EXHIBIT 13.1

                             CORT Business Services
                               Annual Report 1996






                             Capitalizing on Change


<PAGE>



Financial Review

Selected Consolidated Financial Data .....................................   10
Management's Discussion and Analysis of
  Financial Condition and Results of Operations ..........................   11
Consolidated Balance Sheets ..............................................   15
Consolidated Statements of Operations ....................................   16
Consolidated Statements of Stockholders' Equity ..........................   17
Consolidated Statements of Cash Flows ....................................   18
Notes to Consolidated Financial Statements ...............................   19
Independent Auditors' Report .............................................   27
Market for Common Stock of the Registrant and
  Related Stockholders' Matters ..........................................   28

<PAGE>

10

              CORT Business Services Corporation and subsidiaries

<TABLE>
<CAPTION>
                    Selected Consolidated Financial Data(1)

                                            Predecessor                             CORT Business Services
                                      ------------------------   --------------------------------------------------------------
                                                      Three          Nine
                                                      months        months                  Year ended December 31,
                                       Year ended     ended         ended       -----------------------------------------------
                                      December 31,   March 31,   December 31,   Combined
                                      ------------------------   -----------------------
                                          1992          1993       1993 (2)     1993 (2)       1994         1995       1996 (3)
                                        ---------------------      ------------------------------------------------------------
<S>                                     <C>           <C>          <C>          <C>          <C>          <C>          <C>
Furniture rental revenue ...........    $ 83,351      $21,497      $ 79,002     $100,499     $130,026     $141,988     $191,560
Furniture sales revenue ............      23,109        6,228        21,846       28,074       34,534       37,321       42,589
                                        ---------------------      ------------------------------------------------------------
  Total revenue ....................     106,460       27,725       100,848      128,573      164,560      179,309      234,149

Furniture rental gross profit ......      68,555       17,451        63,318       80,769      104,255      114,038      154,602
Furniture sales gross profit .......       9,633        2,548         8,716       11,264       13,885       15,118       17,382
                                        ---------------------      ------------------------------------------------------------
  Total gross profit ...............      78,188       19,999        72,034       92,033      118,140      129,156      171,984

Selling, general and
   administrative expenses .........      74,671       16,779        58,990       75,769       95,526      102,435      136,536
                                        ---------------------      ------------------------------------------------------------
Operating earnings (4) .............       3,517        3,220        13,044       16,264       22,614       26,721       35,448
Interest expense (5) ...............      10,979          879         8,941        9,820       16,246       15,917        8,251
Income (loss) before
  extraordinary loss ...............      (6,862)       1,976         2,313        4,289        3,546        6,218       15,936
Net income (loss) ..................      (6,862)       1,976         2,313        4,289        3,546        2,075       15,936
Earnings per common share
  before extraordinary loss (6) ....                                                             0.81         1.08         1.28
Pro forma income before
  extraordinary loss (7) ...........                                                            9,067       11,529
Pro forma earnings per
  common share (8) .................                                                             0.78         0.99

As of December 31,                        1992                                    1993         1994         1995         1996
------------------                      --------                                -----------------------------------------------
Total assets .......................    $154,262                                $169,777     $178,275     $173,722     $247,199
Total debt .........................     147,948                                 120,269      123,645       53,800       65,600
Stockholders' equity (deficit) .....     (17,268)                                  3,341        6,963       75,421      125,152
<FN>
(1)  The table above sets forth the selected consolidated  financial data of the
     Company  since its  formation  and  acquisition  of CORT  Furniture  Rental
     Corporation  ("CFR" or  "Predecessor")  on March 31, 1993, and the selected
     financial  data  of CFR  prior  to the  acquisition  by  the  Company.  The
     consolidated  financial  data of the  Company as of and for the nine months
     ended  December  31,  1993 and as of and for the years ended  December  31,
     1994,  1995 and 1996  have been  derived  from the  consolidated  financial
     statements of the Company. The financial data of CFR as of and for the year
     ended December 31, 1992, and for the three months ended March 31, 1993 have
     been derived from the financial  statements of CFR. The combined  financial
     data for the year ended December 31, 1993 represent CFR information for the
     three months ended March 31, 1993 combined with information for the Company
     for the nine months  ended  December  31,  1993.  The  selected  historical
     consolidated  financial  data  should  be  read  in  conjunction  with  the
     Company's  consolidated  financial  statements  and notes thereto  included
     elsewhere in this Annual Report.

(2)  Income  statement  data for the nine months ended and  combined  year ended
     December 31, 1993 include the results of  operations  of General  Furniture
     Leasing  Company  ("General  Furniture") for the four months ended December
     31,  1993.  The  September 1, 1993  acquisition  of General  Furniture  was
     accounted  for as a  purchase  business  combination.  Revenue  of  General
     Furniture for the four months ended December 31, 1993 was $13,438,000.

(3)  Income  statement  data for the year ended  December  31, 1996  include the
     results of  operations of Evans Rents from the date of  acquisition,  April
     24, 1996.  The  acquisition  of Evans Rents was accounted for as a purchase
     business  combination.  Revenue of Evans  Rents for the period of April 25,
     1996 through December 31, 1996 was approximately $22,500,000.

(4)  Operating  earnings for 1992 include $1,149,000 of severance and relocation
     costs  resulting  from  the  changes  in the  senior  management  team  and
     $8,877,000 relating to the discontinuation of the development of a computer
     system.   Management  of  the  Company  believes  that  these  charges  are
     non-recurring  in  nature.   Adjusted  for  these  non-recurring  expenses,
     operating  earnings would have been $13,543,000 for the year ended December
     31, 1992.

(5)  Interest  expense in 1992 and for the three  months  ended  March 31,  1993
     reflects the impact of a  restructuring  of CFR on June 30, 1992.  Interest
     expense for the six months  ended  December  31, 1992 and the three  months
     ended  March 31,  1993 was  recognized  at an  effective  rate of 1.8% as a
     result  of  applying  the   accounting   principles   of  a  troubled  debt
     restructuring.

(6)  Earnings per common share before extraordinary loss is computed by dividing
     income before  extraordinary  loss by the weighted average number of shares
     of common stock and common stock equivalents  outstanding  during the year.
     In connection  with the Companys  initial public  offering of common stock,
     the Company  exchanged all subordinated  debentures for 2,728,167 shares of
     common stock. For purposes of the computations of earnings per common share
     for 1994 and 1995, the Company has assumed that the exchange occurred as of
     January 1, 1994 for 2,090,591 shares of common stock.

(7)  Pro forma income before extraordinary loss is adjusted for interest expense
     associated  with the $50  million  of  senior  notes  and the  subordinated
     debentures assumed to be retired on January 1, 1994.

(8)  Pro forma  earnings  per common  share is computed  by  dividing  pro forma
     income before extraordinary loss by 11,608,000 shares, the actual number of
     shares of common stock and common stock equivalents as of December 31, 1995
     on a fully diluted basis.
</FN>
</TABLE>

<PAGE>

                                                                              11
              CORT Business Services Corporation and subsidiaries

                     Management's Discussion and Analysis of
                 Financial Condition and Results of Operations

The  following  information  should  be  read  together  with  the  consolidated
financial  statements and notes thereto  appearing  elsewhere herein (dollars in
thousands, except per share data).

Results of Operations

CORT  Business   Services   Corporation   was  formed  on  March  29,  1993  and
contemporaneously acquired all of the stock of CORT Furniture Rental Corporation
("CFR") in a business  combination  accounted for using the purchase method. The
Company is a holding  company with no assets other than its  investment  in CFR.
The following analysis compares the results of operations of the Company for the
years ended December 31, 1996,  1995 and 1994.  The following  table sets forth,
for the period indicated, certain income statement data as a percentage of total
revenue, unless otherwise indicated.

                                                    Year ended December 31,
                                                    ------------------------
                                                     1994     1995     1996
                                                    ------------------------
Rental revenue ................................      79.0%    79.2%    81.8%
Sales revenue .................................      21.0     20.8     18.2
                                                    ------------------------
  Total revenue ...............................     100.0    100.0    100.0
Cost of rental(1) .............................      19.8     19.7     19.3
Cost of sales(1) ..............................      59.8     59.5     59.2
Gross margin ..................................      71.8     72.0     73.4
Selling, general and administrative expenses ..      58.0     57.1     58.3
                                                    ------------------------
Operating earnings ............................      13.7     14.9     15.1
Interest ......................................       9.9      8.9      3.5
Income taxes ..................................       1.7      2.6      4.8
                                                    ------------------------
Income before extraordinary loss ..............       2.2%     3.4%     6.8%
Net income ....................................       2.2%     1.2%     6.8%

(1)  Cost of rental is  calculated as a percentage  of rental  revenue.  Cost of
     sales is calculated as a percentage of sales revenue.

Components of Operating Earnings

Revenue.  Substantially  all of the Company's  revenue is derived from base rent
and fees  from its  outstanding  furniture  leases  and from the sale of  rental
furniture.  Rental  revenue  is  recognized  in the  month  in  which it is due.
Furniture sales revenue is recognized in the month of furniture delivery.

Cost of Furniture  Rental.  The primary component of cost of furniture rental is
depreciation  of rental  furniture  which is a noncash  charge  included  in the
statements  of  cash  flows  as  a  component  of  cash  provided  by  operating
activities.   The  Company  depreciates  most  of  its  rental  furniture  on  a
declining-balance method over five years, with an estimated salvage value of 40%
of original cost. The remainder of rental furniture is generally  depreciated on
a straight line basis over six years with an estimated salvage value of 25%. The
Company also records the net book value of other disposals,  primarily inventory
shrinkage, as a component of the cost of furniture rental revenue.

Cost of Furniture  Sales.  When furniture is sold, the depreciated book value of
such  furniture is recorded as cost of furniture  sales and is also  included in
the  statements  of cash flows as a  component  of cash  provided  by  operating
activities.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses include  employee,  delivery,  advertising,  occupancy,
utilities and other operating expenses, nonrental depreciation, and amortization
of goodwill.

Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995

Revenue.  Total  revenue  increased  30.6% to $234,149 in 1996 from  $179,309 in
1995.  Furniture rental revenue for the year was $191,560, a 34.9% increase from
$141,988 in 1995. Rental revenue growth before the impact of the acquisitions of
Evans Rents and certain  assets and  liabilities of AFRA  Enterprises,  Inc. and
Apartment Furniture Rental Associates ("AFR"), estimated by excluding all of the
Company's California and New York operations, was approximately $21,535 or 17.0%
which  reflects  growth in the  number of leases as well as  revenue  per lease.
Furniture  sales  increased  14.1% to  $42,589  in 1996  from  $37,321  in 1995.
Excluding the impact of an unusually  large  corporate sale in the first quarter
of 1995, furniture sales would have shown an increase of 18.6%. This increase in
furniture  sales is an effort of the  Company to  maintain a quality  line-up of
rental furniture.

Gross Profit.  Gross profit  margin on total revenue  increased to 73.4% for the
year ended  December  31, 1996 from 72.0% for the year ended  December 31, 1995.
The gross profit margin on furniture  rental revenue  increased to 80.7% in 1996
from 80.3% in 1995. Gross profit margin on furniture sales revenue  increased to
40.8% in 1996 from 40.5% in 1995.

<PAGE>

12

              CORT Business Services Corporation and subsidiaries

                     Management's Discussion and Analysis of
                 Financial Condition and Results of Operations

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  totaled  $136,536 or 58.3% of total revenue in 1996 as
compared to $102,435 or 57.1% of total revenue in 1995. However,  excluding $425
of certain charges  associated with duplicate  showroom  closings related to the
acquisition of Evans Rents, selling,  general and administrative  expenses would
have been 58.1% of total revenue in 1996. The  percentage  increase is primarily
due to the impact of start-up operations in new markets.

Operating  Earnings.  As a result of the  changes in revenue,  gross  margin and
selling, general and administrative expenses discussed above, operating earnings
increased to $35,448,  or 15.1% of total revenue in 1996 from $26,721,  or 14.9%
of total revenue in 1995.  Excluding the second quarter  charges  related to the
acquisition  of Evans Rents  operating  earnings  would have been 15.3% of total
revenue in 1996.

Interest Expense, Net. Interest expense decreased to $8,251 in 1996 from $15,917
in 1995. The decrease is primarily the result of the early retirement of $50,000
in  Senior  Notes  and  the  exchange  of the  Company's and  CFR's subordinated
debentures for Common Stock, both of which occurred in the last quarter of 1995,
net of borrowings under the Revolving Credit Facility.

Furniture Purchases. Furniture purchases totaled $79,306 in 1996, an increase of
46.4% from the $54,153 purchased in 1995.  Approximately $12,200 of purchases is
attributable  to the  acquisitions  of  Evans  Rents  and AFR,  small  portfolio
acquisitions,  and start-up  operations in new markets.  The remaining  increase
supports the growth in furniture rental revenue and replenishes  furniture which
has been sold or disposed.

Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994

Impact  of  Initial  Public  Offering  and  Early  Debt  Retirement.  Due to the
proximity of the Company's initial public  offering and related debt  retirement
transactions  to December 31, 1995,  Management  believes  that pro forma income
before  extraordinary  loss and related per share data provide a more meaningful
comparison  than  historical  results.   Therefore,   pro  forma  income  before
extraordinary loss has been adjusted to reflect the impact of the initial public
offering and related debt  retirement  transactions  as if they  occurred at the
beginning of 1994. Pro forma income excludes  approximately  $4 million,  net of
tax,  associated  with the early  retirement of debt and also excludes  interest
associated with the subordinated debentures and $50,000 of the Senior Notes. Pro
forma earnings per common share before  extraordinary  loss have been calculated
using  11,608,000   shares,  the  actual  number  of  common  and  common  stock
equivalents  outstanding as of December 31, 1995 on a fully diluted basis. Given
the above adjustments,  pro forma income before  extraordinary loss for the year
ended December 31, 1995 was $11,529,  or $0.99 per share compared to $9,067,  or
$0.78 per share.

Revenue. Total revenue increased 9.0% to $179,309 in 1995 from $164,560 in 1994.
Furniture  rental  revenue for the year was  $141,988,  an increase of 9.2% from
$130,026 in 1994.  This  increase  reflects an average  increase of 9.6% in base
rent as well as an  average of 3.1%  growth in the  number of leases.  Furniture
sales  increased  8.1% in 1995 to $37,321  from $34,534 in 1994.  Excluding  the
impact  of an  unusually  large  corporate  sale in the first  quarter  of 1995,
furniture sales would have shown an increase of 5.2%.

Gross Profit.  Gross profit  margin on total revenue  increased to 72.0% for the
year ended  December  31, 1995 from 71.8% for the year ended  December 31, 1994.
The gross profit margin on furniture  rental revenue  increased to 80.3% in 1995
from 80.2% in 1994. Gross profit margin on furniture sales revenue  increased to
40.5% in 1995 from 40.2% in 1994.

Selling,  General and Administrative Expenses totaled $102,435 or 57.1% of total
revenue in 1995 as compared to $95,526 or 58.0% of total  revenue in 1994.  This
percentage  decrease is primarily  attributed to revenue  increasing faster than
occupancy expenses.

Operating  Earnings.  As a result of the  changes in revenue,  gross  margin and
selling, general and administrative expenses discussed above, operating earnings
increased to $26,721,  or 14.9% of total revenue in 1995 from $22,614,  or 13.7%
of total revenue in 1994.

Interest  Expense,  Net.  Interest  expense  decreased  to  $15,917 in 1995 from
$16,246 in 1994.  The decrease is related to the early  retirement of $50,000 in
aggregate  principal  amount  of  Senior  Notes,  as  well  as the  exchange  of
subordinated  debentures  for Common Stock,  both of which  occurred in the last
quarter of 1995.

<PAGE>

                                                                              13

Extraordinary  Loss. As a result of the early retirement of the Senior Notes and
the termination of the old revolving credit facility,  the Company  recognized a
loss of  $4,143,  net of  taxes,  which  has  been  reflected  in the  Company's
consolidated statement of operations as an extraordinary loss for the year ended
December 31, 1995.  The  extraordinary  loss includes  $4,600 of premiums on the
Senior Notes retirement,  the write off of $1,907 of deferred financing fees and
$398 of other associated costs.

Furniture Purchases. Furniture purchases totaled $54,153 in 1995, an increase of
25.3% over total purchases of $43,233 in 1994. Of this increase,  $1,072 or 2.5%
represents  furniture acquired in connection with small portfolio  acquisitions.
The remaining  increase  supports the increase in furniture  rental  revenue and
replenishes  furniture  which has been sold or disposed of while still  reducing
idle inventory.

Liquidity and Capital Resources


The Company's primary capital requirements are for purchases of rental furniture
(including new furniture  purchases and lease portfolio  acquisitions)  and debt
service.  The  Company  purchases  furniture  throughout  each  year to  replace
furniture  which  has been  sold  and to  maintain  adequate  levels  of  rental
furniture to meet  existing and new customer  needs.  Furniture  purchases  were
$43,233,  $54,153  and  $79,306  in 1994,  1995 and 1996,  respectively.  As the
Company's growth strategies continue to be implemented,  furniture purchases are
expected to increase accordingly.

The Company's other capital requirements consist of purchases of property, plant
and equipment, including warehouse and showroom improvements,  office equipment,
trucks and computer hardware and standard programming enhancements necessary for
installation of the new management  information system in additional  districts.
Net purchases of property, plant and equipment were $2,780, $4,108 and $5,652 in
1994, 1995 and 1996, respectively.

During 1994, 1995 and 1996, net cash provided by operations was $52,019, $55,563
and  $77,567,  respectively.  During  1994,  1995 and  1996,  net  cash  used in
investing  activities  was  $46,645,   $54,237,   and  $122,120,   respectively,
consisting  primarily  of  purchases  of  rental  furniture  and  in  1996,  the
acquisitions  of Evans  Rents and AFR.  During  1994,  1995 and  1996,  net cash
provided  (used) by  financing  activities  was ($329),  ($14,108)  and $44,297,
respectively.  In 1995, $36,995 was provided by the initial public offering, net
of expenses,  which was used along with other cash  resources to pay off $50,000
of the Senior  Notes.  In 1996,  $32,672 was provided by the public  offering of
common stock, net of expenses,  which was used to repay  indebtedness  under the
Revolving Credit Facility primarily due to the acquisition of Evans Rents.

CFR  entered  into  a  new  Revolving  Credit  Facility  concurrently  with  the
consummation  of the Company's  initial  public  offering in November  1995. The
Revolving Credit Facility provides a $70,000 line of credit (amended in May 1996
from  $50,000),  subject  to  certain  borrowing  base  restrictions,   to  meet
acquisition and expansion needs as well as seasonal  working capital and general
corporate  requirements.  The Revolving  Credit Facility expires on November 22,
1998.  Borrowings  under  the  Revolving  Credit  Facility  bear  interest  at a
fluctuating  rate based on, at the  Company's  option,  either the lead lender's
base rate or the London Interbank Offer Rate (LIBOR).  The average interest rate
paid by CFR during 1996 on the Revolving  Credit Facility was 7.3%. A commitment
fee calculated based upon the unused portion of the Revolving Credit Facility is
payable  quarterly  in arrears.  The Company  had  $53,441  available  under the
Revolving Credit Facility at December 31, 1996.

The net proceeds from the initial public offering of the Company,  together with
available cash and borrowings of $4,800 under the Revolving Credit Facility were
used to retire  $50,000 in  aggregate  principal  amount of the Senior  Notes in
1995. The Company is required to make annual interest  payments on the remaining
$50,000 in aggregate principal amount of the Senior Notes outstanding  totalling
$6,000  annually,  payable on March 1 and  September 1, in arrears.  The Company
will not be  required to make  principal  repayments  on the Senior  Notes until
maturity.

The Revolving Credit Facility and indenture governing the Senior Notes restricts
the ability of CFR to make advances and pay dividends to the Company.

The Company believes that future cash flows from  operations,  together with the
borrowings  available  under the  Revolving  Credit  Facility  will  provide the
Company with sufficient  liquidity and financial resources to finance its growth
and satisfy its working capital  requirements  through the term of the Revolving
Credit Facility.  The Company may not be able to generate  sufficient cash flows
from operations to pay the entire principal  amount of the remaining  $50,000 of
Senior Notes when due in September  2000. In such event,  the Company intends to
refinance  such  amount  primarily   through   additional  equity  offerings  or
alternative forms of debt

<PAGE>

14

              CORT Business Services Corporation and subsidiaries

                     Management's Discussion and Analysis of
                 Financial Condition and Results of Operations

financing.  However,  there can be no assurance that the Company will be able to
obtain financing on acceptable terms.

The Internal Revenue Service ("IRS") has examined the Federal income tax returns
of CFR for the  years  1989  through  June  30,  1992 and has  proposed  certain
adjustments  to  CFR's  taxable  income,   relating   primarily  to  methods  of
depreciation,  period of cost recovery and certain  capitalized  financing fees.
The Company has reached a settlement  with the IRS on the proposed  adjustments.
The  settlement  did  not  result  in any  additional  financial  statement  tax
expenses,  as the Company's  reserves were adequate to cover such expenses,  and
did not  require  the  Company  to alter its  methods  of  depreciation  or cost
recovery period. The total amount of the settlement is approximately $1 million,
including  interest  through  December  31,  1996,  of which the Company made an
initial deposit of approximately $925 in February, 1996.

The IRS has also  proposed  the  disallowance  of  certain  deductions  taken by
Fairwood  Corporation for a consolidated tax group of which CFR was previously a
member  (the  "Former  Group")  through  the year ended  December  31,  1988 and
subsequent years. The IRS challenge includes the assertion that certain interest
deductions taken by the Former Group should be recharacterized as non-deductible
dividend  distributions  and that deductions for certain expenses related to the
acquisition  of Mohasco  Corporation  (now  Consolidated  Furniture  Corporation
("Consolidated")),   CFR's  former   shareholder,   be  disallowed.   Under  IRS
regulations,  the Company and each other member of the Former Group is severally
liable for the full amount of any  Federal  income tax  liability  of the Former
Group  while CFR was a member of the  Former  Group,  which  could be as much as
approximately $31 million for such periods (including  interest through December
31, 1996). Under the agreement of sale for CFR, Consolidated agreed to indemnify
the Company in full for any  consolidated  tax liability of the Former Group for
the years during which CFR was a member of the Former  Group.  In addition,  the
Company  may have rights of  contribution  against  other  members of the Former
Group if the Company were required to pay more than its  equitable  share of any
consolidated  tax liability.  Fairwood  Corporation has indicated to the Company
that it has  tentatively  reached an agreement in principle with the IRS Appeals
Officer  handling the case regarding a settlement of the principal issues in the
case.  A final  settlement  on that basis would be  substantially  less than the
liability that would result from the proposed  adjustments.  The terms of such a
tentative  settlement  are subject to further review by the IRS and by the Joint
Committee on Taxation, and no assurance can be given that any settlement will be
reached with the IRS. Due to the preliminary  nature of the proposed  agreement,
the  Company is not in a position  to  determine  the  probable  outcome and its
impact on the Company's consolidated financial statements, if any.

Inflation and General Economic Conditions

Historically,  the Company has been able to offset increases in furniture prices
with  increases  in rental  rates.  Management  believes  that  increases in new
furniture  prices have  averaged less than the overall  inflation  rate over the
last five years.  In periods of high  inflation,  the  Company has  historically
achieved  higher margins on its clearance  center sales.  A sustained  recession
with  little or no new job  growth  may have a  material  adverse  affect on the
Company's future opportunities for sustained growth.

<PAGE>

                                                                              15

              CORT Business Services Corporation and subsidiaries

                          Consolidated Balance Sheets
                       (in thousands, except share data)

                                                                December 31,
                                                             -------------------
                                                               1995       1996
                                                             -------------------
Assets
Cash and cash equivalents ................................   $    379   $    123
Accounts receivable, less allowance for doubtful accounts
  of $938 and $1,906 in 1995 and 1996, respectively ......      6,019     11,011
Prepaid expenses .........................................      3,973      4,224
Rental furniture, net (note 2) ...........................    103,741    147,161
Property, plant and equipment, net (note 5) ..............     31,044     35,667
Other receivables and assets, net (note 7) ...............      3,814      3,815
Goodwill, net of accumulated amortization of $1,717
  and $2,678 in 1995 and 1996, respectively (note 13) ....     24,752     45,198
                                                             -------------------
                                                             $173,722   $247,199
                                                             ===================
Liabilities and Stockholders' Equity
Accounts payable .........................................   $  3,597   $  4,157
Rental security deposits .................................      5,761      7,184
Accrued expenses (note 11) ...............................     19,096     27,491
Deferred rental revenue ..................................      5,425      7,174
Long-term debt (note 7) ..................................     53,800     65,600
Deferred income taxes (note 6) ...........................     10,622     10,441
                                                             -------------------
                                                               98,301    122,047
                                                             -------------------
Commitments and contingencies (notes 6, 8 and 10)
Stockholders' equity (notes 1, 3, 4, 7, 9, and 12):
  Common stock, voting, $.01 par value, 15,500,000 shares
    authorized, 10,415,367 and 12,674,381 shares issued
    and outstanding ......................................        104        127
  Common stock, Class B, nonvoting, $.01 par value,
    15,500,000 shares authorized, and none issued
    and outstanding ......................................         --         --
  Additional paid-in capital .............................     67,383    101,155
  Accumulated earnings ...................................      7,934     23,870
                                                             -------------------
      Total stockholders' equity .........................     75,421    125,152
                                                             -------------------
                                                             $173,722   $247,199
                                                             ===================

See accompanying notes to consolidated financial statements.

<PAGE>

16

              CORT Business Services Corporation and subsidiaries

                     Consolidated Statements of Operations
                     (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                   Year ended December 31,
                                                               ------------------------------
                                                                 1994       1995       1996
                                                               ------------------------------
<S>                                                            <C>        <C>        <C>
Revenue:
  Furniture rental ........................................... $130,026   $141,988   $191,560
  Furniture sales ............................................   34,534     37,321     42,589
                                                               ------------------------------
    Total revenue ............................................  164,560    179,309    234,149
                                                               ------------------------------
Operating costs and expenses:
  Cost of furniture rental ...................................   25,771     27,950     36,958
  Cost of furniture sales ....................................   20,649     22,203     25,207
  Employee, delivery and advertising expenses ................   66,256     72,379     95,204
  Occupancy, utilities and nonrental depreciation ............   16,370     16,724     22,722
  Amortization of goodwill ...................................      682        662        961
  Other operating expenses ...................................   12,218     12,670     17,649
                                                               ------------------------------
    Total costs and expenses .................................  141,946    152,588    198,701
                                                               ------------------------------
    Operating earnings .......................................   22,614     26,721     35,448
Interest expense, net ........................................   16,246     15,917      8,251
                                                               ------------------------------
    Income before income taxes and extraordinary loss ........    6,368     10,804     27,197
Income tax expense (note 6) ..................................    2,822      4,586     11,261
                                                               ------------------------------
    Income before extraordinary loss .........................    3,546      6,218     15,936
Extraordinary loss on early retirement of debt, net of
  income tax benefit of $2,762 (notes 6 and 7) ...............       --      4,143         --
                                                               ------------------------------
    Net income ............................................... $  3,546   $  2,075   $ 15,936
                                                               ==============================
Earnings per common share before extraordinary loss .......... $    .81   $   1.08   $   1.28
Extraordinary loss per common share ..........................       --        .53         --
                                                               ------------------------------
Earnings per common share .................................... $    .81   $    .55   $   1.28
                                                               ==============================
Weighted average number of common shares used in computation..    7,049      7,759     12,448
                                                               ==============================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

                                                                              17

              CORT Business Services Corporation and subsidiaries

                Consolidated Statements of Stockholders' Equity
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                      Total
                                          Common     Additional      Accumulated   stockholders'
                                          Stock    paid-in capital    earnings        equity
                                          ------------------------------------------------------
<S>                                        <C>        <C>              <C>           <C>
Balance, December 31, 1993 ............    $ 40       $    988         $ 2,313       $  3,341
  Stock cancellation ..................      (1)             1              --             --
  Issuance of common stock from
    exercise of stock options .........       3             73              --             76
  Net income ..........................      --             --           3,546          3,546
                                          ------------------------------------------------------
Balance, December 31, 1994 ............      42          1,062           5,859          6,963
  Issuance of common stock from
    public offering, net of expenses ..      34         36,961              --         36,995
  Issuance of common stock from
    exercise of stock options .........      --             32              --             32
  Issuance of common stock
    from exercise of warrants .........       1             17              --             18
  Issuance of common stock in debt
    to equity exchange ................      27         29,311              --         29,338
  Net income ..........................      --             --           2,075          2,075
                                          ------------------------------------------------------
Balance, December 31, 1995 ............     104         67,383           7,934         75,421
  Issuance of common stock from
    public offering, net of expenses ..      19         32,653              --         32,672
  Issuance of common stock from
    exercise of stock options .........       1            487              --            488
  Issuance of common stock
    from exercise of warrants .........       3             61              --             64
  Income tax benefit from stock
    options exercised .................      --            571              --            571
  Net income ..........................      --             --          15,936         15,936
                                          ------------------------------------------------------
Balance, December 31, 1996 ............    $127       $101,155         $23,870       $125,152
                                          ======================================================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

18

              CORT Business Services Corporation and subsidiaries

                      Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                            Year ended December 31,
                                                                                       ---------------------------------
                                                                                         1994        1995         1996
                                                                                       ---------------------------------
<S>                                                                                    <C>         <C>          <C>
Cash flows from operating activities:
  Net income .......................................................................   $  3,546    $  2,075     $ 15,936
  Proceeds of disposals of rental furniture in excess of gross profit ..............     20,631      21,455       24,118
  Adjustments  to reconcile net income to net cash provided by operating activities:
    Extraordinary loss on early retirement of debt .................................         --       4,143           --
    Depreciation and amortization:
      Rental furniture .............................................................     18,281      19,551       26,887
      Other ........................................................................      2,358       2,601        3,804
      Goodwill .....................................................................        682         662          961
      Deferred financing fees ......................................................        755         729          698
      Discount on junior subordinated debentures ...................................         68          65           --
    Rental furniture inventory shrinkage ...........................................      1,237       1,838        2,261
    Deferred income taxes ..........................................................      1,054       2,811        2,990
    Pay-in-kind interest converted to long term debt ...............................      2,277       3,598           --
    Changes in assets and liabilities:
      Accounts receivable ..........................................................        106        (547)      (2,820)
      Prepaid expenses .............................................................       (122)       (998)         (58)
      Other receivables and assets .................................................       (736)     (1,190)      (1,544)
      Accounts payable, accrued expenses and rental security deposits, net .........      1,455      (1,768)       2,585
      Deferred rental revenue ......................................................        427         538        1,749
                                                                                       ---------------------------------
        Net cash provided by operating activities ..................................     52,019      55,563       77,567
                                                                                       ---------------------------------
Cash flows from investing activities:
  Purchases of rental furniture ....................................................    (43,233)    (54,153)     (79,306)
  Purchases of property, plant and equipment .......................................     (2,812)     (4,521)      (6,238)
  Sale of property, plant and equipment ............................................         32         413          586
  Purchase of Evans Rents ..........................................................         --          --      (27,778)
  Purchase of AFR ..................................................................         --          --       (9,384)
  Purchase of short-term investments ...............................................       (632)     (1,024)          --
  Sale of short-term investments ...................................................         --       5,048           --
                                                                                       ---------------------------------
        Net cash used in investing activities ......................................    (46,645)    (54,237)    (122,120)
                                                                                       ---------------------------------
Cash flows from financing activities:
  Repayments of long-term debt .....................................................       (795)    (50,287)        (573)
  Payments to retire debt ..........................................................         --      (4,998)          --
  Payment of deferred financing fees ...............................................         --          --         (154)
  Proceeds from issuance of long-term debt .........................................        749         332           --
  Borrowings on the line of credit .................................................         --       4,800       88,076
  Repayments on the line of credit .................................................         --      (1,000)     (76,276)
  Payments on capital lease obligation .............................................       (359)         --           --
  Issuance of common stock .........................................................         76      37,045       33,224
                                                                                       ---------------------------------
        Net cash provided (used) by financing activities ...........................       (329)    (14,108)      44,297
                                                                                       ---------------------------------
        Net increase (decrease) in cash and cash equivalents .......................      5,045     (12,782)        (256)
Cash and cash equivalents at beginning of year .....................................      8,116      13,161          379
                                                                                       ---------------------------------
Cash and cash equivalents at end of year ...........................................   $ 13,161    $    379     $    123
                                                                                       =================================
Supplemental disclosures of cash flow information:
Cash paid for:
  Interest .........................................................................   $ 12,178    $ 13,408     $  7,487
  Income taxes .....................................................................      2,213       2,161        8,089
                                                                                       =================================
Noncash financing activities:
  Tax benefit from exercise of stock options .......................................   $     --    $     --     $    571
  Tax benefit from exchange of debt for equity .....................................         --         741           --
  Exchange of debt for equity (note 7) .............................................         --      28,597           --
                                                                                       =================================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

                                                                              19

               CORT Business Services Corporation and subsidiaries

                   Notes to Consolidated Financial Statements


(1)  Formation and Description of the Company

CORT Business Services Corporation,  formerly New Cort Holdings Corporation (the
"Company"),  was formed on March 29, 1993 and contemporaneously  acquired all of
the stock of CORT Furniture Rental Corporation ("CFR"). The Company is a holding
company with no  independent  operations  and no material  assets other than its
ownership of all the  outstanding  capital  stock of CFR. The Company is largely
dependent  on the receipt of  dividends  or  distributions  from CFR to fund its
obligations.  CFR is a provider  of rental  furniture,  accessories  and related
services to both  corporate and  individual  customers.  In addition,  CFR sells
previously rented furniture.

(2)  Summary of Significant Accounting Policies

(a)  Principles of Consolidation and Presentation

The consolidated  financial statements as of December 31, 1995 and 1996, and for
the years ended December 31, 1994,  1995 and 1996,  include the accounts of CORT
Business Services Corporation and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated.

(b)  Accounting Estimates

The  preparation  of  consolidated   financial  statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of contingent  assets and liabilities at the date of the consolidated
financial  statements and the reported  amounts of revenues and expenses  during
the reported periods. Actual results could differ from these estimates.

(c)  Rental Furniture

Rental  furniture  includes  residential and office furniture which is rented to
customers or is available for rental and/or sale and is recorded at the lower of
depreciated  cost  or  market  value.  Rental  furniture  is  depreciated  on  a
declining-balance  or straight-line  method over 3 to 6 years, with an estimated
salvage value of 25 to 40 percent of original cost. Accumulated  depreciation on
rental  furniture was $45,199,000 and $53,582,000 at December 31, 1995 and 1996,
respectively.  Reserves for purchase  options and shrinkage on rental  furniture
were  $1,793,000  and  $2,768,000  at December 31, 1995 and 1996,  respectively.
Furniture no longer meeting rental standards is held for sale.

Furniture  rentals are  recognized as revenue in the month they are due.  Rental
payments  received  prior to the  month  due are  recorded  as  deferred  rental
revenue.  Cost of furniture  rental  includes  depreciation  expense,  inventory
losses,  repairs and  maintenance,  net book value of furniture sold under lease
purchase options and costs of accessories.

Certain of CFR's  leases  include  purchase  options  whereby the  customer  can
receive  title  to  the  furniture  upon  satisfaction  of  certain  conditions.
Generally,  these leases are  short-term and must be extended by the customer in
order for the purchase option to apply. CFR provides  reserves to reduce the net
book  value of  furniture  under  such  leases  based on the  length of time the
furniture  has been out on  lease  and the  likelihood  of the  exercise  of the
options.

The Company  considers  the  proceeds  from the sale of rental  furniture  as an
element of cash flow from  operations.  Accordingly,  the  proceeds  received in
excess of the gross profit  recognized on sales of rental furniture are added to
net  income  in  deriving  cash  flow  from   operations  in  the   accompanying
consolidated statements of cash flows.

(d)  Property, Plant and Equipment

Property,  plant and  equipment  is recorded at cost,  or fair value if acquired
through a  purchase  business  combination.  Depreciationis  computed  using the
straight-line  method over the estimated  useful lives of the assets as follows:
buildings  50 years;  major  roof  renovations  10 years;  furniture,  fixtures,
machinery and equipment from 5 to 10 years; and leasehold  improvements over the
term of the related leases.

(e)  Goodwill

The  excess  of  purchase  cost  over the  fair  value  of net  assets  acquired
(goodwill)  is  amortized  using the  straight-line  method  over 40 years.  The
Company evaluates the  recoverability  ofits goodwill  annually.  In making such
evaluation,  the Company compares certain financial  indicators such as expected
undiscounted  future  revenues  and net cash  flows to the  carrying  amount  of
goodwill.  Impairment losses, if any, are measured as the excess of the carrying
amount of goodwill over estimated fair market value.

(f)  Cash and Cash Equivalents

Cash  and  cash  equivalents  include  cash in banks  and  investments  having a
maturity  of  three  months  or less on the  date of  purchase.  Cash  and  cash
equivalents  at December  31, 1995 and 1996  consisted  primarily  of  overnight
repurchase funds.

(g)  Rental Security Deposits

The Company may require a non-interest  bearing  security  deposit of one months
rent based on the Companys  evaluation of the credit worthiness of the customer.
The security deposit is returned at the end of the lease provided that all lease
terms have been satisfied.

<PAGE>

20

               CORT Business Services Corporation and subsidiaries

                   Notes to Consolidated Financial Statements


(h) Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation,"  encourages, but does not require companies to record stock-based
employee  compensation  plans at fair value.  The Company has elected to account
for  stock-based  compensation  using the intrinsic  value method  prescribed in
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees,"  and related  Interpretations.  Accordingly,  compensation  cost for
employee  stock options is measured as the excess,  if any, of the quoted market
price of the Company's stock at the date of the grant over the exercise price an
employee must pay to acquire the stock.

(i)  Income Taxes

Income taxes are reported under the asset and liability method, whereby deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and liabilities  and their  respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is  recognized  as income in the period  that  includes  the
enactment date.

(j)  Deferred Financing Fees

Costs incurred with the issuance of long-term debt have been capitalized and are
being  amortized  over  the  term  of the  related  debt  using a  method  which
approximates the effective interest method.

(k)  Earnings Per Common Share

Earnings  per common  share is computed by dividing  net income by the  weighted
average  number  of  shares  of  common  stock  and  common  stock   equivalents
outstanding  during the year. Common stock equivalents are comprised entirely of
stock  options  and  warrants.  The Company  has no other  potentially  dilutive
securities.  Fully-diluted  earnings per common  share is presented  only to the
extent  that it results in  dilution  in excess of 3% of  primary  earnings  per
common share.

Common stock issued and common stock options  granted during the 12-month period
preceding  the date of the Companys  initial  public  offering (see note 4) have
been included in the calculation of weighted  average common shares  outstanding
for  all of  1994  and  1995  using  the  treasury  stock  method  based  on the
initial public offering price.

In connection with the Company's  initial public  offering of Common Stock,  the
Company exchanged CFR's 14% Senior Subordinated Pay-In-Kind Notes, the Company's
14.5% Subordinated Debentures, the Company's 15% Junior Subordinated Debentures,
including the unamortized discount,  and accrued interest on all such debentures
for  2,728,167  shares of Common  Stock.  For  purposes of the  computations  of
earnings  percommon  share for 1994 and 1995,  the Company has assumed  that the
exchange occurred as of January 1, 1994 for 2,090,591 shares of Common Stock.

(3)  Reverse Stock Split

On November 9, 1995,  the Company  effected a 1 for 7.5 reverse  split of Common
Stock  whereby each 7.5 shares of existing  Common Stock were  exchanged for one
share  of  Common  Stock.  All  share  and  per  share  data  appearing  in  the
consolidated  financial  statements  and notes  thereto have been  retroactively
adjusted for this reverse split.

(4)  Public Offerings of Common Stock

In November  1995,  the Company sold,  through an  underwritten  initial  public
offering,  3,402,260  common  shares at $12.00 per share.  The net  proceeds  of
approximately  $36,995,000,  net of associated  underwriting discounts and other
expenses of the offering,  were used to retire a portion of the Senior Notes(see
note 7).

In July 1996,  the  Company  sold,  through  an  underwritten  public  offering,
1,865,100  common shares at $18.75 per share.  The net proceeds of approximately
$32,672,000,  net of associated underwriting discounts and other expenses of the
offering,  were used to repay  indebtedness  under the Revolving Credit Facility
primarily due to the acquisition of Evans Rents (see note 13).

<PAGE>

(5)  Property, Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):

                                     December 31,    December 31,
                                     ----------------------------
                                         1995            1996
                                     ----------------------------
Land and land improvements .........   $ 6,996         $ 7,003
Buildings and improvements .........    15,151          15,169
Machinery, equipment and computer ..     4,896           9,142
Leasehold improvements .............     7,647          11,515
Furniture and fixtures .............     1,421           1,590
Other ..............................     1,252           1,371
                                     ----------------------------
                                        37,363          45,790
Accumulated depreciation
  and amortization .................     6,319          10,123
                                     ----------------------------
                                       $31,044         $35,667
                                     ============================
<PAGE>

                                                                              21

               CORT Business Services Corporation and subsidiaries

                   Notes to Consolidated Financial Statements


(6)  Income Taxes

Components  of the  expense  for income  taxes are  summarized  as  follows  (in
thousands):

                                         Year ended    Year ended   Year ended
                                         December 31,  December 31, December 31,
                                            1994          1995          1996
                                         -------------------------------------
Current:
        Federal .......................... $1,367        $ 1,257      $ 6,117
        State and local ..................    263            494        1,489
                                           -------------------------------------
                                            1,630          1,751        7,606
                                           -------------------------------------
Deferred:
        Federal ..........................  1,013          2,410        3,107
        State and local ..................    179            425          548
                                           -------------------------------------
                                            1,192          2,835        3,655
                                           -------------------------------------
        Total expense before
           extraordinary loss ............ $2,822        $ 4,586      $11,261
Income tax benefit from
        extraordinary loss on early
        retirement of debt ...............   --           (2,762)        --
                                           -------------------------------------
Total income tax expense ................. $2,822        $ 1,824      $11,261
                                           =====================================

The  difference  between the actual  expense for taxes and taxes computed at the
Federal  income tax rate of 34 percent in 1994 and 1995,  and 35 percent in 1996
is summarized as follows(in thousands):


                                        Year ended   Year ended   Year ended
                                        December 31, December 31, December 31,
                                            1994         1995           1996
                                        ----------------------------------------
Tax expense computed
     at Federal rate .................     $2,165       $3,673       $ 9,519
State and local taxes, net
     of Federal benefit ..............        292          607         1,324
Effects of goodwill
     amortization ....................        232          225           336
Other, net ...........................        133           81            82
                                           -------------------------------------
     Total expense before
       extraordinary loss ............     $2,822       $4,586       $11,261
                                           =====================================

<PAGE>

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax  liabilities are presented below (in
thousands):


                                                      December 31,  December 31,
                                                         1995           1996
                                                      --------------------------
Deferred tax assets:
 Accounts receivable, principally
  due to allowance for
  doubtful accounts ..............................        $   375        $   762
 Compensated absences, principally
  due to accrual for financial
  reporting purposes .............................            530            748
 Deferred financing fees .........................            638            495
 Deferred rental revenue .........................          2,209          2,999
 Reserve for unfavorable operating
  lease and duplicate facilities .................          2,377          3,592
 Net operating loss carryforwards ................          1,511            600
 AMT credit carryforward .........................          4,093          3,388
 Other ...........................................          2,105          2,503
                                                          ----------------------
   Total gross deferred tax assets ...............         13,838         15,087
                                                          ----------------------
Deferred tax liabilities:
 Rental furniture, principally due
  to differences in depreciation .................         20,547         20,179
 Property, plant and equipment,
  principally due to differences
  in depreciation ................................          3,913          5,306
 Other ...........................................           --               43
                                                          ----------------------
   Total gross deferred tax
    liabilities ..................................         24,460         25,528
                                                          ----------------------
   Net deferred tax liability ....................        $10,622        $10,441
                                                          ======================

At December 31,  1996,  the Company has net  operating  loss  carryforwards  for
Federal income tax purposes of  approximately  $1,500,000 which are available to
offset only a subsidiary's  future Federal taxable income, if any, through 2007.
The net  operating  loss  carryforwards  are subject to an annual  limitation of
$955,000 pursuant to Internal Revenue Code Section 382. In addition, the Company
has alternative  minimum tax credit  carryforwards of  approximately  $3,388,000
which are available to reduce future Federal  regular income taxes, if any, over
an indefinite period.

The Internal Revenue Service ("IRS") has examined the Federal income tax returns
of CFR for the  years  1989  through  June  30,  1992 and has  proposed  certain
adjustments  to  CFR's  taxable  income,   relating   primarily  to  methods  of
depreciation,  period of cost recovery and certain  capitalized  financing fees.
The Company has reached a settlement  with the IRS on the proposed  adjustments.
The  settlement  did  not  result  in any  additional  financial  statement  tax
expenses,  as the Company's  reserves were adequate to cover such expenses,  and
did not  require  the  Company  to alter its  methods  of  depreciation  or cost
recovery period. The total amount

<PAGE>

22

              CORT Business Services Corporation and subsidiaries
                   Notes to Consolidated Financial Statements

of the  settlement  is  approximately  $1 million,  including  interest  through
December 31, 1996, of which the Company made aninitial  deposit of approximately
$925,000 in  February,  1996.

The IRS has also  proposed  the  disallowance  of  certain  deductions  taken by
Fairwood  Corporation for a consolidated tax group of which CFR was previously a
member  (the  "Former  Group")  through  the year ended  December  31,  1988 and
subsequent years. The IRS challenge includes the assertion that certain interest
deductions taken by the Former Group should be recharacterized as non-deductible
dividend  distributions  and that deductions for certain expenses related to the
acquisition  of Mohasco  Corporation  (now  Consolidated  Furniture  Corporation
("Consolidated")),   CFR's  former   shareholder,   be  disallowed.   Under  IRS
regulations,  the Company and each other member of the Former Group is severally
liable for the full amount of any  Federal  income tax  liability  of the Former
Group  while CFR was a member of the  Former  Group,  which  could be as much as
approximately $31 million for such periods (including  interest through December
31, 1996). Under the agreement of sale for CFR, Consolidated agreed to indemnify
the Company in full for any  consolidated  tax liability of the Former Group for
the years during  which CFR was a member of the Former  Group.In  addition,  the
Company  may have rights of  contribution  against  other  members of the Former
Group if the Company were required to pay more than its  equitable  share of any
consolidated  tax liability.  Fairwood  Corporation has indicated to the Company
that it has  tentatively  reached an agreement in principle with the IRS Appeals
Officer  handling the case regarding a settlement of the principal issues in the
case.  A final  settlement  on that basis would be  substantially  less than the
liability that would result from the proposed  adjustments.  The terms of such a
tentative  settlement  are subject to further review by the IRS and by the Joint
Committee on Taxation, and no assurance can be given that any settlement will be
reached with the IRS. Due to the preliminary  nature of the proposed  agreement,
the  Company is not in a position  to  determine  the  probable  outcome and its
impact on the Companys consolidated financial statements, if any.


(7) Long-Term Debt

The outstanding long-term debt was as follows (in thousands):



                                          December 31,     December 31,
                                             1995              1996
                                          ------------------------------
Revolving Credit Facility, secured......    $3,800           $15,600
Senior Notes, 12%, unsecured............    50,000            50,000
                                           -------------------------
                                           $53,800           $65,600
                                           =========================

<PAGE>

CFR had a  revolving  credit  facility  with a bank for $15  million,  which was
terminated  on November  22,  1995.  CFR  entered  into a new  Revolving  Credit
Facility with a group of banks concurrently with the consummation of the initial
public offering of the Company.  The Revolving  Credit  Facility,  for which the
Company is guarantor, provides a $70 million line of credit (amended in May 1996
from $50  million),  subject to certain  borrowing  base  restrictions,  to meet
acquisition and expansion needs as well as seasonal  working capital and general
corporate  requirements.  The Revolving  Credit Facility expires on November 22,
1998.  Borrowings  under  the  Revolving  Credit  Facility  bear  interest  at a
fluctuating rate based on, at the Companys option,  either the lead lenders base
rate or the London Interbank Offer Rate (LIBOR).  The average interest rate paid
by CFR during 1996 on the Revolving  Credit  Facility was 7.3%. A commitment fee
calculated  based upon the unused  portion of the Revolving  Credit  Facility is
payable quarterly in arrears. The Revolving Credit Facility is collateralized by
substantially all of CFR's assets.

The Senior Notes bear interest at 12 percent with interest payable semi-annually
on March 1 and September 1. The Senior Notes are unsecured and are due September
1, 2000.  The Company may not redeem the Senior Notes prior to September 1, 1998
except in certain  circumstances.  Early  redemptions must be made at a premium.
With the proceeds of the initial public offering, borrowings under the Revolving
Credit Facility and cash on hand, $20 million in aggregate  principal  amount of
Senior Notes were retired at a repurchase price of 108% of the principal amount,
plus accrued and unpaid interest thereon, and $30 million in aggregate principal
amount  of  Senior  Notes  were  retired  at a  redemption  price of 110% of the
principal amount plus accrued and unpaid interest thereon.

The Revolving Credit Facility and indenture  governing the Senior Notes restrict
the ability of CFR to make advances and pay dividends to the Company.

As a result of the early  retirement  of the Senior  Notes in 1995,  the Company
recognized a loss of $4,143,000,  net of taxes,  which has been reflected in the
Company's  consolidated statement of operations as an extraordinary loss for the
year ended  December 31, 1995.  The  extraordinary  loss includes  $4,600,000 of
redemption   premiums  on  the  Senior  Notes   retirement,   the  write-off  of
approximately  $1,907,000 of deferred financing fees and approximately  $398,000
of other associated costs.

Contemporaneously   with  the  initial   public   offering,   CFR's  14%  Senior
Subordinated  Pay-In-Kind Notes, the Company's 14.5% Subordinated Debentures and
the  Company's  15%  Junior  Subordinated  Debentures   (collectively  the "Debt
Securities"), due to

<PAGE>

                                                                              23

controlling and certain other stockholders of the Company, were exchanged for an
aggregate of 2,728,167 shares of Common Stock,  which represented all principal,
accrued  interest and unamortized  discount of the Debt  Securities.  During the
years ended December 31, 1994 and 1995, the aggregate  interest expense incurred
on  the  Debt   Securities  was   approximately   $3,518,000   and   $3,598,000,
respectively,  all of which was  settled  through  the  issuance  of  additional
debentures.

The estimated  fair value of the Company's consolidated  long-term debt based on
the  quoted  market  price and other  available  information  was  approximately
$57,300,000 and $71,100,000 at December 31, 1995 and 1996, respectively.

Other assets include debt issuance costs,  net of accumulated  amortization,  of
$2,534,000 and $1,990,000 at December 31, 1995 and 1996, respectively.

(8) Employee Benefit Plans

The Company  maintains an investment  and  profit-sharing  defined  contribution
retirement plan. All the Company's  employees are eligible to participate  after
one year of service. The Company makes a 50 percent matching contribution on the
first four percent of employee  contributions  to the plan.  The Company may, at
its   discretion,   make  additional   contributions   based  on  the  Company's
performance.  The aggregate  plan  contributions  were  approximately  $650,000,
$940,000,  and $1,080,000 for the years ended December 31, 1994, 1995, and 1996,
respectively.

The  Company  maintains  a  Supplemental  Executive  Retirement  Plan (SERP) for
certain key present and former management executives.  The SERP consists of both
a defined benefit and a defined  contribution plan. The annual costs of the plan
were approximately $139,000, $148,000, and $119,000 for the years ended December
31, 1994, 1995, and 1996,  respectively.  The accrued,  unfunded liability under
the plan as of December 31, 1996 was not significant.

(9) Stock Options

At December  31, 1996,  the Company has three  stock-based  compensation  plans,
which are described  below.  The Company  applies APB Opinion No. 25 and related
Interpretations  in accounting for its plans.  Accordingly,  as all options have
been granted at exercise prices equal to the fair market value as of the date of
grant,  no  compensation  cost  has been  recognized  under  these  plans in the
accompanying consolidated financial statements. Had compensation cost for the

<PAGE>


Company's three stock-based  compensation plans been determined  consistent with
FASB  Statement  No. 123, the Company's net income and earnings per common share
would have been reduced to the pro forma amounts  indicated below (in thousands,
except per share data):


                                                Year ended        Year ended
                                                December 31,      December 31,
                                                    1995               1996
                                                ------------------------------
Net income                      As Reported        $2,075             $15,936
                                Pro Forma          $1,697             $15,327

Earnings per common share       As Reported         $0.55               $1.28
                                Pro Forma           $0.22               $1.23

The effects of compensation  cost as determined  under FASB Statement No. 123 on
net  income in 1995 and 1996 may not be  representative  of the  effects  on pro
forma net income for future periods.

Stock Option and Stock Purchase Plan

Under the terms of the Stock Option and Stock  Purchase  Plan (the "1994 Plan"),
certain key employees were granted, at the discretion of the Board of Directors,
the right to purchase varying amounts of Debt Securities and options to purchase
Common  Stock.  Concurrent  with the  adoption of the 1994 Plan,  all members of
management who previously  held Common Stock of the Company gave up their rights
to such stock.

At the date of grant,  each employee had the option to purchase  immediately  in
cash all  granted  amounts of the Debt  Securities,  or defer  purchase of these
securities,  plus interest,  over a five-year  vesting  period.  In either case,
assuming all obligations to purchase the Debt  Securities  were  fulfilled,  the
exercise price of the options to purchase Common Stock was fixed and the options
are exercisable over a ten-year period.

Contemporaneously  with the initial public  offering,  all Debt  Securities were
exchanged  for Common  Stock (see note 7).  There is no  further  obligation  to
purchase Debt Securities under the 1994 Plan.

The fair value of options  granted on February 1, 1995 is  estimated on the date
of grant  using  the  Black-Scholes  option  pricing  model  with the  following
weighted-average  assumptions:  dividend yield of 0.0%,  expected  volatility of
30%, risk-free interest rate of 7.63%, and expected life of six years.

1995 Stock-Based Incentive Compensation Plan

The 1995 Stock-Based  Incentive  Compensation Plan (the "1995 Plan") was adopted
by the Board of Directors and approved by the Company's  stockholders.  The 1995
Plan  became  effective  on October 31,  1995.  The 1995 Plan  provides  for the
granting of a maximum of 577,427  stock options to key employees of the Company.
No awards can be made under the 1995 Plan after

<PAGE>

24

              CORT Business Services Corporation and subsidiaries
                   Notes to Consolidated Financial Statements


October 31, 1997.  The shares  granted under the 1995 Plan may be in the form of
deferred stock,  restricted stock, incentive stock options,  non-qualified stock
options or stock  appreciation  rights. All awards made in 1995 and 1996 were in
the form of non-qualified  stock options.  The exercise price of an option under
the 1995 Plan is equal to the fair market  value of common stock on the date the
option is granted.  An option under the 1995 Plan vests over a three-year period
and the expiration period may not exceed ten years.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions used for grants in 1995 and 1996, respectively:  0.0% dividend yield
for both years;  expected  volatility of 30% for both years;  risk-free interest
rates of 5.65% and 6.29%, and expected lives of four years and five years.

1995 Directors Stock Option Plan

The 1995 Directors  Stock Option Plan (the  "Director  Plan") was adopted by the
Board of Directors and approved by the Company's stockholders. The Director Plan
became  effective  on October 18,  1995.  The  Director  Plan  provides  for the
granting of a maximum of 50,000 stock options to  non-employee  directors of the
Company.  The Director Plan provides for automatic grants of options to purchase
shares of Common Stock on November 16, 1995 and 1996. The option  exercise price
per  share is equal to the fair  market  value of  common  stock on the date the
option is granted.  All options granted will be vested on November 16, 1998. The
expiration period may not exceed ten years.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions used for grants in 1995 and 1996, respectively:  0.0% dividend yield
for both years;  expected  volatility of 30% for both years;  risk-free interest
rates of 5.89% and 6.43%; and expected lives of seven years for both years.

<PAGE>


Stock Option Activity Summary
The following table summarizes the Company's option plans:
<TABLE>
<CAPTION>

                                                                1994 Plan               1995 Plan          Director Plan
                                                          -----------------------------------------------------------------
                                                                       Weighted                Weighted            Weighted
                                                          Shares       Average      Shares     Average   Shares    Average
                                                          Under        Exercise     Under      Exercise  Under     Exercise
                                                          Option        Price       Option      Price    Option     Price
                                                          -----------------------------------------------------------------
<S>                                                      <C>          <C>          <C>         <C>      <C>       <C>
Outstanding at
   January 1, 1994 .....................................      --           --          --         --        --        --
   Granted .............................................   784,640     $0.25875        --         --        --        --
   Exercised ...........................................  (295,135)     0.25875        --         --        --        --
   Forfeited ...........................................   (53,669)     0.25875        --         --        --        --
                                                          ----------------------------------------------------------------
Outstanding at
   December 31, 1994 ...................................   435,838     $0.25875        --         --        --        --
   Granted .............................................   245,794      1.09800     439,800    $12.00     21,000    $12.00
   Exercised ...........................................   (37,977)     0.85770        --         --        --        --
   Forfeited ...........................................   (16,099)     0.81827        --         --        --        --
                                                          ----------------------------------------------------------------
Outstanding at
   December 31, 1995 ...................................   627,556     $0.57274     439,800    $12.00     21,000    $12.00
   Granted .............................................      --           --       131,300     19.87     10,000     22.75
   Exercised ...........................................   (52,558)     0.33230     (39,501)    12.00       --        --
   Forfeited............................................      --           --          --         --        --        --
                                                          ----------------------------------------------------------------
Outstanding at
   December 31, 1996 ...................................   574,998     $0.59472     531,599    $13.94     31,000    $15.47
Options exercisable at:
   December 31, 1994 ...................................    70,188                     --                   --
   December 31, 1995 ...................................   627,556                     --                   --
   December 31, 1996 ...................................   574,998                  120,280                7,003
Weighted-average fair value at date of grant of options
  granted during the year ended:
   December 31, 1995 ...................................  $   0.57                 $   3.90               $ 5.43
   December 31, 1996 ...................................      --                       7.58                10.59
</TABLE>


<PAGE>

                                                                              25


The following  table  summarizes  information  about the Company's stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>

                                           Options Outstanding                                Options Exercisable
                      -------------------------------------------------------------   ---------------------------------------
                                             Weighted-Average
   Range of                                Remaining Contractual   Weighted-Average                          Weighted-Average
Exercise Prices       Number Outstanding        Life (years)        Exercise Price    Number Exercisable      Exercise Price
-----------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                  <C>                      <C>               <C>                     <C>
$ 0.2587 -  1.0980        574,998                  7.44                 $0.59            574,998                  $0.59
 12.0000                  421,299                  8.88                 12.00            127,283                  12.00
 18.0000 - 22.7500        141,300                  9.69                 20.07                --                     --
                        ---------                                                        -------
                        1,137,597                                                        702,281
                        =========                                                        =======
</TABLE>


10) Rental Commitments

The Company  leases  certain  warehouse and showroom  facilities  and equipment.
Future  minimum  lease  payments  at December  31, 1996 under all  noncancelable
operating leases are as follows (in thousands):

1997 ..............................................   13,999
1998 ..............................................   12,099
1999 ..............................................   10,952
2000 ..............................................    9,228
2001 ..............................................    7,583
Thereafter.........................................   18,997
                                                      ------
   Total minimum lease payments....................   72,858
Less sublease rentals..............................      643
                                                      ------
   Net minimum operating lease payments............  $72,215
                                                     =======

Rental expense was approximately $9,291,000,  $9,177,000 and $12,145,000 for the
years  ended  December  31,  1994,  1995  and  1996,  respectively,   (including
approximately  $1,795,000,  $1,826,000 and  $2,460,000  for  short-term  vehicle
leases).

<PAGE>


(11) Accrued Expenses

Accrued expenses are comprised of (in thousands):


                                               December 31,     December 31,
                                                  1995             1996
                                               -----------------------------
Accrued salaries, wages and incentives ......   $ 4,159           $ 6,301
Accrued interest ............................     2,026             2,078
Accrued vacation ............................     1,325             1,871
Reserves for unfavorable operating lease
  and duplicate facilities ..................     5,942             8,981
Accrued property, sales and use taxes .......     1,529             1,971
Other accrued expenses ......................     4,115             6,289
                                               -----------------------------
                                                $19,096           $27,491
                                               =============================


(12) Warrants to Purchase Common Stock

At December  31, 1995 and 1996,  2,762,200  and 908,410  warrants to purchase an
aggregate  of 450,238 and 148,070  shares of Common  Stock,  respectively,  were
outstanding.  For the  years  ended  December  31,  1995 and 1996,  537,800  and
1,853,790  warrants were exercised for an aggregate of 87,657 and 302,164 shares
of the Common Stock,  respectively.  Each warrant is  exercisable  at a price of
$.0345. The warrants are subject to certain anti-dilution provisions relating to
future issuances of the Common Stock.

(13) Acquisitions

Evans Rents

On April 24,  1996,  the  Company  acquired  Evans  Rents,  a provider of rental
furniture in  California,  for  approximately  $27,778,000,  including  costs of
acquisition,  in a transaction accounted for as a purchase business combination.
As such, the fair value of Evans Rents assets and liabilities were recognized as
of April 24, 1996, and the Company's results of operations  include Evans Rents'
operations  subsequent to that date.  The Company  financed the  acquisition  of
Evans Rents with borrowings under the Revolving Credit Facility.

The fair value  allocated to the  identifiable  assets and  liabilities of Evans
Rents was  determined by  independent  appraisal.  As part of the purchase price
allocation, the Company recorded a reserve for estimated costs to be incurred in
the  consolidation  of duplicate  Evans Rents'  facilities  and  termination  of
employment of certain members of Evans Rents'  management who were not replaced.
Based on the  allocation  of the  purchase  price over the net assets  acquired,
goodwill of  approximately  $14,220,000  was  recorded.  Such  goodwill is being
amortized on a straight-line basis

<PAGE>

26

              CORT Business Services Corporation and subsidiaries
                   Notes to Consolidated Financial Statements


over  40 years.  The  purchase  price has been  allocated  as  follows  (in
thousands):


Cash ........................................................          $     25
Accounts  receivable ........................................             1,967
Prepaid  expenses  and other assets .........................               182
Rental property .............................................            15,066
Property,  plant and equipment ..............................             1,932
Deferred income taxes .......................................             2,600
Goodwill ....................................................            14,220
Accounts payable and accrued expenses .......................            (2,235)
Notes payable ...............................................              (573)
Deferred  revenue ...........................................            (1,543)
Other  liabilities,  including reserves
 for duplicate facilities and employee
 severance ..................................................            (3,863)
                                                                         ------
                                                                       $ 27,778
                                                                       ========

The following unaudited pro forma condensed  consolidated  financial information
presents the combined results of operations of the Company and Evans Rents as if
the  acquisition  had  occurred as of January 1, 1995.  This  information  gives
effect to certain adjustments including amortization of goodwill, elimination of
certain compensation expense,  interest expense on borrowings and related income
tax  effects.  The  pro  forma  consolidated   financial  information  does  not
necessarily  reflect the results of operations  that would have occurred had the
Company and Evans Rents constituted a single entity during the periods.


                                                  Year ended      Year ended
                                                  December 31,    December 31,
                                                     1995            1996
                                                  ----------------------------
                                                    (in thousands, except
                                                      per share amounts)

Total revenue...........................           $209,814        $244,069
Net income..............................              7,176          16,432
Earnings per share......................              $1.20           $1.32
Weighted average number of shares
  used in computation...................              7,759          12,448

<PAGE>

AFR

On August 5, 1996,  the Company  acquired  certain  assets of AFR, a provider of
rental  furniture  in the New  York  City  metropolitan  area,  for  $9,384,000,
including  costs of  acquisition,  in a transaction  accounted for as a purchase
business combination. Based on the allocation of the purchase price over the net
assets  acquired,  goodwill  of  approximately  $6,016,000  was  recorded.  Such
goodwill  is  being  amortized  on a  straight-line  basis  over  40  years.

(14) Quarterly Financial Data (Unaudited)

                                         Three months ended
                         ----------------------------------------------------
                          March 31,    June 30,  September 30,   December 31,
                            1996        1996         1996         1996
                         ----------------------------------------------------
                               (in thousands except per share data)
Furniture rental
  revenue ..............  $38,555      $46,882      $53,707      $52,416
Furniture sales
  revenue ..............   10,214       11,226       10,900       10,249
Operating earnings .....    7,172        8,205       10,030       10,041
Income before
  income taxes .........    5,391        5,941        7,838        8,027
Net income .............    3,160        3,483        4,591        4,702
Earnings per
  common share .........  $   .27      $   .30      $   .35      $   .35


                                         Three months ended
                          ----------------------------------------------------
                          March 31,    June 30,   September 30,   December 31,
                            1995        1995          1995           1995
                          ----------------------------------------------------
                                  (in thousands except per share data)
Furniture rental
  revenue ...............  $33,815     $35,239     $36,354     $ 36,580
Furniture sales
  revenue ...............   10,316       9,288       9,137        8,580
Operating earnings ......    6,252       6,425       6,893        7,151
Income before
  income taxes
  and extraordinary
  loss ..................    2,107       2,226       2,675        3,796
Extraordinary loss,
  net of tax ............     --          --          --          4,143
Net income (loss) .......    1,195       1,273       1,539       (1,932)
Earnings per common
  share before
  extraordinary loss ....  $   .25     $   .26     $   .30     $    .29
Earnings (loss) per
  common share ..........  $   .25     $   .26     $   .30     $   (.17)


<PAGE>


                                                                              27
              CORT Business Services Corporation and Subsidiaries
                          Independent Auditors Report


The Stockholders and Board of Directors
CORT Business Services Corporation and subsidiaries:

We have audited the  accompanying  consolidated  balance sheets of CORT Business
Services  Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the years in the  three-year  period ended  December 31, 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of CORT  Business
Services  Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.



                                                    KPMG Peat Marwick LLP

Washington, D.C.
February 14, 1997

<PAGE>

28

              CORT Business Services Corporation and subsidiaries
                         Market for Common Stock of the
                  Registrant and Related Stockholders' Matters


Common Stock

The  Company's  Common  Stock,  par value  $.01 per share  (the  Common  Stock),
commenced  trading on the Nasdaq  Stock  Market on  November  17, 1995 under the
symbol "CORT". Prior to that date there was no established public trading market
for the Common  Stock.  The Company  delisted  the Common  Stock from the Nasdaq
Stock Market on December 20, 1995 and the Common Stock commenced  trading on the
New  York  Stock  Exchange  under the symbol  "CBS"  on December 21, 1995.   The
following table sets forth,  for the period indicated,  the  high and low  sales
prices of the Company's Common Stock as reported on each exchange.

1995                    Period                  High       Low
-----------------------------------------------------------------
Nasdaq                November 17-
                      December 20             $17 3/4     $13 1/4
New York
 Stock Exchange       December 21-
                      December 31              16 1/2      15 7/8


1996
New York
 Stock Exchange      1st Quarter               19 1/2      15 3/4
                     2nd Quarter               19 1/2      17
                     3rd Quarter               20 3/4      18 1/4
                     4th Quarter               22 7/8      19 3/4

Dividend Policy

The Company has not paid any cash  dividends  on its Common  Stock to date.  The
payment of  dividends,  if any,  in the future is within the  discretion  of the
Board of the Directors and will depend on the  Company's  earnings,  its capital
requirements and financial  condition.  It is the present intention of the Board
of Directors to retain all earnings,  if any, for use in the Company's  business
operations and accordingly, the Board of Directors does not expect to declare or
pay any dividends in the foreseeable future. In addition,  as a holding company,
the Company's  ability to pay dividends is dependent on the receipt of dividends
or advances from its wholly owned subsidiary, CFR. The Revolving Credit Facility
and indenture  governing  the Senior Notes  restricts the ability of CFR to make
advances and pay dividends to the Company.

Holders

As of March 13, 1997, the Company had approximately 267 holders of record of its
Common  Stock.  The  Company  believes  there are in excess of 1,000  beneficial
owners of its Common Stock.