<TABLE>

  FINANCIAL HIGHLIGHTS
  (In thousands, except per share data)
                                                                               (RESTATED 4)
  AS OF AND FOR THE YEARS ENDED DECEMBER 31                            2002        2001          CHANGE
  --------------------------------------------------------------------------------------------------------
  <S>                                                              <C>           <C>                <C>
  OPERATING RESULTS

  Operating revenue                                                $3,589,089    $3,561,445         1%

  Operating income (loss) (1)                                         341,336       (23,177)

  Income (loss) from continuing operations                            170,098      (164,464)

  Income (loss) from discontinued operations (2)                       (3,875)      284,270
  Extraordinary loss (3)                                               (9,229)       (3,422)
                                                                 ---------------------------

  Net income                                                         $156,994      $116,384

  Diluted earnings per share:

  Income (loss) from continuing operations                              $0.56        $(0.55)
  Discontinued operations, net (2)                                      (0.01)
                                                                                       0.95
  Extraordinary loss, net (3)                                           (0.03)        (0.01)
                                                                 ---------------------------

  Diluted earnings per share                                            $0.52         $0.39

  Cash dividends per share                                              $0.41         $0.40         3%
  --------------------------------------------------------------------------------------------------------
  FINANCIAL POSITION
  Total assets                                                     $3,414,938    $3,621,245
  Total debt                                                          835,475     1,155,193
  Shareholders' equity                                              1,218,700     1,207,187
  --------------------------------------------------------------------------------------------------------
  CASH FLOWS
  Cash from operations                                               $381,049      $362,933         5%
  --------------------------------------------------------------------------------------------------------
  SHARE PRICE RANGE
  (Traded on the New York Stock Exchange under the symbol SVM)
  High price for the year                                              $15.50        $14.20
  Low price for the year                                                 8.89          9.84
  Closing price as of December 31,                                      11.10         13.80
  --------------------------------------------------------------------------------------------------------

</TABLE>


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

     In the fourth quarter of 2001, the Company recorded a pretax charge of $345
     million ($279 million, after-tax),  related primarily to goodwill and asset
     impairments  and other items.  The impact on diluted  earnings per share of
     this charge was $0.94.

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

(3)  In 2002 and 2001,  the  Company  repurchased  a portion of its public  debt
     securities and in 2001 the Company  prepaid some of its  longer-term  debt.
     The net impact of these transactions was extraordinary losses of $9 million
     ($15 million  pretax) and $3 million ($6 million  pretax) in 2002 and 2001,
     respectively.  The Company  intends to adopt SFAS 145  beginning  in fiscal
     2003.   Adoption   of  this   Statement   in  2003   will   result  in  the
     reclassification  of the  extraordinary  losses into income from continuing
     operations.

(4)  See the  "Restatement"  section in the Notes to the Consolidated  Financial
     Statements  for the basis of the  restatement  and the financial  statement
     impact.




                                       1
<PAGE>




                     MANAGEMENT DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS




<PAGE>




2002 COMPARED WITH 2001
CONSOLIDATED REVIEW
The Company has restated its financial  statements  for 2001 and 2000 as well as
the previously reported 2002 quarterly results. See the "Restatement" section in
the  Notes  to the  Consolidated  Financial  Statements  for  the  basis  of the
restatement and the financial statement impact.  This Management  Discussion and
Analysis reflects the impacts of the restatement.

Revenues  for 2002 were $3.6  billion,  one  percent  above 2001 with  operating
income of $341 million.  The Company recorded income from continuing  operations
in 2002 of $170 million, a loss from discontinued  operations of $4 million, and
a $9  million  extraordinary  loss from the early  extinguishment  of debt.  Net
income was $157  million in 2002 and $116  million in 2001 and diluted  earnings
per share were $.52 in 2002 and $.39 in 2001.

Diluted earnings per share from continuing  operations was $.56 in 2002 compared
with a loss of $(.55) in 2001. There were three  significant  items in 2001 that
impact the  comparability of the reported amounts with the 2002 figures.  First,
diluted earnings per share from continuing operations for 2001 includes a charge
of $.94 per share ($345 million pretax)  primarily related to goodwill and asset
impairments and other items.  Second,  as discussed  further in the Notes to the
Consolidated  Financial Statements,  Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets",  requires that beginning
in 2002,  goodwill  and trade  names no longer be  amortized.  SFAS 142 does not
permit the  restatement of 2001  financial  information to reflect the impact of
this  Statement.   The  diluted   earnings  per  share   equivalent  of  reduced
amortization  expense  under  SFAS 142 is $.14 ($60  million  pretax)  for 2001.
Third, in the fourth quarter of 2001, the Company  received  approximately  $740
million of after-tax  proceeds,  net of expected cash  payments  relating to the
sale and exit of discontinued businesses.

In 2002,  operating income was $341 million compared to an operating loss of $23
million in 2001.  The 2001  figure  includes  a $345  million  charge  primarily
related to goodwill and asset  impairments  and other items.  Additionally,  the
reduced  amortization  expense under SFAS 142 was $60 million.  Operating income
margins after  adjusting  for these items  decreased to 9.5 percent of operating
revenue in 2002 from 10.7  percent in 2001.  The  decline  in  operating  income
reflects  strong growth at American Home Shield offset by reduced  volume in the
heating,  ventilation and air conditioning (HVAC) and plumbing businesses of ARS
and AMS,  increased workers  compensation and health insurance costs, as well as
increased expenditures related to enterprise-wide initiatives.

Cost of services rendered and products sold were unchanged compared to the prior
year and  decreased as a percentage of revenue to 69.1 percent in 2002 from 69.6
percent  in 2001.  This  decrease  reflects a change in the mix of  business  as
TruGreen  ChemLawn,  Terminix,  and  American  Home Shield  increased in size in
relationship to the overall business of the Company.  These businesses generally
operate at higher gross margin  levels than the rest of the  business,  but also
incur  somewhat  higher selling and  administrative  expenses as a percentage of
revenue.  Selling and administrative expenses increased 11 percent and increased
as a  percentage  of revenue to 21.2  percent  from 19.3  percent in 2001.  This
increase in selling and administrative  expenses reflects increased expenditures
for  marketing  leadership  and sales  initiatives,  as well as  enterprise-wide
expenditures in  procurement,  technology and initiatives to measure and improve
customer and employee satisfaction.

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

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

EXTRAORDINARY LOSS
In the second quarter of 2002,  the Company  repurchased a portion of its public
debt securities and recorded an extraordinary loss of $.03 per diluted share ($9
million after-tax) resulting from the early extinguishment of debt.

In the fourth  quarter of 2001,  the Company used a portion of the cash proceeds
from  the  sale  of  Management  Services  to pay  down  debt  and  recorded  an
extraordinary  loss of $.03 per diluted share ($9 million  after-tax)  resulting
from  the  early  extinguishment  of  debt.  This was  partially  offset  by the
realization of gains ($.02 per diluted share;  $6 million  after-tax)  resulting
from  the  repurchase  of  certain  ServiceMaster  corporate  debt in the  first
quarter.


                                       2
<PAGE>


As discussed in the Notes to the Consolidated Financial Statements,  the Company
intends  to adopt SFAS 145,  "Rescission  of FASB  Statements  No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" in 2003. Adoption
of  this  Statement  in  2003  will  result  in  the   reclassification  of  the
extraordinary  loss resulting from  extinguishment of debt into interest expense
within income from continuing operations.

KEY PERFORMANCE INDICATORS

The table  below  presents  selected  metrics  related  to  customer  counts and
customer  retention  for the three most  profitable  businesses  of the Company.
These measures are presented on a rolling, twelve-month basis.

                                             KEY PERFORMANCE
                                               INDICATORS
                                           As of December 31,

                                            2002           2001
                                        -----------    -----------
TRUGREEN -
   Growth in Full Program Contracts             2%            -4%
   Customer Retention Rate                   59.3%          57.7%

TERMINIX -
   Growth in Pest Control Customers             2%            25%
   Pest Control Customer Retention           75.8%          77.8%
Rate

   Growth in Termite Customers                  -%            30%
   Termite Customer Retention Rate           89.0%          89.7%

AMERICAN HOME SHIELD -
   Growth in Warranty Contracts                15%            14%
   Customer Retention Rate                   53.5%          52.4%



OUTLOOK
Economic  uncertainty and world events contributing to consumer confidence being
at a  ten-year  low,  make it  particularly  difficult  for the  Company to have
visibility to the full year results for 2003. If current conditions persist, the
Company expects to achieve mid single-digit earnings growth in 2003.

SEGMENT REVIEW (2002 VS. 2001)
SEGMENT  RESULTS FOR 2002  REFLECT THE  ELIMINATION  OF GOODWILL  AND TRADE NAME
AMORTIZATION REQUIRED UNDER SFAS 142. THEREFORE,  FOR COMPARATIVE PURPOSES, 2001
RESULTS  HAVE  BEEN  PRESENTED  ON A  PROFORMA  BASIS AS IF SFAS 142 HAD BEEN IN
EFFECT FOR 2001 THEREBY  EXCLUDING THE AMORTIZATION  EXPENSE AFFECTED BY THE NEW
ACCOUNTING STANDARD.  (SEE THE "BUSINESS SEGMENT REPORTING" NOTE IN THE NOTES TO
THE  CONSOLIDATED  FINANCIAL  STATEMENTS).  MANAGEMENTS  DISCUSSION AND ANALYSIS
FOCUSES ON THE 2002 REPORTED AND THE 2001 PROFORMA AMOUNTS.

TRUGREEN SEGMENT
The TruGreen  segment  includes lawn care services  performed under the TruGreen
ChemLawn  brand  name and  landscape  maintenance  services  provided  under the
TruGreen  LandCare brand name. The TruGreen  segment  reported  revenues of $1.4
billion,  slightly above the prior year.  Operating  income was $171 million,  a
decrease of five percent compared to $181 million (proforma) in 2001.

Revenue  in the lawn care  business  increased  one  percent  over  2001,  which
included a two percent  increase in customer  contracts over 2001. This increase
compares with a four percent decline in customer  contracts in 2001. The Company
is realizing  the benefit of improved  customer  retention as well as the impact
from new  marketing  strategies.  In  addition  to  telemarketing,  which is the
primary channel used by TruGreen ChemLawn to sell its services, the business has
increased  expenditures  on direct mail and  television  advertising  leading to
higher sales of new customers.  Quality and other satisfaction  initiatives have
resulted in the  customer  retention  rate  improving  160 basis  points to 59.3
percent compared with 57.7 percent in 2001.  Margins in the lawn care operations
declined slightly,  reflecting increased  expenditures in marketing and customer
retention  initiatives,  partially offset by margin improvements  resulting from
revenue growth and the quality of service and Six Sigma initiatives.

Revenue in the landscape  maintenance  business declined one percent as a softer
economic  environment  contributed to a decline in the core maintenance business
as well as a decline  in add-on  services  (e.g.,  seasonal  flower  plantings).
Despite the  decline in the  maintenance  business,  the  contract  base is more
profitable reflecting lower job costs, improved pricing, and a stronger customer
base.  This  business  has  strengthened  and  expanded  its  sales  operations.
Operating  income margins in the landscaping  business  declined  primarily as a
result of higher  workers  compensation  claims and increased  expenditures  for
field operations training. Management continues to focus on labor efficiency and
margin  improvement  through Six Sigma projects.  Capital employed decreased two
percent, primarily reflecting improved working capital management resulting from
increased customer prepayments and elimination of excess equipment.

TERMINIX SEGMENT
The Terminix segment, which includes termite and pest control services, reported
a nine percent increase in revenue to $924 million from $845 million in 2001 and
operating  income  growth of four  percent  to $127  million  from $123  million
(proforma)  last year.  Revenue growth was driven by the  acquisition in October
2001 of Sears  Termite  & Pest  Control  as well as solid  internal  growth.  As
expected by the Company,  there has been a  substantial  decrease in  profitable
pest  control  customers  from the Sears name in certain  markets.  New sales in
these  markets have not kept pace with  cancellations  and as a result,  overall
customer  retention  rates  have  shown a  decline.  The  Company  has  begun to
experience a reduction in revenue  growth which is likely to continue into 2003.
In  addition,  as  experienced  during late 2002,  operating  margins  have been
impacted by the near-term expenses associated with the rollout of Terminix's new
branch  information  system.  The  rollout of this system to the  branches  will
continue  through  2004.  The system will be an important  tool in the Company's
efforts to improve sales  productivity,  customer  service,  cost efficiency and
regulatory compliance.  Operating margins for the year decreased 80 basis points
reflecting the near term expenses related to the new information  system as well
as increased  expenditures for marketing and health insurance,  partially offset
by improved  branch  efficiencies.  Capital  employed  increased four percent to
support overall business growth.


                                       3
<PAGE>




AMERICAN HOME SHIELD SEGMENT
The American Home Shield  segment,  which provides home  warranties to consumers
that cover HVAC,  plumbing and other appliances,  reported a 15 percent increase
in revenue to $424 million from $369 million in 2001 and operating income growth
of 84 percent to $48 million compared to $26 million (proforma) in 2001. Revenue
growth  reflected  increases  in all sales  channels,  complemented  by improved
customer  retention.  Operating  margins improved as the segment  benefited from
strong volume growth, improved management of service costs and reduced incidence
of claims resulting,  in part, from less extreme weather trends. In light of the
favorable impact that the weather had on operating margins,  management believes
margins will be somewhat lower in 2003.  Capital  employed  increased 21 percent
reflecting the volume growth in the business  resulting in an increased level of
required regulatory investments.

ARS/AMS SEGMENT
The ARS/AMS segment,  which provides direct HVAC and plumbing  services reported
revenue of $719 million,  a decrease of 12 percent compared with $820 million in
2001.  Operating income  decreased 65 percent to $17 million,  compared with $49
million (proforma) in the prior year.  Industry wide there is a growing trend by
consumers  to  repair  rather  than  replace  defective  equipment,   reflecting
uncertainties  in the economy,  as well as a marked  reduction  in  construction
activity. A decline in call volume for residential air conditioning and plumbing
service  resulted in the  Company's  decrease  in revenue  and  profit.  Margins
declined in part due to higher marketing and insurance costs. In addition, lower
revenue  led to  reduced  leverage  of the  fixed  cost  structure.  ARS and AMS
continue their efforts towards a comprehensive rebuilding of marketing and sales
strategies by hiring a marketing  leader and expanding the sales force and sales
training.  Management has realigned its field operating  structure to narrow the
span of  control.  The  leaders  of ARS are  conducting  a  thorough  review  of
individual  branches to determine their long-term  profit  potential and whether
under  performing  locations should be exited.  Capital employed  decreased four
percent,  reflecting  improved  working  capital  management from a reduction in
accounts receivable days sales outstanding.

OTHER OPERATIONS SEGMENT
The Other Operations segment includes the Company's  ServiceMaster  Clean, Merry
Maids,  and  international  operations  as well as its  headquarters  functions.
Reported  segment revenues of $149 million in 2002 compared with $158 million in
the prior year. The segment  reported an operating loss of $23 million  compared
with a loss of $342  million  (proforma)  in 2001.  The 2001  results  include a
charge of $345 million related  primarily to goodwill and asset  impairments and
other items.

The 2002  results  reflect  continuing  growth  in  profit  from  the  franchise
businesses,  offset by higher costs related to enterprise  initiatives and lower
profits  from trade  name  licensing.  Revenues  from the  franchise  operations
decreased by one percent.  ServiceMaster  Clean revenue in 2001 included  direct
management of a significant disaster restoration project at the Pentagon,  which
was,  in part,  offset  in 2002 by growth in the  remaining  franchise  disaster
restoration   business  and  acquisitions  at  Merry  Maids.   Operating  margin
improvement in the franchise  operations  reflects the impact of prior year work
at the  Pentagon  which was at a lower  margin and higher fee income,  offset in
part by an increased  mix of direct owned  branches at Merry Maids,  which carry
lower margins than the base franchise business.

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

Total initial and recurring  franchise fees (excluding the aforementioned  trade
name license agreements) represented 2.5 percent of consolidated revenue in both
2002 and 2001 and related franchise  operating expenses were 1.6 percent and 1.7
percent  of  consolidated  operating  expenses  in 2002 and 2001,  respectively.
Franchised revenue consist principally of continuing monthly fees based upon the
franchisee  revenue  and is  recognized  when the related  franchise  revenue is
reported from the franchisee and  collectibility  is assured.  Franchise revenue
also includes  initial  franchise fees resulting from the sale of the franchise,
which are fixed and are recognized as revenue when collectibility is assured and
all material services or conditions relating to the sale have been substantially
performed.  Total initial and  recurring  franchise  fee income  (excluding  the
aforementioned  trade name license  agreements)  comprised 11.3 percent and 10.2
percent of consolidated  operating  income in 2002 and 2001,  respectively.  The
portion of total  franchise fee income related to initial fees received from the
sales of  franchises  was not material to the Company's  consolidated  financial
statements for all periods.

The Other Operations  segment  increased  expenditures in 2002 on technology and
major operational  initiatives to improve operating efficiency and build greater
customer and employee  satisfaction.  Capital  employed in this segment includes
the  discontinued  operations  and therefore is  significantly  reduced from the
prior year, reflecting the prior year divestitures of businesses.

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

In 2001 the Company sold its Management Services business to ARAMARK Corporation
for approximately $800 million.  The all-cash transaction closed on November 30,
2001 and the Company  recorded an after-tax gain of $404 million from this sale.
(A portion of Management  Services was not sold as part


                                       4
<PAGE>


of this  transaction  and represented a $15 million loss upon  disposition).  In
addition,   the  Company  exited  several   non-strategic  and  under-performing
businesses  including  TruGreen  LandCare  Construction,  Certified Systems Inc.
(CSI),  and  certain   Terminix  Europe   operations.   The  TruGreen   LandCare
Construction  operations were sold to  Environmental  Industries,  Inc. (EII) in
certain  markets.  EII managed the  wind-down of the  contracts in the remaining
markets.  The Company  also sold all of its customer  contracts  relating to CSI
(the Company's  professional employer  organization) to AMS Staff Leasing, N.A.,
Inc.

Reported  "Discontinued  operations"  for  all  periods  presented  include  the
operating  results of the sold and discontinued  businesses noted above and 2001
also includes the gain from the sale of Management Services,  net of losses from
the disposition of other entities.

In the fourth  quarter of 2002,  the  purchaser of the  Company's  European pest
control  and  property  services  operations  made a claim for a purchase  price
adjustment (relating to the 2001 sale), relating to an alleged breach of certain
conditions in the purchase agreement. In the course of responding to that claim,
the  Company  discovered  that  personnel  of the  former  operations  had  made
unsupported  monthly adjustments to certain accounts.  The Company  subsequently
agreed to an adjustment to the purchase  price  consisting of an $8 million cash
payment and the  cancellation  of a previously  reserved  note  receivable of $7
million. This $8 million charge was recorded in 2002.

The components of discontinued operations are as follows:

(In thousands)                2002           2001           2000
-----------------------------------------------------------------
Management
  Services income*             $ -       $33,172        $40,683
Income (loss) from
  other discontinued
  operations                   965       (72,115)          (115)
Gain on sale of
  Management Services,
  net of losses
  from disposition of
  other entities            (4,840)      323,213              -
-----------------------------------------------------------------
Discontinued
  operations               ($3,875)     $284,270        $40,568
-----------------------------------------------------------------

*    This business was sold on November 30, 2001,  consequently the 2001 results
     reflect eleven months of operations.

2001 COMPARED WITH 2000
CONSOLIDATED REVIEW
Revenues for 2001 increased four percent to $3.6 billion.  The Company  reported
an operating  loss in 2001 of $23 million  compared to operating  income of $321
million in 2000. The Company reported a loss from continuing  operations in 2001
of $164 million (after the $279 million after-tax impact of the charge),  income
from  discontinued  operations of $284 million,  and a $3 million  extraordinary
loss from the early  extinguishment of debt. Net income was $116 million in 2001
and $154  million in 2000 and  diluted  earnings  per share was $.39 in 2001 and
$.50 in 2000.

Diluted  earnings per share from  continuing  operations was a loss of $(.55) in
2001 compared to income of $.41 in 2000. As previously  noted,  diluted earnings
per share  from  continuing  operations  for 2001  includes a charge of $.94 per
diluted  share ($345  million  pretax)  primarily  related to goodwill and asset
impairments and other items.

In 2001,  the Company  reported  an  operating  loss of $23 million  compared to
operating  income of $321  million  in 2000.  The 2001  figure  includes  a $345
million charge  primarily  related to goodwill and asset  impairments  and other
items.  In addition,  both 2001 and 2000 include  amortization  expense that has
been eliminated  under SFAS 142.  Operating income margins on a comparable basis
after  adjusting  for the charge and SFAS 142  decreased to 10.7 percent in 2001
from 11.1 percent in 2000. The events of September 11th and the already weakened
economy contributed to earnings pressure during the third and fourth quarters of
2001 by bringing  caution and changes in consumer buying  behavior.  The Company
experienced  the  downturn  in the  economy as  customers  began  deferring  the
replacement of HVAC units,  landscape and lawn care  customers  showed a reduced
propensity  to  purchase  enhancements  and there were  increased  skips in maid
service.

On a consolidated  basis, costs of services rendered and products sold increased
two percent and  decreased as a percentage  of revenue to 69.6 percent from 71.1
percent in 2000.  Selling and  administrative  expenses increased 14 percent and
increased as a percentage of revenue to 19.3 percent from 17.6 percent in 2000.

Interest expense decreased from 2000,  primarily due to reduced debt levels from
improved cash flows,  debt  retirements  with the proceeds  from the  Management
Services  sale,  and the sale of certain of the  Company's  accounts  receivable
throughout the year. Interest income decreased primarily due to a lower level of
investment gains realized, net of impairment losses in 2001.

Minority interest and other expense reflected $19 million more expense than 2000
due  to  reduced  minority   interest  income  of  $8  million  related  to  the
ServiceMaster  Home Service Center venture,  increased minority interest expense
of $8  million  related  to the  equity  security  issued  in the  Allied  Bruce
acquisition,  and a $3 million loss  recorded in 2001 on the  Company's  sale of
receivables.  Throughout  2000 and  until  May  2001,  the  operating  losses of
ServiceMaster  Home Service  Center had been offset  through  minority  interest
income (below the operating  income line) because of  investments in the venture
made by Kleiner Perkins Caufield & Byers. In 2001, this minority interest income
totaled  $6  million,  compared  with $14  million  in 2000.  In May  2001,  the
cumulative operating losses of ServiceMaster Home Service Center began exceeding
the  funding  provided by Kleiner  Perkins.  As a result,  all of the  operating
losses after May of 2001 had been absorbed in the Company's financial statements
without an offset at the minority interest income line.

EXTRAORDINARY LOSS
In the fourth  quarter of 2001,  the Company used a portion of the cash proceeds
from the sale of  Management  Services to pay down debt balances and recorded an
extraordinary  loss of $.03 per diluted share ($9 million  after-tax)  resulting
from  the



                                       5
<PAGE>

early  extinguishment  of debt. This was partially  offset by the realization of
gains  ($.02  per  diluted  share;  $6  million  after-tax)  resulting  from the
repurchase of corporate debt in the first quarter.

As previously  discussed,  the Company intends to adopt SFAS 145 in 2003,  which
will result in the  reclassification  of the  extraordinary  loss into  interest
expense within income from continuing operations.

SEGMENT REVIEW (2001 VS. 2000)
2001 AND 2000 RESULTS HAVE BEEN PRESENTED ON A PROFORMA BASIS AS IF SFAS 142 HAD
BEEN IN EFFECT FOR 2001 AND 2000  THEREBY  EXCLUDING  THE  AMORTIZATION  EXPENSE
AFFECTED BY THE NEW ACCOUNTING  STANDARD.  (SEE THE "BUSINESS SEGMENT REPORTING"
NOTE IN THE  NOTES TO THE  FINANCIAL  STATEMENTS).  MANAGEMENTS  DISCUSSION  AND
ANALYSIS FOCUSES ON THE 2001 AND 2000 PROFORMA AMOUNTS.

TRUGREEN SEGMENT
This segment's results for both 2001 and 2000 exclude the discontinued  TruGreen
LandCare  Construction  business.  The TruGreen segment reported revenue of $1.4
billion,  consistent with 2000. Operating income decreased three percent to $181
million (proforma) from $187 million (proforma) in 2000.

Revenue in the lawn care  business  was  consistent  with 2000,  reflecting  the
realization  of price  increases and growth in ancillary  services,  offset by a
decrease in customer counts.  The lawn care operations'  results were negatively
impacted by winter  weather  conditions  that  persisted much later in the first
quarter of 2001 than in 2000,  resulting in reduced  production levels and lower
margins from sub-optimal labor utilization and fixed cost leverage. In addition,
management was optimistic that the selling season, which had been delayed due to
adverse  weather  in March and  April,  would  rebound  in the  second and third
quarters.  However,  sales were below  expectations and margins in the lawn care
operations  were  unfavorably  impacted by a cost structure that was in place to
support a higher anticipated level of demand.

Landscape  maintenance  revenue increased one percent compared to 2000.  Revenue
growth was  negatively  affected by  management's  decision to enforce  stricter
profitability  standards on contract sales and renewals as well as soft sales in
enhancement services.  Operating margins in the landscaping operations increased
reflecting  improved  labor  efficiency,  offset  in part by  higher  plant  and
material costs.  Capital employed  decreased five percent  primarily  reflecting
continued  improvement of working capital and the reduction of excess  equipment
levels.

TERMINIX SEGMENT
The Terminix  segment  reported a 16 percent increase in revenue to $845 million
from $728  million  in 2000 and  operating  income  growth of 25 percent to $123
million  (proforma)  from $98  million  (proforma)  in 2000.  The strong  growth
reflects the impact of  acquisitions,  the  continued  migration of the customer
base to termite baiting systems,  improved customer retention, and the impact of
price increases. In January 2001, the Company acquired the Allied Bruce Terminix
Companies,  the largest  Terminix  franchise and the fourth largest pest control
company in the United  States.  In  October  2001,  the  Company  completed  the
acquisition  of certain  assets of Sears  Termite  and Pest  Control,  Inc.  The
improvement   in   Terminix's   operating   margins   reflects  the  benefit  of
acquisitions,  in particular an increased mix of higher margin  termite  baiting
sales,  as well as the  impact  of  price  increases  and  ongoing  productivity
improvements.   Capital   employed   increased  15  percent   primarily  due  to
acquisitions,  offset in part by higher prepaid  contracts and improved  working
capital management.

AMERICAN HOME SHIELD SEGMENT
The American Home Shield  segment  reported a 17 percent  increase in revenue to
$369 million compared to $315 million in 2000 reflecting  double-digit growth in
all sales  channels.  Operating  income  increased  25  percent  to $26  million
(proforma)  compared  to  $21  million  (proforma)  in  2000.  Operating  margin
improvement  reflected a decrease in the incidence of claims and expanded use of
network  contractors with negotiated lower rates,  partially offset by a greater
mix of higher cost claims.  Capital employed  decreased four percent,  resulting
from improved management of working capital.

ARS/AMS SEGMENT
The ARS/AMS  segment  reported  revenue  growth of four percent to $820 million,
compared to $787 million in 2000.  Operating income decreased ten percent to $49
million  (proforma),  compared to $55 million (proforma) in 2000. Revenue growth
was supported  primarily by acquisitions  and price  increases.  Call volume for
residential  plumbing and HVAC services was below management's  expectations and
was impacted by cooler weather, a softening economic environment and a slow-down
in construction  activity.  Of all the businesses in ServiceMaster,  ARS/AMS has
the  largest  mix  of  non-recurring   revenue  and  is  most  affected  by  new
construction,  and consequently  appears to be most impacted by the condition of
the  economy.  In an effort to mitigate  the impact of the volume  shortfall  on
operating margins,  the Company implemented a detailed cost reduction program in
the  second  and  third  quarters  of 2001.  In  addition,  in order to focus on
improving  performance,  the Company  discontinued  acquisition  activity in the
fourth quarter of 2001.  Capital  employed  increased  three percent,  primarily
reflecting the impact of acquisitions.

OTHER OPERATIONS SEGMENT

Revenues in the Other  Operations  segment  decreased 30 percent to $158 million
from $226 million, primarily reflecting divestitures in 2000. The operating loss
in 2001 of $342 million (proforma) compared with operating income of $19 million
(proforma)  in 2000.  2001 results  include a charge of $345  million  primarily
related to goodwill and asset impairments and other items.

In 2001,  the Company  recognized $15 million of license fee income related to a
three-year  licensing  agreement  with ARAMARK for the use of the  ServiceMaster
trade  name in  certain  markets.  This  fee  income  was  offset  by  increased
expenditures  in  ServiceMaster   Home  Service  Center  and  corporate  support
functions.

The  franchise  operations,   ServiceMaster  Clean  and  Merry  Maids,  achieved
double-digit   revenue  and  profit  growth,


                                       6
<PAGE>

reflecting growth in disaster restoration services (which included a significant
level of direct managed disaster  restoration work at the Pentagon in 2001), the
benefit of successful marketing programs,  national account  relationships,  and
employee  retention  initiatives.  Total  initial and recurring  franchise  fees
(excluding  the  aforementioned   licensing  fee)  represented  2.5  percent  of
consolidated  revenue  in both  2001 and 2000 and 1.7  percent  of  consolidated
operating  expenses in both 2001 and 2000.  Total franchise fee income comprised
10.2 percent and 9.8 percent of consolidated  operating income in 2001 and 2000,
respectively.

2002 FINANCIAL POSITION AND CASH FLOWS
Net cash provided from  operations  was $381 million in 2002, $18 million higher
than 2001 and $224 million in excess of 2002 net income.  The increase  reflects
lower working capital usage.  This  improvement  included better  receivable and
payables management, most notably in the TruGreen ChemLawn and ARS businesses.

Property  additions  increased $19 million,  reflecting  the net purchase  price
relating to the residual  value  guarantees of leases for five  assisted  living
facilities sold in the second quarter.  Cash used for  acquisitions  declined to
$13 million from $56 million in 2001  reflecting the reduction or curtailment of
acquisitions at Terminix and ARS.

CASH AND DEBT LEVELS
Cash and marketable  securities  totaled  approximately $303 million at December
31, 2002. In 2002, the Company repurchased a portion of its publicly traded debt
with a principal amount of $252 million,  including  approximately  $218 million
repurchased in a tender offer during the second quarter of 2002. The Company has
completed the debt reduction  program  announced in October 2001. As a result of
continued  strong cash flows and the  application  of the net proceeds  received
from the Company's 2001 dispositions, total debt was reduced by $320 million for
the twelve months ended December 31, 2002.  This  represents a reduction in debt
outstanding  of  approximately  $1.0  billion  over the last two  years  and the
Company's  lowest  level in over five  years.  The debt  repurchase  allowed the
Company  the  opportunity  to lengthen  its  maturity  profile by  focusing  the
majority of the  repurchase on debt with shorter  maturities.  Approximately  67
percent  of the  Company's  debt now  matures  beyond  five years and 42 percent
beyond fifteen years.  The Company's next significant debt maturity is not until
2005.

The Company is party to a number of debt agreements which require it to maintain
certain  financial and other  covenants,  including  limitations on indebtedness
(debt cannot exceed 3.5 times EBITDA) and interest  coverage ratio (EBITDA needs
to  exceed  four  times   interest   expense).   In  addition,   under   certain
circumstances,  the agreements may limit the Company's  ability to pay dividends
and repurchase shares of common stock.  These limitations are not expected to be
a factor in the Company's future dividend and share repurchase plans. Failure by
the Company to maintain these covenants could result in the  acceleration of the
maturity of the debt. At December 31, 2002,  the Company was in compliance  with
the  covenants  related  to these  debt  agreements  and based on its  operating
outlook for 2003 expects to be able to maintain  compliance  in the future.  The
Company does not have any debt agreements that contain put rights or provide for
acceleration of maturity as a result of a change in credit rating.

Management  believes that funds  generated  from  operations  and other existing
resources will continue to be adequate to satisfy  ongoing working capital needs
of the Company.  The Company has a committed  revolving credit facility for $490
million,  which will  expire in December  2004.  As of December  31,  2002,  the
Company had issued  approximately  $136  million of letters of credit  under the
facility and had unused commitments of approximately  $354 million.  The Company
also has $550 million of senior unsecured debt and equity  securities  available
for issuance under an effective shelf registration statement.

In 2001,  the  Company  entered  into an  agreement  to  ultimately  sell,  on a
revolving basis,  certain  receivables to unrelated third party  purchasers.  At
December 31, 2002 and 2001, there were no receivables  outstanding that had been
sold to third parties.  The agreement is a 364-day facility that is renewable at
the option of the  purchasers.  The  Company  may sell up to $65  million of its
receivables to these purchasers in the future and therefore has immediate access
to cash proceeds from these sales. The amount of the eligible receivables varies
during the year based on seasonality of the business and will at times limit the
amount available to the Company.

The Company maintains operating lease facilities with banks totaling $95 million
which provide for the  acquisition and development of properties to be leased by
the Company.  There are residual value  guarantees of these  properties up to 82
percent of the fair market value of the  properties.  At December 31, 2002 there
was approximately $72 million funded under these facilities.  Of the $95 million
in facilities,  $80 million  expires in October 2004 and $15 million  expires in
January 2008. Approximately $15 million of these leases that involve constructed
properties  have been  included on the balance sheet as assets with related debt
as of December 31, 2002 and 2001.

The majority of the Company's  vehicle fleet is leased through operating leases.
The lease terms are  non-cancelable  for the first twelve  month term,  then are
month-to-month  leases,  cancelable at the Company's option.  There are residual
value  guarantees  (ranging  from 70  percent  to 87  percent  depending  on the
agreement)  on  these  vehicles,   which   historically  have  not  resulted  in
significant  net  payments to the  lessors.  At  December  31,  2002,  there was
approximately $257 million of residual value relating to the Company's fleet.

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

(IN MILLIONS)         Total      < 1 Yr   2-3 Yrs  4-5 Yrs > 5 yrs
-----------------------------------------------------------------
Debt balances            $835      $31     $175     $70     $559
Non-cancelable
 operating
 leases                   261       63       90      57       51
-----------------------------------------------------------------
Total amount           $1,096      $94     $265    $127     $610
-----------------------------------------------------------------

As of December 31, 2002, the Company had  approximately  $136 million of letters
of credit issued under its bank credit


                                       7
<PAGE>


facility  and  approximately  $26 million of  annually  renewable  surety  bonds
outstanding that primarily  support  obligations the Company has under insurance
programs.  If the surety bonds are not renewed,  the Company  expects to replace
them with letters of credit issued under its bank credit facility.

DISCONTINUED OPERATIONS
The  assets  and  liabilities  related  to  discontinued  businesses  have  been
classified  in separate  captions on the  Consolidated  Statements  of Financial
Position.  This includes the assets and liabilities  specifically related to the
CSI,  LandCare  Construction,  and Terminix Europe  businesses.  The decrease in
assets  of the  discontinued  operations  reflects  the  sale of  equipment  and
receivable collections.  The decline in liabilities from discontinued operations
represents  the  settlement  of insurance  claims and other cash  payments.  The
remaining  liabilities  primarily represent the obligations related to long-term
insurance claims and litigation exposures.

CONTINUING OPERATIONS
Receivables  are  slightly  below  the  level  last  year  reflecting   improved
collections and days sales outstanding at several businesses.  Deferred customer
acquisition costs increased reflecting growth in the volume of baiting contracts
written at Terminix.  The Company capitalizes sales commissions and other direct
contract  acquisition  costs relating to termite baiting and pest contracts,  as
well as home warranty  agreements.  Property and equipment  decreased  slightly,
reflecting   general   business  growth  offset  by   depreciation   expense  on
larger-scale technology projects. The Company does not have any material capital
commitments at this time.

Deferred revenue increased  reflecting  growth in warranty  contracts written at
American Home Shield, increased volume in termite baiting contracts and customer
prepayments in the lawn care business.

As of the date of the Company's  acquisition of ARS in 1999,  certain members of
management  acquired,  at fair market  value,  equity  interests in the HVAC and
plumbing operations. In the fourth quarter of 2002, the Company repurchased,  at
fair market value,  these  shares.  The Company  continues to maintain  minority
investors in Terminix.  This minority  ownership  reflects an interest issued to
the prior owners of the Allied Bruce Terminix  Companies in connection with that
acquisition.   This  equity   security  is   convertible   into  eight   million
ServiceMaster common shares. The ServiceMaster shares are included in the shares
used for the calculation of diluted earnings per share.

Total  shareholders'  equity  increased one percent to $1.2 billion,  reflecting
earnings partially offset by dividends paid to shareholders. Cash dividends paid
to shareholders  totaled $123 million,  or $.41 per share,  compared to $.40 per
share in 2001.  The total amount of cash  dividends  increased four percent from
the prior year primarily reflecting the per share increase.

In January  2003,  the  Company  paid a cash  dividend of $.105 per share and in
March 2003,  declared a second  quarter cash dividend of $.105 per share payable
on April 30, 2003. The timing and amount of future dividend increases are at the
discretion of the Board of Directors and will depend on, among other things, the
Company's capital structure objectives and cash requirements.  In July 2000, the
Board of Directors  authorized $350 million for share repurchases.  In 2002, the
Company repurchased $52 million of its shares. There remains  approximately $229
million available for repurchases under the July 2000  authorization.  Decisions
relating to any future share  repurchases will depend on various factors such as
the Company's  commitment to maintain  investment grade credit ratings and other
strategic investment opportunities.

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

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

The Company generally maintains the majority of its debt at fixed rates. Over 95
percent of total debt at December  31, 2002 and December 31, 2001 was at a fixed
rate. The payments on the approximately $72 million of funding outstanding under
the  Company's  real estate  operating  lease  facilities as well as its vehicle
fleet and equipment  operating  leases  (approximately  $257 million in residual
value) are tied to floating  interest rates.  Nonetheless,  the Company believes
its exposure to interest rate  fluctuations  is not  significant  to its overall
results of operations.

The Company has several debt and lease  agreements  where the  interest  rate or
rent payable under the agreements  automatically adjusts based on changes in the
Company's credit ratings.  While the Company is not currently expecting a change
in its credit ratings,  based on amounts outstanding at December 31, 2002, a one
rating category improvement in the Company's credit ratings would reduce expense
on an annualized  basis by  approximately  $0.7 million.  A one rating  category
reduction  in  the  Company's  credit  ratings  would  increase  expense  on  an
annualized basis by approximately $1.3 million.

The following table summarizes  information  about the Company's fixed rate debt
instruments  as of December 31, 2002 and presents the  principal  cash flows and
related  weighted-average  interest rates by expected  maturity dates.  The fair
value of the  Company's  fixed  rate  debt was  approximately  $880  million  at
December 31, 2002.

                      Expected Maturity Date
                 ----------------------------------
                                                    There-
 (In millions)   2003   2004  2005   2006   2007    after  Total
-----------------------------------------------------------------
Fixed rate debt  $31    $24   $151   $11    $59     $559   $835
  Avg. Rate      4.2%   4.8%   8.2%  6.0%   6.7%     7.5%   7.2%
-----------------------------------------------------------------

CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated  financial statements requires management to
make  certain  estimates  and  assumptions  required  under  generally  accepted
accounting

                                       8
<PAGE>


principles which may differ from the actual results.  The more significant areas
requiring  the  use  of  management   estimates  relate  to  the  allowance  for
receivables,  accruals for  self-insured  retention  limits  related to medical,
workers compensation,  auto and general liability insurance,  settlement of home
warranty claims,  the possible  outcomes of outstanding  litigation,  the useful
lives for depreciation  and  amortization  expense and the valuation of tangible
and intangible assets.

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

The Company carries insurance policies on insurable risks. The Company generally
has  self-insured  retention  limits and has obtained insured layers of coverage
above such self-insured retention limits. Accruals for self-insurance losses are
recorded based on the Company's claims experience and actuarial assumptions. The
establishment  of  appropriate  reserves  is an  inherently  uncertain  process.
Reserve  estimates  are  regularly  reviewed and updated  using the most current
information available.  Any resulting adjustments,  which could be material, are
reflected in the period identified.

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

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

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







FORWARD-LOOKING STATEMENTS


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



                                       9
<PAGE>


<TABLE>

FIVE YEAR FINANCIAL SUMMARY


                                                                         (Restated 1)   (Restated 1)   (Restated 1)    (Restated 1)
                                                                 2002         2001          2000            1999           1998
(In thousands, except per share data)                                                                     unaudited     unaudited
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
<S>                                                          <C>           <C>           <C>             <C>            <C>
Operating revenue                                            $3,589,089    $3,561,445    $3,421,802      $3,063,668     $2,185,352
Operating income                                                341,336      (23,177)       320,851         245,672        296,530
   PERCENTAGE OF OPERATING REVENUE                                 9.5%        (1.0%)          9.4%            8.0%          13.6%
Non-operating expense                                            77,770       121,718       103,733          86,981         77,644
Provision for income taxes                                       93,468        19,569        92,844          67,628         90,510
                                                           ------------------------------------------------------------------------
Income from continuing operations                               170,098     (164,464)       124,274          91,063        128,376

Discontinued operations, net                                    (3,875)       284,270        40,568          61,626         51,601
Extraordinary loss, net of income taxes                         (9,229)       (3,422)             -               -              -
Cumulative effect of accounting change,
  net of income taxes                                                 -             -      (11,161)               -              -
                                                           ------------------------------------------------------------------------
Net income                                                     $156,994      $116,384      $153,681        $152,689       $179,977

Earnings per share:
   Basic                                                          $0.52         $0.39         $0.51           $0.50          $0.62
   Diluted:
      Income from continuing operations                           $0.56       $(0.55)         $0.41           $0.29          $0.43

      Discontinued operations, net                               (0.01)          0.95          0.13            0.20           0.17
      Extraordinary loss, net                                    (0.03)        (0.01)             -               -              -
      Cumulative effect of accounting change                          -             -        (0.04)               -              -
                                                           ------------------------------------------------------------------------
         Diluted earnings per share                               $0.52         $0.39         $0.50           $0.49          $0.60

Shares used to compute basic earnings per share                 300,383       298,659       302,487         307,637        289,315
Shares used to compute diluted earnings per share               314,112       298,659       305,518         314,406        298,887
Shares outstanding, net of treasury shares                      298,253       300,531       298,474         307,530        289,030

Cash dividends per share                                          $0.41         $0.40         $0.38           $0.36          $0.33
Share price range:
   High price                                                    $15.50        $14.20        $14.94          $22.00         $25.50
   Low price                                                      $8.89         $9.84         $8.25          $10.13         $16.00

Financial Position (at year end):
Current assets                                                 $919,174    $1,119,050      $693,019        $705,661       $461,758
Current liabilities                                             839,064       805,298       675,902         712,520        608,289
Working capital                                                  80,110       313,752        17,117         (6,859)       (146,531)
Current ratio                                                   1.1 - 1       1.4 - 1       1.0 - 1         1.0 - 1         .8 - 1
Total assets                                                 $3,414,938    $3,621,245    $3,939,710      $3,819,687     $2,882,242
Total liabilities                                             2,095,929     2,311,381     2,753,226       2,567,372      1,861,217
TOTAL DEBT OUTSTANDING                                          835,475     1,155,193     1,833,556       1,769,298      1,127,783
Minority interest                                               100,309       102,677         5,933           2,934              -
Shareholders' equity                                          1,218,700     1,207,187     1,180,551       1,249,381      1,021,025

(1)  See the  "Restatement"  section in the Notes to the Consolidated  Financial
     Statements for the basis of the restatement and financial statement impact.


</TABLE>

                                       10
<PAGE>


<TABLE>


CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
                                                                                                     (Restated 6)     (Restated 6)
For years ended December 31,                                                              2002            2001             2000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>              <C>              <C>
OPERATING REVENUE                                                                     $3,589,089       $3,561,445       $3,421,802
OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold                                            2,481,226        2,480,472        2,431,912
Selling and administrative expenses                                                      761,085          688,429          601,835
Goodwill, trade name and other intangible amortization (1)                                 7,442           70,890           67,204
Charge (credit) for impaired assets and other items (2)                                   (2,000)         344,831                -
-----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses                                                     3,247,753        3,584,622        3,100,951
-----------------------------------------------------------------------------------------------------------------------------------

OPERATING INCOME                                                                         341,336         (23,177)          320,851

NON-OPERATING EXPENSE (INCOME)
Interest expense                                                                          77,519          128,033          136,831
Interest and investment income                                                            (6,431)         (11,972)         (19,861)
Minority interest and other expense (income), net                                          6,682            5,657          (13,237)
-----------------------------------------------------------------------------------------------------------------------------------

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                    263,566        (144,895)          217,118
Provision for income taxes                                                                93,468          19,569            92,844
-----------------------------------------------------------------------------------------------------------------------------------

INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
   ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                      170,098        (164,464)          124,274
Discontinued operations, net of income taxes (3)                                          (3,875)        284,270            40,568
Extraordinary loss, net of income taxes (4)                                               (9,229)         (3,422)                -
Cumulative effect of accounting change, net of income taxes (5)                                -               -           (11,161)
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                              $156,994         $116,384         $153,681
-----------------------------------------------------------------------------------------------------------------------------------

BASIC EARNINGS PER SHARE:
Income from continuing operations before extraordinary items
   and cumulative effect of accounting change                                              $0.57          ($0.55)            $0.41
Discontinued operations, net (3)                                                           (0.01)           0.95              0.13
Extraordinary loss, net (4)                                                                (0.03)          (0.01)                -
Cumulative effect of accounting change, net (5)                                                -                -            (0.04)
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE                                                                   $0.52            $0.39            $0.51
-----------------------------------------------------------------------------------------------------------------------------------

DILUTED EARNINGS PER SHARE:
Income from continuing operations before extraordinary items
   and cumulative effect of accounting change                                              $0.56          ($0.55)            $0.41
Discontinued operations, net (3)                                                           (0.01)           0.95              0.13
Extraordinary loss, net (4)                                                                (0.03)          (0.01)                -
Cumulative effect of accounting change, net (5)                                                -               -             (0.04)
-----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE                                                                 $0.52           $0.39             $0.50
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  The Company adopted Statement of Financial  Accounting Standards (SFAS) No.
     142,  "Goodwill  and  Other  Intangible   Assets",   which  eliminates  the
     amortization  of  goodwill  and  intangible  assets with  indefinite  lives
     beginning in 2002.  Had the provisions of SFAS 142 been applied to 2001 and
     2000,  amortization  expense  would have been  reduced by $60 million  ($42
     million  after-tax,  $0.14 per diluted  share) in 2001 and $58 million ($40
     million after-tax, $0.13 per diluted share) in 2000.

(2)  The  Company  recorded  a pretax  charge  of $345  million  ($279  million,
     after-tax) or $.94 per diluted share in the fourth quarter of 2001, related
     primarily to goodwill and asset impairments as well as other items.

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

(4)  In 2002 and 2001,  the  Company  repurchased  a portion of its public  debt
     securities and in 2001 the Company  prepaid some of its  longer-term  debt.
     The net impact of these transactions was extraordinary losses of $9 million
     ($15 million  pretax) and $3 million ($6 million  pretax) in 2002 and 2001,
     respectively.  The Company  intends to adopt SFAS 145  beginning  in fiscal
     2003.   Adoption   of  this   Statement   in  2003   will   result  in  the
     reclassification  of the  extraordinary  losses into income from continuing
     operations.

(5)  In 2000, the Company  changed its method of accounting for revenue from its
     termite baiting contracts.  The cumulative effect of this accounting change
     as of January 1, 2000 was $11.1 million ($18.9 million pretax).

(6)  See the  "Restatement"  section in the Notes to the Consolidated  Financial
     Statements  for the basis of the  restatement  and the financial  statement
     impact.

     See accompanying Notes to the Consolidated Financial Statements.



                                       11
<PAGE>


<TABLE>

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
                                                                                                            (Restated 1)
As of December 31,                                                                               2002            2001
------------------------------------------------------------------------------------------------------------------------
ASSETS:

CURRENT ASSETS:
<S>                                                                                           <C>              <C>
Cash and cash equivalents                                                                     $227,409         $402,644
Marketable securities                                                                           75,194           72,429
Receivables, less allowances of $27,616 and $28,397, respectively                              332,186          340,935
Inventories                                                                                     67,748           68,036
Prepaid expenses and other assets                                                               39,464           34,734
Deferred customer acquisition costs                                                             48,419           46,004
Deferred taxes and income taxes receivable                                                     123,100           90,200
Assets of discontinued operations                                                                5,654           64,068
------------------------------------------------------------------------------------------------------------------------
Total Current Assets                                                                           919,174        1,119,050
------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
At cost                                                                                        413,939          469,140
Less:  accumulated depreciation                                                              (219,062)        (272,930)
------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment                                                                     194,877          196,210
------------------------------------------------------------------------------------------------------------------------

OTHER ASSETS:
Goodwill                                                                                     1,919,780        1,904,178
Intangible assets, primarily trade names                                                       257,781          261,136
Notes receivable                                                                                55,770           59,204
Long-term securities and other assets                                                           67,556           81,467
------------------------------------------------------------------------------------------------------------------------
   TOTAL ASSETS                                                                             $3,414,938       $3,621,245
------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY:

CURRENT LIABILITIES:
Accounts payable                                                                                92,121           97,251
Accrued liabilities:
   Payroll and related expenses                                                                 99,504           83,182
   Self-insured claims and related expenses                                                     84,521           63,819
   Other                                                                                       102,380          131,780
Deferred revenues                                                                              397,290          343,873
Liabilities of discontinued operations                                                          32,113           50,449
Current portion of long-term debt                                                               31,135           34,944
------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities                                                                      839,064          805,298
------------------------------------------------------------------------------------------------------------------------

LONG-TERM DEBT                                                                                 804,340        1,120,249

LONG-TERM LIABILITIES
   Deferred taxes                                                                              312,500          233,000
   Liabilities of discontinued operations                                                       28,800           50,600
   Other long-term obligations                                                                 111,225          102,234
------------------------------------------------------------------------------------------------------------------------
   Total Long-Term Liabilities                                                                 452,525          385,834
------------------------------------------------------------------------------------------------------------------------

MINORITY INTEREST                                                                              100,309          102,677

COMMITMENTS AND CONTINGENCIES (See Note)

SHAREHOLDERS' EQUITY
Common stock $0.01 par value, authorized 1 billion shares; issued
   316,024 and 314,538, respectively                                                             3,160            3,145
Additional paid-in capital                                                                   1,054,272        1,039,228
Retained earnings                                                                              355,893          322,103
Accumulated other comprehensive loss                                                             (849)          (2,496)
Restricted stock                                                                               (1,988)            (581)
Treasury stock                                                                               (191,788)        (154,212)
------------------------------------------------------------------------------------------------------------------------
   Total Shareholders' Equity                                                                1,218,700        1,207,187
------------------------------------------------------------------------------------------------------------------------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                               $3,414,938       $3,621,245
------------------------------------------------------------------------------------------------------------------------

(1)  See the  "Restatement"  section in the Notes to the Consolidated  Financial
     Statements  for the basis of the  restatement  and the financial  statement
     impact.

See accompanying Notes to the Consolidated Financial Statements


</TABLE>


                                       12
<PAGE>


<TABLE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)

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

<S>                                         <C>          <C>         <C>          <C>          <C>          <C>          <C>
BALANCE DECEMBER 31, 1999 (As Previously
  Reported)                                 $    3,132   $1,033,568  $  241,701   $   (1,821)  $  (68,287)  $   (2,577)  $1,205,716
Prior period adjustment (1)                                   1,214      43,666       (4,028)                                40,852
------------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 2000 (Restated 1)        $    3,132   $1,034,782  $  285,367   $   (5,849)  $  (68,287)  $   (2,577)  $1,246,568
====================================================================================================================================
Net Income 2000 (Restated 1)                                            153,681                                             153,681
Other comprehensive income, net of tax
  Net unrealized gains on securities,
    net of reclassification adjustment (2)                                             3,169                                  3,169
  Foreign currency translation                                                        (6,597)                                (6,597)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                                              153,681       (3,428)                               150,253

Shareholder dividends                                                  (114,321)                                           (114,321)
Shares issued under options,
  debentures, grant plans and
  other (2,099 shares)                                         (981)                               18,887          748       18,654
Treasury shares purchased (12,637 shares)                                                        (135,633)                 (135,633)
Shares issued for acquisitions
  (1,482 shares)                                     5       (1,514)                                16,539                   15,030
====================================================================================================================================
BALANCE DECEMBER 31, 2000 (Restated 1)          $3,137   $1,032,287    $324,727      $(9,277)   $(168,494)     $(1,829)  $1,180,551
====================================================================================================================================
Net Income 2001 (Restated 1)                                            116,384                                             116,384
Other comprehensive income, net of tax
  Net unrealized (loss) on securities,
    net of reclassification adjustment (2)                                            (4,359)                                (4,359)
  Foreign currency translation                                                        11,140                                 11,140
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                                              116,384        6,781                                123,165

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

Shareholder dividends                                                  (123,204)                                           (123,204)
Shares issued under options,
  debentures, grant plans and
  other (2,706 shares)                              15       15,044                                14,482       (1,407)      28,134
Treasury shares purchased (4,985 shares)                                                          (52,058)                  (52,058)
====================================================================================================================================
BALANCE DECEMBER 31, 2002                       $3,160   $1,054,272    $355,893        $(849)   $(191,788)     $(1,988)  $1,218,700
====================================================================================================================================

(1)  See the  "Restatement"  section in the Notes to the Consolidated  Financial
     Statements for the basis for the  restatement  and the financial  statement
     impact.

(2)  Disclosure   of   reclassification   amounts  (net  of  tax)   relating  to
     comprehensive income:
                                                                                  2002           2001          2000
======================================================================================================================
     Unrealized  holding gains (losses) arising in period                      $(4,745)        $(1,219)     $12,106
     Less:(Gains)losses realized                                                   876          (3,140)      (8,937)
----------------------------------------------------------------------------------------------------------------------
     Net unrealized   gains  (losses)  on  securities                          $(3,869)        $(4,359)      $3,169
======================================================================================================================
See accompanying Notes to the Consolidated Financial Statements.
</TABLE>



                                       13
<PAGE>

<TABLE>


CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                                                                                           (Restated 1) (Restated 1)
For years ended December 31,                                                      2002          2001         2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1                                         $ 402,644    $  42,669    $  49,565
CASH FLOWS FROM OPERATIONS:
NET INCOME                                                                       156,994      116,384      153,681
   Adjustments to reconcile net income to net cash provided from operations:
   (Income) loss from discontinued operations                                      3,875     (284,270)     (40,568)
   Charge for impaired assets and other items, net of tax                         (1,200)     279,393         --
   Extraordinary loss                                                              9,229        3,422         --
   Cumulative effect of accounting change                                           --           --         11,161

   Depreciation expense                                                           50,434       49,913       48,320
   Amortization expense                                                            7,442       70,890       67,204
   Deferred income tax expense                                                    65,799       37,470       43,821

Change in working capital, net of acquisitions:
   Receivables                                                                    13,282       (1,313)      (3,584)
   Inventories and other current assets                                           (8,030)     (14,677)      (2,320)
   Accounts payable                                                               (4,241)      (4,445)     (11,995)
   Deferred revenues                                                              49,849       35,750       21,129
   Accrued liabilities                                                            37,127       22,266      (23,403)
   Tax refund from prior years payments                                             --         51,000       39,000
   Other, net                                                                        489        1,150          721
====================================================================================================================
NET CASH PROVIDED FROM OPERATIONS                                                381,049      362,933      303,167
====================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
   Property additions                                                            (60,599)     (41,709)     (56,460)
   Sale of equipment and other assets                                              4,615        9,838       13,576
   Business acquisitions, net of cash acquired                                   (13,003)     (55,842)    (144,834)
   Proceeds from business sales                                                     --           --         44,784
   Notes receivable, financial investments and securities                         (2,117)     (15,361)     (22,398)
   Proceeds from sale of Management Services                                        --        766,779         --
   Proceeds from sale of European businesses                                      30,500       90,387         --
====================================================================================================================
NET CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES                           (40,604)     754,092     (165,332)
====================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings (payments)                                                    (345,142)    (719,963)      11,266
   Shareholders' dividends                                                      (123,204)    (119,008)    (114,321)
   Purchase of ServiceMaster stock                                               (52,058)      (1,308)    (135,633)
   Other, net                                                                     19,140       13,970       12,769
====================================================================================================================
NET CASH USED FOR FINANCING ACTIVITIES                                          (501,264)    (826,309)    (225,919)
====================================================================================================================
NET CASH PROVIDED FROM (USED FOR) DISCONTINUED OPERATIONS                        (14,416)      69,259       81,188
 ===================================================================================================================
CASH INCREASE (DECREASE) DURING THE YEAR                                        (175,235)     359,975       (6,896)
====================================================================================================================
CASH AND CASH EQUIVALENTS AT DECEMBER 31                                       $ 227,409    $ 402,644    $  42,669
====================================================================================================================

(1)  See the  "Restatement"  section in the Notes to the Consolidated  Financial
     Statements for the basis for the  restatement  and the financial  statement
     impact.

See accompanying Notes to the Consolidated Financial Statements.

</TABLE>



                                       14
<PAGE>

Notes to Consolidated Financial Statements


SIGNIFICANT ACCOUNTING POLICIES



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

The preparation of the consolidated  financial statements requires management to
make  certain  estimates  and  assumptions  required  under  generally  accepted
accounting  principles  ("GAAP") which may differ from the actual  results.  The
more significant  areas requiring the use of management  estimates relate to the
allowance for receivables, accruals for self-insured retention limits related to
medical, workers compensation,  auto and general liability insurance, settlement
of home warranty claims,  the possible outcomes of outstanding  litigation,  the
useful lives for  depreciation and  amortization  expense,  and the valuation of
tangible and intangible assets.

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

The Company  carries  insurance  policies on insurable  risks at levels which it
believes to be appropriate.  The Company  generally has  self-insured  retention
limits and has  obtained  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  establishment of
appropriate reserves is an inherently  uncertain process.  Reserve estimates are
regularly reviewed and updated using the most current information available. Any
resulting  adjustments,  which could be  material,  are  reflected in the period
identified.

Tangible  (fixed) and intangible  assets with finite lives are  depreciated  and
amortized on a straight-line  basis,  over their estimated  useful lives.  These
lives are based on the Company's  previous  experience for similar  assets,  the
potential  for market  obsolescence  and other  industry and business  data.  In
accordance  with  Statement of Financial  Accounting  Standards  (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived  Assets",  these assets
are  tested for  recoverability  whenever  events or  changes  in  circumstances
indicate that their carrying amounts may not be recoverable.  In performing this
test,  if the  undiscounted  future  cash flows from the asset are less than the
carrying amount of the asset,  an impairment  loss would be recognized  based on
the asset's fair value,  and the  carrying  amount of the asset would be reduced
accordingly.

In accordance with SFAS No. 142,  "Goodwill and Other  Intangible  Assets",  the
Company does not amortize its goodwill or  indefinite-lived  intangible  assets.
The Company tests these assets for impairment,  at a minimum, on an annual basis
by applying a fair-value based test.

REVENUES:  Revenues from lawn care, pest control,  liquid and fumigation termite
applications,  as well as  heating/air  conditioning  and plumbing  services are
recognized as the services are provided.  Revenues from landscaping services are
recognized  as they are earned based upon monthly  contractual  arrangements  or
when services are performed for non-contractual arrangements.  Revenues from the
Company's  commercial  installation  contracts,  primarily relating to HVAC, are
recognized  on the  percentage  of  completion  method in the ratio  that  total
incurred costs bear to total estimated  costs. The Company  eradicates  termites
through  the use of baiting  stations,  as well as through  non-baiting  methods
(e.g., fumigation or liquid treatment).  Termite services using baiting stations
as well as home warranty  services  typically are sold through annual  contracts
for a one-time,  upfront payment. Direct costs of these contracts (service costs
for termite  contracts and claim costs for warranty  contracts)  are expensed as
incurred.  The Company  recognizes  revenue over the life of these  contracts in
proportion  to the expected  direct  costs.  Revenue  from trade name  licensing
arrangements  is  recognized  when  earned.  Franchised  revenues  (which in the
aggregate  represent less than three percent of  consolidated  revenue)  consist
principally  of  continuing  monthly  fees  based upon the  franchisee  revenue.
Monthly fee revenue is recognized when the related franchise revenue is reported
from the  franchisee  and  collectibility  is assured.  Franchise  revenue  also
includes initial franchise fees resulting from the sale of the franchise,  which
are fixed and are recognized as revenue when  collectibility  is assured and all
material  services or  conditions  relating to the sale have been  substantially
performed. Total franchise fee income (excluding trade name licensing) comprised
11.4 percent,  10.2 percent and 9.8 percent of consolidated  operating income in
2002,  2001 and 2000,  respectively.  The portion of total  franchise fee income
related to initial fees received from the sale of a franchise were immaterial to
the Company's consolidated financial statements for all periods.

The Company had $397 million and $344  million of deferred  revenues at December
31, 2002 and 2001,  respectively,  which consist  primarily of payments received
for annual  contracts  relating to home warranty,  termite baiting and lawn care
services.  The revenue related to these services is recognized as the service is
performed over the contractual period.

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

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



                                       15
<PAGE>

Notes to Consolidated Financial Statements


ADVERTISING:  As  discussed in the "Interim  Reporting"  note above,  TruGreen's
pre-season  advertising  costs are deferred and  recognized in proportion to the
contract revenue over the year. These costs are not deferred beyond the calendar
year-end. Beginning in 2002, the cost of direct-response advertising at Terminix
is capitalized and amortized over its expected period of future  benefits.  This
direct-response  advertising consists primarily of direct-mail  promotions,  for
which the cost is capitalized and amortized over the one-year  customer contract
life.  At December  31,  2002,  approximately  $1.3  million of direct  response
advertising costs were deferred and recorded in prepaid expenses.  For all other
advertising,  the Company  expenses the cost of  advertising  the first time the
advertising takes place.

INVENTORY  VALUATION:  Inventories  are  valued at the lower of cost  (first-in,
first-out basis) or market. Inventory costs include material, labor, and related
overhead and handling  costs.  Raw materials  represent less than one percent of
the inventory  value at December 31, 2002.  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.  Leasehold
improvements  relating to leased  facilities are depreciated  over the remaining
life of the lease. Technology equipment as well as software and development have
an estimated  useful life of three to seven  years.  Intangible  assets  consist
primarily  of goodwill  ($1.9  billion),  trade names ($239  million)  and other
intangible  assets ($19  million).  As required by SFAS 142  beginning  in 2002,
goodwill is not subject to  amortization  and intangible  assets with indefinite
useful lives are not amortized  until their useful lives are determined to be no
longer  indefinite.  Goodwill  and  intangible  assets  that are not  subject to
amortization  are subject to at least an annual  assessment  for  impairment  by
applying a fair-value  based test.  Estimated  fair value is determined for each
reporting unit by utilizing the expected  present value of the future cash flows
of  the  units.  The  Company  completed  its  initial  assessment  of  goodwill
impairment  in the second  quarter of 2002.  The Company has also  completed its
annual  assessment of impairment  as of October 1. These  assessments  concluded
that there were no impairment issues. The Company performs impairment testing on
an  annual  basis  and may  test  for  impairment  on a more  frequent  basis if
management believes events have occurred or circumstances have changed resulting
in a reporting unit's fair value being reduced below its book value.  Intangible
assets with finite  lives ($19  million and $23 million at December 31, 2002 and
2001,  respectively) are amortized on a straight-line basis over their estimated
useful lives.

As  discussed  in the  "Portfolio  Review  and  Strategic  Actions"  Note to the
Consolidated  Financial  Statements,  in the course of completing  its portfolio
review,  the Company recorded  impairment charges in 2001 related to goodwill of
TruGreen  LandCare  and the United  Kingdom  Terminix  operations.  The  Company
computed the  impairment  of the  associated  goodwill by utilizing a discounted
cash flow  methodology,  in which the present value of the future  expected cash
flows of the businesses, were compared to the book values. The impairment losses
recorded were the excess of the book values over the discounted cash flows.

As required by SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company's long-lived assets,  including fixed assets and intangible
assets (other than goodwill),  are tested for recoverability  whenever events or
changes  in  circumstances  indicate  that  their  carrying  amounts  may not be
recoverable.  No recovery  problems  have been  indicated by these  comparisons.
Based on these reviews,  when the undiscounted  future cash flows from the asset
are less than the carrying amount of the asset, an impairment loss is recognized
based on the asset's fair value, and the carrying amount of the asset is reduced
accordingly.

FAIR VALUE OF FINANCIAL  INSTRUMENTS  AND CREDIT RISK:  The carrying  amounts of
cash  and  cash  equivalents,   receivables,   accounts  payable,   and  accrued
liabilities  approximate  fair  value  because  of the short  maturity  of these
instruments.  The carrying  amounts of long-term  receivables  approximate  fair
value as the  effective  rates for these  instruments  are  comparable to market
rates at year-end.  The carrying  amount of marketable and long-term  securities
also  approximate  fair  value as  unrealized  gains and  losses on  investments
accounted  for at  market  value  are  reported  net-of-tax  as a  component  of
accumulated  comprehensive  income (loss).  The carrying  amount of debt is $835
million and $1.2  billion and the  estimated  fair value is  approximately  $880
million  and $1.1  billion at  December  31,  2002 and 2001,  respectively.  The
estimated fair value of debt is based upon borrowing rates  currently  available
to the Company for long-term borrowings with similar terms and maturities.

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

Financial  instruments,  which potentially  subject the Company to financial and
credit risk,  consist  principally of investments and  receivables.  Investments
consist  primarily of publicly  traded debt and common  equity  securities.  The
Company  periodically  reviews its portfolio of investments to determine whether
there has been an other than temporary  decline in the value of the  investments
from factors such as deterioration  in the financial  condition of the issuer or
the  market(s) in which it competes.  As a result of such a review,  the Company
wrote down the value of its investment portfolio by $4 million,  pretax in 2001.
Receivables have little  concentration of credit risk due to the large number of
customers and the dispersion across geographical areas. The Company maintains an
allowance for losses based upon the expected collectibility of receivables.

INCOME  TAXES:  The  Company  accounts  for  income  taxes  under  the SFAS 109,
"Accounting  for  Income  Taxes."  This  statement  uses an asset and  liability
approach  for the  expected  future tax


                                       16
<PAGE>

Notes to Consolidated Financial Statements


consequences  of events that have been  recognized  in the  Company's  financial
statements  or tax  returns.  Deferred  income taxes are provided to reflect the
differences  between the tax bases of assets and  liabilities and their reported
amounts in the financial statements.

EARNINGS PER SHARE:  Basic  earnings per share is based on the  weighted-average
number of common shares outstanding during the year. The weighted average common
shares for the diluted  earnings per share  calculation  include the incremental
effect  related to  outstanding  options  whose market price is in excess of the
exercise price and shares potentially issuable under convertible securities.  In
computing diluted earnings per share, the after-tax  interest expense related to
convertible  debentures is added back to net income in the numerator,  while the
diluted shares in the denominator include the shares issuable upon conversion of
the debentures.  The effects of outstanding  stock options whose market price is
in  excess  of  the  exercise  price  and  shares  potentially   issuable  under
convertible securities have not been included in the 2001 diluted loss per share
calculation as their effect would have been anti-dilutive.

STOCK-BASED  COMPENSATION:  Beginning  in 2003,  the  Company  will  account for
employee  stock options as  compensation  expense in  accordance  with SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 148, "Accounting for Stock-Based
Compensation  - Transition  and  Disclosure,  an amendment of FASB Statement No.
123",  provides  alternative  methods of  transitioning  to the fair value based
method of accounting for employee  stock options as  compensation  expense.  The
Company will use the "prospective method" of SFAS 148 and expense the fair value
of new  employee  option  grants  awarded  subsequent  to 2002.  If the  Company
continues  its  historical  pattern  of option  granting,  the  impact  would be
approximately  $.005 per share in 2003,  increasing  to  approximately  $.03 per
share over five years.

Prior to 2003,  the Company has accounted  for employee  share options under the
intrinsic  method of Accounting  Principles Board Opinion 25, as permitted under
GAAP. Accordingly,  no compensation cost has been recognized in the accompanying
financial  statements  related to these options.  Had  compensation  expense for
employee  options been determined under the fair value based method of SFAS 123,
proforma  reported  net income and net  earnings  per share  would  reflect  the
following:



(In thousands, except per share data)       2002       2001      2000
========================================================================
Net income as reported                   $156,994    $116,384  $153,681
  Deduct: total stock-based
  compensation expense
  determined under fair value
  based method, net
  of related tax effects                   (7,576)     (7,613)   (8,170)
------------------------------------------------------------------------
Proforma net income                      $149,418    $108,771  $145,511

Basic Earnings Per Share::
  As reported                                $.52        $.39      $.51
   Proforma                                   .50         .36       .48

Diluted Earnings Per Share:
  As reported                                $.52        $.39      $.50
    Proforma                                  .49         .36       .48
========================================================================
SEE THE "SHAREHOLDERS' EQUITY" NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR
A  DESCRIPTION  OF THE  ASSUMPTIONS  USED  TO  COMPUTE  THE  ABOVE  STOCK  BASED
COMPENSATION EXPENSE.

NEWLY ADOPTED  ACCOUNTING  PRINCIPLES:  In June 2001,  the Financial  Accounting
Standards Board issued SFAS 142 "Goodwill and Other Intangible Assets". SFAS 142
requires that after December 31, 2001,  existing  goodwill will not be amortized
and intangible  assets with indefinite  useful lives will not be amortized until
their useful lives are determined to be no longer indefinite. In accordance with
SFAS 142, the Company  discontinued  the amortization of goodwill and indefinite
lived  intangible  assets  effective  January 1, 2002.  Goodwill and  intangible
assets that are not amortized are subject to at least an annual  assessment  for
impairment  by  applying a  fair-value-based  test.  The Company  completed  its
initial  assessment of goodwill  impairment in the second  quarter of 2002.  The
Company has also completed its annual  assessment of impairment as of October 1.
These assessments concluded that there were no impairment issues.

NEWLY ISSUED ACCOUNTING  STATEMENTS AND POSITIONS:  In April 2002, the Financial
Accounting   Standards  Board  (FASB)  issued  SFAS  145,  "Rescission  of  FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections".  The primary  impact to the Company of this  Statement  is that it
rescinds  SFAS  4  which  required  all  material  gains  and  losses  from  the
extinguishment  of  debt to be  classified  as  extraordinary  items.  SFAS  145
requires that the more  restrictive  criteria of APB Opinion No. 30 will be used
to determine whether such gains or losses are extraordinary. The Company intends
to adopt this  Statement in its fiscal year 2003, as required by the  Statement.
Adoption  of  this  Statement  will  result  in  the   reclassification  of  the
extraordinary  losses  into income from  continuing  operations  included in the
accompanying Consolidated Statements of Income.

In June 2002, the FASB issued SFAS 146,  "Accounting  for Costs  Associated with
Exit or Disposal Activities". This Statement requires recording costs associated
with exit or disposal  activities at their fair values when a liability has been
incurred.  Under  previous  guidance,  certain  exit  costs  were  accrued  upon
management's  commitment  to an exit plan,  which is generally  before an actual
liability has been incurred.  The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002.



                                       17
<PAGE>

Notes to Consolidated Financial Statements


In November 2002, the FASB issued  Interpretation No. 45 (FIN 45),  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of  Others".  FIN 45  elaborates  on the  existing
disclosure requirements for most guarantees,  including loan guarantees, such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee,  the company must recognize an initial  liability for the fair value,
or market value,  of the  obligations  it assumes under that  guarantee and must
disclose that information in its interim and annual financial statements. FIN 45
will be effective for the Company on a prospective basis to guarantees issued or
modified  after  December 31, 2002.  The Company is assessing the impact of this
Statement on the Company's  financial  position and results of  operations.  The
disclosure requirements in this interpretation have been adopted by the Company.

In January 2003, the FASB issued FASB  Interpretation No. 46,  "Consolidation of
Variable  Interest  Entities"  (FIN  46).  Under  this  Interpretation,  certain
entities known as "Variable Interest Entities" (VIE) must be consolidated by the
"primary  beneficiary"  of the entity.  The  primary  beneficiary  is  generally
defined as having the  majority of the risks and rewards  arising  from the VIE.
For VIE's in which a significant (but not majority)  variable  interest is held,
certain  disclosures  are  required.  The  Company  is  required  to  apply  the
requirements  of FIN 46 starting  with its third  quarter 2003 Form 10-Q filing.
The Company is presently assessing the impact of this  Interpretation,  however,
it is not  expected  to have a  material  impact on the  Consolidated  Financial
Statements.  Based on  information  as of December  31,  2002,  adoption of this
Interpretation  in 2003 could result in  approximately $5 million to $60 million
of real estate  operating  leases being  included on the balance sheet as assets
with associated debt.

BUSINESS SEGMENT REPORTING
The  business of the  Company is  conducted  through  five  operating  segments:
TruGreen,  Terminix,  American Home Shield, ARS/AMS and Other Operations. Due to
the Company's  sale of its Management  Services  business unit and its exit from
other  businesses in 2001,  certain  operations have become more significant for
segment reporting purposes. In addition,  the Company's management and reporting
structure  changed  during  2002.  As a result,  the  Company has  expanded  its
business segment  reporting which will allow for better ongoing  visibility into
the components of the business.  The companies that  previously were reported in
the Home  Maintenance  & Improvement  segment have been further  broken out into
American Home Shield and the combination of ARS/AMS.  The franchise  operations,
ServiceMaster  Clean  and  Merry  Maids,  formerly  in the  Home  Maintenance  &
Improvement segment, are reported in the Other Operations segment. In accordance
with  Statement  of  Financial  Accounting  Standards  No.  131,  the  Company's
reportable  segments are strategic business units that offer different services.
The  TruGreen  segment  provides   residential  and  commercial  lawn  care  and
landscaping  services  through  the  TruGreen  ChemLawn  and  TruGreen  LandCare
companies. As a result of the decision in the fourth quarter of 2001 to exit the
LandCare Construction business,  the results of the construction  operations are
now included in discontinued  operations for all periods.  The Terminix  segment
provides  termite and pest control  services to residential  and commercial U.S.
customers.  The  American  Home  Shield  segment  provides  home  warranties  to
consumers that cover heating, ventilation, air conditioning (HVAC), plumbing and
certain appliances. This segment also includes home inspection services provided
by AmeriSpec.  The American Residential Services,  (ARS) and American Mechanical
Services (AMS) segment  provides HVAC and plumbing  services  provided under the
ARS, AMS and Rescue Rooter brand names.  The Other  Operations  segment includes
the franchise  operations of ServiceMaster  Clean and Merry Maids, which provide
disaster restoration and cleaning services as well as the Company's headquarters
operations  which  provides  various  technology,  marketing,  finance and other
support services to the business units.

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

Segment  information  for the years ended  December 31, 2002,  2001, and 2000 is
presented  below.  As discussed in the  "Restatement"  Note, the information for
2001 and 2000 has been restated.

SFAS 142, "Goodwill and Other Intangible Assets", eliminates the amortization of
goodwill and  intangible  assets with  indefinite  lives  beginning in 2002. The
table  below  also  presents  "Proforma"  information  for 2001  and 2000  which
eliminates  amortization  expense related to goodwill and intangible assets with
indefinite  lives, so that these periods are presented on a comparable  basis to
the 2002 information.



                                       18
<PAGE>
<TABLE>
Notes to Consolidated Financial Statements



BUSINESS SEGMENT TABLE

(In thousands)                                        2002          % Change        2001          % Change         2000
===========================================================================================================================
<S>                                              <C>                    <C>     <C>                    <C>     <C>
OPERATING REVENUE:
   TruGreen                                      $ 1,372,984              0%    $ 1,368,770              0%    $ 1,365,470
   Terminix                                          924,384              9         845,453             16         728,299
   American Home Shield                              423,526             15         368,951             17         315,266
   ARS/AMS                                           718,892            (12)        820,177              4         787,026
   Other Operations                                  149,303            N/A         158,094            (30)        225,741
---------------------------------------------------------------------------------------------------------------------------
Total Operating Revenue                          $ 3,589,089              1%    $ 3,561,445              4%    $ 3,421,802
===========================================================================================================================
OPERATING INCOME:
   TruGreen                                      $   171,235             11%    $   154,301             (4%)   $   160,982
   Terminix                                          127,441             23         103,925             26          82,176
   American Home Shield                               47,890            104          23,512             29          18,272
   ARS/AMS                                            17,342            (57)         39,978            (14)         46,444
   Other Operations (1)                              (22,572)           N/A        (344,893)           N/A          12,977
---------------------------------------------------------------------------------------------------------------------------
Total Operating Income (1)                       $   341,336            N/A     $   (23,177)           N/A     $   320,851
===========================================================================================================================
OPERATING INCOME - SFAS 142 PROFORMA:
   TruGreen                                      $   171,235             (5%)   $   180,676             (3%)   $   186,856
   Terminix                                          127,441              4         122,979             25          98,215
   American Home Shield                               47,890             84          25,993             25          20,751
   ARS/AMS                                            17,342            (65)         49,210            (10)         54,607
   Other Operations (1)                              (22,572)           N/A        (341,582)           N/A          18,655
---------------------------------------------------------------------------------------------------------------------------
Total Operating Income - SFAS 142 Proforma (1)   $   341,336            N/A     $    37,276            N/A     $   379,084
===========================================================================================================================
CAPITAL EMPLOYED: (2)
   TruGreen                                      $ 1,011,846             (2%)   $ 1,031,387             (5%)   $ 1,090,099
   Terminix                                          620,863              4         594,970             15         518,010
   American Home Shield                              100,026             21          82,374             (4)         86,236
   ARS/AMS                                           416,068             (4)        431,756              3         417,931
   Other Operations                                    5,681            N/A         324,570            (64)        907,764
---------------------------------------------------------------------------------------------------------------------------
Total Capital Employed                           $ 2,154,484            (13%)   $ 2,465,057            (18%)   $ 3,020,040
===========================================================================================================================
IDENTIFIABLE ASSETS:
   TruGreen                                      $ 1,070,031             (1%)   $ 1,082,135             (9%)   $ 1,192,942
   Terminix                                          841,437              2         823,333             20         685,126
   American Home Shield                              376,059             16         323,229             10         292,587
   ARS/AMS                                           489,366             (6)        519,026              1         514,408
   Other Operations                                  638,045            (27)        873,522            (30)      1,254,647
---------------------------------------------------------------------------------------------------------------------------
Total Identifiable Assets                        $ 3,414,938             (6%)   $ 3,621,245             (8%)   $ 3,939,710
===========================================================================================================================
DEPRECIATION & AMORTIZATION EXPENSE:
   TruGreen                                      $    25,163            (53%)   $    53,140              2%    $    52,339
   Terminix                                           11,150            (64)         30,822              7          28,875
   American Home Shield                                5,583            (26)          7,516              4           7,253
   ARS/AMS                                             9,166            (49)         18,048              7          16,857
   Other Operations                                    6,814            (40)         11,277             11          10,200
---------------------------------------------------------------------------------------------------------------------------
Total Depreciation & Amortization Expense        $    57,876            (52%)   $   120,803              5%    $   115,524
===========================================================================================================================
CAPITAL EXPENDITURES:
   TruGreen                                      $    11,803            107%    $     5,709            (76%)   $    28,030
   Terminix                                           17,013             63          10,427             47           7,075
   American Home Shield                                4,794            (40)          8,033            104           3,935
   ARS/AMS                                             5,658            (20)          7,093            (15)          8,342
   Other Operations                                   21,331            104          10,447            (22)          9,078
---------------------------------------------------------------------------------------------------------------------------
Total Capital Expenditures                       $    60,599             45%    $    41,709            (26%)   $    56,460
===========================================================================================================================
</TABLE>

(1)  In the fourth quarter of 2001, the Company recorded a pretax charge of $345
     million,  related  primarily to goodwill and asset  impairments  as well as
     other items.

(2)  Capital  employed  represents  the segments  total assets less  liabilities
     (exclusive of debt balances).

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

(In thousands)              2002         % Change         2001         % Change        2000
================================================================================================
<S>                    <C>                <C>        <C>                    <C>    <C>
TruGreen               $   916,216              1%   $   910,573            (3%)   $   934,318
Terminix                   709,955              1        705,608            25         563,943
American Home Shield        72,085              -         72,085            (3)         74,277
ARS/AMS                    347,968              -        347,863             4         334,857
Other Operations           112,106              5        106,599            N/A        382,073

------------------------------------------------------------------------------------------------
Total                  $ 2,158,330              1%   $ 2,142,728            (6%)   $ 2,289,468
================================================================================================

</TABLE>

                                       19
<PAGE>

Notes to Consolidated Financial Statements

RESTATEMENT
The Company has restated its  consolidated  financial  statements  for the years
ended  December 31, 2001 and 2000.  Subsequent  to the issuance of the Company's
2001  consolidated   financial   statements,   management  determined  that  the
historical  accounting  treatment relating to the items below required revision.
The table below presents the net income and equity impacts from the restatement.



                                              Net          Net       Beginning
  ($ IN  MILLIONS,  EXCEPT PER SHARE DATA)   Income      Income       Equity
                                              2001        2000         2000
                                            --------    --------    ----------
  CONTINUING OPERATIONS:

  AHS deferred acquisition costs              $(8.5)      $(6.1)       $(30.0)
  Trade name license fee                        9.0           -             -
  Insurance (TruGreen)                          3.7        (3.7)            -
  Other, net                                   (0.6)       (5.8)        (20.7)
  Tax adjustment from  reincorporation         (0.8)       (0.8)         35.0
                                             --------    --------    ----------

  INCOME/EQUITY IMPACT                         $2.8      $(16.4)       $(15.7)

    EPS IMPACT                                $0.01      $(0.05)

  DISCONTINUED OPERATIONS:

    INCOME/EQUITY IMPACT *                   $(41.5)      $(3.7)        $59.4

    EPS IMPACT                               $(0.14)     $(0.01)

  * PRIMARILY REPRESENTS THE TAX ADJUSTMENT FROM REINCORPORATION

A summary of the significant effects of the restatement is as follows:
<TABLE>


                                                            2001                              2000
                                              ------------------------------------------------------------
                                               As Previously                  As Previously
(In thousands, except per share data)           Reported (1)    As Restated    Reported (1)    As Restated
----------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31
<S>                                             <C>            <C>            <C>            <C>
Operating revenue                               $ 3,539,187    $ 3,561,445    $ 3,420,371    $ 3,421,802

Operating income                                    (38,336)       (23,177)       340,354        320,851

Income  from  continuing  operations  before
  income taxes                                     (152,264)      (144,895)       241,762        217,118

Income from continuing operations before
  extraordinary items and cumulative
  effect of accounting change                      (167,313)      (164,464)       140,690        124,274

Discontinued operations, net                        325,768        284,270         44,298         40,568
Extraordinary loss, net                              (3,422)        (3,422)          --             --
Cumulative effect of  accounting change                --             --          (11,161)       (11,161)
----------------------------------------------------------------------------------------------------------
Net income                                      $   155,033    $   116,384    $   173,827    $   153,681
==========================================================================================================

Diluted earnings per share:
Income from continuing operations before
  extraordinary items                                $(0.52)        ($0.55)         $0.46          $0.41

Discontinued operations, net                           1.05           0.95           0.15           0.13
Extraordinary loss, net                               (0.01)         (0.01)            -              -
Cumulative effect of  accounting change                  -              -           (0.04)         (0.04)
----------------------------------------------------------------------------------------------------------
Diluted earnings per share                           $ 0.51          $0.39          $0.57          $0.50
==========================================================================================================

AS OF DECEMBER 31
Current assets                                  $ 1,131,824    $ 1,119,050
Net property, plant, and equipment                  180,937        196,210
Other long-term assets                            2,361,978      2,305,985

----------------------------------------------------------------------------------------------------------
Total assets                                    $ 3,674,739    $ 3,621,245
==========================================================================================================

Current liabilities                             $   796,113    $   805,298
Long-term debt                                    1,105,518      1,120,249
Long-term liabilities                               449,470        385,834
Minority interest                                   102,677        102,677

Total shareholders' equity                        1,220,961      1,207,187

----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity      $ 3,674,739    $ 3,621,245
==========================================================================================================
</TABLE>

(1)  During the third quarter of 2002, the Company sold its Terminix  operations
     in the United  Kingdom.  The financial  results from these  operations have
     been reclassified from "Continuing Operations" to "Discontinued Operations"
     for   all   periods   presented.   Amounts   as   restated   include   this
     reclassification in order to conform with the 2002 presentation.







                                       20
<PAGE>


Notes to Consolidated Financial Statements


AMERICAN HOME SHIELD DEFERRED ACQUISITION COSTS
In July 2002, the Company changed its method of accounting for deferred customer
acquisition  costs in its  American  Home  Shield  business  from  SFAS No.  60,
"Accounting  and  Reporting  by  Insurance  Enterprises,"  pursuant to which the
Company believed it was appropriate to amortize deferred  acquisition costs over
the expected customer life to FASB Technical Bulletin No. 90-1,  "Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts," pursuant
to which  deferred  acquisition  costs are amortized  over the initial  contract
life.

The new method of  accounting  reduced  after-tax  earnings  by $.03 per diluted
share in 2002,  but had no  material  impact on cash flow in  current  or future
years. In the second quarter of 2002, the Company  recorded a cumulative  charge
of $45 million ($.14 per diluted share) to effect this change.

Following  discussions with the Staff of the Securities and Exchange Commission,
the Company has restated prior years to account for deferred  acquisition  costs
in  accordance  with  FASB  Technical  Bulletin  No.  90-1.  The  effect of this
restatement is to reduce net income by $8.5 million or $.03 per diluted share in
2001,  and $6.1 million or $.02 per diluted  share in 2000.  In  addition,  this
change results in a reduction of retained  earnings of $30 million at January 1,
2000.

TRADE NAME LICENSE FEE
In connection  with the sale of its Management  Services  business in the fourth
quarter of 2001,  the Company  entered into a three-year  licensing  arrangement
with  ARAMARK  Corporation  for the use of the  ServiceMaster  trade name.  This
agreement was valued at $15 million and accordingly, a like amount was allocated
from the purchase price.  The Company intended to recognize this amount over the
three-year  contractual  period,  and as such,  recognized  $2  million  related
thereto in each of the first and second  quarters of 2002. In November 2002, the
Company  announced that it had determined  that it was  appropriate to recognize
the entire $15 million  licensing fee in the fourth  quarter of 2001. The effect
of this  correction  is to increase  net income by $9 million and  earnings  per
share by $.03 in 2001, and to reduce net income by $2.5 million and earnings per
share by $.01 in the first half of 2002.

INSURANCE  (TRUGREEN)
In January 2002, the Company reported that it had recognized a $9 million pretax
expense in 2001  relating to a revised  estimate of the 2000  insurance  reserve
requirements.  Net income has been  restated  for this item which  results in an
increase to income from continuing  operations of $3.7 million (or $.01) in 2001
and a decrease to income from continuing  operations of the same amount in 2000.
The  remaining  adjustment  results in a decrease  to income  from  discontinued
operations of $1.1 million.

REINCORPORATION TAX
Prior to 1997,  the  Company was in  partnership  form and  therefore  was not a
federal taxpayer. Consequently, the Company did not record deferred tax balances
reflecting  the  differences  between  the book and tax basis of its  assets and
liabilities. When the Company converted to corporate form in 1997, it realized a
significant step-up in the tax basis of its assets,  which was largely reflected
as an increase in the basis of the tax  intangibles and provided for significant
tax deductions over the next 15 years. In accounting for this event in 1997, the
Company recorded the net deferred tax asset associated with differences  between
the  book  and tax  basis  of its  assets  and  liabilities.  As it  related  to
intangible  assets,  the  Company  made a  determination  that the tax  basis of
intangibles  equaled  the  overall  book  balance  of  intangible  assets  on an
enterprise  basis.  Subsequently it was determined that intangible assets needed
to be  considered  at the  individual  business  unit level which  resulted in a
situation  where tax basis  exceeded  book basis.  This  created a deferred  tax
asset. The Company restated the financial statements to reflect the deferred tax
asset as if it had been recorded in 1997.


This change results in an increase to retained earnings as of January 1, 2000 of
$92.6 million, and an increase to the tax provision for continuing operations of
$.8  million  in both 2001 and 2000 and an  increase  to the tax  provision  for
discontinued  operations  of $.8  million  and $1.2  million  in 2001 and  2000,
respectively.  This restatement also results in an increase to the tax provision
relating to the gain on certain  businesses  sold in 2001 of $45.8 million.  The
net impact of these items was to increase  deferred tax assets by $33.4  million
and equity by $43.2 million as of December 31, 2001.

OTHER, NET
Other items primarily  relate to adjustments in accruals,  timing of revenue and
expense items and other miscellaneous  items. The Company also determined it was
appropriate to expense the costs associated with telephone directory placements
when the directory is published rather than expensing the cost over the contract
period.  In addition,  certain  operating leases of constructed  properties have
been included in the balance sheet as assets with associated debt. The financial
statements  have been  restated from the amounts  previously  reported for these
items.



                                       21
<PAGE>

Notes to Consolidated Financial Statements


GOODWILL AND INTANGIBLE ASSETS
In June  2001,  the  Financial  Accounting  Standards  Board  issued  SFAS  142,
"Goodwill and Other  Intangible  Assets".  SFAS 142 requires that after December
31, 2001,  existing  goodwill will no longer be amortized and intangible  assets
with indefinite  useful lives will not be amortized until their useful lives are
determined to be no longer indefinite.  In accordance with SFAS 142, the Company
discontinued the amortization of goodwill and indefinite lived intangible assets
effective January 1, 2002. Goodwill and intangible assets that are not amortized
are  subject  to at least an annual  assessment  for  impairment  by  applying a
fair-value-based  test. The Company completed its initial assessment of goodwill
impairment  in the second  quarter of 2002.  The Company has also  completed its
annual  assessment of impairment  as of October 1. These  assessments  concluded
that there were no impairment issues. In accordance with SFAS 142, the following
table provides summarized transitional  information for the years ended December
31,  2002,  2001 and 2000,  with the 2001 and 2000  information  presented on an
adjusted basis to reflect the elimination of amortization expense required under
SFAS 142:


(IN THOUSANDS,  EXCEPT PER SHARE DATA)       2002         2001          2000
-------------------------------------------------------------------------------
Reported operating income                $ 341,336    ($ 23,177)   $   320,851
Add  back: Goodwill and trade name
  amortization                                --         60,453         58,233
-------------------------------------------------------------------------------
Operating income as adjusted under
  SFAS 142                               $ 341,336    $  37,276    $   379,084
===============================================================================
Reported  income from continuing
  operations before extraordinary loss
  and cumulative effect of accounting
  change                                 $ 170,098    ($164,464)   $   124,274
Add  back: Goodwill and trade name
  amortization, net of tax                    --         41,590         40,244
-------------------------------------------------------------------------------
Income from continuing
  operations before extraordinary
  loss and cumulative effect of
  accounting change as adjusted
  under SFAS 142                           170,098     (122,874)       164,518
Discontinued operations,  net of taxes      (3,875)     284,270         40,568
Extraordinary loss, net of taxes            (9,229)      (3,422)           -
Cumulative effect of accounting
   change, net of taxes                         -            -         (11,161)
-------------------------------------------------------------------------------
Net income as adjusted under
  SFAS 142                               $ 156,994    $ 157,974    $   193,925
===============================================================================
Reported basic earnings per share
 from continuing operations before
 extraordinary loss and cumulative
 effect of accounting change                 $0.57       ($0.55)         $0.41
Add  back: Goodwill and trade name
  amortization, net of tax                       -         0.14           0.13
-------------------------------------------------------------------------------
Basic earnings per share
  from continuing
  operations before extraordinary
  loss and cumulative effect of
  accounting change as adjusted
  under SFAS 142                              0.57        (0.41)          0.54
Discontinued operations, net                 (0.01)        0.95           0.13
Extraordinary loss, net                      (0.03)       (0.01)            -
Cumulative effect of accounting
   change, net                                 -              -          (0.04)
-------------------------------------------------------------------------------
Basic earnings per share as adjusted
  under SFAS 142                             $0.52        $0.53          $0.64
===============================================================================
Reported diluted earnings per share
  from continuing operations before
  extraordinary loss and cumulative
  effect of accounting change                $0.56       ($0.55)         $0.41
Add  back:  Goodwill  and  trade name
 amortization, net of tax                      -           0.14           0.13
-------------------------------------------------------------------------------
Diluted earnings per share
  from continuing
  operations before extraordinary
  loss and cumulative effect of
  accounting change as adjusted
  under SFAS 142                              0.56        (0.41)          0.54
Discontinued operations, net                 (0.01)        0.95           0.13
Extraordinary loss, net                      (0.03)       (0.01)            -
Cumulative effect of accounting
   change, net                                 -            -            (0.04)
-------------------------------------------------------------------------------
Diluted earnings per share as adjusted
  under SFAS 142                             $0.52        $0.53          $0.63
===============================================================================
The following table summarizes goodwill and intangible assets as of December 31:



(IN THOUSANDS)                     2002          2001         2000
======================================================================
Goodwill (1)                    $1,919,780    1,904,178    2,043,179
Trade names (1)                    238,550      238,550      246,289

Other intangible assets             78,284       74,197       61,517
Accumulated amortization (2)       (59,053)     (51,611)     (44,014)
----------------------------------------------------------------------
  Net other intangibles             19,231       22,586       17,503
----------------------------------------------------------------------

Total                           $2,177,561   $2,165,314   $2,306,971
======================================================================

(1)  Not subject to amortization

(2)  Amortization expense of $7 million, $10 million and $9 million was recorded
     in 2002,  2001 and  2000,  respectively.  Annual  amortization  expense  of
     approximately $6 - $8 million is expected over the next five years.

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

                                  2002        2001       2000
===============================================================
Tax at U.S.
  Federal statutory rate         35.0%     (35.0%)      35.0%
State and local income
  taxes net of U.S. federal
  benefit                         3.6        1.4         4.3
Net operating loss and
  tax credits                    (3.7)      (1.7)       (0.7)
Impairment of non-deductible
  goodwill                          -       43.5           -
Non-deductible amortization
  expense                           -        2.7         2.5
Other                             0.6        2.6         1.7
---------------------------------------------------------------
Effective rate                   35.5%      13.5%       42.8%
===============================================================

The effective tax rate for discontinued  operations was 39.4%,  44.7%, and 43.9%
for 2002, 2001, and 2000,  respectively.  The difference between these rates and
the federal  statutory  tax rate of 35%  reflects  state  taxes,  net of federal
benefit, the impairment of non-deductible goodwill in 2001, and permanent items,
primarily  amortization  expense in 2001 and 2000.  The  effective  tax rate for
extraordinary  items and the cumulative  effect of accounting  change was 40.0%,
41.1% and 41.1% for 2002, 2001 and 2000, respectively.



                                       22
<PAGE>

Notes to Consolidated Financial Statements


Income tax expense from continuing operations is as follows:

(In thousands)                           2002
                         -----------------------------------
                            CURRENT     DEFERRED    TOTAL
U.S. federal                $33,718     $48,838     $82,556
State and local                 359      10,553      10,912
------------------------------------------------------------
                            $34,077     $59,391     $93,468
============================================================

                                         2001
                         -----------------------------------
                            Current    Deferred     Total
U.S. federal                $38,619   $(22,267)     $16,352
State and local               7,174     (3,957)       3,217
------------------------------------------------------------
                            $45,793   $(26,224)     $19,569
============================================================

                                         2000
                         -----------------------------------
                            Current     Deferred     Total
U.S. federal                $43,406     $35,217     $78,623
State and local               7,782       6,439      14,221
------------------------------------------------------------
                            $51,188     $41,656     $92,844
============================================================


Deferred income tax expense  results from timing  differences in the recognition
of income and expense for income tax and financial reporting purposes.  Deferred
income tax balances reflect the net tax effects of temporary differences between
the carrying  amounts of assets and  liabilities  for  financial  reporting  and
income tax  purposes.  The deferred tax asset  primarily  reflects the impact of
future tax deductions  related to the Company's  accruals.  Management  believes
that, based upon its lengthy and consistent history of profitable operations, it
is probable  that its deferred tax assets will be realized,  primarily  from the
generation  of future  taxable  income.  The  deferred tax  liability  primarily
reflects  the basis  differences  related to  intangible  assets.  In 2002,  the
Company  adopted SFAS 142 which  eliminated the  requirement to record  goodwill
amortization  expense in the  financial  statements.  The Company  continues  to
amortize  the  intangible  assets for tax  purposes  which  yields an annual tax
benefit of  approximately  $50  million.  The tax  benefit is  reflected  in the
Consolidated  Statement of Financial Position as an increase in the deferred tax
liability.  Significant components of the Company's deferred tax balances are as
follows:

(In thousands)                                2002          2001
=================================================================
Deferred tax assets (liabilities):
Current:
  Prepaid expenses and other              $(4,500)      $(5,700)
  Receivables allowances                    11,400        11,100
  Accrued insurance and
    related expenses                        16,800        17,200
  Other accrued expenses                    92,500        56,600
-----------------------------------------------------------------
    Total current asset                    116,200        79,200
=================================================================
  Long-Term:
  Long-term assets (1)                   (302,700)     (237,100)
  Insurance expenses                        26,800        38,800
  Other long-term obligations             (36,600)      (34,700)
-----------------------------------------------------------------
    Total long-term liability            (312,500)     (233,000)
=================================================================
Net deferred tax liability              $(196,300)    $(153,800)
=================================================================

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

Total tax payments in 2002 were $27 million.  In 2001, the Company  received net
tax refunds of $1 million,  and in 2000,  the Company made total tax payments of
$38 million, net of refunds.

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

CURRENT YEAR
During 2002, the Company acquired several small companies, primarily in the pest
control and lawn care businesses.  The net purchase price of these  acquisitions
was $18  million.  The  Company  recorded  goodwill  of $12  million  and  other
intangible assets of $4 million related to these acquisitions.

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

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

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

During 2000, the Company  acquired many small  companies,  primarily in the lawn
care,  HVAC and  plumbing,  pest  control and  landscaping  businesses.  The net
purchase  price  was $207  million,  of which  approximately  $162  million  was
recorded as goodwill.




                                       23
<PAGE>


Notes to Consolidated Financial Statements



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

(in thousands)                  2002          2001          2000
==================================================================
Purchase price                $18,850      $245,646      $246,886
Less liabilities
  assumed                     (1,207)      (54,790)      (39,588)
------------------------------------------------------------------
Net purchase price            $17,643      $190,856      $207,298
==================================================================
Net cash paid
  for acquisitions            $13,003       $55,842      $144,834
Shares issued                       -             -        15,030
Seller financed debt            4,640        35,014        47,434
Minority ownership
  in Terminix                       -       100,000             -
------------------------------------------------------------------
Payment for
  acquisitions                $17,643      $190,856      $207,298
==================================================================

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

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


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

In the fourth  quarter of 2002,  the  purchaser of the  Company's  European pest
control  and  property  services  operations  made a claim for a purchase  price
adjustment (relating to the 2001 sale), relating to an alleged breach of certain
conditions in the purchase agreement. In the course of responding to that claim,
the  Company  discovered  that  personnel  of the  former  operations  had  made
unsupported  monthly adjustments to certain accounts.  The Company  subsequently
agreed to an adjustment to the purchase  price  consisting of an $8 million cash
payment and the  cancellation  of a previously  reserved  note  receivable of $7
million. This $8 million charge was recorded in 2002.

At December 31, 2002, the Company has certain assets on its financial statements
relating  to  discontinued  operations,  primarily  receivables.  Management  is
actively collecting the outstanding  receivables.  The Company believes that the
remaining assets are presented at their net realizable value.

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

(in thousands, except per share data)
Operating Results:              2002          2001          2000
=================================================================
Operating revenue            $40,692    $2,271,376    $2,550,244
Income (loss) from
  discontinued
  operations before
  income taxes                 1,600       (27,232)       72,328
Provision for income
  taxes                          635        11,711        31,760
-----------------------------------------------------------------
Income from
  discontinued
  operations                     965       (38,943)
Gain on sale of
  Management Services,
  net of losses from
  disposition of other
  entities
                              (4,840)      323,213           -
=================================================================
Income from
  discontinued
  operations                 ($3,875)     $284,270       $40,568
=================================================================
Diluted earnings
  per share from
  discontinued
  operations                  ($0.01)        $0.95         $0.13
=================================================================


Financial Position:                           2002          2001
=================================================================
Current assets                              $5,300       $46,700
Property, plant and equipment                  400        12,300
Long-term assets                                 -         5,100
-----------------------------------------------------------------
Total assets                                $5,700       $64,100
-----------------------------------------------------------------
Current liabilities                        $32,200       $50,400
Long-term liabilities                       28,800        50,600
-----------------------------------------------------------------
Total liabilities                          $61,000      $101,000
=================================================================

In the fourth  quarter of 2001, the Company  recorded a pretax charge  primarily
related to goodwill and asset impairments and other items totaling $345 million.
Reserves and accrual  balances  remain on the financial  statements  relating to
these  operations.   Cash  payments  incurred  for  the  wind-down  of  LandCare
construction contracts, lease termination costs, workers compensation and health
claims as well as professional  service fees have been made during 2002.  During
the second  quarter of 2002,  the Company  completed  the sale of its  ownership
interest in five assisted  living  facilities.  These  properties  were financed
through an  operating  lease


                                       24
<PAGE>

Notes to Consolidated Financial Statements


arrangement,  whereby, the Company guaranteed a portion of the residual value of
the  properties.  At December 31, 2001, a $13.5 million  reserve was established
representing  the amount by which the  residual  value  guarantees  exceeded the
value of bids to purchase the facilities at that time. The final sales price was
significantly  greater than these bid levels and the Company  realized a gain of
$3.6 million from the sale on the assisted living properties.

The table below  summarizes the activity during the twelve months ended December
31, 2002 for the remaining liabilities from the discontinued  operations and the
reserves for items recorded in the fourth quarter of 2001. The Company  believes
that the remaining reserves continue to be adequate and reasonable.

                                Balance at      Cash                  Balance at
                                 Dec. 31,     Payments     Income/     Dec. 31,
(in thousands)                     2001       or Other    (Expense)      2002
--------------------------------------------------------------------------------
Remaining liabilities
 from discontinued
 operations
   LandCare Construction          $34,100     $22,700     $(2,600)      $14,000
   Certified   Systems, Inc.       23,800      13,700      (3,500)       13,600
   Management Services              7,400       1,300       4,500         1,600
   International businesses        19,600      20,100(1)  (21,900)(1)    21,400
   Other                           16,100       6,300        (600)       10,400
Reserves related to
  strategic actions in the
  fourth quarter of 2001          $36,000     $14,900      $5,600       $15,500


(1) The liabilities of this business assumed by the buyer of the sold operations
totaled $19.6 million.  During 2002, the Company recorded accruals in connection
with sold  operations  and a cash  adjustment to the purchase  price of the 2001
dispositions.

The  Company  recorded a $3.2  million  charge in the second  quarter of 2002 in
operating income relating to the retirement  agreement of a key executive.  This
severance will be paid out over three years.

DISPOSITIONS IN 2000
In September 2000, the Company  completed the sales of two non-core  businesses.
The Company's  interior plant care business was sold for $44 million in cash. In
addition, the Company sold its Diversified Health Services unit, a business that
manages long-term care facilities.  Neither transaction had a material impact on
the Company's operating results.

COMMITMENTS AND CONTINGENCIES
The Company  carries  insurance  policies on insurable  risks at levels 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 and warranty claims in the
American Home Shield business are made based on the Company's claims  experience
and actuarial  assumptions.  The Company has certain liabilities with respect to
existing or  potential  claims,  lawsuits,  and other  proceedings.  The Company
accrues  for these  liabilities  when it is probable  that future  costs will be
incurred and such costs can be reasonably estimated.

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

EMPLOYEE BENEFIT PLANS
Discretionary  contributions  to  qualified  profit  sharing  and  non-qualified
deferred  compensation  plans were made in the  amount of $9.2  million in 2002,
$8.9 million in 2001 and $9.3 million in 2000. Under the Employee Share Purchase
Plan, the Company  contributed  $.9 million in 2002, $.8 million in 2001 and $.8
million in 2000.  These funds defrayed part of the cost of the shares  purchased
by employees.

MINORITY INTEREST OWNERSHIP AND RELATED PARTIES
The Company continues to maintain minority investors in Terminix.  This minority
ownership  reflects an interest  issued to the prior  owners of the Allied Bruce
Terminix Companies in connection with that acquisition.  This equity security is
exchangeable into eight million  ServiceMaster  common shares. The ServiceMaster
shares are included in the shares used for the  calculation of diluted  earnings
per share. As of the date of the Company's  acquisition of ARS in 1999,  certain
members of management  acquired,  at fair market value,  equity interests in the
HVAC and  plumbing  operations.  In the  fourth  quarter  of 2002,  the  Company
repurchased at fair value the shares of ARS for approximately $3 million.

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

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

In January  2001,  Jonathan P. Ward,  President and Chief  Executive  Officer of
ServiceMaster, purchased from ServiceMaster a 5.50 percent convertible debenture
due January 9, 2011,  with a face value of $1.1 million.  The Company loaned Mr.
Ward the  entire  amount  of the  purchase  price  through a 5.50  percent  full
recourse loan due January 9, 2011. In May 2001, Mr. Ward purchased a second 5.50
percent  convertible  debenture  due May 10,  2011,  with a face  value  of $1.1
million.  The  Company  loaned 50 percent of the  purchase  price of this second
debenture  with a 5.50  percent  full  recourse  loan  due  May 10,  2011.  Each
debenture becomes  convertible into 20,000 shares of ServiceMaster  common stock
on December 31, in each of the years 2001 through 2005.  The Company has treated
these  transactions  under  variable  plan  accounting  and  the  impact  to the
financial statements was immaterial in 2002 and 2001.


                                       25
<PAGE>

Notes to Consolidated Financial Statements


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

(In thousands)                      2002          2001
-------------------------------------------------------
8.45% maturing in 2005          $137,499      $250,000
6.95% maturing in 2007            49,225       100,000
7.88% maturing in 2009           179,000       193,000
7.10% maturing in 2018            79,473       149,000
7.45% maturing in 2027           195,000       195,000
7.25% maturing in 2038            82,650        88,150
International borrowings               -        36,519
Other                            112,628       143,524
Less current portion            (31,135)      (34,944)
-------------------------------------------------------
Total long-term debt            $804,340    $1,120,249
=======================================================

The Company is party to a number of debt agreements which require it to maintain
certain  financial and other  covenants,  including  limitations on indebtedness
(debt cannot exceed 3.5 times earnings before interest, taxes, depreciation, and
amortization  (EBITDA)) and interest coverage ratio (EBITDA needs to exceed four
times  interest  expense).  In  addition,   under  certain  circumstances,   the
agreements  may limit the  Company's  ability to pay  dividends  and  repurchase
shares of common stock. These limitations are not expected to be a factor in the
Company's future dividend and share repurchase plans.  Failure by the Company to
maintain these covenants could result in the acceleration of the maturity of the
debt.  At December 31, 2002,  the Company was in  compliance  with the covenants
related to these debt  agreements  and based on its operating  outlook for 2003,
expects to be able to maintain compliance in the future.

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

Since August  1997,  ServiceMaster  has issued $1.1  billion of  unsecured  debt
securities  pursuant to  registration  statements  filed with the Securities and
Exchange Commission.  As of December 31, 2002, ServiceMaster had $550 million of
senior  unsecured debt  securities and equity  interests  available for issuance
under an effective shelf registration statement.

In the second quarter of 2002,  the Company  recorded an  extraordinary  loss on
early  extinguishment  of $9  million  after-tax,  or $.03  per  diluted  share,
resulting  from the  repurchase  of its  publicly  traded  debt with a principal
amount of $252 million  including  approximately  $218 million  repurchased in a
tender offer.

In the fourth quarter of 2001,  the Company repaid prior to maturity,  its 10.81
percent notes maturing 2001-2002,  6.65 percent notes maturing 2002-2004 and its
7.4 percent notes maturing in 2006. In connection  with the early  retirement of
these notes, the Company paid  "make-whole"  premiums of $17 million pretax.  In
addition, during 2001, the Company repurchased, prior to maturity, approximately
$123.9 million of its public debt and recognized a pretax gain of  approximately
$11 million.

The Company  has a  committed  revolving  bank  credit  facility  for up to $490
million  that  expires in December  2004.  The  facility can be used for general
Company purposes.  As of December 31, 2002, the Company had issued approximately
$136 million of letters of credit under the facility and had unused  commitments
of  approximately  $354 million.  At the Company's  current credit ratings,  the
interest rate under the facility is LIBOR plus 125 to 150 basis points depending
upon usage.

As of December 31, 2002, the Company had  approximately  $26 million of annually
renewable  surety bonds  outstanding  that  primarily  support  obligations  the
Company has under insurance programs.  If the surety bonds are not renewed,  the
Company  expects to replace  them with  letters of credit  issued under its bank
credit facility.

The Company is exposed to interest rate  fluctuations on its floating rate debt.
As of year-end,  the Company had no floating rate  borrowings.  The Company has,
from time to time,  entered into interest rate swap or similar  arrangements  to
mitigate its exposure to interest rate  fluctuations,  and does not, as a matter
of policy, enter into hedging contracts for trading or speculative  purposes. As
of December 31, 2002, no interest rate swaps were outstanding.

Cash interest  payments were $76 million in 2002,  $128 million in 2001 and $130
million in 2000.  Average rates paid on the revolving  credit  facility were 5.0
percent in 2001 and 6.6 percent in 2000. There were no material borrowings under
the facility in 2002. Future scheduled long-term debt payments are $31.1 million
in 2003 (average  rate of 4.2  percent),  $24.3 million in 2004 (average rate of
4.8  percent),  $151.3  million in 2005  (average  rate of 8.2  percent),  $10.6
million in 2006 (average rate of 6.0 percent) and $59.1 million in 2007 (average
rate of 6.7 percent).

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

The majority of the Company's  vehicle fleet is leased through operating leases.
Lease terms are non-cancelable for the first 12 month term and then are month-to
-month  leases,  cancelable at the Company's  option.  There are residual  value
guarantees (ranging from 70 percent to 87 percent depending on the agreement) on
these vehicles, which historically have not resulted in significant net payments
to the lessors.  There are no net payments reflected in the future minimum lease
obligation as the leases are  cancelable  and there are no expected net payments
due under the  guarantees.  At December  31, 2002 there was  approximately  $257
million of residual value relating to the Company's fleet.

Rental expense for 2002,  2001 and 2000 was $159 million,  $160 million and $147
million,  respectively.  Future long-term


                                       26
<PAGE>

Notes to Consolidated Financial Statements


noncancelable  operating lease payments are $63.0 million in 2003, $49.7 million
in 2004, $39.8 million in 2005, $31.8 million in 2006, $25.2 million in 2007 and
$51.5 million thereafter.

The Company maintains operating lease facilities with banks totaling $95 million
which provide for the  acquisition and development of properties to be leased by
the Company.  The Company has  guaranteed  the residual  value of the properties
under the leases up to 82 percent of the fair market  value at the  commencement
of the lease. At December 31, 2002,  approximately  $72 million was funded under
these  facilities.  Of the $95 million in  facilities,  $80  million  expires in
October 2004 and $15 million expires in January 2008.  Approximately $15 million
of these leases that involve  constructed  properties  have been recorded on the
balance  sheet as capital  leases with  related  assets and debt  recorded as of
December 31, 2002 and 2001.

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

As of December 31, 2002, the aggregate  market value of the Company's short- and
long-term  investments in debt and equity  securities was $116.7 million and the
aggregate cost basis was $119.1 million.

Interest and dividend  income  received on cash and  marketable  securities  was
$10.6  million,  $9.7  million,  and $10.0  million,  in 2002,  2001,  and 2000,
respectively.  Gains and  losses on sales of  investments,  as  determined  on a
specific  identification  basis, are included in investment income in the period
they are realized. The Company periodically reviews its portfolio of investments
to determine whether there has been an other than temporary decline in the value
of the investments from factors such as deterioration in the financial condition
of the  issuer  or the  market(s)  in which it  competes.  As a result of such a
review,  the  Company  wrote down the value of its  investment  portfolio  by $4
million, pretax in 2001.

RECEIVABLE SALES
In 2001,  the Company  entered into an agreement  which provides for the ongoing
revolving  sale of a  designated  pool of accounts  receivable  of TruGreen  and
Terminix to a wholly-owned,  bankruptcy-remote subsidiary, ServiceMaster Funding
LLC.  ServiceMaster  Funding LLC has entered into an agreement to transfer, on a
revolving  basis,  an  undivided  percentage  ownership  interest  in a pool  of
accounts receivable to unrelated third party purchasers.  ServiceMaster  Funding
LLC retains an undivided  percentage interest in the pool of accounts receivable
and bad debt losses for the entire  pool are  allocated  first to this  retained
interest.  The Company recorded a $3 million pretax loss in 2001 related to this
program which was recorded in minority interest  expense.  At December 31, 2002,
there were no receivables  sold to third parties under this agreement.  However,
the  Company  may sell its  receivables  in the future  which  would  provide an
alternative  funding  source.  The  agreement  is a  364-day  facility  that  is
renewable  at the  option  of the  purchasers.  The  Company  may sell up to $65
million of its  receivables to these  purchasers in the future and therefore has
immediate  access to cash proceeds from these sales.  The amount of the eligible
receivables varies during the year based on seasonality of the business and will
at times limit the amount available to the Company.

COMPREHENSIVE INCOME

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

(In thousands)                    2002      2001       2000
-------------------------------------------------------------
Unrealized holding
  gains (losses)
  arising in period           $(7,941)   $(3,601)    $20,553
Tax expense                    (3,196)    (2,382)      8,447
-------------------------------------------------------------
Net of tax amount             $(4,745)   $(1,219)    $12,106
=============================================================
Gains (losses) realized       $(1,460)    $3,845     $15,173
Tax expense                      (584)       705       6,236
-------------------------------------------------------------
Net of tax amount               $(876)    $3,140      $8,937
=============================================================

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

(In thousands)                    2002      2001       2000
-------------------------------------------------------------
Unrealized gains
  (losses) on securities      $(1,036)    $2,832     $7,192
Foreign currency
  translation                     187     (5,329)   (16,469)
-------------------------------------------------------------
Total                           $(849)   $(2,496)   $(9,277)
=============================================================

SHAREHOLDERS' EQUITY
The Company has  authorized one billion shares of common stock with par value of
$.01 and 11 million shares of preferred stock. There were no shares of preferred
stock issued or outstanding.

The Company has an  effective  shelf  registration  statement to issue shares of
common  stock  in  connection  with  future,  unidentified  acquisitions.   This
registration  statement allows the Company to issue registered  shares much more
efficiently  when acquiring  privately held companies.  The Company plans to use
the shares over time in connection with purchases of small  acquisitions.  There
were  approximately  4.7  million  shares  available  for  issuance  under  this
registration statement at December 31, 2002.

As of December 31, 2002,  there were 37.3 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


                                       27
<PAGE>



Notes to Consolidated Financial Statements



vesting period and are restricted as to the sale or transfer of the shares.

Beginning  in 2003,  the Company  will  account for  employee  stock  options as
compensation  expense in accordance  with SFAS 123,  "Accounting for Stock-Based
Compensation." SFAS 148,  "Accounting for Stock-Based  Compensation - Transition
and Disclosure,  an amendment of FASB Statement No. 123",  provides  alternative
methods  of  transitioning  to the fair value  based  method of  accounting  for
employee  stock  options  as  compensation  expense.  The  Company  will use the
"prospective  method" of SFAS 148 and  expense  the fair  value of new  employee
option  grants  awarded  subsequent  to  2002.  If  the  Company  continues  its
historical pattern of option granting,  the impact would be approximately  $.005
per share in 2003, growing to approximately $.03 per share over five years.

Prior to 2003,  the Company has accounted  for employee  share options under the
intrinsic  method of Accounting  Principles Board Opinion 25, as permitted under
GAAP. Accordingly,  no compensation cost has been recognized in the accompanying
financial   statements   related  to  these   options.   See  the   "Stock-Based
Compensation"  note in the  "Significant  Accounting  Policies"  section for the
proforma  net income and earnings per share under the fair value based method of
SFAS 123. In computing  this proforma  impact,  the fair value of each option is
estimated on the date of grant based on the  Black-Scholes  option pricing model
with  the  following  weighted-average  assumptions  in  2002,  2001  and  2000:
risk-free  interest  rates  of  4.5  percent,   4.8  percent  and  6.1  percent,
respectively;  distribution  yields of 3.2 percent 3.7 percent and 4.1  percent,
respectively;  and average  expected  lives of six to seven  years.  The options
granted to employees in 2002, 2001 and 2000 have weighted-average fair values of
$3.51,  $2.41 and $2.19,  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.



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

<TABLE>


                                                       Share          Price            Weighted Avg.     Share         Price
                                                      Options         Range           Exercise Price     Grants        Range
================================================================================================================================
<S>                                                 <C>           <C>                      <C>          <C>        <C>
Total exercisable, December 31, 1999                10,180,246    $2.24 - 87.55            $11.20             -               -
Total outstanding, December 31, 1999                23,773,529    $2.24 - 87.55            $13.37       713,830    $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2000
  Granted to employees                               4,326,164    $8.48 - 12.55             $9.75             -               -
  Exercised or vested                                (591,517)    $2.24 - 14.55             $5.04     (231,474)    $2.86 - 7.96
  Terminated or resigned                             (992,847)    $2.25 - 81.60            $16.86             -               -
--------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2000                12,208,351    $2.25 - 87.55            $12.37             -               -
Total outstanding, December 31, 2000                26,515,329    $2.25 - 87.55            $12.84       482,356    $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2001
  Granted to employees                               5,184,141    $9.10 - 12.52            $10.63             -               -
  Exercised or vested                                (864,418)    $2.25 - 11.41             $6.52     (171,518)    $2.86 - 7.96
  Terminated or resigned                           (1,503,167)    $2.25 - 87.55            $17.27             -               -
--------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2001                15,237,607    $2.25 - 77.56            $12.36             -               -
Total outstanding, December 31, 2001                29,331,885    $2.25 - 77.56            $12.40       310,838    $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2002
  Granted to employees                               4,939,141    $9.09 - 15.10            $13.08       179,000    $10.51-13.80
  Exercised or vested                              (1,586,248)    $2.25 - 14.55             $7.60     (129,533)    $2.86 - 7.96
  Terminated or resigned                             (871,439)    $5.14 - 73.53            $16.37             -               -
--------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2002                18,089,830    $2.25 - 77.56            $13.05             -               -
Total outstanding, December 31, 2002                31,813,339    $2.25 - 77.56            $12.64       360,305   $2.86 - 13.80
================================================================================================================================

</TABLE>

                                       28
<PAGE>

Notes to Consolidated Financial Statements




Options outstanding at December 31, 2002:
<TABLE>

                            Number        Weighted Average         Weighted             Number             Weighted
     Range of            Outstanding          Remaining             Average           Exercisable           Average
  Exercise Prices        at 12/31/02            Life             Exercise Price       at 12/31/02       Exercise Price
=======================================================================================================================
   <S>                   <C>                  <C>                    <C>               <C>                 <C>
    $2.25 - 6.44            813,696           2.0 Years              $6.43               813,696           $6.43
    7.41 - 10.78         11,684,161           4.0 Years               9.58             5,796,771            9.18
   10.80 - 15.94         12,853,267           6.0 Years              12.32             6,282,043           11.78
   16.12 - 22.33          6,098,288           6.0 Years              18.18             4,836,464           18.21
   27.20 - 77.56            363,927           4.0 Years              42.88               360,856           42.88
-----------------------------------------------------------------------------------------------------------------------
   $2.25 - 77.56         31,813,339           5.0 Years             $12.64            18,089,830          $13.05
=======================================================================================================================
</TABLE>


EARNINGS PER SHARE
Basic  earnings  per share is computed by dividing  income  available  to common
stockholders  by the  weighted-average  number  of  shares  outstanding  for the
period.  The weighted  average common shares for the diluted  earnings per share
calculation includes the incremental effect related to outstanding options whose
market price is in excess of the exercise  price.  Shares  potentially  issuable
under  convertible  securities have been considered  outstanding for purposes of
the diluted earnings per share  calculations.  In computing diluted earnings per
share, the after-tax interest expense related to convertible debentures is added
back to net income in the numerator, while the diluted shares in the denominator
include the shares issuable upon  conversion of the  debentures.  The effects of
outstanding  stock options whose market price is in excess of the exercise price
and shares  potentially  issuable  under  convertible  securities  have not been
included in the 2001  diluted loss per share  calculation  as their effect would
have been anti-dilutive.  As a result, diluted earnings per share is the same as
basic  earnings per share.  Had the Company  recognized  income from  continuing
operations in 2001,  incremental shares  attributable to the assumed exercise of
outstanding  options and conversion of debentures  would have increased  diluted
shares  outstanding by 12.7 million shares,  and the after-tax  interest expense
related to  convertible  debentures  that would have been added to net income in
the numerator totaled $4.8 million.

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


(In thousands, except per
share data)
                                    FOR YEAR ENDED 2002                For year ended 2001                 For year ended 2000
CONTINUING OPERATIONS:         INCOME      SHARES      EPS         Loss       Shares         EPS       Income       Shares     EPS
====================================================================================================================================
<S>                          <C>          <C>        <C>        <C>           <C>         <C>         <C>           <C>       <C>
Basic EPS                    $170,098     300,383    $0.57      $(164,464)    298,659     $(0.55)     $124,274      302,487   $0.41
Effect of Dilutive
  Securities, net of tax:
    Options                                 5,529                                 -                                   3,031
    Convertible
      Debentures                4,780       8,200                      -          -                      -              -
------------------------------------------------------------------------------------------------------------------------------------
Diluted EPS                  $174,878     314,112    $0.56      $(164,464)    298,659     $(0.55)     $124,274      305,518   $0.41
====================================================================================================================================


</TABLE>

                                       29
<PAGE>


Notes to Consolidated Financial Statements


QUARTERLY OPERATING RESULTS (UNAUDITED)
As discussed in the Notes to the Consolidated Financial Statements,  the Company
has restated its consolidated  financial statements for the years ended December
31, 2001 and 2000 as well as the previously reported 2002 quarterly results. The
impact of the  restatement  on  operating  revenue,  gross  profit,  income from
continuing operations and earnings per share is presented below.

For interim accounting purposes, TruGreen ChemLawn incurs pre-season advertising
costs and annual  repair and  maintenance  procedures  that are performed in the
first quarter.  These costs are deferred and recognized as expense in proportion
to the related  revenues.  Full year  results are not  affected.  The  quarterly
information  for 2002,  2001 and 2000 has been  restated to treat  certain costs
that were previously  deferred as period costs. There was no impact on full-year
results for 2002, 2001 and 2000 as a result of this change.

The  table  below  excludes  extraordinary  items and the  cumulative  effect of
accounting  changes.  These items are as follows. In the second quarter of 2002,
the Company recorded an extraordinary loss from the early extinguishment of debt
of $.03 per diluted share ($9 million  after-tax).  In 2001, also related to the
early extinguishment of debt, the Company recorded an extraordinary loss of $.03
per  diluted  share  ($9  million  after-tax)  in  the  fourth  quarter  and  an
extraordinary gain of $.02 per diluted share ($6 million after-tax) in the first
quarter.

In 2000,  the Company  changed  its method of  accounting  for revenue  from its
termite baiting contracts. The cumulative effect of this accounting change as of
January 1, 2000 was $11.1 million ($18.9 million pretax).

<TABLE>

  (in thousands, except
      per share data)             AS PREVIOUSLY   AS RESTATED    %    As Previously  As Restated   %     As Previously   As Restated
                                     REPORTED                           Reported                            Reported
                                       2002          2002       Chg     2001 (1)        2001      Chg        2000 (1)       2000
====================================================================================================================================
CONTINUING OPERATIONS:
Operating Revenue:
<S>                                  <C>           <C>        <C>        <C>         <C>           <C>       <C>          <C>
First Quarter                        $733,385      $734,263   2%         $719,591    $722,861      1%        $712,105     $714,865
Second Quarter                      1,032,807     1,034,937    1        1,015,687   1,020,034      5          974,528      976,081
Third Quarter                       1,013,484     1,010,661    3          981,552     981,284      3          955,081      953,895
Fourth Quarter                            N/A       809,228   (3)         822,357     837,266      8          778,657      776,961
====================================================================================================================================
                                                 $3,589,089   1%       $3,539,187  $3,561,445      4%      $3,420,371   $3,421,802
====================================================================================================================================
Gross Profit:
First Quarter                        $203,135      $188,202   7%         $193,924    $175,085      7%        $180,924     $163,858
Second Quarter                        346,050       359,769    4          332,577     344,643      6          316,159      326,129
Third Quarter                         323,456       335,252    4          306,063     321,774      2          300,766      316,755
Fourth Quarter                            N/A       224,640   (6)         217,006     239,471      31         195,428      183,148
====================================================================================================================================
                                                 $1,107,863   2%       $1,049,570  $1,080,973      9%        $993,277     $989,890
====================================================================================================================================
Income from Continuing
Operations:
First Quarter                         $23,785       $11,858   N/A         $17,006       $734     (94%)        $27,104      $13,322
Second Quarter                         60,750        71,437   44           45,019      49,735     (8)          49,469       54,239
Third Quarter                          57,810        66,988   49           35,730      45,042     (11)         42,231       50,659
Fourth Quarter                            N/A        19,815   N/A       (265,068)   (259,975)     N/A          21,886        6,054
====================================================================================================================================
                                                   $170,098   N/A      $(167,313)  $(164,464)     N/A        $140,690     $124,274
====================================================================================================================================
Basic Earnings Per Share:
First Quarter                           $0.08         $0.04   N/A           $0.06       $ -     (100%)          $0.09        $0.04
Second Quarter                           0.20          0.24   41             0.15        0.17     (6)            0.16         0.18
Third Quarter                            0.19          0.22   47             0.12        0.15     (12)           0.14         0.17
Fourth Quarter                            N/A          0.07   N/A          (0.89)      (0.87)     N/A            0.07         0.02
====================================================================================================================================
                                                      $0.57   N/A         $(0.56)     $(0.55)     N/A           $0.47        $0.41
====================================================================================================================================
Diluted Earnings Per Share:
First Quarter                           $0.08         $0.04   N/A           $0.06        $ -    (100%)          $0.09        $0.04
Second Quarter                           0.20          0.23   44             0.15        0.16     11             0.16         0.18
Third Quarter                            0.19          0.22   47             0.12        0.15     (12)           0.14         0.17
Fourth Quarter                            N/A          0.07   N/A          (0.84)      (0.87)     N/A            0.07         0.02
====================================================================================================================================
                                                      $0.56   N/A         $(0.52)     $(0.55)     N/A           $0.46        $0.41
====================================================================================================================================
DISCONTINUED OPERATIONS:
Income from Discontinued
Operations:
First Quarter                           $(43)        $(217)                $6,218      $5,258                  $8,950       $8,463
Second Quarter                            200           295                 5,694       4,225                  16,846       15,993
Third Quarter                             527         1,095                10,393       7,490                   8,555        8,753
Fourth Quarter                            N/A       (5,048)               303,463     267,297                   9,947        7,359
====================================================================================================================================
                                                   $(3,875)              $325,768    $284,270                 $44,298      $40,568
====================================================================================================================================
Diluted Earnings Per Share:
First Quarter                             $ -           $ -                 $0.02       $0.02                   $0.03        $0.03
Second Quarter                              -             -                  0.02        0.01                    0.05         0.05
Third Quarter                               -             -                  0.03        0.02                    0.03         0.03
Fourth Quarter                            N/A        (0.02)                  0.97        0.89                    0.03         0.02
====================================================================================================================================
                                                    $(0.01)                 $1.05       $0.95                   $0.14        $0.13
====================================================================================================================================
</TABLE>

(1)  During the third quarter of 2002, the Company sold its Terminix  operations
     in the United  Kingdom.  The financial  results from these  operations have
     been reclassified from "Continuing Operations" to "Discontinued Operations"
     for all periods presented.

                                   2002              2001                2000
-------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE:
First Quarter                     $0.10    0%        $0.10   11%         $0.09
Second Quarter                     0.10    0         0.10    11           0.09
Third Quarter                     0.105    5         0.10     0           0.10
Fourth Quarter                    0.105    5         0.10     0           0.10
===============================================================================
                                  $0.41    3%        $0.40    5%         $0.38
===============================================================================






                                       30
<PAGE>





REPORT OF INDEPENDENT AUDITORS

To the Shareholders of The ServiceMaster Company

We have audited the accompanying  consolidated  statements of financial position
of The ServiceMaster Company and subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of income,  shareholders'
equity,  and cash flows for each of the three years in the period ended December
31, 2002.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of The  ServiceMaster  Company and
subsidiaries  as of  December  31,  2002  and  2001,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting  principles  generally accepted
in the United States of America.

As discussed in the Restatement note to the consolidated  financial  statements,
the  accompanying  2001 and 2000  consolidated  financial  statements  have been
restated.

As discussed in the Newly Adopted Accounting Principles note to the consolidated
financial  statements,  effective  January 1, 2002, the Company adopted SFAS No.
142, Goodwill and Other Intangible Assets.


Deloitte & Touche LLP
Chicago, Illinois
March 26, 2003