Shares outstanding, net of treasury shares..........................      255,386       243,527      242,939       230,396

Cash distributions per share........................................   $     0.26    $     0.25   $     0.24    $     0.23
Share price range:
    High price......................................................   $     5.90    $     5.13   $     3.13    $     3.19
    Low price.......................................................   $     4.35    $     2.89   $     2.60    $     2.78

FINANCIAL POSITION (at year end):
Current assets......................................................   $  257,542    $  217,517   $  237,262    $  219,661
Current liabilities.................................................      206,755       157,458      158,046       135,375
Working capital.....................................................       50,787        60,059       79,216        84,286
Current ratio.......................................................        1.2-1         1.4-1        1.5-1         1.6-1
Total assets........................................................   $1,005,531    $  843,660   $  796,935    $  593,693
Non-current liabilities.............................................      511,211       376,638      372,052       410,056
Minority interest/deferred gain.....................................       77,906       187,583      170,831         9,174
Shareholders' equity................................................      209,659       121,981       96,006        39,088
PERCENTAGE RETURN ON WEIGHTED-AVERAGE SHAREHOLDERS' EQUITY..........          33%           45%          80%           84%

</TABLE>

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

                    1997 (A)   1996      1995
                   -----       ----      ----
    Net Income    $264,076  $245,140  $172,019
    EPS:  Basic   $    .92  $    .77  $    .66
    Diluted       $    .89  $    .75  $    .64


(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.

                                       31
<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 1998 and
1997 amounts have been reclassified to conform with the 1999 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   medical,   workers
compensation,  auto and general  liability  insurance,  the possible outcomes of
outstanding litigation and useful lives for depreciation and amortization.

REVENUES:   Revenues  from  lawn  care,  termite,   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 on the Company's commercial  installation  contracts are
recognized  on the  percentage  of  completion  method in the ratio  that  total
incurred costs bear to total estimated costs.

  Home warranty  contract fees are recognized as revenues  ratably over the life
of the contract  while the contract  costs are expensed as incurred.  Franchised
services  revenues  (which  in  aggregate  represent  less  than 10  percent  of
consolidated  totals) consist of initial  franchise fees received from the sales
of licenses, sales of products to franchisees, and continuing monthly fees based
upon franchise revenue.

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

  Revenues from the  professional  employer  organization  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, and factory
overhead and related  handling  costs.  Raw materials  represent less than three
percent of the inventory value at December 31, 1999. 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 ($260  million)  and  goodwill  ($2.2
billion).  These  assets  are  amortized  on a  straight-line  basis  over their
estimated useful lives,  which are  predominately 40 years.  Long-lived  assets,
including  fixed assets and  intangible  assets,  are  periodically  reviewed to
determine  recoverability by comparing their carrying values to the undiscounted
future cash flows expected to be realized from their use. No recovery  problems,
other  than that  noted in the  Diversified  Health  Services  business  and the
discontinued  Home  Health  Care  operations,   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 utilizes an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax  consequences
of events that have been recognized in the Company's financial statements or tax
returns.  Deferred income taxes are provided to reflect the differences  between
the tax bases of  assets  and  liabilities  and their  reported  amounts  in the
financial statements.

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

NEWLY  ISSUED  ACCOUNTING  STATEMENTS  AND  POSITIONS:  In 1998,  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
intends to adopt this  Statement  in January  2001 as  required  by the  amended
Statement.  Adoption of this Statement is not expected to have a material impact
on the Company's financial statements.


                                       32
<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,
1999 and 1998, and the related consolidated statements of income,  shareholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1999.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

  In our  opinion,  the  consolidated  financial  statements  referred  to above
present  fairly,  in  all  material  respects,  the  financial  position  of The
ServiceMaster Company and Subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of operations and cash flows for each of the three years in
the period ended  December 31,  1999,  in  conformity  with  generally  accepted
accounting principles.

ARTHUR ANDERSEN LLP
Chicago, Illinois
January 24, 2000


                                       33
<PAGE>

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

                                                                                     1999               1998               1997
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                            <C>                <C>                <C>

OPERATING REVENUE............................................................  $   5,703,535      $   4,724,119      $    3,961,502

OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold .................................      4,459,035          3,679,612           3,058,160
Selling and administrative expenses .........................................        775,826            648,085             559,409
Other, net (1) ..............................................................         85,500                -                   -
                                                                                      ------             ------              ------

Total operating costs and expenses ..........................................      5,320,361          4,327,697           3,617,569
                                                                                   ---------          ---------           ---------

OPERATING INCOME ............................................................        383,174            396,422             343,933

NON-OPERATING EXPENSE (INCOME):
Interest expense ............................................................        108,955             92,945              76,447
Interest and investment income ..............................................        (21,974)           (15,301)            (14,304)
Minority interest ...........................................................            -                  -                 7,511
                                                                                      ------             ------              ------

INCOME BEFORE INCOME TAXES ..................................................        296,193            318,778             274,279

Provision for income taxes (pro forma corporate form in 1997)(2) ............        122,630            128,786             110,809
                                                                                     -------            -------             -------

NET INCOME (pro forma corporate form in 1997 )(1),(2)........................  $     173,563      $     189,992      $      163,470
                                                                               =============      =============      ==============

</TABLE>
<TABLE>
<CAPTION>

PER SHARE  (pro forma corporate form in 1997):(1), (2), (3)
<S>                                                                                    <C>                <C>                 <C>
   BASIC.....................................................................          $0.56              $0.66               $0.57
                                                                                       -----              -----               -----
   DILUTED...................................................................          $0.55              $0.64               $0.55
                                                                                       -----              -----               -----
</TABLE>

(1)  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 those items, net income and earnings per share were as follows:
<TABLE>
<CAPTION>

                                                                     1999               1998             1997
                                                               ---------------    --------------     -----------
      <S>                                                         <C>               <C>               <C>
      Net income before non-recurring items, net...........       $ 224,863         $ 189,992         $ 163,470
      Per share before non-recurring items, net:
         Basic.............................................          $ 0.73            $ 0.66            $ 0.57
                                                                     ======            ======            ======

         Diluted...........................................          $ 0.72            $ 0.64            $ 0.55
                                                                     ======            ======            ======

</TABLE>


(2)  The Company  converted  from  partnership  to corporate  form in a tax-free
     exchange for  shareholders  on December 26, 1997.  Prior to the conversion,
     the  Partnership  was not  subject to federal  income  taxes as its taxable
     income was  allocated  to the  Company's  shareholders.  As a result of the
     conversion,  the Company is a taxable  entity and is  responsible  for such
     payments. The results shown above for the year ended December 31, 1997 have
     been restated to adjust the actual historical partnership  information to a
     pro forma basis that  assumes that  reincorporation  had occurred as of the
     beginning  of the year.  Upon  reincorporation,  the Company  recognized  a
     significant  increase in the tax basis of certain assets and recorded a $65
     million  tax  gain  related  to  reincorporation,   which  represented  the
     difference  between  the tax  basis  and  book  value  of its  assets.  The
     Company's historical  partnership net income in 1997 was $329 million ($264
     million  before the one-time  tax gain) and basic and diluted  earnings per
     share  were  $1.15 and  $1.10,  respectively  ($0.92  and $0.89  before the
     one-time tax gain).

(3)  Basic  earnings per share are  calculated  based on 307,637 shares in 1999,
     289,315 shares in 1998, and 285,944 shares in 1997,  while diluted earnings
     per share are calculated based on 314,406 shares in 1999, 298,887 shares in
     1998,  and 299,640 shares in 1997. All share and per share data reflect the
     three-for-two share splits in August 1998 and June 1997.

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


                                       34
<PAGE>

STATEMENTS OF FINANCIAL POSITION
(In thousands)
<TABLE>
<CAPTION>
                                                                                         As of December 31,

                                                                                      1999               1998
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
<S>                                                                              <C>               <C>
Cash and cash equivalents....................................................    $    59,834       $    66,400
Marketable securities .......................................................         54,376            54,022
Receivables, less allowances of $39,011 in 1999 and $38,988 in 1998 .........        558,842           372,375
Inventories..................................................................         82,861            49,770
Prepaid expenses and other assets............................................        140,690           102,835
Deferred taxes and tax receivables...........................................         62,635            24,800
                                                                                      ------            ------
   Total current assets......................................................        959,238           670,202
                                                                                     -------           -------

PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land and buildings...........................................................         71,972            53,068
Equipment....................................................................        587,838           388,141
                                                                                     -------           -------
                                                                                     659,810           441,209
Less:  accumulated depreciation..............................................        341,712           229,049
                                                                                     -------           -------
Net property, plant, and equipment...........................................        318,098           212,160
                                                                                     -------           -------

OTHER ASSETS:
Intangible assets, primarily trade names and goodwill,
  less accumulated amortization of $343,316 in 1999 and $272,254 in 1998 ....      2,461,389         1,884,002
Notes receivable, long-term securities, and other assets ....................        131,490           148,487
                                                                                     -------           -------
   Total Assets..............................................................    $ 3,870,215       $ 2,914,851
                                                                                 ===========       ===========

LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable.............................................................    $   145,237       $   110,523
Accrued liabilities:
   Payroll and related expenses..............................................         99,910            96,199
   Insurance and related expenses............................................         53,412            56,748
   Income taxes payable......................................................          6,479            84,165
   Other.....................................................................        211,529           149,477
Deferred revenues............................................................        257,521           204,969
Current portion of long-term debt............................................         71,716            51,616
                                                                                      ------            ------
   Total current liabilities.................................................        845,804           753,697
                                                                                     -------           -------

LONG-TERM DEBT...............................................................      1,697,582         1,076,167
OTHER LONG-TERM OBLIGATIONS..................................................        121,113           128,501

COMMITMENTS AND CONTINGENCIES (see Notes)

SHAREHOLDERS' EQUITY:
Common stock $0.01 par value, authorized 1 billion shares; issued and
 outstanding of 307,530 shares in 1999 and 298,030 shares in 1998 ...........          3,075             2,980
Additional paid-in capital...................................................      1,033,568           788,124
Retained earnings............................................................        241,701           179,840
Accumulated other comprehensive income ......................................         (1,821)            3,911
Restricted stock.............................................................         (2,577)           (3,383)
Treasury stock...............................................................        (68,230)          (14,986)
                                                                                     -------           -------
   Total shareholders' equity................................................      1,205,716           956,486
                                                                                   ---------           -------
Total Liabilities and Shareholders' Equity...................................    $ 3,870,215       $ 2,914,851
                                                                                 ===========       ===========

</TABLE>

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

                                       35
<PAGE>

STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,

                                                                                    1999            1998            1997
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>             <C>             <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1......................................   $   66,400      $   64,876      $   72,009

CASH FLOWS FROM OPERATIONS:
NET INCOME..................................................................      173,563         189,992         329,076
    Adjustments to reconcile net income to
    net cash provided from operations:
      Depreciation .........................................................       67,382          50,644          45,392
      Amortization..........................................................       71,062          53,961          47,670
      Non-recurring items, net..............................................       85,500             -               -
      Tax asset recorded upon reincorporation...............................          -               -           (65,000)
    Change in working capital, net of acquisitions:
      Receivables...........................................................      (49,130)        (46,205)         (6,853)
      Inventories and other current assets..................................      (32,368)         (2,360)        (14,210)
      Accounts payable......................................................       (2,703)         18,475           5,603
      Deferred revenues.....................................................       28,026          22,033          30,012
      Deferred 1998 tax payment.............................................      (78,500)         78,500             -
      Deferred income tax expense...........................................       20,300          36,400             -
      Accrued liabilities...................................................      (25,022)          2,472             (82)
    Other, net..............................................................       (1,535)          1,627             281
                                                                                ---------       ---------       ---------

NET CASH PROVIDED FROM OPERATIONS...........................................      256,575         405,539         371,889
                                                                                ---------       ---------       ---------
  MEMO: NET CASH PROVIDED FROM OPERATIONS EXCLUDING ALL TAX PAYMENTS .......      433,491         413,986         377,989

CASH FLOWS FROM INVESTING ACTIVITIES:
    Property additions......................................................      (88,754)        (75,297)        (46,232)
    Sale of equipment and other assets......................................        8,021           6,941           4,134
    Business acquisitions, net of cash acquired.............................     (510,512)       (222,452)       (233,689)
    Proceeds from sale of businesses........................................       70,344          45,893             -
    Net purchases of investment securities..................................      (12,474)        (11,011)        (16,753)
    Notes receivable and financial investments..............................      (19,357)        (10,645)         (3,593)
    Payments to sellers of acquired businesses..............................      (12,664)        (10,271)         (4,723)
                                                                                ---------       ---------       ---------
NET CASH USED FOR INVESTING ACTIVITIES......................................     (565,396)       (276,842)       (300,856)
                                                                                ---------       ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Borrowings, net.........................................................    1,263,427         310,190         888,528
    Payment of borrowings and other obligations.............................     (776,183)       (564,448)       (160,155)
    Proceeds from stock offering............................................          -           208,561             -
    Shareholders dividends (and distributions to trust in 1997).............     (111,702)        (75,152)       (155,883)
    Purchase of ServiceMaster stock.........................................      (93,046)        (18,310)       (657,191)
    Proceeds from employee share plans......................................       19,259          12,638           6,526
    Other...................................................................          500            (652)              9
                                                                                ---------       ---------       ---------

NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES......................      302,255        (127,173)        (78,166)
                                                                                ---------       ---------       ---------
CASH INCREASE (DECREASE) DURING THE YEAR....................................       (6,566)          1,524          (7,133)
                                                                                ---------       ---------       ---------
CASH AND CASH EQUIVALENTS AT DECEMBER 31....................................   $   59,834      $   66,400      $   64,876
                                                                               ==========      ==========      ==========

</TABLE>

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

                                       36
<PAGE>

STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)

<TABLE>
<CAPTION>

                                                                     CORPORATE EQUITY
                                                         ---------------------------------------

                                                                       ADDITIONAL                    LIMITED     ACCUMULATED
                                                          COMMON        PAID-IN        RETAINED     PARTNERS'   COMPREHENSIVE
                                                           STOCK        CAPITAL        EARNINGS      EQUITY        INCOME
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>             <C>          <C>            <C>
BALANCE, DECEMBER 31, 1996..............................$    -        $      -        $     -      $  856,268     $   6,357
                                                        ========================================================================


Net income 1997 ........................................                                 65,000       264,076
Other comprehensive income, net of tax:
   Unrealized gains on securities, net
      of reclassification adjustment ...................                                                              4,269
   Foreign currency translation ($3,580 tax expense)....                                                             (5,283)
                                                        ------------------------------------------------------------------------
Total comprehensive income .............................                                 65,000       264,076        (1,014)
Shareholder distributions ..............................                                             (155,883)
Shares issued under options, debentures,
   grant plans and other (6,552 shares) ................                                               21,165
Treasury shares repurchased from WMX
   (61,112 shares) .....................................                                             (625,978)
Treasury shares purchased and related costs
   (2,051 shares) ......................................
Shares issued for the acquisition of Barefoot,
   Inc. and other acquisitions (16,161 shares) .........                                              156,299
Conversion to corporate form............................   2,799         513,148                     (515,947)
                                                        ------------------------------------------------------------------------

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)
                                                        ========================================================================

</TABLE>


<TABLE>
<CAPTION>


                                                          TREASURY        RESTRICTED      TOTAL
                                                            STOCK           STOCK        EQUITY
----------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>
BALANCE, DECEMBER 31, 1996..............................$ (60,000)     $   (5,858)    $  796,767
                                                        ==========================================


Net income 1997 ........................................                                 329,076
Other comprehensive income, net of tax:
   Unrealized gains on securities, net
      of reclassification adjustment ...................                                   4,269
   Foreign currency translation ($3,580 tax expense)....                                  (5,283)
                                                        ------------------------------------------
Total comprehensive income .............................                                 328,062
Shareholder distributions ..............................                                (155,883)
Shares issued under options, debentures,
   grant plans and other (6,552 shares) ................    3,511           1,588         26,264
Treasury shares repurchased from WMX
   (61,112 shares) .....................................                                (625,978)
Treasury shares purchased and related costs
   (2,051 shares) ......................................  (31,213)                       (31,213)
Shares issued for the acquisition of Barefoot,
   Inc. and other acquisitions (16,161 shares) .........   30,120                        186,419
Conversion to corporate form............................
                                                        ------------------------------------------

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
                                                        ==========================================
</TABLE>
All share data  reflect the  three-for-two  share splits in August 1998 and June
1997.

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

                                                1999        1998       1997
                                                ----        ----       ----
Unrealized holding gains arising in period   $   555     $  3,295   $  5,904
Less: gains realized                          (4,285)      (3,780)    (1,635)
                                              -------      -------    -------
Net unrealized gains on securities           $(3,730)    $   (485)  $  4,269
                                             ========    =========  =========

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


                                       37
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

BUSINESS UNIT REPORTING

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

  The Other Operations group includes primarily ServiceMaster Employer Services,
a professional  employer  organization that provides clients with administrative
processing  of  payroll,  workers'  compensation  insurance,  health  insurance,
unemployment  insurance and other  employee  benefit plans;  Diversified  Health
Services,  which provides  services and products to the long-term care industry;
and the Company's headquarters operations.

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

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

  The following information for 1997 is presented on a pro forma basis as if the
Company had been a taxable corporation and corporate taxes had been allocated to
the segments.  Certain immaterial amounts have been reclassified to conform with
the 1999 presentation.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands)
<TABLE>
<CAPTION>

                                    Consumer
                                                             & Commercial    Management      Other
                                                               Services       Services     Operations   Consolidated

                                                            ---------------------------------------------------------
1999
<S>                                                           <C>           <C>           <C>           <C>
Operating revenue ..........................................  $ 3,133,420   $ 1,940,887   $ 629,228     $5,703,535
Operating income ...........................................      382,411       124,736    (123,973)       383,174
OPERATING INCOME, EXCLUDING NON-RECURRING ITEMS(1) .........      382,411        74,636      11,627        468,674
Net interest expense (income) ..............................       87,422        (5,538)      5,097         86,981
Provision for income taxes .................................      123,923        53,152     (54,445)       122,630
                                                              -----------   -----------   ---------     ----------
Net income .................................................  $   171,066   $    77,122   $ (74,625)    $  173,563
                                                              ===========   ===========   =========     ==========

NET INCOME, EXCLUDING NON-RECURRING ITEMS (1)...............  $   171,066   $    47,463   $   6,334     $  224,863
                                                              ===========   ===========   =========     ==========

Identifiable assets ........................................  $ 3,356,367   $   224,694   $ 289,154     $3,870,215
Depreciation and amortization expense ......................      110,496        19,424       8,524        138,444
Capital expenditures .......................................       53,996        30,370       4,388         88,754

1998

Operating revenue ..........................................  $ 2,048,185   $ 2,040,948   $ 634,986     $4,724,119
Operating income ...........................................      305,408       112,919     (21,905)       396,422
OPERATING INCOME, EXCLUDING NON-RECURRING ITEMS (1 ) .......      305,408        74,919      16,095        396,422
Net interest expense (income) ..............................       39,175        (1,882)     40,351         77,644
Provision for income taxes .................................      107,552        46,380     (25,146)       128,786
                                                              -----------   -----------   ---------     ----------
Net income .................................................  $   158,681   $    68,421   $ (37,110)    $  189,992
                                                              ===========   ===========   =========     ==========

NET INCOME, EXCLUDING NON-RECURRING ITEMS (1) ..............  $   158,681   $    45,774   $ (14,463)    $  189,992
                                                              ===========   ===========   =========     ==========

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

1997

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

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


(1): In 1999,  this line excludes the $50 million  pretax gain in the Management
     Services  segment  related  to the  sale of its  Premier  business  and its
     remaining 15 percent  interest in ServiceMaster  Energy  Management and the
     $136 million pretax charge in the Other  Operations  segment related to the
     Diversified Health Services operation,  which included  write-downs for the
     impairment of assets. In 1998, this line excludes a $38 million pretax gain
     recorded in  Management  Services  related to the  formation of a strategic
     venture which acquired 85% of the assets of ServiceMaster Energy Management
     and pretax  charges  totaling $38 million in the Other  Operations  segment
     related  primarily  to the home health care  operations,  which  included a
     write-down  for the  impairment  of assets  and costs  relating  to exiting
     customer arrangements.


                                       38
<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 Partnership's shareholders approved
a tax-free plan of reorganization to return to corporate form. The ServiceMaster
Company  was  created  as part of this plan 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 $0.01 par value  common  stock.  No federal  income
taxes were imposed on the  shareholders  of the  Partnership  as a result of the
reincorporation.  Pro forma  information has been presented in the  accompanying
financial statements in order to compare the continuing results of operations as
if the Company had been a taxable  entity in 1997.  The pro forma tax  provision
has been  calculated  assuming  that the  Company's  effective tax rate had been
approximately 40 percent of pretax earnings.

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

INCOME TAXES

  As  previously  noted,  prior  to  reincorporation  at the end of  1997,  most
operations  conducted by the Company and its  subsidiary  partnerships  had been
exempt from federal  corporate  income tax. As a result of the  reincorporation,
the Company recognized a step-up in the tax basis of its assets,  which is being
amortized against taxable income.

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

                                           1999          1998
                                           ----          ----
Tax at U.S. federal statutory rate        35.0%          35.0%
State and local income taxes,
   net of U.S. federal benefit             4.0%           4.4%
Non-deductible amortization                1.4%            -
Other                                      1.0%           1.0%
                                         -------        -------
Effective rate                            41.4%          40.4%
                                          =====          =====


  Income tax expense consists of:

                                          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 purposes and the amounts for income tax purposes.  Management believes
that, based upon its lengthy and consistent history of profitable operations, it
is  probable  that the net  deferred  tax asset will be  realized  on future tax
returns,  primarily from the generation of future  taxable  income.  Significant
components of the Company's deferred tax balances are as follows:

                                             1999          1998
                                             ----          ----
(In thousands) Deferred tax assets (liabilities):

  Current:
  Prepaid expenses and other              $(26,700)  $   (23,400)
  Accounts receivable allowance             12,900         7,400
  Accrued insurance and
    related expenses                        24,900        24,100
  Other accrued expenses                    33,600        16,700
                                            ------        ------
       Total current asset                  44,700        24,800
  Long-term:
  Long-term assets                         (43,100)         (500)
  Insurance expenses                        32,300        32,500
  Other long-term obligations               (9,000)      (11,600)
                                            ------       -------
     Total long term asset (liability)     (19,800)       20,400
                                           --------      --------
Net deferred tax asset                 $    24,900   $    45,200
                                       ===========   ===========

Total tax payments in 1999 were $177 million,  of which $79 million  represented
the 1998 federal tax payment that was deferred into 1999.  There were no federal
taxes paid in 1998 and  approximately $8 million of state tax payments were made
in the year.


                                       39
<PAGE>

ACQUISITIONS

CURRENT YEAR -

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

  During 1999, the Company completed two significant acquisitions. In March, the
Company acquired  LandCare USA (LandCare) which, when combined with the existing
landscape operations of the Company,  created the largest commercial landscaping
company in America. In April, 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 tradenames  that are being  amortized over 40
years.  Certain  preliminary value allocations are subject to change during 2000
as additional information (primarily asset appraisals) is obtained.

  Certain members of management acquired, at fair market value, equity interests
in the  landscaping  operations and the  heating/air  conditioning  and plumbing
operations. The Company and the holders of minority interests in the landscaping
and heating/air  conditioning  operations have the respective options to acquire
or sell the minority interests between 2004 and 2009. The purchase price will be
determined  based  on the  fair  market  value  of the  entities  at the  future
transaction  date.  The  minority  interest  acquisition  will  be  recorded  as
additional purchase cost at the time of payment.

  Also during the year, 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.

PRIOR YEARS -

  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, which
was the third largest pest control company in the United Kingdom,  significantly
increased the  international  presence of Terminix.  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 the year,
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.

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

  During 1997,  the Company made several  smaller  acquisitions,  which included
Certified  Systems,  Inc.,  one of the nation's  largest  professional  employer
organizations, Orkin's lawn care and plantscaping division and a number of other
lawn care and pest control  businesses.  The Company also purchased the minority
interests  of  Management   Services  and  Diversified  Health  Services  for  a
combination of cash and Company shares totaling  approximately $25 million.  The
aggregate fair market value of the assets acquired less liabilities  assumed for
these  smaller  acquisitions  was $247  million,  including  approximately  $267
million of intangible assets, primarily goodwill.

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

<TABLE>
<CAPTION>

              (In thousands)                     1999             1998            1997
                                                 ----             ----            ----
<S>                                          <C>               <C>             <C>
Fair value of assets acquired .............. $ 1,078,105       $ 459,400       $ 577,849
Less liabilities assumed ...................    (140,477)        (23,167)        (93,452)
                                             -----------       ---------       ---------
Net assets acquired ........................ $   937,628       $ 436,233       $ 484,397

Net cash paid for acquisitions ............. $   510,512       $ 222,452       $ 233,689
Shares issued ..............................     266,615         104,567         186,419
Seller financed and assumed debt ...........     160,501         109,214          64,289
                                             -----------       ---------       ---------
Payment for acquisitions.................... $   937,628       $ 436,233       $ 484,397

</TABLE>
                                       40
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

OTHER EVENTS-CURRENT YEAR

  In the first quarter of 1999, the Company  announced that it was undertaking a
strategic  review and assessment of the services that comprised the  Diversified
Health  Services  operation  due to  changes  in  reimbursement  and  compliance
policies and the resulting financial  difficulties of a number of its customers.
Diversified  Health  Services  has  provided  general  management  services  for
long-term care facilities, as well as a number of ancillary services,  including
rehabilitation  therapy,  medical  supplies,  pharmacy,  and  design  and  build
services.  In addition,  the Company  provided  financing to certain  facilities
generally  in return  for a  long-term  management  contract  and a share in the
market appreciation of the facility. Based on the review of the business and the
credit risks involved,  the Company reduced the scope of the services it offered
substantially,  including  its ancillary  services,  and  eliminated  all future
credit extension activities. As a result of this review, the Company recorded an
after-tax  charge of $81 million in the second  quarter  relating to Diversified
Health  Services.  Since that time, the Company has terminated  several customer
relationships,  decreased  the level of overhead  costs in the  operations,  and
reduced the scope of its ancillary 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
                                                      ====


  Given the  uncertainty in the industry and the decision to reduce the size and
scope of Diversified  Health  Services,  the Company  reviewed the expected cash
flows from the business,  which were less than the carrying value of the assets,
and accordingly,  recorded an impairment  charge primarily  relating to goodwill
associated with the business.  A significant  amount of receivables,  loans, and
investments in nursing homes were written down largely due to the  deterioration
in the  financial  viability of the  customers  which  resulted  primarily  from
changes  in  Medicare  reimbursement  levels.  The  majority  of the  receivable
write-down  related to seven troubled  nursing homes. As previously  noted,  the
Company  recorded  an $11  million  charge to provide  for losses and  exposures
relating to contracts  and  services.  The Company has exited a number of client
arrangements in which customers were not paying  Diversified Health Services and
the prospect of collection continues to be low.  Approximately $5 million of the
provision  has been  utilized  and the  Company  continues  to believe  that the
remaining reserve is adequate and appropriate.

  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).  Also in the quarter,  the Company sold its  remaining 15
percent  interest in  ServiceMaster  Energy  Management  to its  partner,  Texas
Utilities,  which  resulted  in an  after-tax  gain of $5  million  ($8  million
pretax).

PRIOR YEAR

  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.

  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.

                                       41
<PAGE>

  In June 1996, Ray D. Martin,  a former  salesman  employed by  ServiceMaster's
Management  Services  unit,  filed a lawsuit  in Fulton  County,  Georgia  which
contended that the Company had not paid him the full amount of commission due to
him on a sale in which he was involved. The Company believed that the commission
was not payable  under the Company's  commission  policies and  procedures.  The
amount then at issue was approximately  $180,000. In the course of the pre-trial
proceedings,  the trial court  entered a default  judgment  against the Company.
Consequently,  the Company was not permitted to defend its position and the only
issue  left to be  considered  at the  trial was the  question  of  damages.  In
addition, the trial court then permitted the plaintiff to amend his complaint to
include a tort  claim,  which  allowed  for the  levying  of  punitive  damages.
However,  the trial  court did not permit  the  Company to file an answer to the
amended  complaint  or  otherwise to make the point that there is no basis for a
tort claim in the  circumstances  of this case. On September 29, 1999, the trial
court  entered  final  judgment  for the  plaintiff  in a total  amount  of $136
million. Under Georgia law, that judgement will accrue post-judgment interest at
a statutory rate of 12 percent per annum, except for the portion of the judgment
that represents  pre-judgment interest. On October 14, 1999, the Company filed a
motion for judgment  notwithstanding  the verdict or, in the alternative,  for a
new trial. The Company, based on advice of outside legal counsel,  believes that
the award of $135 million in punitive damages is not supportable by the facts of
the case or by  applicable  state  law.  The  Company is not  presently  able to
reasonably estimate the ultimate outcome of this case, and accordingly,  minimal
expense has been recorded.  In the event that the adverse  judgment is sustained
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.

  The  Company  believes  that other legal  proceedings  and  currently  pending
litigation  arising in the ordinary  course of business will not have a material
effect on the consolidated financial statements.

SUBSEQUENT EVENT

  In January 2000,  the Company  announced the formation and initial  funding of
WeServeHomes.com,  a separate  Internet company that will provide  comprehensive
on-line  solutions  for  homeowners  including  home  services,   products,  and
information.  ServiceMaster  owns 84 percent  of  WeServeHomes.com  and  Kleiner
Perkins Caufield & Byers (Kleiner Perkins), contributed $15 million to hold a 16
percent ownership interest with warrants to purchase an additional $11.5 million
in  stock  at  the  same   price.   The   expenses  in  2000   associated   with
WeServeHomes.com   will  be  reduced  by  the  amount  of  the  Kleiner  Perkins
investment.

EMPLOYEE BENEFIT PLANS

  Contributions  to qualified  profit  sharing  plans were made in the amount of
$11.6 million in 1999, $9.9 million in 1998 and $8.2 million in 1997.  Under the
Employee Share Purchase Plan, the Company contributed $1.3 million in 1999, $1.2
million in 1998 and $1.1 million in 1997.  These funds defrayed part of the cost
of the shares purchased by employees.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

      (In thousands)                                      1999           1998
-------------------------------------------------------------------------------
  Notes Payable:
    10.57%, maturing in 2000.....................$        9,000   $    18,000
     8.38%, maturing in 2000 - 2001 .............        20,000        30,000
    10.81%, maturing in 2000 - 2002 .............        55,000        55,000
     6.65%, maturing in 2002 - 2004 .............        70,000        70,000
     7.40%, maturing in 2006 ....................       125,000       125,000
     6.95%, maturing in 2007 ....................       100,000       100,000
     7.88%, maturing in 2009 ....................       250,000             -
     7.10%, maturing in 2018 ....................       150,000       150,000
     7.45%, maturing in 2027 ....................       200,000       200,000
     7.25%, maturing in 2038 ....................       150,000       150,000
  Revolving credit facilities ...................       382,500        50,000
  International borrowings ......................        93,048        48,272
  Other .........................................       164,750       131,511
  Less current portion ..........................       (71,716)      (51,616)
                                                    -----------   -----------

  Total long-term debt...........................$    1,697,582   $ 1,076,167
                                                    ===========   ===========
-------------------------------------------------------------------------------

  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.

 In June  1997,  ServiceMaster  filed a shelf  registration  statement  with the
Securities  and  Exchange  Commission  for the  sale of up to  $950  million  in
unsecured  senior debt  securities or equity  interests.  In November  1999, the
Company  filed a  registration  statement  for the  sale of an  additional  $700
million in unsecured senior debt securities or equity interests. As of year end,
the Company had $800 million of securities  available  for issuance  under these
shelf registration  statements.  The first debt issuance from the shelf occurred
in August 1997.  It included two tranches of debt  totaling  $300  million.  The
Company  completed  a second $300  million  dual-tranche  offering of  unsecured
senior notes in February  1998. In August 1999,  the Company  completed a senior
unsecured  debt  offering of $250  million,  7.875 percent notes priced to yield
7.98  percent  and due August 15,  2009.  The net  proceeds  of these  offerings
reduced  borrowings under bank credit facilities and thereby reduced exposure to
short-term interest rate fluctuations.

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

                                       42
<PAGE>

  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 $390  million of unused  commitment  as of
December 31, 1999.

  The Company is exposed to interest  rate  fluctuations  on its  floating  rate
debt.  As of year end,  the Company had  approximately  $220 million in floating
rate borrowings.  The Company has, from time to time, entered into interest rate
swap  or  similar  arrangements  to  mitigate  its  exposure  to  interest  rate
fluctuations,  and does not, as a matter of policy, enter into hedging contracts
for trading or speculative  purposes.  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%.

  Cash interest  payments were $97 million in 1999, $88 million in 1998, and $63
million in 1997.  Average rates paid on the revolving  credit  facility were 5.5
percent in 1999, 5.9 percent in 1998, and 6.0 percent in 1997.  Future scheduled
long-term debt payments are $71.7 million in 2000 (average rate of 4.4 percent),
$72.6  million in 2001  (average  rate of 5.3  percent),  $57.2  million in 2002
(average  rate of 5.9  percent),  and $42.0 million in 2003 (average rate of 5.2
percent) and $40.7 million in 2004 (average rate of 5.6 percent).  Notes payable
of $19.0  million  due in 2000 are  intended to be  refinanced  by the long term
revolving  credit  facility in 2000 and  therefore are not included in the $71.7
million of current  liabilities.  The $382.5 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 2004.

  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 $1.7 billion.

  Future long-term  noncancelable  operating lease payments are $44.7 million in
2000, $34.8 million in 2001, $26.5 million in 2002, $19.3 million in 2003, $13.5
million in 2004 and $23.8 million thereafter. Rental expense for 1999, 1998, and
1997 was $137.9 million, $103.8 million, and $83.9 million, respectively.

  The Company  maintains a $95 million  operating  lease  facility  with a bank,
which provides for the acquisition and development of properties to be leased by
the Company.  The Company has  guaranteed  the residual  value of the properties
under the lease up to 82 percent of the fair market value at the commencement of
the lease.  The Company  does not expect to be required to make  residual  value
payments and  therefore,  no amounts have been  included in the future  payments
above.  At December  31, 1999,  approximately  $64 million was funded under this
facility.

CASH AND MARKETABLE SECURITIES

  Marketable  securities  held at December 31, 1999 and 1998, 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.  As of December 31, 1999, the aggregate  market value of the
Company's  short- and long-term  investments  in debt and equity  securities was
$103 million and the aggregate cost basis was $96 million.

  Interest and dividend  income  received on cash and marketable  securities was
$9.0  million,  $8.9  million,  and $8.3  million,  in  1999,  1998,  and  1997,
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.

                               1999    1998    1997
                               ----    ----    ----
Unrealized holding gains
  Arising in period ....      $1,026  $5,529  $9,908
Tax expense ............         471   2,234   4,004
                              ------  ------  ------
Net of tax amount ......      $  555  $3,295  $5,904
                              ======  ======  ======

Gains realized .........      $7,239  $6,342  $2,743
Tax expense ............       2,954   2,562   1,108
                              ------  ------  ------
Net of tax amount ......      $4,285  $3,780  $1,635
                              ======  ======  ======

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

                        1999      1998      1997
                        ----      ----      ----
Unrealized gain on
  Securities .....    $ 4,023   $ 7,753   $ 8,238
Foreign currency
  translation ....     (5,844)   (3,842)   (2,895)
                      -------   -------   -------
Total ............    $(1,821)  $ 3,911   $ 5,343
                      =======   =======   =======

                                       43
<PAGE>

SHAREHOLDERS' EQUITY

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

  In May 1998,  the Company filed a Form S-3  registration  statement,  and 21.2
million   Company   shares  were  sold  at  $19.17  per  share.   This  included
approximately  11.4  million of  newly-issued  shares  from the  Company and 9.8
million shares sold by existing  shareholders.  The net proceeds to the Company,
after the underwriting  discount and offering expenses,  were approximately $209
million  and were used to reduce  outstanding  debt under  existing  bank credit
facilities.

  In July 1998, the Company filed a shelf registration  statement to issue up to
5.3 million  shares of common  stock in  connection  with  future,  unidentified
acquisitions. In April 1999, the Company filed another shelf registration, which
increased the shares available for issuance to 13.9 million. These filings allow
the Company to issue  registered  shares much more  efficiently  when  acquiring
privately-held  companies.  The  Company  plans to use the  shares  over time in
connection   with  purchases  of  roll-up   acquisitions   and  small  strategic
acquisitions. There were approximately 6.4 million shares available at year end.

  As of December 31, 1999,  there were 24.3 million Company shares available for
issuance upon the exercise of employee  options  outstanding  and future grants.
Share  options are issued at a price not less than the fair market  value on the
grant date and expire  within ten years of the grant date.  Certain  options may
permit the holder to pay the option  exercise price by tendering  Company shares
that have been owned by the holder without  restriction for an extended  period.
Share  grants  carry a  vesting  period  and are  restricted  as to the  sale or
transfer of the shares.

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

(In  thousands,  except per share data)

                                     1999         1998        1997
                                     ----         ----        ----
Net Income:
   As reported (1)                 $173,563     $189,992    $163,470
   SFAS 123 Pro forma              $166,601     $185,555    $160,966

Net Income Per Share:
   Basic:     As reported (1)          $.56         $.66        $.57
              SFAS 123 Pro forma       $.54         $.64        $.56

   Diluted:  As reported (1)           $.55         $.64        $.55
             SFAS 123 Pro forma        $.53         $.62        $.54

(1) Pro forma corporate form in 1997.

  The SFAS 123 pro forma net income  reflects  options granted in 1999, 1998 and
1997.  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 1999, 1998 and 1997: risk-free interest rates of 5.4 percent, 5.6
percent  and 6.3  percent,  respectively;  volatility  rates of 25  percent,  22
percent and 21 percent,  respectively;  distribution yields of 2.5 percent,  1.9
percent  and 3.2  percent,  respectively;  and average  expected  lives of seven
years.   The  options   granted  to  employees  in  1999,  1998  and  1997  have
weighted-average  fair values of $4.15, $5.17, and $2.81,  respectively and vest
ratably over five years.  The Company has  estimated  the value of these options
assuming a single weighted-average expected life for the entire award.


                                       44
<PAGE>

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

                                             Share             Price         Weighted-Avg.      Share           Price
                                            Options            Range        Exercise Price      Grants          Range
=========================================================================================================================
<S>                                       <C>           <C>                  <C>             <C>           <C>
Total exercisable, December 31, 1996       8,202,741    $   0.73 -  7.63     $    5.49           -----              -----
Total outstanding, December 31, 1996      16,576,116    $   0.73 - 10.78     $    7.56       1,806,741     $  2.86 - 7.96

TRANSACTIONS DURING 1997
    Granted to employees                   5,295,785    $  11.23 - 18.42     $   11.62            -----             -----
    Exercised, paid, or vested            (1,892,034)   $   2.17 -  9.26     $    5.17        (430,460)    $  2.86 - 7.96
    Cancelled, related to WMX             (4,218,750)   $           9.78     $    9.78           -----              -----
    Terminated or resigned                  (440,960)   $   1.97 - 11.22     $    7.11        (120,175)    $  2.86 - 7.96

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

TRANSACTIONS DURING 1998
    Granted to employees                   3,574,376    $  15.74 - 22.77     $   18.29           -----              -----
    Exercised, paid, or vested            (1,604,784)   $   2.25 - 11.22     $    6.29        (293,376)    $  2.86 - 7.96
    Terminated or resigned                  (377,023)   $   0.73 - 18.26     $    8.57           -----              -----

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

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

<TABLE>
<CAPTION>

Options outstanding at December 31, 1999:

      Range of          Number Outstanding      Remaining       Weighted-Average      Number Exercisable        Weighted-Average
   Exercise Prices         at 12/31/99            Life           Exercise Price          at 12/31/99             Exercise Price
=================================================================================================================================
<S>                         <C>                 <C>                 <C>                   <C>                        <C>
$   2.24 -  6.44             2,549,353          3.5 years           $  5.18                2,549,353                 $  5.18
    6.48 - 10.78             4,826,967          5.5 years              8.95                3,315,054                    8.73
   11.22 - 15.94             8,252,322          8.0 years             11.81                2,928,303                   12.44
   16.12 - 22.77             7,556,423          8.5 years             18.21                  993,033                   18.52
   27.20 - 45.79               316,374          7.0 years             33.07                  220,901                   31.01
---------------------------------------------------------------------------------------------------------------------------------
 $  2.24 - 45.79            23,501,439          7.0 years           $ 12.85               10,006,644                 $ 10.37
=================================================================================================================================

</TABLE>

EARNINGS PER SHARE

  Basic earnings per share are 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 1999           For year ended 1998
                                                ------------------------------------------------------------

(In thousands, except per share data)             Income     Shares     EPS     Income      Shares    EPS
                                                ------------------------------------------ -----------------
<S>                                                <C>        <C>       <C>      <C>        <C>       <C>
BASIC EPS (PRO FORMA CORPORATE FORM IN 1997)       $173,563   307,637   $0.56    $189,992   289,315   $0.66
EFFECT OF DILUTIVE SECURITIES, NET OF TAX:

    Options                                                     6,769                         9,391
    Convertible debentures                                -         -                  32       181
                                                ----------------------        ------------ ---------
DILUTED EPS (PRO FORMA CORPORATE FORM IN 1997)     $173,563   314,406   $0.55    $190,024   298,887   $0.64
                                                ========================================== =================
</TABLE>


                               For year ended 1997
                                                 ------------------------------

  (In thousands, except per share data)            Income     Shares     EPS
                                                 --------------------- --------

  BASIC EPS (PRO FORMA CORPORATE FORM IN 1997)      $163,470  285,944    $0.57
  EFFECT OF DILUTIVE SECURITIES, NET OF TAX:

      Options                                                   8,333
      Convertible debentures                           1,114    5,363
                                                 ---------------------
  DILUTED EPS (PRO FORMA CORPORATE FORM IN 1997)    $164,584  299,640    $0.55
                                                 ===================== ========



                                       45
<PAGE>

QUARTERLY OPERATING RESULTS

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

  Certain amounts from prior periods have been  reclassified to conform with the
current presentation.
<TABLE>
<CAPTION>


(Unaudited, in thousands, except per share data)
                                                             Percent Incr.                     Percent Incr.
                                             1999              '99-'98            1998            '98-'97            1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                     <C>         <C>                    <C>         <C>
OPERATING REVENUE:
First Quarter ...................         $1,115,062              14%         $  981,788             20%         $  817,136
Second Quarter ..................          1,537,074              23           1,244,627             23           1,010,794
Third Quarter ...................          1,584,225              24           1,273,093             17           1,090,114
Fourth Quarter ..................          1,467,174              20           1,224,611             17           1,043,458
                                          ----------                          ----------                         ----------
                                          $5,703,535              21%         $4,724,119             19%         $3,961,502
GROSS PROFIT:
First Quarter ...................         $  215,247              15%         $  186,991             17%         $  159,991
Second Quarter ..................            368,237              26             293,261             14             257,260
Third Quarter ...................            359,885              14             316,718             23             257,449
Fourth Quarter ..................            301,131              22             247,537              8             228,642
                                          ----------                          ----------                         ----------
                                          $1,244,500              19%         $1,044,507             16%         $  903,342
NET INCOME:
(PRO FORMA IN 1997)
First Quarter ......................      $   35,609              22%         $   29,270              1%         $   28,982
Second Quarter .....................          18,035             (68)             56,404             21              46,707
   BEFORE NON-RECURRING ITEMS, NET .          69,335              23              56,404             21              46,707
Third Quarter ......................          66,637              18              56,352             20              46,793
Fourth Quarter .....................          53,282              11              47,966             17              40,988
                                          ----------                          ----------                         ----------
                                          $  173,563              (9)%        $  189,992             16%         $  163,470
   BEFORE NON-RECURRING ITEMS, NET .      $  224,863              18%         $  189,992             16%         $  163,470

BASIC NET INCOME PER SHARE:
(PRO FORMA IN 1997)
First Quarter .......................     $     0.12               9%         $     0.11             22%         $     0.09
Second Quarter ......................           0.06             (70)               0.20             18                0.17
   BEFORE NON-RECURRING ITEMS, NET ..           0.22              10                0.20             18                0.17
Third Quarter .......................           0.21              11                0.19             12                0.17
Fourth Quarter ......................           0.17               6                0.16              7                0.15
                                          ----------                          ----------                         ----------
                                          $     0.56             (15)%        $     0.66             16%         $     0.57
  BEFORE NON-RECURRING ITEMS, NET ...     $     0.73              11%         $     0.66             16%         $     0.57

DILUTED NET INCOME PER SHARE:
(PRO FORMA IN 1997)
First Quarter ........................    $     0.12              20%         $     0.10             11%         $     0.09
Second Quarter .......................          0.06             (68)               0.19             19                0.16
   BEFORE NON-RECURRING ITEMS, NET ...          0.22              16                0.19             19                0.16
Third Quarter ........................          0.21              11                0.19             19                0.16
Fourth Quarter .......................          0.17               6                0.16             14                0.14
                                          ----------                          ----------                         ----------
                                          $     0.55             (14)%        $     0.64             16%         $     0.55
   BEFORE NON-RECURRING ITEMS, NET ...    $     0.72              13%         $     0.64             16%         $     0.55

CASH DIVIDENDS PER SHARE:
First Quarter ........................    $     0.09              13%         $     0.08              7%         $     0.07 1/2
Second Quarter .......................          0.09              13                0.08              7                0.07 1/2
Third Quarter ........................          0.09              13                0.08              -                0.08
Fourth Quarter .......................          0.09               -                0.09             13                0.08
                                          ----------                          ----------                         --------------
                                          $     0.36               9%         $     0.33              6%         $     0.31
PRICE PER SHARE:
First Quarter ........................    $    22.00 - 17.50                  $    19.63 - 16.50                 $    12.33 - 10.92
Second Quarter .......................         20.94 - 17.31                       25.50 - 17.92                      15.92 - 12.09
Third Quarter ........................         18.56 - 14.00                       24.75 - 19.75                      19.67 - 15.17
Fourth Quarter .......................         16.25 - 10.13                       23.81 - 16.00                      19.50 - 14.00


</TABLE>

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


                                       46