CORT BUSINESS SERVICES
1997 Annual Report








                                   Our people







                                                               ...our   strength




<PAGE>



Office Furniture  Rental
National Accounts Program
Residential Furniture Rental


Retail
CORT BUSINESS SERVICES
Trade Show Furnishings


Internet & Relocation Services
Housewares Rental
Customized Product


<PAGE>

<TABLE>
<CAPTION>

FINANCIAL HIGHLIGHTS                                                                    TOTAL REVENUE
(dollars in thousands, except per share data)                                           (in millions)
                                                                                        Chart

Year ended December 31,                        1995         1996           1997
--------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>             <C>
Furniture rental revenue ................     $141,988     $191,560     $237,212
Furniture sales revenue .................       37,321       42,589       50,006
  Total revenue .........................      179,309      234,149      287,218
Gross profit ............................      129,156      171,984      211,327
Operating earnings ......................       26,721       35,448       46,308
Income before extraordinary loss ........        6,218       15,936       22,326        RENTAL REVENUE
  Per diluted share .....................         1.11         1.31         1.67        (in millions)
                                                                                        Chart
As of December 31,
--------------------------------------------------------------------------------
Total assets ............................     $173,722     $247,199     $277,841
Total debt ..............................       53,800       65,600       63,132
Stockholders' equity ....................       75,421      125,152      149,332


                                                                                        GROSS PROFIT
                                                                                        (in millions)
                                                                                        Chart
CORT TODAY

The Company is the largest,  and only national,  provider of high-quality office
and residential rental furniture and related  accessories.  CORT meets the needs
of  corporations,  corporate  employees,  small  businesses and  individuals for
temporary office,  residential and trade show furniture and furnishings.  CORT's        OPERATING EARNINGS
coast-to-coast  network,  covering  32  states  and the  District  of  Columbia,        (in millions)
includes 109 rental showrooms, 72 clearance centers and 72 distribution centers.        Chart
The Company's  business is operated  under the CORT  Furniture  Rental,  General
Furniture Leasing, CORT Furniture Rental Clearance Center, CORT Housewares, CORT
Trade Show Furnishings, CORT Special Projects and Relocation Central names.
</TABLE>


                                        1
<PAGE>


TO OUR INVESTORS:



In 1997, CORT Business Services completed its best year ever.

CORT has now reported record revenues and operating  earnings every year for the
past five years. During this period,  revenues have grown at a compounded annual
rate of 22%,  and  operating  earnings  at 28%,  even after  making  significant
investments  for the future.  In 1997,  CORT achieved  increases in revenues and
operating  earnings of 23% and 31%,  respectively.  This  strong and  consistent
performance confirms the soundness of our strategic plan.

Our  impressive  results  reflect  a  variety  of  factors,  including  business
demographics that favor CORT's type of  corporate-oriented  service; a sound and
consistent  operating  strategy;  investments  in new markets and services  with
significant  growth  potential,   and  a  management  group  that  is  the  most
experienced and innovative in the industry.  As stockholders  themselves,  these
managers are dedicated to building value for all investors.

These factors have been among the traditional  reasons for our business success.
But there is another important factor: our approximately  2,300 employees.  They
bring commitment, energy and enthusiasm to their jobs. Their performance enabled
CORT to achieve results that met the criteria for inclusion in Forbes Magazine's
most recent compilation of "America's 200 Best Small Companies."

In other highlights of an active and productive year, we:

o    Acquired businesses that moved us deeper into the trade show market.
o    Completed the integration of last year's Evans Rents acquisition.
o    Established  the  Relocation  Central web site as a  value-added  source of
     information for customers.
o    Expanded our distribution of Herman Miller office furniture systems.


As a result,  CORT further solidified its role as the leader of the rent-to-rent
furniture industry.

AN OUTSTANDING YEAR

Revenues  for the year ended  December  31, 1997  increased  by 23%, to a record
$287.2 million,  from $234.1 million in 1996.  Income  performance was even more
impressive.  Operating  earnings  increased  31% to $46.3  million,  from  $35.4
million  the year  before.  Net  income  was $22.3  million,  equal to $1.67 per
diluted share, compared with $15.9 million, or $1.31 per diluted share, one year
ago. The percentage gains were 40% and 27%, respectively.

                                       2

<PAGE>


Operating  margins,  a key measurement of productivity,  increased to 16.1% from
15.1% in 1996. This improvement reflects the consistent implementation of proven
operating strategies;  enhanced efficiencies from the successful  integration of
Evans  Rents in  California,  and growth and  improved  productivity  in startup
operations.

This  overall  performance,  to which so many CORT people  contributed,  met our
goals for dynamic growth and enhanced investor values.

Our expansion program continues to be an important  platform for growth and even
stronger customer service. Late in 1997, we entered the Pittsburgh and Cleveland
markets through  acquisition.  Earlier this year, we purchased  another business
that expands our presence in two other prime corporate areas--New Jersey and New
York.

CORT is actively filling the remaining gaps in its national network.  Within the
past few years, through strategic acquisitions and startups, we also expanded in
Los Angeles,  San Francisco and other California cities, and entered new markets
in Salt Lake City, UT, St. Louis, MO, Birmingham,  AL, Portland,  OR, Las Vegas,
NV and New York City.

CORT has  targeted  the  growing  trade show  furnishings  business as a logical
extension of its rental services.  To significantly  expand our ability to serve
trade show exhibitors,  and to quickly  establish a broader  national  presence,
CORT acquired three affiliated businesses early in 1997.

This  multi-pronged  expansion  strategy is our gateway to untapped markets.  It
also provides access to established customer bases and creates opportunities for
cross-selling of related services.

WHAT'S AHEAD

CORT  plans  to  widen  its  leadership   position  in  the  highly   fragmented
rent-to-rent  furniture  industry.  We intend to be a major  consolidator  in an
industry   where  many   undercapitalized   entrepreneurs   are  candidates  for
consolidation.

For a focused, well managed company like ours,  rent-to-rent offers the prospect
of  above-average   returns  and  accelerated  growth.  We  anticipate  that  an
aggressive  combination  of  geographically  driven  acquisitions,  plus  strong
internal growth, will enhance our one-third market share.

Today, CORT is a quality organization.  We have vast financial,  operational and
managerial resources,  a world-class employee team and a proven growth strategy.
We look to 1998 and beyond with confidence and enthusiasm.


Paul N. Arnold
President and Chief Executive Officer


In a fast-changing
environment, CORT
people make the
difference. They are
the reason for
our extraordinary
performance and our future
expectations.

                                        3
<PAGE>

Our people


CORT's business revolves
around people serving
people. Our people
pride themselves on
providing solutions
to customers'
furniture needs.

                                        4
<PAGE>



THE MARKET WE SERVE


CORT  serves  corporations,  businesses  of  all  sizes,  and  individuals.  The
corporate  sector,  which accounts for approximately 80% of our rental revenues,
is experiencing  another growth cycle.  Strong  corporate  profits,  appreciated
stock  prices  and  low  interest  rates  are  enabling   corporations  to  make
acquisitions, open facilities and build sales bases. This puts people in motion,
as hirees,  transferees,  outside contractors or independent workers.  They need
office furniture and furnished  living  quarters.  CORT is the only company that
can meet these furniture rental needs throughout the United States.

This is why we have  attracted  customers  like EDS,  MCI,  Warner  Bros.,  TCI,
ConAgra, TRANSAMERICA, Great West-Life Assurance, and Exxon Company USA.

The concept of renting rather than owning furniture appeals to both corporations
and  individuals  with an eye on the bottom line.  Among the other  benefits are
flexible lease lengths,  immediate order fulfillment,  extensive product choices
and convenient one-stop shopping. This preference for renting has contributed to
the increase in our monthly base rent of nearly $17.5  million at year end. Just
five years ago, our monthly base rent was $6.3 million.

SERVING THE OFFICE MARKET

CORT rents a full line of  branded,  top quality  furniture  to  businesses  and
entrepreneurs whose needs are immediate but temporary.

During periods of expansion or shifting needs,  corporations  require work space
for task force teams,  fully-  furnished  rooms for training  classes and office
suites for employees on temporary  assignment.  Flexibility is just as important
to start-up companies, home businesses and entrepreneurial ventures.

Whether a company is a multinational giant or a small home-based business,  CORT
can provide customized plans to meet their furniture needs.

SERVING THE RESIDENTIAL MARKET

As computer and communications technology have
fostered greater mobility,  workers spend more time away from their home cities.
They may be contract  employees,  members of  consultant  teams or task  forces,
corporate employees  temporarily assigned to different locations for training or
to handle special projects, or employees who are changing jobs or relocating.

                                        5
<PAGE>


For  individuals  who must forego the  comforts of home, a pleasant and relaxing
away-from-work  environment is often a key to productivity.  Corporate employers
and  employees are bypassing  impersonal,  cramped and expensive  hotel rooms in
favor of spacious fully-furnished  apartments.  CORT provides all the furniture,
housewares and accessories needed to feel at home.


SERVING THE AFTERMARKET

CORT is able to generate  income beyond the furniture  rental stream.  Customers
can purchase  previously rented furniture at any of our 72 clearance centers, at
significant   reductions  from  conventional  retail  pricing.   Even  at  these
discounted prices, we generally recover more than 100% of our original furniture
costs.

Through the timely disposal of previously rented furniture,  CORT maintains high
quality  standards in its 109 showrooms and its rental  inventories.  To prolong
product life, we concentrate on styles that are  attractive,  durable and appeal
to universal tastes.


HOW CORT IS PLANNING FOR THE FUTURE

One of CORT's most valuable  qualities is our own capacity for change. We have a
vast appetite for new ideas,  approaches  and concepts that help  customers meet
their business goals.

For  example,  one of our growth  strategies  has  revolved  around  "incubator"
businesses.  These complement our core furniture rental  activities,  extend the
CORT brand name,  anticipate  customers' evolving needs and create opportunities
for cross selling.  As these fledgling  services mature,  we are able to provide
customers with yet another reason to do business with CORT.

In 1996,  we focused our efforts to grow our  housewares  unit,  which  provides
kitchen, bedroom and bathroom accessories. It is now approaching the status of a
full-fledged business. We see the trade show and convention services business as
a high-potential  market.  Some new initiatives work while others may fall short
of expectations.  But the cost of the occasional  disappointment is modest while
the winners return our investment many times over.

                                        6

<PAGE>


 ... our strength




             CORT people bring
             dedication, teamwork
             and a sense of
             empowerment to the
             implementation of a
             sound strategic plan.

                                        7
<PAGE>


PEOPLE-OUR KEY STRENGTH

CORT's   customers--the   nation's   manufacturing,    service   and   financial
companies--have  experienced  economic,  social and infrastructural  upheaval of
great proportions.

CORT has successfully risen to this challenge. Not just because we had the right
strategic  plan...which  we did,  and not just  because we had the  resources to
carry out our  plan...which  we did,  and not just because we had the benefit of
good luck and good timing...which we did.

Important as they are,  these  elements  alone would not have been enough.  What
made it work was CORT people.

Our 700 local market sales  consultants  provide furniture  solutions,  complete
with space planning and design  assistance.  They are also invaluable sources of
information about neighborhoods,  schools and other demographics  important to a
businessperson new to the area. A team of national account  specialists,  chosen
for their professionalism and problem-solving  ability,  serves the rental needs
of our largest,  multi-location  customers and coordinates local market efforts.
Our team of 1,100  warehousing  and  distribution  personnel  oversee  furniture
deliveries   that  arrive  on  time,  in  quality   condition.   Our  200-person
administrative   staff  of  customer   service,   finance  and  quality  control
specialists  is stationed  in local  markets so that  customer  needs can be met
promptly.

Many  employees,  including  most of our  managers,  began at entry  levels  and
learned  the  business  as they moved  upward.  Along the way,  they  acquired a
feeling of shared  accomplishment and team pride that is our most valuable asset
today and into the future.

<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>


SELECTED CONSOLIDATED FINANCIAL DATA(1)
(in thousands, except per share data)

              CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                          Predecessor                        CORT Business Services Corporation
                                          -----------   ----------------------------------------------------------------------------
                                              Three        Nine
                                             months       months
                                              ended        ended                               Year ended December 31,
                                            March 31,   December 31,   Combined    -------------------------------------------------
                                            ---------   ------------   --------
                                              1993        1993(2)      1993(2)       1994          1995        1996(3)        1997
                                              ----        -------      -------       ----          ----        -------        ----
<S>                                         <C>          <C>          <C>          <C>           <C>          <C>           <C>
Furniture rental revenue .................  $ 21,497     $ 79,002     $100,499     $130,026      $141,988     $191,560      $237,212
Furniture sales revenue ..................     6,228       21,846       28,074       34,534        37,321       42,589        50,006
                                               -----       ------       ------       ------        ------       ------        ------
  Total revenue ..........................    27,725      100,848      128,573      164,560       179,309      234,149       287,218
Furniture rental gross profit ............    17,451       63,318       80,769      104,255       114,038      154,602       191,578
Furniture sales gross profit .............     2,548        8,716       11,264       13,885        15,118       17,382        19,749
                                               -----        -----       ------       ------        ------       ------        ------
  Total gross profit .....................    19,999       72,034       92,033      118,140       129,156      171,984       211,327
Selling, general and
  administrative expenses ................    16,779       58,990       75,769       95,526       102,435      136,536       165,019
                                              ------       ------       ------       ------       -------      -------       -------
Operating earnings .......................     3,220       13,044       16,264       22,614       26,721        35,448        46,308
Interest expense(4) ......................       879        8,941        9,820       16,246        15,917        8,251         8,374
Income (loss) before
  extraordinary loss .....................     1,976        2,313        4,289        3,546         6,218       15,936        22,326
Net income (loss) ........................  $  1,976     $  2,313      $ 4,289      $ 3,546       $ 2,075     $ 15,936      $ 22,326
Earnings per common share
  before extraordinary loss(5) ...........                                          $  0.91       $  1.26     $   1.40      $   1.74
Earnings per common share before
  extraordinary loss--assuming dilution ..                                          $  0.85       $  1.11     $   1.31      $   1.67

</TABLE>

<TABLE>
<CAPTION>

As of December 31,                                                      1993         1994         1995         1996         1997
------------------                                                      ----         ----         ----         ----         ----
<S>                                                                   <C>          <C>           <C>          <C>           <C>
Total assets ....................................................     $169,777     $178,275      $173,722     $247,199      $277,841
Total debt ......................................................      120,269      123,645        53,800       65,600        63,132
Stockholders' equity ............................................        3,341        6,963        75,421      125,152       149,332
</TABLE>

(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, 1996 and 1997 have been derived from the consolidated financial
     statements of the Company.  The financial  data of CFR 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  approximately
     $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)  Interest  expense for the three  months  ended March 31, 1993  reflects the
     impact of a restructuring of CFR on June 30, 1992. Interest expense for 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.

(5)  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  outstanding  during  the  year.  In  connection  with the
     Company's  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.

                                       10
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


                             CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES

The  following  information  should  be  read  together  with  the  consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report
(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, 1995,  1996 and 1997.  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,
                                      -----------------------------
                                      1995        1996        1997
                                      ----        ----        ----
Rental revenue .....................  79.2%       81.8%       82.6%
Sales revenue ......................  20.8        18.2        17.4
  Total revenue .................... 100.0       100.0       100.0
Cost of rental(1) ..................  19.7        19.3        19.2
Cost of sales(1) ...................  59.5        59.2        60.5
Gross margin .......................  72.0        73.4        73.6
Selling, general and
  administrative expenses ..........  57.1        58.3        57.5
Operating earnings .................  14.9        15.1        16.1
Interest ...........................   8.9         3.5         2.9
Income taxes .......................   2.6         4.8         5.4
Income before extraordinary loss ...   3.4%        6.8%        7.8%
Net income .........................   1.2%        6.8%        7.8%

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

(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 25%
to 40% of original  cost.  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, 1997 AS COMPARED
TO YEAR ENDED DECEMBER 31, 1996

Revenue.  Total  revenue  increased  22.7% to $287,218 in 1997 from  $234,149 in
1996.  Furniture rental revenue for the year was $237,212, a 23.8% increase from
$191,560 in 1996.  Rental revenue growth before the impact of  acquisitions  and
merged markets is estimated to be approximately 13% which reflects growth in the
number of leases as well as revenue per lease.  Furniture  sales increased 17.4%
to $50,006 in 1997 from  $42,589 in 1996.  Excluding  the impact of an unusually
large  corporate sale in the second quarter of 1997,  furniture sales would have
shown an increase of 13.3%.  This  increase  reflects  the  Company's  continued
efforts to maintain the quality of its rental furniture line-up.

<PAGE>



Gross Profit.  Gross profit  margin on total revenue  increased to 73.6% for the
year ended  December  31, 1997 from 73.4% for the year ended  December 31, 1996.
The gross profit margin on furniture  rental revenue was 80.8% in 1997 and 80.7%
in 1996.  Gross profit margin on furniture  sales revenue  decreased to 39.5% in
1997 from 40.8% in 1996. The gross profit margin on furniture  sales revenue for
1997 would have been 40.1% without the unusually large corporate sale.

                                       11

<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  totaled  $165,019 or 57.5% of total revenue in 1997 as
compared to $136,536 or 58.3% of total revenue in 1996. This percentage decrease
is attributed to the  efficiencies  gained in  California by  integrating  Evans
Rents, as well as the growth and productivity of the startups the Company opened
in prior years. In addition,  1996 included $425 of certain  charges  associated
with duplicate showroom closings related to the acquisition of Evans Rents.

Operating  Earnings.  As a result of the  changes in revenue,  gross  margin and
selling, general and administrative expenses discussed above, operating earnings
increased to $46,308,  or 16.1% of total revenue in 1997 from $35,448,  or 15.1%
of total revenue in 1996.

Interest Expense,  Net. Interest expense increased to $8,374 in 1997 from $8,251
in 1996.

Furniture Purchases.  Furniture purchases totaled $76,010 in 1997, a decrease of
1.7% from the $77,323  purchased in 1996.  Purchases in 1996 were  significantly
higher as the Company  converted the Evans Rents  business to the CORT furniture
line. In 1997,  furniture purchases supported normal growth and replenishment of
furniture which has been sold or disposed.


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  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.

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 $77,323 in 1996, an increase of
46.8% from the $52,677 purchased in 1995.  Approximately $10,000 of purchases is
attributable to the acquisitions of Evans Rents and AFR 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.

                                       12

<PAGE>

                             CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES


LIQUIDITY AND CAPITAL RESOURCES

The  Company's  primary  capital   requirements  are  for  purchases  of  rental
furniture.  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
$52,677,  $77,323  and  $76,010  in 1995,  1996 and 1997,  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 leasehold improvements, warehouse and office equipment,
standard   programming   enhancements  and  computer   hardware   necessary  for
installation of the management  information system in additional districts.  Net
purchases of property,  plant and  equipment  were $4,108,  $5,652 and $7,638 in
1995, 1996 and 1997, respectively.

During 1995, 1996 and 1997, net cash provided by operations was $55,563, $78,374
and  $100,639,  respectively.  During  1995,  1996 and  1997,  net cash  used in
investing   activities  was  $54,237,   $122,927  and  $100,665,   respectively,
consisting primarily of purchases of rental furniture and portfolio acquisitions
and in 1996,  the  acquisitions  of Evans Rents and AFR.  During 1995,  1996 and
1997, net cash provided  (used) by financing  activities was ($14,108),  $44,297
and ($97),  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 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,  subject to certain  borrowing base
restrictions,  to meet  acquisition  and  expansion  needs  as well as  seasonal
working capital and general corporate  requirements.  In February 1998, the term
of the  revolving  credit  facility was extended  from November 1998 to February
2002,  the amount of credit  increased  to $75  million and the  borrowing  base
restrictions  were  released.   The  revolving  credit  facility  is  no  longer
collateralized  by  substantially  all of CFR's  assets  but does  restrict  the
ability of CFR to pledge its assets as security.  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 1995,  1996, and 1997 on
the  revolving  credit  facility  was 7.90%,  7.30% and 7.25%,  respectively.  A
commitment fee calculated  based upon the unused portion of the revolving credit
facility  is payable  quarterly  in arrears.  The Company had $54,628  available
under the revolving credit facility at December 31, 1997.

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
$49,932 in aggregate  principal amount of the Senior Notes outstanding  totaling
approximately  $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  $49,932 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

                                       13
<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


of debt 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 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.  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 $35 million for such periods (including  interest through December
31, 1997). 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. The Company is not in a position to determine the probable
outcome and its impact on the Company's  consolidated  financial statements,  if
any.


NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting  Comprehensive  Income" ("Statement 130").  Statement 130 establishes
standards  for  the  reporting  and  display  of  comprehensive  income  and its
components  in the  financial  statements.  The Company is required to adopt the
provisions  of Statement  130 for the year ending  December  31,  1998.  Earlier
application is permitted;  however, upon adoption of Statement 130, CORT will be
required  to  reclassify   previously  reported  annual  and  interim  financial
statements.  CORT  believes  that the  disclosure  of  comprehensive  income  in
accordance  with the  provisions  of  Statement  130 will  impact  the manner of
presentation of its financial statements as currently and previously reported.


YEAR 2000 COMPLIANCE

The Company has evaluated the costs necessary to make its computer  systems Year
2000 compliant.  The bulk of these costs are expected to be incurred during 1998
and are not  expected  to have a material  impact on the  Company's  cash flows,
results of operations or financial condition.


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.


FORWARD-LOOKING STATEMENTS

In addition to  historical  information,  this Annual  Report  includes  certain
forward-looking  statements  as  such  term is  defined  in  Section  27A of the
Securities  Act and  Section  21E of the  Exchange  Act.  These  forward-looking
statements involve certain risks and uncertainties, including but not limited to
acquisitions, additional financing requirements, development of new products and
services,  the effect of  competitive  products  and  pricing  and the effect of
general  economic  conditions,   that  could  cause  actual  results  to  differ
materially from those in such forward-looking statements.

                                       14

<PAGE>


CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)


                             CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES


                                                                December 31,
                                                           ---------------------
                                                             1996          1997
                                                             ----          ----
ASSETS
Cash and cash equivalents ..............................   $    123     $     --
Accounts receivable, less allowance for
  doubtful accounts
  of $1,906 and $2,891 in 1996 and 1997,
  respectively .........................................     11,011       13,521
Prepaid expenses .......................................      4,224        4,127
Rental furniture, net (note 2) .........................    147,161      164,323
Property, plant and equipment, net (note 4) ............     35,667       38,777
Other receivables and assets, net (note 6) .............      3,815        3,183
Goodwill, net of accumulated amortization
  of $2,678 and $4,224 in 1996 and 1997,
  respectively (note 12) ...............................     45,198       53,910
                                                             ------       ------
                                                           $247,199     $277,841
                                                           ========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .......................................   $  4,157     $  5,551
Rental security deposits ...............................      7,184        7,978
Accrued expenses (note 10) .............................     27,491       27,936
Deferred rental revenue ................................      7,174        9,239
Long-term debt (note 6) ................................     65,600       63,132
Deferred income taxes (note 5) .........................     10,441       14,673
                                                             ------       ------
                                                            122,047      128,509
                                                            -------      -------

Commitments and contingencies
 (notes 5, 7 and 9)

Stockholders' equity (notes 3, 6, 8, and 11):
  Common stock, voting, $.01 par value,
    20,000,000 shares authorized, 12,674,381
    and 12,869,306 shares issued and outstanding .......        127          129
  Common stock, Class B, nonvoting, $.01 par
    value, 20,000,000 shares authorized, none
    issued and outstanding .............................         --           --
  Additional paid-in capital ...........................    101,155      103,007
  Retained earnings ....................................     23,870       46,196
                                                             ------       ------
       Total stockholders' equity ......................    125,152      149,332
                                                            -------      -------
                                                           $247,199     $277,841
                                                           ========     ========


See accompanying notes to consolidated financial statements.

                                       15
<PAGE>


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

CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES


                                                    Year ended December 31,
                                                --------------------------------
                                                  1995        1996        1997
                                                  ----        ----        ----

Revenue:
  Furniture rental ...........................  $141,988    $191,560    $237,212
  Furniture sales ............................    37,321      42,589      50,006
                                                  ------      ------      ------
    Total revenue ............................   179,309     234,149     287,218
                                                 -------     -------     -------
Operating costs and expenses:
  Cost of furniture rental ...................    27,950      36,958      45,634
  Cost of furniture sales ....................    22,203      25,207      30,257
  Employee, delivery and advertising
    expenses .................................    72,379      95,204     114,674
  Occupancy, utilities and nonrental
    depreciation .............................    16,724      22,722      27,747
  Amortization of goodwill ...................       662         961       1,546
  Other operating expenses ...................    12,670      17,649      21,052
                                                  ------      ------      ------
    Total costs and expenses .................   152,588     198,701     240,910
                                                 -------     -------     -------
    Operating earnings .......................    26,721      35,448      46,308
Interest expense, net ........................    15,917       8,251       8,374
                                                  ------       -----       -----
    Income before income taxes and
     extraordinary loss ......................    10,804      27,197      37,934
Income tax expense (note 5) ..................     4,586      11,261      15,608
                                                   -----      ------      ------
    Income before extraordinary loss .........     6,218      15,936      22,326
Extraordinary loss on early retirement
  of debt, net of income tax benefit
  of $2,762 (notes 5 and 6) ..................     4,143          --          --
                                                   -----      ------      ------
    Net income ...............................  $  2,075    $ 15,936    $ 22,326
                                                ========    ========    ========
Earnings per common share before
  extraordinary loss (note 13) ...............  $   1.26    $   1.40    $   1.74
Extraordinary loss per common share ..........       .62          --          --
                                                --------    --------    --------
Earnings per common share ....................  $    .64    $   1.40    $   1.74
                                                ========    ========    ========
Weighted average number of common
  shares used in computation .................     6,688      11,416      12,804
                                                   -----      ------      ------
Earnings per common share before
  extraordinary loss--assuming dilution ......  $   1.11    $   1.31    $   1.67
Extraordinary loss per common
  share--assuming dilution ...................       .55          --          --
                                                --------    --------    --------
Earnings per common
  share--assuming dilution ...................  $    .56    $   1.31    $   1.67
                                                ========    ========    ========
Weighted average number of common
  shares used in computation--
  assuming dilution ..........................     7,578      12,144      13,378
                                                   -----      ------      ------


See accompanying notes to consolidated financial statements.

                                       16
<PAGE>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

                             CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                  Additional                  Total
                                           Common   Paid-in    Retained   Stockholders'
                                            Stock   Capital    Earnings     Equity
                                            -----   -------    --------     ------
<S>                                     <C>        <C>        <C>        <C>
Balance, December 31, 1994 ..............$     42   $  1,062   $  5,859   $  6,963
  Net income ............................      --         --      2,075      2,075
  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
                                            -----     ------     ------     ------
Balance, December 31, 1995 ..............     104     67,383      7,934     75,421
                                            -----     ------      -----     ------
  Net income ............................      --         --     15,936     15,936
  Income tax benefit from stock
    options exercised ...................      --        571         --        571
  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
                                             ----    -------     ------    -------
Balance, December 31, 1996 ..............     127    101,155     23,870    125,152
                                             ----    -------     ------    -------
  Net income ............................      --         --     22,326     22,326
  Income tax benefit from stock
    options exercised ...................      --      1,177         --      1,177
  Issuance of common stock from
    exercise of stock options ...........       1        660         --        661
  Issuance of common stock from
    exercise of warrants ................       1         15         --         16
                                             ----   --------     ------    -------
Balance, December 31, 1997 ..............$    129   $103,007   $ 46,196   $149,332
                                         ========   ========   ========   ========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       17
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                         Year ended December 31,
                                                    ----------------------------------
                                                       1995        1996         1997
                                                       ----        ----         ----
Cash flows from operating activities:
<S>                                                <C>          <C>          <C>
  Net income ..................................... $   2,075    $  15,936    $  22,326
  Proceeds of disposals of rental
   furniture in excess of gross profit ...........    21,455       24,118       27,697
  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 ...........................    19,551       26,887       33,704
      Other depreciation and amortization ........     2,601        3,804        4,871
      Goodwill ...................................       662          961        1,546
      Deferred financing fees ....................       729          698          726
      Discount on junior subordinated debentures .        65           --           --
    Rental furniture inventory shrinkage .........     1,838        2,261        3,567
    Deferred income taxes ........................     2,811        2,990        3,972
    Pay-in-kind interest converted to
     long-term debt ..............................     3,598           --           --
    Changes in assets and liabilities:
      Accounts receivable ........................      (547)      (2,795)        (364)
      Prepaid expenses ...........................      (998)          (8)         195
      Other receivables and assets ...............    (1,190)          27           83
      Accounts payable, accrued expenses
       and rental security deposits, net .........    (1,768)       1,746          262
      Deferred rental revenue ....................       538        1,749        2,054
                                                      ------        -----        -----
        Net cash provided by
         operating activities ....................    55,563       78,374      100,639
                                                      ------       ------      -------
Cash flows from investing activities:
  Purchases of rental furniture ..................   (52,677)     (77,323)     (76,010)
  Purchases of portfolio acquisitions ............    (1,476)      (2,790)     (16,851)
  Purchases of property, plant and equipment .....    (4,521)      (6,238)      (8,628)
  Sale of property, plant and equipment ..........       413          586          990
  Purchase of Evans Rents ........................        --      (27,778)          --
  Purchase of AFR ................................        --       (9,384)        (166)
  Purchase of short-term investments .............    (1,024)          --           --
  Sale of short-term investments .................     5,048           --           --
                                                       -----       ------        ------
        Net cash used in
         investing activities ....................   (54,237)    (122,927)    (100,665)

Cash flows from financing activities:
  Repayments of Senior Notes .....................   (50,287)        (573)         (68)
  Payments to retire Senior Notes ................    (4,998)          --           --
  Payment of deferred financing fees .............        --         (154)          --
  Proceeds from issuance of long-term debt .......       332           --           --
  Borrowings on the line of credit ...............     4,800       87,400       54,200
  Repayments on the line of credit ...............    (1,000)     (75,600)     (56,600)
  Issuance of common stock .......................    37,045       33,224          677
  Other ..........................................        --           --        1,694
                                                      ------       ------        -----
        Net cash provided (used) by
         financing activities ....................   (14,108)      44,297          (97)
                                                     -------       ------        ------
        Net increase (decrease) in
         cash and cash equivalents ...............   (12,782)        (256)        (123)
Cash and cash equivalents at
  beginning of year ..............................    13,161          379          123
                                                      ------       ------        ------
Cash and cash equivalents at end of year ......... $     379    $     123           --
                                                   =========    =========        ======
Supplemental disclosures of cash flow
 information:
Cash paid for:
  Interest ....................................... $  13,408    $   7,487    $   7,664
  Income taxes ...................................     2,161        8,089       11,626
Noncash financing activities:
  Tax benefit from exercise of stock options ..... $      --    $     571    $   1,177
  Tax benefit from exchange of debt for equity ...       741           --           --
  Exchange of debt for equity (note 6) ...........    28,597           --           --
</TABLE>

See accompanying notes to consolidated financial statements.

                                       18
<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             CORT BUSINESS SERVICES CORPORATION AND SUBSIDIARIES


(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, 1996 and 1997, and for
the years ended December 31, 1995,  1996 and 1997,  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 primarily on a
declining-balance  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  $53,582,000  and  $66,797,000 at December 31, 1996 and 1997,  respectively.
Reserves for purchase  options and shrinkage on rental furniture were $2,768,000
and $4,406,000 at December 31, 1996 and 1997, 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.  Depreciation  is 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 20 to 40 years. The
Company evaluates the  recoverability of its 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, 1996  consisted  primarily of overnight  repurchase
funds.

(g) Rental Security Deposits

The Company may require a non-interest  bearing  security deposit of one month's
rent based on the Company's 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.

(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.

                                       19

<PAGE>


(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 are capitalized and 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 available to common
stockholders  by  the  weighted   average  number  of  shares  of  common  stock
outstanding  during the year.  Earnings per common  share--assuming  dilution is
computed by dividing net income available to common stockholders by the weighted
average  number of shares of common stock and dilutive  potential  common stock.
Dilutive  securities are comprised  entirely of stock options and warrants.  The
Company has no other potentially dilutive securities.

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  per common  share for 1995,  the Company has assumed that the exchange
occurred as of January 1, 1994 for 2,090,591 shares of Common Stock.

(l) Advertising costs

Costs incurred for producing  advertising are generally  expensed when incurred.
Costs of yellow pages and brochures  are deferred and amortized  over the period
the material is in use. At December 31, 1996 and 1997,  approximately $1,642,000
and  $1,962,000  of  deferred  advertising  expenses  were  reported  in prepaid
expenses.  Advertising expenses were approximately  $9,676,000,  $10,983,000 and
$12,632,000 for December 31, 1995, 1996 and 1997, respectively.

(3) 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 6).

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 12).


(4) PROPERTY, PLANT AND EQUIPMENT

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

                                    December 31,    December 31,
                                        1996            1997
                                        ----            ----

Land and land improvements ..........  $ 7,003        $ 6,772
Buildings and improvements ..........   15,169         15,418
Machinery, equipment
  and computers .....................    9,142         12,500
Leasehold improvements ..............   11,515         14,657
Furniture and fixtures ..............    1,590          1,793
Other ...............................    1,371          2,391
                                         -----          -----
                                        45,790         53,531
Accumulated depreciation
  and amortization ...................  10,123         14,754
                                        ------         ------
                                       $35,667        $38,777
                                       =======        =======

<PAGE>


(5) 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,
                               1995         1996         1997
                               ----         ----         ----
Current:
  Federal ................    $ 1,257     $ 6,117      $ 9,037
  State and local ........        494       1,489        2,453
                                  ---       -----        -----
                                1,751       7,606       11,490
                                -----       -----       ------
Deferred:
  Federal ................      2,410       3,107        3,515
  State and local ........        425         548          603
                                  ---         ---          ---
                                2,835       3,655        4,118
                                -----       -----        -----
Total expense before
  extraordinary loss .....    $ 4,586     $11,261      $15,608
Income tax benefit from
  extraordinary loss on early
  retirement of debt .....     (2,762)         --           --
                               ------      ------       ------
Total income tax expense .    $ 1,824     $11,261      $15,608
                              =======     =======      =======


                                       20
<PAGE>


The  difference  between the actual  expense for taxes and taxes computed at the
Federal  income tax rate of 34 percent in 1995,  and 35 percent in 1996 and 1997
is summarized as follows (in thousands):

                            Year ended   Year ended    Year ended
                           December 31,  December 31,  December 31,
                               1995          1996        1997
                               ----          ----        ----
Tax expense computed
  at Federal rate ...........  $3,673     $ 9,519      $13,277
State and local taxes, net
  of Federal benefit ........     607       1,324        1,986
Effects of goodwill
  amortization ..............     225         336          395
Other, net ..................      81          82          (50)
                                -----      ------       ------
  Total expense before
    extraordinary loss ......  $4,586     $11,261      $15,608
                               ======     =======      =======


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,
                                                      1996            1997
                                                      ----            ----
Deferred tax assets:
  Accounts receivable, principally
    due  to allowance
    for doubtful accounts ......................   $   762        $ 1,156
  Compensated absences, principally
    due to accrual for financial
    reporting purposes .........................       748            845
  Deferred financing fees ......................       495            352
  Deferred rental revenue ......................     2,999          3,715
  Reserve for unfavorable operating
    lease and duplicate facilities .............     3,592          2,829
  Reserve for purchase options and
    shrinkage on rental property ...............     1,107          1,762
  Net operating loss carryforwards .............       600            205
  AMT credit carryforward ......................     3,388            394
  Other ........................................     1,396          1,836
                                                     -----          -----
    Total gross deferred tax assets ............    15,087         13,094
                                                    ------         ------
Deferred tax liabilities:
  Rental furniture, principally due
    to differences in depreciation .............    20,179         22,387
  Property, plant and equipment,
    principally due to differences
    in depreciation ............................     5,306          5,140
  Other ........................................        43            240
                                                    ------         ------
    Total gross deferred tax
      liabilities ..............................    25,528         27,767
                                                    ------         ------
    Net deferred tax liability .................   $10,441        $14,673
                                                   =======        =======


At December 31,  1997,  the Company has net  operating  loss  carryforwards  for
Federal  income tax purposes of  approximately  $500,000  which are available to
offset future Federal taxable  income,  if any,  through 2007. In addition,  the
Company  has  alternative  minimum  tax credit  carryforwards  of  approximately
$394,000 which are available to reduce future Federal  regular income taxes,  if
any, over an indefinite period.

The Internal  Revenue Service  ("IRS") has 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.  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 $35 million for such periods (including  interest through December
31, 1997). 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. The Company is not in a position to determine the probable
outcome and its impact on the Company's  consolidated  financial statements,  if
any.

(6) LONG-TERM DEBT

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

                                    December 31,    December 31,
                                        1996            1997
                                        ----            ----
Revolving credit facility ..........   $15,600        $13,200
Senior Notes .......................    50,000         49,932
                                        ------         ------
                                       $65,600        $63,132
                                       =======        =======


CFR entered into a 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, 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 is  collateralized  by
substantially  all of CFR's assets.  In February 1998,

                                       21
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


the term of the  revolving  credit  facility was extended  from November 1998 to
February 2002,  the amount of credit  increased to $75 million and the borrowing
base  restrictions  were released.  The revolving  credit  facility is no longer
collateralized  by  substantially  all of CFR's  assets  but does  restrict  the
ability of CFR to pledge its assets as security.  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 1995, 1996 and 1997 on the
revolving credit facility was 7.90%, 7.30% and 7.25%, respectively. A commitment
fee calculated based upon the unused portion of the revolving credit facility is
payable quarterly in arrears.

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 statements 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  Sub-ordinated  Debentures  (collectively  the "Debt
Securities"),  due to 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 year ended  December 31, 1995,  the  aggregate  interest
expense  incurred on the Debt Securities was  approximately  $3,598,000,  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
$71,100,000 and $68,100,000 at December 31, 1996 and 1997, respectively.

Other assets include debt issuance costs,  net of accumulated  amortization,  of
$1,990,000 and $1,264,000 at December 31, 1996 and 1997, respectively.


(7) 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  $940,000,
$1,080,000,  and  $1,215,000  for the years ended  December 31, 1995,  1996, and
1997, 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 $148,000, $119,000, and $152,000 for the years ended December
31, 1995, 1996, and 1997,  respectively.  The accrued,  unfunded liability under
the plan as of December 31, 1997 was not significant.

The Company has maintained an employee stock purchase plan,  since July 1, 1997.
All employees are eligible to  participate in the plan after 90 days of service.
The price of the shares  purchased in the open market is the average  price paid
for all the shares  purchased by the broker on the investment  date. The Company
assumes the cost of brokerage  commissions and service charges for all purchases
made under the plan.  During 1997,  3,174 shares of Common Stock were  purchased
through the plan at an average price of $37.30 per share.


(8) STOCK OPTIONS

At December 31, 1997, the Company had four stock-based compensation plans, which
were  adopted  by  the  Board  of  Directors   and  approved  by  the  Company's
stockholders.  These plans 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  Company's  four  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):

                                       22
<PAGE>


                            Year ended    Year ended   Year ended
                           December 31,  December 31,  December 31,
                               1995          1996         1997
                               ----          ----         ----

Net income
  As reported ............... $2,075       $15,936      $22,326
  Pro forma ................. $1,697       $15,327      $21,461
Earnings per common share
  As reported ...............  $ .64        $ 1.40       $ 1.74
  Pro forma .................  $ .25        $ 1.34       $ 1.68
Earnings per common share
  assuming dilution
    As reported .............  $ .56        $ 1.31       $ 1.67
    Pro forma ...............  $ .22        $ 1.26       $ 1.60


The effects of compensation  cost as determined  under FASB Statement No. 123 on
net income in 1995,  1996 and 1997 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 6).  There is no  further  obligation  to
purchase Debt Securities under the 1994 Plan.

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:  dividend  yield of 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")  became
effective on October 31, 1995. The 1995 Plan was amended in May 1997 to increase
the number of stock options  available for grant. The 1995 Plan provides for the
granting  of a maximum  of  1,210,000  stock  options  to key  employees  of the
Company.  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, 1996 and 1997 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,  1996 and 1997  respectively:  0% dividend
yield  for all  years;  expected  volatility  of 30% for  all  years;  risk-free
interest rates of 5.65%,  6.29% and 6.25%;  expected  lives of four years,  five
years and six years, respectively.

1995 Directors Stock Option Plan

The 1995 Directors Stock Option Plan (the "1995 Director Plan") became effective
on October 18,  1995.  The 1995  Director  Plan  provided  for the granting of a
maximum of 50,000 stock options to  non-employee  directors of the Company.  The
1995 Director Plan provided for automatic  grants of options to purchase  shares
of Common Stock on November  16, 1995 and 1996.  The option  exercise  price per
share was equal to the fair market  value of common stock on the date the option
was 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% 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.

1997 Directors Stock Option Plan

The 1997 Directors Stock Option Plan (the "1997 Director Plan") became effective
on May 14, 1997.  The 1997  Director Plan provides for the granting of a maximum
of 50,000 stock  options to  non-employee  directors  of the  Company.  The 1997
Director Plan provides for automatic  grants of options to purchase 2,000 shares
of Common Stock for each of the Company's non-employee directors on the business
day  immediately  following the Company's  Annual  Meeting of  stockholders  for
calendar years 1997,  1998,  1999,  2000 and 2001. The option price per share is
equal to the  fair  market  value of  common  stock  on the date the  option  is
granted.  An option under the 1997 Director 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 1997: 0% dividend yield;  expected  volatility of
30%; risk-free interest rate of 6.54% and expected life of seven years.

                                       23

<PAGE>

Stock Option Activity Summary
The following table summarizes the Company's stock option plans:
<TABLE>
<CAPTION>
                                              1994 Plan             1995 Plan           1995 Directors Plan     1997 Directors Plan
------------------------------------------------------------------------------------------------------------------------------------
                                                   Weighted                 Weighted               Weighted                Weighted
                                        Shares      Average     Shares       Average    Shares      Average      Shares     Average
                                         Under     Exercise      Under      Exercise     Under      Exercise      Under     Exercise
                                        Option       Price      Option        Price     Option       Price       Option      Price
                                        --------------------------------------------------------------------------------------------
Outstanding at
<S>        <C> <C>                      <C>          <C>        <C>         <C>         <C>         <C>         <C>        <C>
  December 31, 1994 .................   435,838      $0.26           --         --          --          --          --         --
  Granted ...........................   245,794       1.10      439,800     $12.00      21,000      $12.00          --         --
  Exercised .........................   (37,977)      0.86           --         --          --          --          --         --
  Forfeited .........................   (16,099)      0.82           --         --          --          --          --         --
                                        -------      -----      -------     ------      ------      ------      ------     ------
Outstanding at
  December 31, 1995 .................   627,556      $0.57      439,800     $12.00      21,000      $12.00          --         --
  Granted ...........................        --         --      131,300      19.87      10,000       22.75          --         --
  Exercised .........................   (52,558)      0.33      (39,501)     12.00          --          --          --         --
  Forfeited .........................        --         --           --         --          --          --          --         --
                                        -------      -----      -------     ------      ------      ------      ------     ------
Outstanding at
  December 31, 1996 .................   574,998      $0.59      531,599     $13.94      31,000      $15.47          --         --
  Granted ...........................        --         --      106,500      25.68          --          --      10,000     $25.50
  Exercised .........................   (70,565)      0.55      (50,115)     12.55          --          --          --         --
  Forfeited .........................   (17,937)      0.79       (2,833)     18.31          --          --          --         --
                                        -------      -----      -------     ------      ------      ------      ------     ------
Outstanding at
  December 31, 1997 .................   486,496      $0.59      585,151     $16.18      31,000      $15.47      10,000     $25.50
                                        -------      -----      -------     ------      ------      ------      ------     ------
Options exercisable at:
  December 31, 1995 .................   627,556                      --                     --                      --
  December 31, 1996 .................   574,998                 120,280                  7,003                      --
  December 31, 1997 .................   486,496                 255,420                 19,002                      --

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                      --
    December 31, 1997 ...............        --                   11.01                     --                  $12.00
</TABLE>

The following  table  summarizes  information  about the Company's stock options
outstanding at December 31, 1997:
<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            486,496                  6.45                   $ 0.59                  486,496              $ 0.59
           12.00            373,794                  7.88                    12.00                  228,794               12.00
    18.00- 22.75            252,357                  9.32                    22.65                   45,628               20.28
                          ---------                                                                 -------
                          1,112,647                                                                 760,918
                          ---------                                                                 -------
</TABLE>

                                       24

<PAGE>

(9) RENTAL COMMITMENTS

The Company  leases  certain  warehouse and showroom  facilities  and equipment.
Future  minimum  lease  payments  at December  31, 1997 under all  noncancelable
operating leases are as follows (in thousands):

1998 ..............................................     $16,507
1999 ..............................................      15,698
2000 ..............................................      13,410
2001 ..............................................      11,594
2002 ..............................................       9,636
Thereafter ........................................      26,729
                                                         ------
  Total minimum lease payments ....................      93,574
Less sublease rentals .............................       1,929
                                                         ------
  Net minimum operating lease payments ............     $91,645
                                                        =======

Rental  expense,   net  of  sublease  income,   was  approximately   $9,177,000,
$12,145,000  and  $15,964,000  for the years ended  December 31, 1995,  1996 and
1997,  respectively,   (including  approximately   $1,826,000,   $2,460,000  and
$3,880,000 for short-term vehicle leases).


(10) ACCRUED EXPENSES

Accrued expenses are comprised of (in thousands):

                                      December 31,   December 31,
                                          1996           1997
                                      ---------------------------
Accrued salaries, wages
  and incentives ..................... $ 6,301        $ 7,478
Accrued interest .....................   2,078          2,065
Accrued vacation .....................   1,871          2,113
Reserves for unfavorable operating
  lease and duplicate facilities ....    8,981          7,073
Accrued property, payroll, sales
  and use taxes .....................    1,971          2,350
Acquisition holdbacks ...............      846            887
Other accrued expenses ..............    5,443          5,970
                                         -----          -----
                                       $27,491        $27,936
                                       =======        =======


(11) WARRANTS TO PURCHASE COMMON STOCK

At  December  31, 1996 and 1997,  908,410  and  433,800  warrants to purchase an
aggregate  of 148,070  and 75,915  shares of Common  Stock,  respectively,  were
outstanding.  For the years  ended  December  31, 1996 and 1997,  1,853,790  and
474,610 warrants were exercised for an aggregate of 302,164 and 78,504 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.


(12) 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 to the net  assets  acquired,
goodwill of  approximately  $14,220,000  was  recorded.  Such  goodwill is being
amortized on a  straight-line  basis over 40 years.  The purchase price has been
allocated as follows (in thousands):
<PAGE>

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.

                                       25

<PAGE>
                                       Year ended      Year ended
                                       December 31,    December 31,
                                           1995            1996
                                 ----------------------------------------
                                 (in thousands, except per share amounts)
Total revenue ........................  $209,814        $244,069
Income before extraordinary loss .....     7,176          16,432
Earnings before extraordinary loss
  per common share .................... $   1.40        $   1.44
Weighted average number of shares
  used in computation .................    6,688          11,416
Earnings before extraordinary
  loss per common share--
  assuming dilution ................... $   1.24        $   1.35
Weighted average number of shares
  used in computation--
  assuming dilution ...................    7,578          12,144

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 to the net
assets  acquired,  goodwill  of  approximately  $6,183,000  was  recorded.  Such
goodwill is being amortized on a straight-line basis over 40 years.

Other Acquisitions
In 1997, the Company acquired certain assets of Alco Trade Show Services,  Delta
Furniture Rentals,  Inc. and Integrity  Furniture Inc. In addition,  the Company
acquired the stock of Levitt  Investment  Company and the McGregor  Corporation.
Each  of  these   transactions   were  accounted  for  as  a  purchase  business
combination.  Based on the  allocation  of the purchase  price to the net assets
acquired,  a total of approximately  $10,092,000 of goodwill was recorded.  Such
goodwill is being amortized on a straight line basis over 20-40 years.

(13) EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

                                  Year ended     Year ended     Year ended
                                 December 31,   December 31,   December 31,
                                     1995           1996           1997
                                     ----           ----           ----
                                  (in thousands, except per share amounts)
Income before
  extraordinary loss .............  $6,218        $15,936        $22,326
Increase in earnings, net
  of taxes, resulting from
  the Exchange of Common
  Stock (note 1) .................   2,200             --             --
                                     -----         ------         ------
Income applicable to common
  shares before
  extraordinary loss .............   8,418         15,936         22,326
Extraordinary loss,
  net of taxes ...................   4,143             --             --
                                     -----         ------         ------
Net income applicable to
  common shares ..................  $4,275        $15,936        $22,326
                                    ======        =======        =======
Weighted average shares
  outstanding ....................   6,688         11,416         12,804
Effect of dilutive securities:
  Stock options ..................     527            457            489
  Warrants .......................     363            271             85
                                     -----         ------         ------
Weighted average shares and
  assumed conversions ............   7,578         12,144         13,378
                                     =====         ======         ======
Earnings per common share
  before extraordinary loss ...... $  1.26       $   1.40       $   1.74
Extraordinary loss
  per share ......................    0.62             --             --
                                     -----         ------         ------
Earnings per common share ........ $  0.64       $   1.40       $   1.74
                                   =======       ========       ========
Earnings per common share
  before extraordinary loss--
  assuming dilution .............. $  1.11       $   1.31       $   1.67
Extraordinary loss per share--
  assuming dilution .............. $  0.55             --             --
                                     -----         ------         ------
Earnings per common share--
  assuming dilution .............. $  0.56       $   1.31       $   1.67
                                   =======       ========       ========

                                       26
<PAGE>

(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                 Three months ended
                                                            ------------------------------------------------------------------
                                                            March 31,         June 30,         September 30,      December 31,
                                                              1997              1997               1997               1997
                                                              ----              ----               ----               ----
                                                                       (in thousands, except per share amounts)
<S>                                                         <C>               <C>                <C>                <C>
Furniture rental revenue ................................   $55,553           $59,679            $61,135            $60,845
Furniture sales revenue .................................    11,748            14,802             12,253             11,203
Operating earnings ......................................    10,411            11,743             12,103             12,051
Income before income taxes ..............................     8,426             9,490              9,978             10,040
Net income ..............................................     4,930             5,607              5,876              5,913
Earnings per common share ...............................   $   .39           $   .44            $   .46            $   .46
Earnings per common share--assuming dilution ............   $   .37           $   .42            $   .44            $   .44


                                                                                 Three months ended
                                                            ------------------------------------------------------------------
                                                            March 31,         June 30,         September 30,      December 31,
                                                              1996              1996               1996               1996
                                                              ----              ----               ----               ----
                                                                       (in thousands, except per share amounts)
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 ................................  $   .30           $   .33            $   .38            $   .37
Earnings per common share--assuming dilution .............  $   .28           $   .31            $   .36            $   .35

</TABLE>

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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP


Washington, D.C.
February 13, 1998

                                       27

<PAGE>

  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") trades
on the New York Stock Exchange under the symbol "CBZ".  The following table sets
forth,  for the  period  indicated,  the high and low  sales  price per share of
Common Stock.


                                    1996                   1997
                              ------------------------------------------
                               High      Low         High        Low
                              ------------------------------------------
1st Quarter ................  19 1/2    15 3/4      25 1/2      20 3/4
2nd Quarter ................  19 1/2    17          30 14/16    21 1/4
3rd Quarter ................  20 3/4    18 1/4      43 1/4      27 13/16
4th Quarter ................  22 7/8    19 3/4      41 6/16     32 7/16


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  restrict the ability of CFR to make
advances and pay dividends to the Company.


HOLDERS

As of March 11, 1998, the Company had approximately 222 holders of record of its
Common  Stock.  The  Company  believes  there are in excess of 1,400  beneficial
owners of its Common Stock.


CORT would like to express its appreciation to the following  employees pictured
in the Annual Report:

Rick Bell           Dwayne Elam         Sue Leslie          Britt Moser
Tony Bowden         Stacy Ford          Tom Mattingly       James Nichols
Yleana Cordoves     Brian Jones         Crystal McCormick   Bill Plasencia
Anthony D'Ali       Saundra Howell      Philip Miller       Sophie Ou
Lynda Decker        Peggy Krajewski     Charles Mitchell    Teri Waller


                                       28

<PAGE>

<TABLE>
<CAPTION>

CORT BUSINESS SERVICES CORPORATION


<S>                        <C>
DIRECTORS

Keith E. Alessi
Chairman, President & CEO
TeleSpectrum Worldwide Inc.

Paul N. Arnold
President & Chief
Executive Officer of
CORT Business
Services Corporation

Bruce C. Bruckmann         Officers of the Company: Front Row (left to right):  Victoria L. Stiles, Michael
Managing Director of       G. Connors,  Frances Ann Ziemniak;  Second Row (left to right):  Paul N. Arnold,
Bruckmann, Rosser,         Frank Martini,  Lloyd Lenson; Back Row (left to right): Charles M. Egan, Kenneth
Sherrill & Co., Inc.       W. Hemm, Anthony J. Bellerdine, Steven D. Jobes; Not pictured: Maureen C. Thune.

Michael A. Delaney
Managing Director of Citicorp
Venture Capital Ltd.

Charles M. Egan
Chairman of CORT Business
Services Corporation

Gregory B. Maffei
Chief Financial Officer
of Microsoft Corporation

James A. Urry
Vice President of Citicorp
Venture Capital Ltd.
</TABLE>

<TABLE>
<CAPTION>


OFFICERS                                   CORPORATE  DIRECTORY

<S>                                        <C>                                 <C>
Paul N. Arnold
President & Chief Executive Officer        CORPORATE LEGAL COUNSEL             CORPORATE HEADQUARTERS
                                           Dechert Price & Rhoads              4401 Fair Lakes Court
Anthony J. Bellerdine                      Philadelphia, PA                    Suite 300
Group Vice President                                                           Fairfax, VA 22033
                                           INDEPENDENT ACCOUNTANTS             703-968-8500
Michael G. Connors                         KPMG Peat Marwick LLP
Vice President--Real Estate                Washington, DC                      STOCKHOLDER INQUIRIES
                                                                               A copy of the annual report as filed
Charles M. Egan                            ANNUAL MEETING                      with the Securities and Exchange
Chairman                                   CORT Business Services              Commission on Form 10-K is
                                           Corporation's Annual Meeting of     available without charge, exclusive of
Kenneth W. Hemm                            Stockholders will be held on        exhibits, upon written request to:
Group Vice President                       Tuesday, May 12, 1998 at 2:00 p.m.    Vice President--Finance
                                           at the Holiday Inn Fair Oaks,         CORT Business Services Corporation
Steven D. Jobes                            11787 Lee Jackson Highway,            4401 Fair Lakes Court
Vice President--Marketing,                 Fairfax, VA 22033.                    Suite 300
Merchandising, Sales &                                                           Fairfax, VA 22033
National Accounts                          REGISTRAR AND TRANSFER AGENT          FAX: 703-968-8503
                                           American Stock Transfer &
Lloyd Lenson                               Trust Company
Group Vice President                       40 Wall Street                      Designed by Curran & Connors, Inc.
                                           New York, NY 10005
Frank Martini
Group Vice President

Victoria L. Stiles
Vice President--Human Resources &
Corporate Risk Management

Maureen C. Thune
Controller & Assistant Secretary

Frances  Ann  Ziemniak  Vice  President--Finance,
Chief  Financial  Officer and Secretary
</TABLE>


<PAGE>


America's
National Furniture
Rental  Company\tm


One hundred nine showrooms serving the following metropolitan areas:

<TABLE>
<CAPTION>
<S>                               <C>                           <C>                             <C>
o Birmingham, AL                  o Orlando, FL                 o St. Paul, MN                  o Portland, OR
o Huntsville, AL                  o Pensacola, FL               o St. Louis, MO                 o Philadelphia, PA
o Little Rock, AR                 o Tampa, FL                   o Charlotte, NC                 o Pittsburgh, PA
o Phoenix, AZ                     o Atlanta, GA                 o Durham, NC                    o Memphis, TN
o Los Angeles, CA                 o Chicago, IL                 o Raleigh, NC                   o Nashville, TN
o Orange County, CA               o Indianapolis, IN            o Newark, NJ                    o Austin, TX
o Sacramento, CA                  o Kansas City, KS             o Albuquerque, NM               o Corpus Christi, TX
o San Diego, CA                   o Lexington, KY               o Las Vegas, NV                 o Dallas, TX
o San Francisco, CA               o Louisville, KY              o New York, NY                  o El Paso, TX
o San Jose, CA                    o Baton Rouge, LA             o Westchester County, NY        o Ft. Worth, TX
o Denver, CO                      o Lafayette, LA               o Cincinnati, OH                o Houston, TX
o Washington, DC                  o New Orleans, LA             o Cleveland, OH                 o San Antonio, TX
o Wilmington, DE                  o Boston, MA                  o Columbus, OH                  o Salt Lake City, UT
o Clearwater, FL                  o Baltimore, MD               o Dayton, OH                    o Richmond, VA
o Ft. Lauderdale, FL              o Detroit, MI                 o Oklahoma City, OK             o Virginia Beach, VA
o Jacksonville, FL                o Minneapolis, MN             o Tulsa, OK                     o Seattle, WA
o Miami, FL
</TABLE>


            4401 Fair Lakes Court, Suite 300, Fairfax, Virginia 22033
                              Phone: 1-800-962-CORT
                    Internet Address: http://www.CORTI.com