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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               
                            AMENDMENT NO. 1 TO     
                                   FORM 10-K
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934
 
  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF THE 1934
 
                        COMMISSION FILE NUMBER: 0-14338
 
                               ----------------
 
                              U.S. RENTALS, INC.
 
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<S>                                            <C>
                  DELAWARE                                       94-3061974
        (STATE OR OTHER JURISDICTION                          (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
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             1581 CUMMINS DR. SUITE 155, MODESTO CALIFORNIA 95358
                                (209) 544-9000
 
                               ----------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                         COMMON STOCK, $0.01 PAR VALUE
                               (TITLE OF CLASS)
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
 
                               ----------------
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 19,
1998 as reported on the New York Stock Exchange, was approximately
$260,218,425. Shares of Common Stock held by each officer and director and by
each person who 5% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
 
  As of March 19, 1998, Registrant had outstanding 30,759,975 shares of Common
Stock.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be held May 7, 1998 are incorporated by reference in Part III.
 
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                             EXPLANATORY NOTE     
   
  This amendment no. 1 to the Company's report on Form 10-K for its fiscal
year ended December 31, 1997, is being filed to delete certain proforma
information presented in item 6 for prior years, Selected Financial Data, on
page 9 of the report, to provide additional information on tax rates and year
2000 issues under Management's Discussion and Analysis of Financial Condition
and Results of Operations and delete certain financial data presented in Part
IV page F-3.     
   
  The information presented in item 6, Selected Financial Data, under the 1996
column for proforma data has been removed. Additional information to the
Income Taxes narrative under the 1997 Compared to 1996 information within
Management's Discussion and Analysis of Financial Condition and Results of
Operations was added to describe the actual effective income tax rate of 82.3%
for 1997. Information concerning year 2000 issues was also added under the
1997 compared to 1996 information within Management's Discussion and Analysis
of Financial Condition and Results of Operations. In addition to the above,
selected proforma income and income per share data in Part IV page F-3 has
been removed.     
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                               TABLE OF CONTENTS
 
                               ITEM OF FORM 10-K
 
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                                                                            ----
 
                                     PART I
 
 <C>      <S>                                                               <C>
 ITEM 1.  BUSINESS.......................................................     1
 ITEM 2.  LOCATIONS AND PROPERTIES.......................................     7
 ITEM 3.  LEGAL PROCEEDINGS..............................................     8
 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............     8
 
                                    PART II
 
 ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS...........................................     8
 ITEM 6.  SELECTED FINANCIAL DATA........................................     9
 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.........................................    10
 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................    13
 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE..........................................    13
 
                                    PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............    14
 ITEM 11. EXECUTIVE COMPENSATION.........................................    15
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.    15
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................    15
 
                                    PART IV
 
 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS FORM 8-K...    15
 SIGNATURES...............................................................   17
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ITEM 1. BUSINESS
 
GENERAL
 
  U.S. Rentals, Inc., a Delaware corporation ("U.S. Rentals" or the
"Company"), is the second largest equipment rental company in the United
States and the largest in the West based on 1997 rental revenues. The Company
currently operates 124 Profit Centers in 22 states and in 1997 generated an
average of approximately 130,000 rental contracts per month from a diverse
base of customers including commercial and residential construction,
industrial, and homeowner customers. More than 280,000 customers did business
with the Company in 1997. U.S. Rentals owns more than 90,000 pieces of rental
equipment, comprised of over 600 equipment categories, including aerial work
platforms, forklifts, paving and concrete equipment, compaction equipment, air
compressors, hand tools, plumbing, landscaping and gardening equipment.
Management believes that the Company's fleet, which had a weighted average age
of approximately 23 months and an original equipment cost of approximately
$580 million at December 31, 1997, is one of the most comprehensive and well-
maintained equipment rental fleets in the industry. U.S. Rentals also sells
new equipment manufactured by nationally known companies, used equipment from
its rental fleet, and rental-related merchandise, parts and supplies.
 
  The Company's strategic objective is to continue to grow profitably in both
existing and new markets by acquiring rental yards, opening start-up rental
yards, and expanding its equipment fleet at existing locations. U.S. Rentals
routinely evaluates attractive markets for expansion where a leading position
can be created by acquiring an existing business or opening a new rental yard.
The Company has grown internally through the expansion of its equipment fleet
at existing locations and through the integration of 44 start-up and acquired
equipment rental yards since January 1997. As a result of the Company's
strategy, total revenues increased to $424.7 million in 1997 from $305.8
million in 1996. During the same period, operating income before depreciation
and amortization and a one-time charge for the termination cost of deferred
compensation agreements with certain employees increased to $144.3 million
from $102.8 million in 1996.
 
  Certain statements identified by words such as "will," "may," "should,"
"expect," "anticipate," "estimates," or "continue," contained in this Report
under "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements
concerning the Company's operations, economic performance and financial
condition. See Risk Factors in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of how actual
results might differ from the forward-looking statements.
 
INDUSTRY
 
  The equipment rental industry serves a wide variety of commercial and
residential construction, industrial and homeowner customers. Equipment
available for rent ranges from small hand tools costing less than $100 to
large earth-moving equipment costing over $200,000. Management believes that
the continued growth in the rental industry reflects, in part, increased
outsourcing trends by commercial and industrial construction customers that
increasingly seek to reduce their capital invested in equipment, and to reduce
the costs associated with maintaining and servicing such equipment. While
equipment users traditionally have rented equipment for specific purposes,
such as supplementing capacity during peak periods and in connection with
special projects, the convenience and cost-saving factors of utilizing rental
equipment have encouraged customers to look to suppliers such as USRentals as
ongoing, comprehensive sources of equipment. Management believes that demand
for rental equipment by the commercial and industrial segments will continue
to increase as these customers continue to outsource non-core operations.
 
  The equipment rental industry is highly fragmented and primarily consists of
a large number of relatively small, independent businesses serving discrete
local markets and a small number of multi-yard regional and multi-regional
operators. Management believes that an estimated 85% of the approximately
12,000 equipment rental operators in the United States have fewer than five
locations and, therefore, believes the equipment rental industry offers
substantial consolidation opportunities for large, well-capitalized rental
companies such as
 
                                       1
<PAGE>
 
U.S. Rentals. Relative to smaller competitors, multi-regional operators such
as the Company benefit from several competitive advantages, including access
to capital, the ability to offer a broad range of modern equipment, purchasing
power with equipment suppliers, sophisticated management information systems,
national brand identity and the ability to service national accounts. In
addition, management believes multi-regional operators such as the Company are
less sensitive to local economic downturns.
 
  The growth of the industry is, in fact, one of the prime reasons for its
consolidation. Industry observers estimate there are over 12,000 equipment
rental business in the U.S. However, only an estimated 8% of total industry
revenues are generated by the 10 largest companies (U.S. Rentals ranks second)
and the 100 largest generate just 16% of the $20 billion total. Yet, as the
demand for more and newer equipment increases, the remaining firms face
mounting pressure to invest in bigger, newer, and more expensive fleets. At
the same time, they lack the purchasing power that the big firms are able to
garner through volume discounts. Many are family businesses whose owners' only
exit strategy is to sell their businesses or watch them disappear. The end
result has been a consolidation that has typified many other industries.
 
CUSTOMERS
 
  In 1997, U.S. Rentals had more than 280,000 active customers while
generating an average of 130,000 rental contracts per month from a diverse
customer base ranging from Fortune 500 companies to small contractors and
homeowners. During 1997, no one customer accounted for more than 1% of the
Company's total revenues, and the top 10 customers represented less than 4.5%
of total revenues. Customers look to U.S. Rentals as an ongoing, comprehensive
source of rental equipment because of the economic advantages and convenience
of renting, as well as the high costs associated with equipment ownership. The
Company classifies its customer base into the following categories: (i)
commercial and residential construction, including contractors; (ii)
industrial, including manufacturers, petrochemical facilities, chemical
companies, paper mills, and public utilities; and (iii) homeowners and others.
In addition to maintaining its historically strong relationships with small
and medium-sized customers, the Company is increasing its emphasis on larger
national and multi-regional accounts. Management estimates that in 1997,
commercial and residential construction, industrial and homeowner and other
customers accounted for approximately 56%, 28% and 16%, respectively, of the
Company's total revenues. Further, U.S. Rentals offers its customers "one-stop
shopping" through the sale of rental-related merchandise, parts and supplies,
sales of new and used equipment and maintenance and delivery services.
 
  Commercial and Residential Construction. U.S. Rentals' commercial and
residential construction customers include national and regional contractors
and subcontractors involved in commercial and residential construction
projects such as residential developments, apartment buildings, schools,
hospitals, airports, roads, bridges and highways, chemical plants and other
manufacturing facilities. U.S. Rentals' commercial construction customers
range from Fortune 500 companies to small businesses.
 
  Industrial. The Company's industrial customers, many of which operate 24
hours per day, utilize U.S. Rentals to outsource equipment requirements to
reduce their capital investment and minimize the ongoing maintenance, repair
and storage costs associated with equipment ownership. Management believes
that the Company is well-positioned to take advantage of the increasing trend
among customers to outsource equipment needs. Generally, U.S. Rentals'
industrial customers tend to rent for longer periods of time than commercial
and residential construction customers, contractors or homeowners. While
historically not a primary focus, the Company recently increased emphasis on
national and multi-regional accounts that should enhance its ability to
provide an ongoing, comprehensive supply of equipment to industrial customers.
 
  Homeowners and Others. U.S. Rentals rents landscaping, plumbing, remodeling
and home improvement equipment and tools to homeowners and other customers.
These customers value the convenience of U.S. Rentals' seven-days-a-week
operating hours, pick up and delivery service and flexible rental terms.
Rentals to homeowners are often for periods as short as two hours and provide
higher gross margins relative to other customer segments. Generally, the
Company's operating locations are highly visible and well-located. The
 
                                       2
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Company believes that its comprehensive and well-maintained rental fleet and
the Company's brand name recognition provide a significant competitive
advantage in attracting the homeowner segment of the market.
 
PRODUCTS AND SERVICES
 
  In 1997, equipment rental revenue together with rental-related revenue such
as repair services, delivery and damage waiver income accounted for
approximately 80.2% of the Company's total revenues. U.S. Rentals also acts as
a distributor of new equipment on behalf of certain nationally known equipment
manufacturers. Revenues from the sale of parts, merchandise and new equipment
accounted for approximately 10.7% of U.S. Rentals' total revenues in 1997.
Approximately 9.1% of U.S. Rentals' 1997 total revenues was from the sale of
used rental equipment.
 
  Rental Equipment. U.S. Rentals rents over 600 different types of equipment,
and management believes that the Company's rental fleet, which consists of
more than 90,000 pieces of equipment, is one of the most comprehensive and
well-maintained fleets in the equipment rental industry. The original
equipment cost of the Company's rental fleet was approximately $580 million as
of December 31, 1997.
 
  Five categories of equipment represented approximately 78.9% of U.S.
Rentals' total rental equipment fleet (based on original equipment cost) as of
December 31, 1997: (i) earth-moving equipment (22.3%), (ii) aerial work
platforms (21.8%), (iii) forklifts (16.4%), (iv) trucks (11.8%), and (v)
compaction rollers (6.6%). The mix of rental equipment at each of U.S.
Rentals' Profit Centers is tailored to meet the demands of the local customer
base.
 
  U.S. Rentals seeks to maintain a modern, efficient rental fleet through
regular sales of used rental equipment and ongoing capital investment in new
rental equipment. As of December 31, 1997, the weighted average age of the
Company's rental equipment fleet was approximately 23 months. In addition,
management believes U.S. Rentals has one of the most advanced preventive
maintenance programs in the equipment rental industry. This program extends
the useful life of the Company's rental equipment, typically resulting in
higher resale prices. U.S. Rentals also generates revenues from maintenance
service for its customers that own equipment and from delivery charges,
particularly for larger pieces of equipment.
 
  Sales of Used Equipment. U.S. Rentals routinely sells used rental equipment
to adjust the size and composition of its rental fleet to changing market
conditions and as part of its ongoing commitment to maintain a new, top
quality fleet. The Company achieves favorable sales prices for its used
equipment due to its strong preventive maintenance program and its practice of
selling used equipment before it becomes irreparable or obsolete. The
incentives created by the Company's profit sharing program motivate Profit
Center managers to optimize the timing of sales of used rental equipment by
taking into account maintenance costs, rental demand patterns and resale
prices. The Company sells used equipment to its existing rental customers, as
well as to domestic and international buyers of used equipment.
 
  Sales of Parts and Merchandise. During the course of 1997, many of the
Company's facilities were expanded and remodeled to enhance the sale of
merchandise and new equipment. Improved showrooms, averaging 2,500 square feet
in size, now include as many as 500 different types of products--ranging from
work gloves and hardhats, to diesel air compressors and portable generators.
As a result, the Company's customers are now able to buy more supplies while
renting their equipment, thereby saving time and increasing their
productivity. This sales activity allows the Company to attract and retain
customers by offering the convenience of "one-stop shopping."
 
  Sales of New Equipment. During the year, the Company also expanded its new
equipment distribution activities. The Company is a dealer for certain
equipment manufacturers, including Genie Industries, Snorkel and Sky Jack
(aerial work platforms), Gehl (rough terrain forklifts and skid-steer
loaders), LeRoi and Sullair (air compressors), and Multiquip and Ingersoll
Rand (earth compaction equipment and portable generators). U.S. Rentals is
also the exclusive distributor for certain manufacturers in several of its
markets. The Company
 
                                       3
<PAGE>
 
believes that the volume of its equipment purchases creates significant
purchasing power with suppliers, which leads to favorable prices and terms on
equipment purchased for its rental fleet and for sale as new equipment. The
Company's ability to sell new equipment offers flexibility to its customers
while enhancing U.S. Rentals' customer relations.
 
OPERATIONS
 
  The Company's equipment rental yards occupy an average of approximately 2.4
acres and include: (i) a customer service center and showroom displaying
selected rental equipment, new equipment offered for sale and related
merchandise; (ii) an equipment service area; and (iii) storage facilities for
equipment requiring protection from inclement weather. Each Profit Center is
staffed by an average of approximately 22 full-time employees and two part-
time employees, including a manager, assistant manager, sales assistants, back
office clerks, truck drivers, mechanics and yard personnel. Each equipment
rental yard offers a broad range of equipment for rent, with the actual
equipment mix tailored to meet the anticipated needs of the customers in each
location. The rental yard employees' knowledge of the equipment enables them
to recommend the best equipment for a customer's particular application. The
Company's yards are open seven days a week and provide customers with 24-hour
maintenance, repair and support services, including service at the customer's
job site. Each Profit Center Manager is responsible for every aspect of the
yard's operation, including establishing rental rates, selecting equipment,
and determining employee compensation at such location. The Company's Profit
Center Managers have an average of 16 years of rental experience in the
industry.
 
  The Company operates all of its Profit Centers under the name "U.S.
Rentals", other than two Profit Centers that are operated under the name
Contractors Equipment Rental and one Profit Center that is operated under the
name U.S. HiReach.
 
SALES, MARKETING AND ADVERTISING
 
  U.S. Rentals strives to create a partnership with each customer in order to
satisfy all the customer's equipment needs. As a result of the Company's
innovative profit sharing program, employees are motivated to know the
customers in their markets and tailor the equipment fleet to local demand
patterns. Since U.S. Rentals believes that many customers choose to rent in
order to reduce their capital investment and maintenance costs and to maximize
flexibility, the Company offers flexible rental terms to its customers.
Customers may rent equipment by the hour, day, week or month, with the
periodic cost declining as the duration of the rental term increases. The
Company, through its eleven regional credit offices, offers credit to its
commercial and residential construction and industrial customers.
 
  The Company markets its products and value-added services locally primarily
through its sales force that consisted of approximately 375 field-based
salespersons and approximately 1,590 store-based customer service
representatives as of December 31, 1997. The Company's sales force is
knowledgeable about all of U.S. Rentals' services and products, including the
rental of equipment, sales of new and used equipment, sales of parts and
merchandise, and U.S. Rentals' value-added services, including equipment
training, delivery and maintenance. The field-based sales force calls on
contractors' offices and job sites and industrial facilities, assisting
customers in planning for their equipment requirements. U.S. Rentals also
provides its sales force with extensive training, including frequent in-house
training by supplier representatives about the operating features and
maintenance requirements of new equipment. The Company's sales force does not
earn commissions on equipment rentals; instead, they participate in the
Company's profit sharing program along with employees at all levels of the
Company. Management believes that the Company's sales personnel, through the
Company's innovative profit sharing program, are among the most highly
compensated in the industry.
 
  U.S. Rentals' National Accounts Program is dedicated to marketing to
customers with a multi-regional or national presence. The National Accounts
Program supplements the efforts of the Profit Centers, which deal directly
with management of the local facilities of multi-regional and national firms.
National Accounts sales personnel call on the corporate headquarters of U.S.
Rentals' large commercial construction and industrial
 
                                       4
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customers in order to expand existing business relationships to include
additional facilities and construction sites. The National Accounts Program
simplifies billing and pricing for large customers while allowing their local
representatives to continue to deal primarily with local Profit Centers.
 
  The Company promotes its services primarily in the telephone directories in
the markets it serves, as well as by direct mail, and advertising in
newspapers and on local television and radio. Each Profit Center Manager
determines the frequency and type of advertising in the local market. Profit
Centers also host open houses, customer appreciation events and other special
promotional events. The Company also selectively advertises in national
industry publications and trade journals, and provides a toll-free telephone
number (1-800-US-RENTS) that automatically connects each caller to the
Company's closest equipment rental yard. In addition to its principal
marketing methods, the Company has an Internet web page (www.usrentals.com)
that describes the Company's locations, product lines and used equipment
available for sale.
 
PURCHASING AND SUPPLIERS
 
  The Company's size and stature in the equipment rental industry, as well as
its strong and long-standing vendor relationships, enable it to purchase
equipment directly from manufacturers at what management believes are among
the best prices and terms in the industry. The Company employs a Director of
Vendor Relations to negotiate favorable terms with preferred vendors. However,
individual Profit Center Managers operate independently in evaluating and
selecting additional fleet based on local demand. U.S. Rentals has developed
strong relationships with many leading equipment manufacturers, which has led
to exclusive distribution rights for certain lines of equipment in several of
its markets. Management believes that the favorable pricing, service, training
and information that U.S. Rentals receives from its suppliers represent a
significant competitive advantage for the Company. During 1997, the Company
purchased approximately $246.6 million of rental equipment, of which
approximately 51.9% was obtained from its top 10 suppliers. No single supplier
accounted for more than 13.8% of the Company's total purchases. U.S. Rentals
believes it could readily replace any of its existing suppliers if it were to
lose its ability to purchase equipment from such supplier.
 
INFORMATION SYSTEMS
 
  U.S. Rentals' proprietary POS is used for the day-to-day management of its
more than 90,000 pieces of rental equipment. The data generated from each
Profit Center's POS system is uploaded daily to the Company's mainframe
computer at its headquarters. The Company's proprietary management information
systems, including the Company's POS system, allow management and Profit
Center managers to review all aspects of each Profit Center's business,
including profitability, equipment utilization rates, rental rates, number of
contracts generated and collection of receivables. Management at all levels
use these systems to generate rental contracts, track equipment usage, report
customer credit histories, compile accounts receivable aging reports and
monitor monthly profitability. Access to such data assists management in
closely monitoring and quickly reacting to the ongoing operations at each
Profit Center. Additionally, the statements generated by the Company's
management information systems are consistently reviewed by corporate,
regional and divisional managers, as well as by each Profit Center manager, to
monitor profit sharing earnings and detect areas for improvement at each
location. This type of decentralized processing, with centralized management
information system reporting, provides for timely and effective reporting of
information for auditing and control purposes. U.S. Rentals' data processing
center, located at its headquarters in Modesto, California, utilizes a Hewlett
Packard mainframe computer for its flexibility and capacity to accommodate the
Company's future systems needs. The Company's computer system is updated and
maintained by in-house staff of systems development professionals, who also
developed U.S. Rentals' customized and proprietary management information
systems software. The Company's computer systems are Year 2000 compliant and
should enable the Company to absorb a doubling of the network in the years
ahead.
 
 
 
                                       5
<PAGE>
 
COMPETITION
 
  The equipment rental industry is highly fragmented and competitive. Industry
observers estimate there are over 12,000 equipment rental businesses in the
U.S. However, only approximately 8% of total estimated industry revenues of
$20 billion are generated by the 10 largest companies and the 100 largest
generate just 16%. Each market in which U.S. Rentals operates is served by
numerous competitors, ranging from national and multi-regional companies such
as Hertz Equipment Rental Corporation, Prime Service, Inc., Rental Service
Corporation and United Rentals, Inc., to small, independent businesses with a
limited number of locations. Management believes that participants in the
equipment rental industry compete on the basis of customer relationships,
customer service, breadth and quality of product line and price. In general,
the Company believes that national and multi-regional operators, especially
larger operators such as U.S. Rentals, enjoy substantial competitive
advantages over small, independent rental businesses that cannot afford to
maintain the comprehensive rental equipment fleet and high level of
maintenance and service that U.S. Rentals offers. The Company believes that
its commitment to personalized customer service, highly motivated and
experienced employees, decentralized management structure, proprietary
information systems and the breadth and the quality of its rental fleet enable
it to compete successfully.
 
  As the equipment rental industry consolidates, the Company faces competition
from other large well-financed national and multiregional companies for
acquisition candidates in more markets. The competition makes it more
difficult to find undervalued companies to acquire. The Company intends to
continue its selective approach to acquisitions of essentially solid
businesses at reasonable costs.
 
EMPLOYEES
 
  As of December 31, 1997, U.S. Rentals had a total of 2,817 employees, of
which 552 were salaried and 2,265 were hourly personnel. U.S. Rentals' work
force at 123 of its 124 Profit Centers is not unionized and management
believes that its relationship with both its unionized and non-unionized
employees is excellent. The Company is committed to, and has realized
significant benefits from, its formal employee training programs. Management
believes that this investment in training and safety awareness programs for
employees is a competitive advantage that positions U.S. Rentals to be
responsive to customer needs.
 
MATERIAL PATENTS, LICENSES, FRANCHISES AND CONCESSIONS
 
  The Company does not hold or depend upon any material patent, government
license, franchise or concession, except for the "U.S. Rentals(R)" service
mark, which is registered with the U.S. Patent and Trademark Office.
 
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
 
  The Company's operations are subject to a variety of federal, state and
local laws and regulations governing, among other things, worker safety, air
emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances located on
or in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose such liability
without regard to whether the owner or lessee knew of, or was responsible for,
the presence of such hazardous or toxic substances. There can be no assurance
that the Company's locations have been operated in compliance with
environmental laws and regulations or that future uses of conditions will not
result in the imposition of environmental liability upon the Company or expose
the Company to liability to third parties even if the Company has been
indemnified by third parties against such liabilities. There also can be no
assurance that environmental contamination does not currently exist at any of
the Company's locations from prior activities at such locations or from
neighboring properties. Phase I environmental assessments on some recently
acquired facilities indicated the possibility of releases of hazardous or
toxic substances at those facilities, but the Company has not determined
whether releases actually have occurred or whether remediation will be
 
                                       6
<PAGE>
 
required. Moreover, there can be no assurance that a Phase I environmental
assessment will disclose all environmental contamination located at that site.
The remaining owned and leased facilities were acquired without first
obtaining a Phase I environmental assessment. Environmental contamination has
been found at certain of those facilities, principally in connection with the
removal of underground storage tanks. No assurance can be given that
environmental contamination is not present at the other locations.
 
  The Company dispenses petroleum products from above-ground storage tanks at
a majority of its Profit Centers. The remainder of its Profit Centers dispense
petroleum products from underground storage tanks. The Company maintains an
environmental compliance program that includes the implementation of required
technical and operational activities designed to minimize the potential for
leaks and spills, maintenance of records and the regular testing and
monitoring of tank systems for tightness. There can be no assurance, however,
that these tank systems have been or will at all times remain free from leaks
or that the use of these tanks has not or will not result in spills or other
releases. The Company incurs ongoing expenses associated with the removal of
older underground storage tanks and the performance of appropriate remediation
at certain of its locations. The actual cost of remediating environmental
conditions may be different from that anticipated by the Company due to the
difficulty in estimating such cost and due to potential changes in the status
of legislation and state reimbursement programs. The Company also uses other
hazardous materials in the ordinary course of its business. In addition, the
Company generates and disposes of hazardous waste such as used motor oil,
radiator fluid and solvents, and may be liable under various federal, state
and local laws for environmental contamination at facilities where its waste
is or has been disposed. The Company believes that hazardous substances
currently requiring remediation are present at eight of its facilities. The
Company has applied or is applying for governmental determinations that
remediation has been completed at two locations and is undertaking or
anticipates undertaking remediation at the six other facilities. Management
believes that the Company is also responsible (pursuant to the terms of
certain of its leases) for any required remediation of seven double-walled
underground storage tanks. The Company has reserved approximately $1.1 million
for such remediation and removal of additional underground storage tanks and
associated potential liability. The Company does not believe that costs
associated with such remediation and potential liability will have a material
adverse effect on the Company's results of operations or financial condition.
 
ITEM 2. LOCATIONS AND PROPERTIES.
 
  As of March 20, 1998 the Company operated 124 Profit Centers in the
following 22 states: Alabama (5), Arizona (2), Arkansas (3), California (49),
Florida (15), Georgia (1), Idaho (1), Kansas (2), Louisiana (3), Michigan (1),
Missouri (2), Nebraska (1), Nevada (5), New Mexico (2), North Carolina (1),
Oklahoma (2), Oregon (2),South Carolina (5), Texas (16), Utah (1), Virginia
(4) and Washington (1). U.S. Rentals owns 45 of its Profit Centers and leases
the other 79, as well as its approximately 18,000 square foot headquarters
office in Modesto, California. The Company's leases have terms expiring from
1998 to 2012, with the majority of its leases having multiple five-year
renewal options. The Company also maintains ten credit and other offices which
are leased. The net book value of owned facilities was approximately $19
million at December 31, 1997, and the average annual lease expense on each
leased facility was approximately $61,000 in 1997. Management believes that
none of U.S. Rentals' leased facilities, individually, is material to the
Company's operations. In addition, as of December 31, 1997, U.S. Rentals owned
a fleet of approximately 1,282 non-rental delivery, fleet service and sales
personnel vehicles.
 
 
                                       7
<PAGE>
 
ITEM 3. LEGAL PROCEEDINGS.
 
  The Company is involved in numerous claims and potential claims that have
arisen in the ordinary course of the Company's business. Claims (including
litigation) for property damage, personal injury and death from users of its
equipment and the estates of such users, as well as employee claims relating
to workers' compensation and other employee-related issues, are inherent in
the nature of the Company's business. The Company cannot predict the ultimate
outcome of any of its current claims; however, due to the amount of the
Company's self-insurance reserves and the existence of insurance coverage for
claims between $1 million and $100 million, management does not believe that
any of such claims, either alone or in the aggregate, will have a material
adverse effect on the Company's results of operations or financial condition.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
  No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
 
                                    PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
         MATTERS
 
  The Company's Common Stock is traded on the New York Stock Exchange (NYSE)
under the symbol USR. The following table provides the high and low closing
sales prices of the Common Stock as reported by the NYSE for each quarter of
1997.
 
<TABLE>
<CAPTION>
                                                FIRST    SECOND   THIRD  FOURTH
                                              QUARTER(1) QUARTER QUARTER QUARTER
                                              ---------- ------- ------- -------
     <S>                                      <C>        <C>     <C>     <C>
     High....................................   $20.13   $27.50  $29.31  $27.38
     Low.....................................   $17.00   $15.38  $24.25  $23.13
</TABLE>
--------
(1) Trading commenced February 21, 1997.
 
  The Company has not paid any cash dividends on the Common Stock since its
formation and does not currently intend to declare or pay cash dividends in
the foreseeable future. Future dividend policy will depend on the Company's
earnings, capital requirements, financial condition covenants under the
Company's Credit Facility and other factors considered relevant by the Board
of Directors.
 
 
                                       8
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>   
<CAPTION>
                                         YEARS ENDED DECEMBER 31,
                          ------------------------------------------------------
                             1993       1994       1995       1996       1997
                          ---------- ---------- ---------- ---------- ----------
                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S>                       <C>        <C>        <C>        <C>        <C>
STATEMENT OF INCOME
 DATA:
Revenues................  $  143,582 $  187,758 $  242,847 $  305,837 $  424,693
Income from operations..      12,686     23,786     38,022     42,154     43,591
Income before income
 taxes and extraordinary
 item...................      13,891     22,484     31,092     33,458     35,748
Income tax expense (b)..         405        499        468        374     29,407
                          ---------- ---------- ---------- ---------- ----------
Net income before
 extraordinary item.....      13,486     21,985     30,624     33,084      6,341
Extraordinary item, net
 of tax benefit of $995.         --         --         --         --       1,511
                          ---------- ---------- ---------- ---------- ----------
Net income..............  $   13,486 $   21,985 $   30,624 $   33,084 $    4,830
                          ========== ========== ========== ========== ==========
Basic net income per
 share..................  $     0.65 $     1.06 $     1.48 $     1.59 $     0.17
Diluted net income per
 share..................  $     0.65 $     1.06 $     1.48 $     1.59 $     0.16
Basic weighted average
 shares outstanding.....  20,748,975 20,748,975 20,748,975 20,748,975 29,351,715
Diluted weighted average
 shares outstanding.....  20,748,975 20,748,975 20,748,975 20,748,975 29,843,752
PRO FORMA FOR THE
 RECAPITALIZATION AND
 THE IPO (A):
Pro forma income before
 income taxes...........                                              $   57,935
Pro forma income tax
 expense (b)............                                                  23,290
                                                                      ----------
Pro forma net income....                                              $   34,645
                                                                      ==========
Pro forma net income per
 share..................                                              $     1.13
Shares used in computing
 pro forma net income
 per share..............                                              30,748,975
PRO FORMA TRANSACTIONS:
Termination of deferred
 compensation
 agreements.............                                              $   20,290
Interest expense........                                                   1,897
Non-recurring expenses
 of the Predecessor not
 transferred to the
 Company................                                                     --
                                                                      ----------
                                                                      $   22,187
                                                                      ==========
BALANCE SHEET DATA (AT
 END OF YEAR):
Rental equipment, net...  $   65,606 $  112,563 $  152,848 $  205,982 $  390,598
Total assets............     125,390    187,525    245,184    324,448    585,811
Total debt..............      48,419     84,751    105,696    186,710    220,300
</TABLE>    
--------
   
(a) The pro forma results of operations assume the Recapitalization (as defined
    under Management's Discussion and Analysis of Results of Operations and
    Financial Conditions) and the subsequent initial public offering (IPO)
    occurred on January 1, 1997, along with the following items: (i) one-time
    charge relating to termination of deferred compensation agreements with
    certain employees, (ii) interest expense as a result of reductions
    indebtedness, and (iii) income and expenses from non-operating assets of
    the Predecessor not transferred to the Company. The pro forma operations
    data had been prepared for comparative purposes only and does not purport
    to represent what the Company's actual results of operations would have
    been had the Recapitalization and the subsequent IPO in fact occurred on
    January 1, 1997.     
 
(b) Prior to the IPO and Recapitalization, the Company was an S corporation,
    and accordingly, federal and state taxes were generally paid at the
    shareholder level only. Subsequent to February 26, 1997, the Company is
    subject to federal and state income taxes as a C corporation. Pro forma
    income tax expense is computed as if the Company were taxed as a C
    corporation for all periods presented.
 
 
                                       9
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
GENERAL
 
  The Company's initial public offering ("IPO") was declared effective on
February 20, 1997. Prior to the IPO, the equipment rental business was
operated by Ayr, Inc. (formerly known as USR Holdings, Inc.), a California
corporation (the "Predecessor") that was treated as an S corporation under the
Internal Revenue Code. The Company (as de?ned in the Notes to Financial
Statements) did not have any operations prior to its IPO. Prior to the closing
of the IPO, the Predecessor transferred substantially all of its operating
assets and associated liabilities to the Company in exchange for 20,748,975
shares of common stock of the Company, representing all of the Company's
outstanding capital stock prior to the IPO. The Predecessor retained only non-
operating assets and liabilities, including approximately $25.7 million of
notes receivable from related parties and approximately $24.4 million of notes
payable to related parties. These transactions are referred to as the
"Recapitalization" in this report.
 
  Because the Predecessor elected to be treated as an S corporation, the
Predecessor's sole shareholder paid federal and state taxes on the
Predecessor's taxable income. Therefore, the provision for income taxes prior
to February 26, 1997, reflects only certain state income taxes the Predecessor
was required to pay. Upon the transfer of the assets and liabilities from the
Predecessor to the Company, which is a C corporation, all income generated by
the Company became subject to federal income taxes and applicable state income
taxes, as reflected in the financial information included in this report.
 
RESULTS OF OPERATIONS
 
 1997 Compared to 1996
 
  Revenues. Total revenues for 1997 increased 38.9% to $424.7 million compared
to $305.8 million in 1996. Rental revenue increased 32.2% to $340.5 million or
80.2% of total revenues for 1997, as compared to rental revenue of $257.5
million or 84.2% of total revenues in 1996. Of the $83.0 million increase in
rental revenue, $59.7 million was due primarily to increased demand for
equipment at existing locations. The remaining increase of approximately $23.3
million was the result of adding 43 new operating locations in 1997. Since the
majority of these locations were added in the later part of the year, the
increase in revenue from such locations is expected to be substantially
greater in 1998 than in 1997. Rental revenue as a percentage of total revenue
continues to decrease due to the Company's efforts to take advantage of used
equipment sales opportunities and to enhance its focus on merchandise and new
equipment sales markets. Rental equipment sales increased 57.7% to
$38.8 million or 9.1% of total revenues for 1997 from $24.6 million or 8.1% of
total revenues in 1996 due to increased customer demand, increased sales
effort, and an increase in equipment available for sale. Merchandise and new
equipment sales increased 91.2% for 1997 to $45.3 million or 10.7% of total
revenues as compared to $23.7 million or 7.8% of total revenues in 1996,
primarily due to the increase in the related rental revenue, expansion of
product lines within resale showrooms, as well as a 54% increase in the number
of operating locations during the year.
 
  Gross Profit. Gross profit for 1997 increased 37.5% to $117.7 million from
$85.6 million in 1996. Gross profit from rentals increased 35.1% to $184.1
million for 1997 from $136.3 million in 1996 as a result of higher revenue
volume as described above. Rental gross profit as a percent of rental revenue
increased to 54.1% for 1997 from 52.9% in 1996. This increase as a percentage
of rental revenue was attributable to lower maintenance and depreciation costs
associated with newer equipment acquired to expand the rental fleet. Gross
profit from sales of used rental equipment increased 36.2% to $19.8 million
for 1997 from $14.5 million in 1996 due to increased demand for used
equipment, but decreased as a percent of such revenue due to the mix of sales
toward later model equipment. Gross profit from sales of merchandise and new
equipment increased 89.3% to $11.9 million for 1997 compared to $6.3 million
for 1996 due to the impact of increased rental volume on the sale of
merchandise, a concerted effort to continue to expand product lines and resale
showrooms, and an increase in new equipment sales and customer volume. Gross
profit was also impacted by an increase in direct
 
                                      10
<PAGE>
 
operating expenses for 1997 which increased 37.2% to $98.1 million as compared
to $71.5 million in 1996. The increase reflects staffing and facilities costs
resulting from an increased number of rental yards and other associated costs
necessary to support the increased size of the rental fleet and volume.
 
  Selling, General and Administrative Expense. Selling, general and
administrative expense for 1997 increased 18.5% to $42.6 million compared to
$35.9 million in 1996. The increase was primarily due to higher profit sharing
expense and to a lesser extent advertising, bad debt and liability insurance
costs. As a percentage of total revenue, selling, general and administrative
expenses decreased from 11.7% in 1996 to 10.0% in 1997. This decrease is a
result of efficiencies in operations and realizing certain economies of scale
related to the increase in revenue as described above.
 
  Termination Cost of Deferred Compensation Agreements. This is a one-time
compensation expense related to the termination of the Predecessor's deferred
incentive compensation agreements prior to the IPO in February 1997.
 
  Interest Expense. Interest expense decreased 20.2% to $6.7 million for 1997
from $8.4 million in 1996. The decrease was primarily the result of lower
average debt outstanding during 1997 as compared to 1996 as a result of
repayment of debt from the proceeds of the IPO.
 
  Other Expense, Net. Substantially all other income and expense items for
1997 and 1996 are related to investments and charitable contributions made by
the Predecessor prior to the IPO and are not expected to be incurred by the
Company in the future as a result of the Recapitalization.
          
  Income Taxes. Prior to the Recapitalization, the Company was taxed as an S
corporation for federal and state purposes. Income tax expense (benefit) was
approximately 1.5% of pre-tax income (loss) for 1996 and the period prior to
the Recapitalization in 1997. In connection with the Recapitalization in
February 1997, the Company recorded a one-time $7.5 million charge to reflect
the deferred tax liability of the Company based on statutory federal and state
rates for a C corporation. This charge represented 21.0% of pre-tax income for
1997. In addition, the benefit with respect to losses incurred prior to the
Recapitalization were computed as the S corporation tax rates rather than the
C corporation rates. This differential in tax benefit computed using the S
corporation rates rather than the C corporation rates represented 21.1% of
pre-tax income for 1997. Subsequent to the Recapitalization, the Company was
taxed as a C corporation resulting in an effective rate of 40.2%.     
 
 1996 Compared to 1995
 
  Revenues. Total revenues in 1996 increased 25.9% to $305.8 million from
$242.8 million in 1995. Rental revenue in 1996 increased 19.8% to $257.5
million or 84.2% of total revenues, as compared to rental revenue of $214.8
million or 88.5% of total revenues in 1995. Of the $42.6 million increase in
rental revenue in 1996, $33.6 million was due primarily to increased demand
for equipment at existing locations. The remaining increase of approximately
$9.0 million was primarily due to nine new locations which were added in 1996.
Rental equipment sales increased 127.4% to $24.6 million or 8.0% of total
revenues in 1996 from $10.8 million or 4.5% of total revenues in 1995 due to
increased customer demand and increased sales efforts. Merchandise and new
equipment sales increased 38.2% in 1996 to $23.7 million or 7.8% of total
revenues as compared to $17.2 million or 7.0% of total revenues in 1995,
primarily due to increased rental revenue and demand for new equipment.
 
  Gross Profit. Gross profit in 1996 increased 14.2% to $85.6 million from
$75.0 million in 1995 primarily due to increased rental revenue. Gross profit
decreased to 28.0% of total revenues in 1996 from 30.9% in 1995. The decrease
was partially due to a 27.8% increase in rental equipment depreciation
resulting from the increase in rental fleet offset in part by a change in
depreciation method for equipment purchases subsequent to January 1, 1996 (see
Note 1 of the Notes to Financial Statements). In addition, rental equipment
expense increased 26.7% due to the impact of increased rental volume. Gross
profit was also impacted by an increase in direct operating expenses in 1996
which increased 26.5% to $71.5 million as compared to $56.5 million in 1995.
The increase reflects staffing costs resulting from an increased number of
rental yards and higher maintenance costs necessary to support the increased
size of the rental fleet. Gross profit from sales of merchandise and new
equipment increased 9.6% in 1996 as compared to 1995 due to the impact of
increased rental volume on the sale of merchandise and an increase in new
equipment sales. However, gross profit on sale of merchandise and new
equipment as a percentage of total revenues declined due to a shift in sales
mix toward lower margin items.
 
                                      11
<PAGE>
 
  Selling, General and Administrative Expense. Selling, general and
administrative expense in 1996 increased 14.3% to $35.9 million or 11.7% of
total revenues compared to $31.4 million or 12.9% of total revenues in 1995.
The increase was primarily due to higher advertising, bad debt and liability
insurance expenses, the total of which was partially offset by lower profit
sharing expense in 1996 as compared to 1995. Selling, general and
administrative expense includes $1.5 million and $0.6 million in 1996 and
1995, respectively, of non-recurring compensation expense related to the
Predecessor's deferred incentive compensation agreements that were terminated
in February 1997.
 
  Interest Expense. Interest expense increased 51.2% to $8.0 million in 1996
from $5.3 million in 1995. The increase was primarily the result of higher
average borrowings under the credit facility and other debt outstanding of
$122.6 million in 1996 as compared to $72.5 million in 1995. However, this
increase was partially offset by a decrease in the average interest rate to
6.1% in 1996 as compared to 7.2% in 1995.
 
  Other Expense, Net. Other expense decreased 59.0% to $0.7 million in 1996
from $1.6 million in 1995 as a result of a reduction in the level of
charitable contributions by the Predecessor offset in part by a non-recurring
write-off of $1.3 million on a non-operating investment. Substantially all
other expense items for 1996 are not expected to be incurred by the Company in
the future as a result of the Recapitalization.
 
  Income Taxes. Under the Predecessor's election to be taxed as an S
corporation for federal and state purposes, income tax expense was
approximately 1.1% of pre-tax income in 1996 as compared to 1.5% of pre-tax
income in 1995. On a pro forma C corporation basis, the Predecessor's
effective tax rate would have been 40.2% in 1996 as compared to 41.1% in 1995.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company received net proceeds of $186 million from the IPO of 10,000,000
shares of its common stock on February 26, 1997. A portion of the net proceeds
from the IPO was used to repay all of the then outstanding senior notes and
borrowings under the Company's old credit facility. In conjunction with the
IPO, the Company entered into a new credit facility which provides
availability of up to $300 million (the "Credit Facility").
 
  The Company has primarily used cash to purchase rental equipment and acquire
new rental yards. The Company historically has met its cash requirements
primarily through net cash provided by operating activities and borrowings
under its Credit Facility. In addition to the Company's Credit Facility, the
Company expects to complete a $250 million private placement of senior
unsecured notes during the first six months of 1998. The Company believes that
cash flow from operations, availability under the Credit Facility and the debt
offering will be sufficient to support its operations, expansion and liquidity
requirements for at least the next 12 months.
 
  During 1997, the Company's operating activities before changes in operating
assets and liabilities provided net cash flow of $100 million as compared to
$85.3 million in 1996. This $14.7 million increase was substantially due to
increased operating income (exclusive of depreciation and amortization
expenses, gains on sale of rental equipment and the deferred compensation
agreement termination cost) of $33.3 million, offset in part by the one-time
$20.3 million deferred compensation agreement termination cost. The $33.3
million increase in cash flows was due to higher revenues associated with
increased investment in rental equipment, increases in the number of operating
locations, and enhanced focus on merchandise and new equipment sales, offset
by a slight decrease in operating margins as a percentage of revenue. The
slight decrease in operating margins as a percentage of revenue is due to the
start-up costs of new locations.
 
  Net cash used in investing activities was $317.7 million for 1997 as
compared to $117.4 million in 1996. The principal causes for the variation in
cash flow between the periods were increased purchases of rental equipment,
acquisition of rental operations, and investment in property and equipment,
partially offset by increased sales of rental equipment. The increase in
rental fleet relates to newly opened or acquired yards and the continued
expansion and replacement of rental fleet at existing locations. Rental
equipment purchases for 1997 were $246.6 million as compared to $106.5 million
in 1996.
 
                                      12
<PAGE>
 
  Net cash provided by financing activities was $238.1 million for 1997 as
compared to $43.9 million in 1996. The increase was due to receipt of the net
proceeds of $186 million from the IPO in February 1997, which were used to
repay all of the then existing senior notes and borrowings under the Company's
old credit facility, proceeds from a note payable to a related party,
subsequent borrowings under the Credit Facility and a reduction in dividends
paid.
   
  U.S. Rentals believes that its management information systems are year 2000
compliant. At minimal cost over the past two years the Company has upgraded
its proprietary systems and the Company's software vendors have advised the
Company that the systems provided by them are year 2000 compliant. U.S.Rentals
does not believe that year 2000 will have a material adverse effect on its
business relationships with its suppliers or customers, or have a material
adverse effect on its business, results of operations or financial condition.
    
CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
 
  Statements in this section and throughout this Report contain forward-
looking statements that represent the Company's expectations or beliefs
concerning future events, including but not limited to the following: (i) the
Company's ability to continue acquiring and opening rental yards and grow
profitably, (ii) the Company's ability to maintain its market leadership and
competitive advantage, (iii) customers continuing to outsource,
(iv) multiregional operators', such as the Company, sensitivity to economic
downturns, (v) the Company's continued emphasis on larger accounts, (vi) the
Company's ability to complete a debt offering in the first half of 1998, if at
all, and (vii) the sufficiency of the Company's cash to meet expected capital
expenditures and interest expense.
 
  The Company cautions that these statements are qualified by important
factors that could cause actual results to differ from those in the forward-
looking statements: the Company's ability to acquire or open additional rental
yards and the timing, pricing and related costs of the acquisitions, the
effective integration of the acquired businesses, variations in seasonal
rental patterns principally due to the effect of weather on construction
activity, increased competition due to larger companies expanding into
previously less competitive markets, the cyclical nature of the equipment
rental industry, the timing and financing of capital expenditures for fleet
expansions, and general economic conditions in the Company's markets including
the possible impact of interest rate fluctuations. See also "Business--
Governmental and Environmental Regulation" section for other factors that
could affect the Company's actual results. In addition, the market price of
the Company's common stock could be subject to significant variation due to
fluctuations in the Company's operating results, changes in earnings estimates
by securities analysts and other factors.
 
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
 
  The Company's revenue and operating results historically have fluctuated
from quarter to quarter, and the Company expects that they will continue to do
so in the future. These fluctuations have been caused by a number of factors,
including seasonal rental patterns of the Company's customers (principally due
to the effect of weather, such as the impact of El Nino, on construction
activity), general economic conditions in the Company's markets, the timing of
acquisitions and the development of start-up locations and related costs, the
effectiveness of integrating acquired businesses and start-up locations, and
timing of capital expenditures for fleet expansion. The Company incurs
substantial costs in establishing or integrating newly acquired and start-up
locations. Historically, the Company's acquired businesses and start-up
locations generally have not been profitable until after their first year of
operations. The operating results for any historic quarter are not necessarily
indicative of results for any future period. Any revenue shortfall below
expectations could have an immediate and significant adverse effect on results
of operations.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The financial statements and supplementary data required by this Item 8 are
set forth as indicated in Item 14, "Exhibits, Financial Statement Schedule and
Reports on Form 8-K."
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  Not applicable.
 
 
                                      13
<PAGE>
 
                                   PART III
 
  Certain information required by Part III is omitted from this Report in that
the Registrant will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this Report and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee
Report or the Performance Graph included in the Proxy Statement.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information relating to directors required by this item will be
contained under the captions "Board of Directors" and "Election of Directors"
in a definitive Proxy Statement.
 
  Executive Officers
 
  The following table sets forth the executive officers of the Company:
 
<TABLE>
<CAPTION>
   NAME                                AGE               POSITION
   ----                                ---               --------
   <S>                                 <C> <C>
   William F. Berry...................  45 President and Chief Executive Officer
   John S. McKinney...................  43 Vice President-Finance and Chief
                                           Financial Officer
   Grace M. Crickette.................  36 Vice President-Risk Management
   William F. Locklin.................  45 Vice President and Region Manager
   Steve Nadelman.....................  35 Vice President and Region Manager
</TABLE>
 
  William F. Berry has been an employee of the Company and one of its
predecessors since 1966, became the Company's President and Chief Executive
Officer in January 1987 and became a Director in 1996. In his more than 30
years with the Company and its predecessor, Mr. Berry has held numerous
operational and managerial positions, including Profit Center Manager,
Division Manager and Regional Vice President.
 
  John S. McKinney has been the Vice President-Finance and Chief Financial
Officer of the Company since 1990 and became a Director in 1996. Mr. McKinney
joined the Company in 1988 as Controller, held that position until being
promoted to his current positions. Prior to joining the Company, Mr. McKinney
served as the controller of an electrical wholesale company, held various
financial positions with Iomega Corporation and spent several years as a
certified public accountant with Arthur Andersen & Co.
 
  Grace M. Crickette has been the Company's Vice President-Risk Management
since March 1996. Ms. Crickette served as a Risk Management Director from 1994
until March 1996 and Risk Management Analyst from 1991 to 1994. Prior to
joining the Company, Ms. Crickette was a legal assistant for five years at a
Southern California law firm that specializes in insurance defense.
 
  William F. Locklin has been a Vice President and Region Manager since
joining the Company in 1987. Mr. Locklin has more than 19 years of experience
in the equipment rental business. Prior to joining the Company, Mr. Locklin
held numerous management positions in the equipment rental industry over a
seven-year period with Hertz Equipment Rental Corporation.
 
  Steve E. Nadelman has been a Vice President and Region Manager since 1993.
Mr. Nadelman joined the Company in 1991 and served as a Profit Center Manager
before being promoted to his current position. Mr. Nadelman has more than 17
years of experience in the equipment rental business. Prior to joining the
Company, Mr. Nadelman held numerous service, sales and management positions in
the equipment rental industry, including several years with Hertz Equipment
Rental Corporation.
 
 
                                      14
<PAGE>
 
  The information required pursuant to Item 405 of Regulation S-K will be
contained under the caption Section 16 (a) of the Securities Exchange Act of
1934 in the Company's Proxy Statement.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this Item will be contained under the caption
"Compensation of Executive Officers" in the Company's Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this Item will be contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this Item will be contained under the caption
"Certain Transactions" in the Company's Proxy Statement.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) (1)FINANCIAL STATEMENT SCHEDULES
 
<TABLE>
<S>                                                                          <C>
Report of Independent Auditors.............................................  F-1
Balance Sheets--December 31, 1996 and 1997.................................  F-2
Statements of Operations--Years ended December 31, 1995, 1996 and 1997.....  F-3
Statements of Stockholders' Equity--Years ended December 31, 1995, 1996 and
 1997......................................................................  F-4
Statements of Cash Flows--Years ended December 31, 1995, 1996 and 1997.....  F-5
Notes to Financial Statements..............................................  F-6
</TABLE>
 
  (b) (2)REPORTS OF FORM 8-K
 
      Not applicable.
 
                                      15
<PAGE>
 
  (c) EXHIBITS
 
<TABLE>   
<CAPTION>
  EXHIBIT
  NUMBER                      DESCRIPTION OF EXHIBITS                      PAGE
  -------                     -----------------------                      ----
  <C>     <S>                                                              <C>
   2.1*   Asset Contribution Agreement
   3.1*   Restated Certificate of Incorporation of the Company
   3.2*   Amended and Restated Bylaws of the Company
   4.1*   Specimen Common Stock certificate
  10.1*   Form of Indemnification Agreement between the Company and each
          of its executive officers and directors
  10.2*   Form of Employment Agreement between the Company and John S.
          McKinney
  10.3*   Form of Registration Rights Agreement
  10.4*   1997 Performance Award Plan
  10.5*   Form of Employment Agreement between the Company and William
          F. Berry
  10.6*   Second Amended and Restated Credit Agreement by and among the
          Predecessor, Bank of America NT&SA as agent, and the banks
          named therein dated as of February 26, 1997
  10.11*  Cancellation of Deferred Compensation Agreement between the
          Predecessor and William F. Berry dated as of January 27,1997
  10.12*  Cancellation of Deferred Compensation Agreement between the
          Predecessor and John. S. McKinney dated as of January 27, 1997
  10.13** Demand Revolving Note Payable to Richard D. Colburn
  23.1*** Consents of Price Waterhouse LLP
  24.1*** Power of Attorney (contained of signature page to this report)
  27.1*** Financial Data Schedule
  27.2*** Financial Data Schedule
  27.3*** Financial Data Schedule
</TABLE>    
--------
  *  Incorporated by reference from the Company's Registration Statement on
     Form S-1 (333-17783) in February 1997.
 
 **  Incorporated by reference from the Company's Quarterly Report on Form 10-Q
     for the quarter ended March 31, 1997.
   
***  Previously filed under 10K (0-14338) for the year ended December 31, 1997.
         
                                       16
<PAGE>
 
                                  SIGNATURES
   
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this
Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly
authorized.     
 
                                          U.S. Rentals, Inc.
 
                                          By:     /s/ John S. McKinney
Date: August 21, 1998                     _____________________________________
                                                    John S. McKinney
                                                 Chief Financial Officer
   
  Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Amendment No. 1 has been signed below by the following persons
on behalf of the registrant and in the capacities indicated below.     
 
<TABLE>   
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
<S>                                  <C>                           <C>
                 *                   Chief Executive Officer,       August 21, 1998
____________________________________ President and Director
         (William F. Berry)
 
       /s/ John S. McKinney          Chief Financial Officer and    August 21, 1998
____________________________________ Director, in his capacities
         (John S. McKinney)          as Chief Financial Officer
                                     and Principal Accounting
                                     Officer

                 *                   Chairman of the Board          August 21, 1998
____________________________________
        (Richard D. Colburn)

                 *                   Director                       August 21, 1998
____________________________________
         (James P. Miscoll)

                 *                   Director                       August 21, 1998
____________________________________
        (Robert D. Paulson)

                 *                   Director                       August 21, 1998
____________________________________
         (Keith W. Renken)

      */s/ John S. McKinney
____________________________________
          John S. McKinney
          Attorney-in-fact
</TABLE>    
 
                                      17
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of U.S. Rentals, Inc.
 
  In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of U.S. Rentals, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of management of U.S. Rentals, Inc.; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
 
                                          Price Waterhouse LLP
Sacramento, California
January 28, 1998
 
                                      F-1
<PAGE>
 
                               U.S. RENTALS, INC.
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1996     1997
                                                              -------- --------
                                                               (IN THOUSANDS,
                                                                EXCEPT SHARE
                                                                    DATA)
<S>                                                           <C>      <C>
                           ASSETS
Cash and cash equivalents.................................... $  2,906 $  3,104
Accounts receivable, net.....................................   35,653   60,906
Notes receivable from affiliate..............................   25,365      --
Notes receivable, other......................................      563      501
Inventories..................................................    5,841   17,379
Rental equipment, net........................................  205,982  390,598
Property and equipment, net..................................   42,345   78,014
Goodwill, net................................................    1,035   23,114
Prepaid expenses and other assets............................    4,758   12,195
                                                              -------- --------
Total assets................................................. $324,448 $585,811
                                                              ======== ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities....................... $ 57,008 $ 75,048
Notes payable to related parties.............................   23,943   17,000
Notes payable, other.........................................  162,767  203,300
Deferred taxes...............................................      --    25,077
                                                              -------- --------
Total liabilities............................................  243,718  320,425
                                                              -------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
  Common stock, $.01 par value;
    100,000,000 shares authorized,
    30,748,975 shares issued and outstanding.................      --       307
  Common stock at stated value;
    2,500 shares authorized,
    900 shares issued and outstanding........................      699      --
  Paid-in capital............................................   13,186  244,211
  Retained earnaings.........................................   66,845   20,868
                                                              -------- --------
Total stockholders' equity...................................   80,730  265,386
                                                              -------- --------
Total liabilities and stockholders' equity................... $324,448 $585,811
                                                              ======== ========
</TABLE>
 
             Please see accompanying notes to financial statements.
 
                                      F-2
<PAGE>
 
                               U.S. RENTALS, INC.
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>   
<CAPTION>
                                                YEARS ENDED DECEMBER 31,
                                            ----------------------------------
                                               1995        1996        1997
                                            ----------  ----------  ----------
                                            (IN THOUSANDS, EXCEPT SHARE AND
                                                   PER SHARE AMOUNTS)
<S>                                         <C>         <C>         <C>
REVENUES:
 Rental revenue............................ $  214,849  $  257,486  $  340,507
 Rental equipment sales....................     10,832      24,629      38,839
 Merchandise and new equipment sales.......     17,166      23,722      45,347
                                            ----------  ----------  ----------
   Total revenues..........................    242,847     305,837     424,693
                                            ----------  ----------  ----------
COST OF REVENUES:
 Rental equipment expense..................     51,370      65,102      87,209
 Rental equipment depreciation.............     43,885      56,105      69,231
 Cost of rental equipment sales............      4,693      10,109      19,065
 Cost of merchandise and new equipment
  sales....................................     11,418      17,423      33,420
 Direct operating expense..................     56,506      71,482      98,068
                                            ----------  ----------  ----------
   Total cost of revenues..................    167,872     220,221     306,993
                                            ----------  ----------  ----------
   Gross profit............................     74,975      85,616     117,700
 Selling, general and administrative
  expense..................................     31,440      35,934      42,597
 Non-rental depreciation and amortization..      5,513       7,528      11,222
 Termination cost of deferred compensation
  agreements...............................         --          --      20,290
                                            ----------  ----------  ----------
   Operating income........................     38,022      42,154      43,591
 Interest expense..........................     (4,575)     (8,373)     (6,680)
 Related party interest (expense) income,
  net......................................       (735)        342        (690)
 Other expense, net........................     (1,620)       (665)       (473)
                                            ----------  ----------  ----------
   Income before income taxes and
    extraordinary item.....................     31,092      33,458      35,748
   Income tax expense......................        468         374      29,407
                                            ----------  ----------  ----------
   Net income before extraordinary item....     30,624      33,084       6,341
 Extraordinary item, net of tax benefit of
  $995.....................................         --          --       1,511
                                            ----------  ----------  ----------
 Net income................................ $   30,624  $   33,084  $    4,830
                                            ==========  ==========  ==========
 Basic net income before extraordinary
  item per share........................... $     1.48  $     1.59  $      .22
                                            ==========  ==========  ==========
 Diluted net income before extraordinary
  item per share........................... $     1.48  $     1.59  $      .21
                                            ==========  ==========  ==========
 Basic net income per share................ $     1.48  $     1.59  $      .17
                                            ==========  ==========  ==========
 Diluted net income per share.............. $     1.48  $     1.59  $      .16
                                            ==========  ==========  ==========
 Basic weighted average shares
  outstanding.............................. 20,748,975  20,748,975  29,351,715
                                            ==========  ==========  ==========
 Diluted weighted average shares
  outstanding.............................. 20,748,975  20,748,975  29,843,752
                                            ==========  ==========  ==========
UNAUDITED PRO FORMA DATA (NOTE 7):
 Historical income before income taxes and
  extraordinary item....................... $   31,092  $   33,458  $   35,748
 Pro forma income tax expense..............     12,780      13,456      14,371
                                            ----------  ----------  ----------
   Pro forma net income before
    extraordinary item..................... $   18,312  $   20,002  $   21,377
                                            ==========  ==========  ==========
 Pro forma basic net income before
  extraordinary item per share............. $      .88  $      .96  $      .73
                                            ==========  ==========  ==========
 Pro forma diluted net income before
  extraordinary item per share............. $      .88  $      .96  $      .72
                                            ==========  ==========  ==========
</TABLE>    
 
             Please see accompanying notes to financial statements.
 
                                      F-3
<PAGE>
 
                               U.S. RENTALS, INC.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                               TOTAL
                                                       PAID-IN   RETAINED  STOCKHOLDERS'
                            SHARES    STATED/PAR VALUE CAPITAL   EARNINGS     EQUITY
                          ----------  ---------------- --------  --------  -------------
                                                (IN THOUSANDS)
<S>                       <C>         <C>              <C>       <C>       <C>
Balance at December 31,
 1994...................         900       $ 699       $ 13,186  $ 44,066    $ 57,951
  Net income............         --          --             --     30,624      30,624
  Dividends.............         --          --             --     (5,498)     (5,498)
                          ----------       -----       --------  --------    --------
Balance at December 31,
 1995...................         900         699         13,186    69,192      83,077
  Net income............         --          --             --     33,084      33,084
  Dividends.............         --          --             --    (35,431)    (35,431)
                          ----------       -----       --------  --------    --------
Balance at December 31,
 1996...................         900         699         13,186    66,845      80,730
  Net income............         --          --             --      4,830       4,830
  Recapitalization......        (900)       (699)           699       --          --
Distribution of non-op-
 erating assets, net....         --          --          (4,219)      --       (4,219)
Dividends paid prior to
 initial public
 offering...............         --          --             --     (1,905)     (1,905)
Contribution of earnings
 to paid-in capital.....         --          --          48,902   (48,902)        --
Recapitalization due to
 initial public
 offering...............  20,748,975         207           (207)      --          --
Initial public offering
 proceeds, net of
 issuance cost of
 $1,550.................  10,000,000         100        185,850       --      185,950
                          ----------       -----       --------  --------    --------
Balance at December 31,
 1997...................  30,748,975       $ 307       $244,211  $ 20,868    $265,386
                          ==========       =====       ========  ========    ========
</TABLE>
 
 
 
             Please see accompanying notes to financial statements.
 
                                      F-4
<PAGE>
 
                               U.S. RENTALS, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                                 ------------------------------
                                                   1995      1996       1997
                                                 --------  ---------  ---------
                                                        (IN THOUSANDS)
<S>                                              <C>       <C>        <C>
OPERATING ACTIVITIES:
Net income.....................................  $ 30,624  $  33,084  $   4,830
Adjustments to reconcile net income to net cash
 provided
 by operating activities:
  Depreciation and amortization................    49,398     63,633     80,453
  Gain on sale of equipment....................    (6,342)   (14,955)   (20,692)
  Principal adjustment on notes receivable.....      (220)      (572)      (146)
  Provision for doubtful accounts..............     3,441      4,075      7,773
  Deferred income taxes........................       --         --      25,077
  Interest income not collected................       --         --        (294)
  Interest expense not paid....................       --         --         495
  Loss on early extinguishment of debt.........       --         --       2,506
CHANGES IN OPERATING ASSETS AND LIABILITIES:
  Accounts receivable..........................   (10,526)    (9,799)   (26,505)
  Inventories..................................    (1,413)    (1,665)    (4,989)
  Prepaid expenses and other assets............    (1,515)    (1,466)    (8,247)
  Accounts payable and other liabilities.......    11,588        597     19,518
                                                 --------  ---------  ---------
Net cash provided by operating activities......    75,035     72,932     79,779
                                                 --------  ---------  ---------
INVESTING ACTIVITIES:
Acquisitions of rental operations..............       --     (15,033)   (64,076)
Purchases of rental equipment..................   (88,861)  (106,501)  (246,631)
Proceeds from sale of rental equipment.........    10,832     24,629     38,839
Purchases of property and equipment, net.......   (10,764)   (23,068)   (45,971)
(Funding) collection of notes receivable, net..    (1,061)     2,537        122
                                                 --------  ---------  ---------
Net cash used in investing activities..........   (89,854)  (117,436)  (317,717)
                                                 --------  ---------  ---------
FINANCING ACTIVITIES:
(Payments on) proceeds from line of credit,
 net...........................................   (28,200)    39,553    130,733
Proceeds from (payments on) senior notes.......    50,000     40,000    (92,506)
Payments on other obligations, net.............      (718)      (191)      (138)
Proceeds from related party note payable.......       --         --      17,000
Proceeds from issuance of common stock, net of
 issuance costs................................       --         --     185,950
Cash retained by the Predecessor in connection
 with Recapitalization.........................       --         --        (998)
Dividends paid.................................    (5,498)   (35,431)    (1,905)
                                                 --------  ---------  ---------
Net cash provided by financing activities......    15,584     43,931    238,136
                                                 --------  ---------  ---------
Net increase (decrease) in cash and cash
 equivalents...................................       765       (573)       198
Cash and cash equivalents at beginning of year.     2,714      3,479      2,906
                                                 --------  ---------  ---------
Cash and cash equivalents at end of year.......  $  3,479  $   2,906  $   3,104
                                                 ========  =========  =========
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Net assets retained by the Predecessor in
 connection
 with Recapitalization.........................                       $   3,221
                                                                      =========
</TABLE>
 
             Please see accompanying notes to financial statements.
 
                                      F-5
<PAGE>
 
                              U.S. RENTALS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Organization
 
  U.S. Rentals, Inc. (the "Company") is a Delaware corporation primarily
involved in the short-term rental of general purpose construction equipment,
and to a lesser extent, selling complementary parts, merchandise, new and used
equipment to commercial and residential construction, industrial and homeowner
customers. At December 31, 1997, the Company operated 123 equipment rental
yards located in 21 states across the United States.
 
 Initial public offering
 
  The Company's initial public offering ("IPO") was declared effective on
February 20, 1997. Prior to the IPO, the equipment rental business was
operated by Ayr, Inc. (formerly known as USR Holdings, Inc.), a California
corporation (the "Predecessor"). The Company did not have any operations prior
to the IPO. Prior to closing of the IPO, the Predecessor transferred
substantially all of its operating assets and associated liabilities to the
Company for 20,748,975 shares of common stock of the Company, representing all
of the outstanding capital stock prior to the IPO. The Predecessor retained
only non-operating assets and liabilities, including approximately $25.7
million of notes receivable from an affiliate and $24.4 million of notes
payable to related parties. These transactions are referred to as the
"Recapitalization" in these financial statements. In conjunction with the
Recapitalization, the Predecessor entered into an agreement to terminate
deferred compensation agreements with certain executives. The Predecessor
borrowed approximately $20.3 million under its bank line of credit to fund the
cost of termination. The Company assumed the liability for the indebtedness
under the bank line of credit as part of the Recapitalization. The non-
recurring cost of the termination was expensed in 1997. Unless otherwise
indicated, the Company also refers to the Predecessor prior to the IPO.
 
 Related party transactions
 
  As disclosed in these financial statements, the Company has participated in
certain transactions with related parties during the current and previous
years. In the opinion of management, all transactions with related parties
have been conducted on terms which are fair and equitable; however, the
transactions are not necessarily on the same terms as those which would have
been made between wholly unrelated parties.
 
 Financial statement presentation
 
  The preparation of 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 financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Rental revenue
 
  Rental revenue is recognized upon the earliest occurrence of either the
return of the equipment or the end of one month's rental term.
 
 Rental equipment
 
  Rental equipment is recorded at cost. Depreciation for rental equipment
acquired prior to January 1, 1996, is computed using the straight-line method
over an estimated five-year useful life with no salvage value. Rental
equipment acquired subsequent to January 1, 1996, is depreciated using the
straight-line method over an
 
                                      F-6
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
estimated seven-year useful life, after giving effect to an estimated salvage
value of 10%. Included in purchases of rental equipment are the costs of minor
equipment which are fully depreciated in the month of acquisition. Accumulated
depreciation on rental equipment was $161,765,000 and $190,213,000 at December
31, 1996 and 1997, respectively.
 
  Ordinary maintenance and repair costs are charged to operations as incurred.
When rental equipment is disposed of, the related cost and accumulated
depreciation are removed from the respective accounts. Proceeds from the
disposal and the related net book value of the equipment are recognized in the
period of disposal and reported as revenue from rental equipment sales and
cost of rental equipment sales in the statement of operations.
 
 Property and equipment
 
  Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
 
  The estimated useful lives for property and equipment range from 10 to 39
years for buildings; 1 to 8 years for vehicles, delivery and yard equipment;
and 5 to 10 years for fixtures and leasehold improvements.
 
  Ordinary maintenance and repairs costs are charged to operations as
incurred. When property and equipment are disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
 
 Inventories
 
  The Company's inventories primarily consist of items such as hand tools and
accessories held for resale. Inventories are stated at the lower of cost,
determined by the first-in, first-out method, or market.
 
 Self-insurance
 
  The Company is self-insured for general liability, workers' compensation,
and group medical claims up to specified per claim and aggregate amounts.
Self-insurance costs are accrued based upon the aggregate liability for
reported claims incurred and an estimated liability for claims incurred but
not reported. These liabilities are not discounted.
 
 Earnings per share
 
  Historical earnings per share is presented based on the weighted average
number of outstanding common shares, after giving effect to the
Recapitalization retroactively for all periods. Pro forma earnings per share
is based on the weighted average number of outstanding common shares, after
giving effect to the Recapitalization and the pro forma income tax expense as
if the Company were a C corporation for all periods presented. Diluted
weighted average shares outstanding were calculated using the treasury stock
method and exceed basic weighted average shares outstanding by 492,037 due to
3,907,887 dilutive options outstanding at December 31, 1997. Basic and diluted
earnings per share attributable to the extraordinary item totaled $.05 for the
year ended December 31, 1997.
 
 Cash and cash equivalents
 
  The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
 
 
                                      F-7
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Fair value of financial instruments
 
  The carrying amounts reported in the balance sheets for cash and cash
equivalents, trade accounts receivable, and accounts payable and other
liabilities approximated fair value due to the immediate to short-term
maturity of these financial instruments. The fair value of notes receivable
and notes payable is determined using current interest rates for similar
instruments as of December 31, 1997, and approximates the carrying value of
these notes due to the fact that the underlying instruments include provisions
to adjust note balances and interest rates to approximate fair market value.
 
 Concentrations of credit risk
 
  Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction and industrial customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers and the Company's geographic dispersion. The Company performs credit
evaluations of its customers' financial condition and generally does not
require collateral on accounts receivable. The Company maintains an allowance
for doubtful accounts on its receivables based upon expected collectability.
The allowance for doubtful accounts was $6,991,000 and $9,495,000 at December
31, 1996 and 1997, respectively.
 
 Advertising costs
 
  The Company advertises primarily through trade journals and the media.
Advertising costs are expensed as incurred and totaled $3,094,000, $4,200,000,
and $6,453,000 for each of the three years in the period ended December 31,
1997.
 
 Goodwill
 
  Amortization of goodwill is provided on a straight-line basis over forty
years. Goodwill is presented net of accumulated amortization of $207,000 and
$371,000 at December 31, 1996 and 1997.
 
 Long-lived assets
 
  Long-lived assets are recorded at the lower of amortized cost or fair value.
As part of an ongoing review of the valuation of long-lived assets, management
assesses the carrying value of such assets if facts and circumstances suggest
they may be impaired. If this review indicates that the carrying value of
these assets may not be recoverable, as determined by a nondiscounted cash
flow analysis over the remaining useful life, the carrying value would be
reduced to its estimated fair value. There have been no material impairments
recognized in these financial statements.
 
 Income taxes
 
  Subsequent to the IPO and Recapitalization, the Company is assessed
corporate income taxes for federal and state purposes. Income taxes are
recorded under the liability approach; a current or deferred liability or
asset is recognized for the current or deferred income tax consequences of all
events that have been recorded in the financial statements.
 
  Prior to the IPO, the Predecessor had elected S corporation status under the
U.S. Internal Revenue Code. Pursuant to this election (and similar elections
in California and certain other states), the Predecessor's income, deductions,
and credits are reported on the income tax return of the Predecessor's
stockholder for federal purposes and, accordingly, no provision for federal
income taxes has been made.
 
                                      F-8
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  California assesses a corporate level income tax on S corporations, and
certain states in which the Predecessor does business do not recognize S
corporation status. Therefore, the Predecessor remains subject to, and has
made provision for, taxes in those states.
 
  Because of the Recapitalization, historical results of operations, including
income taxes, are not, in all cases, indicative of future results. The
unaudited pro forma income tax provision is computed using the liability
approach as if the Company had been a C corporation for all periods presented.
Pro forma income tax expense is lower than actual income tax expense in 1997
due to the recognition of a $7,520,000 deferred tax liability upon the
Recapitalization and the pro forma benefit from the inclusion in pro forma
taxable income of the net loss from January 1, 1997, to the closing date of
the IPO attributable to the nonrecurring cost to terminate deferred
compensation agreements.
 
 Stock Options
 
  The Company accounts for its stock option plan in accordance with the
intrinsic value method, under which no compensation expense is recognized in
the financial statements except where the fair market value of the stock
exceeds the exercise price of the options granted on the date of grant. The
Company has presented the pro forma disclosures of the compensation expense
under the fair value method of Statement of Financial Accounting Standards
Number 123 ("SFAS 123") in Note 9.
 
 Adoption of new accounting pronouncements
 
  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 128, Earnings per Share ("SFAS 128"),
which changed the basis upon which earnings (or loss) per share is calculated.
As required by this statement, the Company adopted the provisions of SFAS 128
for the year ended December 31, 1997, and retroactively for each of the
preceding years presented in the financial statements.
 
 Reclassifications
 
  Certain prior year balances have been reclassified to conform to the 1997
presentation.
 
2. ACQUISITIONS
 
  During 1997, the Company acquired the assets of 9 businesses operating 33
rental locations throughout the United States. The acquisitions were financed
through borrowings under the Company's line of credit and have been recorded
using the purchase method of accounting. The results of operations for each
location acquired have been included in the Company's results of operations
from their respective acquisition dates. A summary of the purchase price and
assets acquired is as follows (in thousands):
 
<TABLE>
   <S>                                                                  <C>
   Rental equipment.................................................... $ 26,877
   Inventories.........................................................    6,549
   Accounts receivable.................................................    6,521
   Other assets........................................................    2,704
   Goodwill............................................................   21,425
                                                                        --------
                                                                        $ 64,076
                                                                        ========
</TABLE>
 
                                      F-9
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following unaudited pro forma data (in thousands) summarizes the results
of operations of the periods indicated as if the acquisitions had been
completed on January 1, 1996. The pro forma data gives effect to the actual
operating results prior to acquisition and adjustments to goodwill. The pro
forma results do not purport to be indicative of the results that would have
actually been achieved if the acquisitions had occurred on January 1, 1996, or
that may be achieved in the future.
 
<TABLE>
<CAPTION>
                                                                 1996     1997
                                                               -------- --------
                                                                  (UNAUDITED)
   <S>                                                         <C>      <C>
   Total revenues............................................. $363,848 $459,649
   Net income................................................. $ 22,288 $ 23,073
</TABLE>
 
3. NOTES RECEIVABLE FROM AFFILIATE
 
  Prior to the Recapitalization, the Predecessor had notes receivable from an
affiliate. As discussed in Note l, these notes were retained by the
Predecessor. The Company earned interest income from the affiliate of
$3,343,000, $3,420,000, and $555,000 for each of the three years in the period
ended December 31, 1997, respectively. The notes provide for positive or
negative annual adjustments of principal based on the change in the Consumer
Price Index, limited to certain percentages of the affiliated entity's
cumulative net income from December 31, 1984. The accompanying financial
statements include principal adjustments in notes receivable and other income
in the amounts of $220,000, $572,000, and $146,000 for each of the three years
in the period ended December 31, 1997, respectively.
 
4. PROPERTY AND EQUIPMENT
 
  Property and equipment, net, consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ------------------
                                                               1996      1997
                                                             --------  --------
   <S>                                                       <C>       <C>
   Land..................................................... $ 14,099  $ 21,543
   Buildings................................................   12,806    21,600
   Vehicles and delivery equipment..........................   28,000    45,234
   Yard equipment...........................................    3,000     3,674
   Furniture and fixtures...................................    4,626     7,227
   Leaseholds...............................................    8,942    15,666
                                                             --------  --------
                                                               71,473   114,944
   Less accumulated depreciation............................  (29,128)  (36,930)
                                                             --------  --------
                                                             $ 42,345  $ 78,014
                                                             ========  ========
</TABLE>
 
5. ACCOUNTS PAYABLE AND OTHER LIABILITIES
 
  Accounts payable and other liabilities consist of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1996    1997
                                                                ------- -------
   <S>                                                          <C>     <C>
   Trade payables and other accruals........................... $34,264 $50,716
   Profit sharing accrual......................................   8,742  12,667
   Self-insurance reserve......................................  14,002  11,665
                                                                ------- -------
                                                                $57,008 $75,048
                                                                ======= =======
</TABLE>
 
                                     F-10
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. NOTES PAYABLE
 
   Notes payable consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1996     1997
                                                              -------- --------
<S>                                                           <C>      <C>
Notes payable to related parties:
  Subordinated note payable to The Colburn School of
   Performing Arts, interest payable quarterly at prime rate
   plus 5%................................................... $ 20,000 $    --
  Demand notes payable to related parties, interest at
   various rates tied to the Predecessor's average bank
   borrowing rate............................................    3,943      --
  Demand note to majority stockholder, interest payable
   monthly at a rate tied to the Company's revolving line of
   credit (5.90% at December 31, 1997).......................      --    17,000
                                                              -------- --------
                                                                23,943   17,000
                                                              -------- --------
Notes payable, other:
  Senior notes payable to various parties, interest payable
   semiannually ranging from 6.82% to 7.76%..................   90,000      --
  Revolving line of credit, interest payable monthly at
   reference rate plus .125% (8.25% at December 31, 1996)....   26,300      --
  Revolving line of credit, interest payable monthly at money
   market rate (ranging from 6.03% to 6.34% at December 31,
   1997).....................................................   43,000  203,000
  Notes payable to a bank, interest and principal payable
   monthly at rates ranging from 5.74% to 9.51%..............    2,967      --
  Notes payable related to the purchase of certain
   businesses, imputed interest averaging 7%, due through
   1999......................................................      500      300
                                                              -------- --------
                                                               162,767  203,300
                                                              -------- --------
                                                              $186,710 $220,300
                                                              ======== ========
</TABLE>
 
  The Company's agreement with the banks provides for an unsecured line of
credit of $300,000,000 maturing no later than 2002. The revolving line of
credit is unsecured and includes restrictions as to limitations upon certain
ratios of liabilities to net worth and upon the minimum net worth of the
Company. The Company is in compliance with covenants in all agreements. The
Company pays a commitment fee ranging from .175% to .25% on the unused portion
of the outstanding line of credit balance less outstanding letters of credit
calculated quarterly based on the average daily balance. The senior and bank
note agreements existing at December 31, 1996, were paid down with the
proceeds from the IPO.
 
  Cash paid for interest was $7,545,000, $11,185,000, and $9,608,000 for each
of the three years in the period ended December 31, 1997, respectively.
 
  Maturities of notes payable are as follows at December 31, 1997 (in
thousands):
 
<TABLE>
            <S>                                  <C>
            1998................................ $220,000
            1999................................      300
                                                 --------
                                                 $220,300
                                                 ========
</TABLE>
 
                                     F-11
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
7. INCOME TAXES
 
  As discussed in Note 1, the Company was taxed as an S corporation prior to
the Recapitalization. As such, the income tax provision was comprised of
current state income tax expense of $468,000 and $374,000 for 1995 and 1996,
respectively. Deferred taxes for such periods were immaterial. Cash payments
for state income taxes made by the Company were $597,000 and $353,000 for 1995
and 1996, respectively. Cash payments for federal and state income taxes made
by the Company were $11,407,000 in 1997.
 
  The following provision for income taxes for 1997 includes all state taxes
recognized by the Predecessor as an S corporation prior to the
Recapitalization and federal and state taxes recognized by the Company
subsequent to the Recapitalization (in thousands).
 
<TABLE>
<CAPTION>
                                                                         1997
                                                                        -------
   <S>                                                                  <C>
   Federal:
     Current........................................................... $ 3,765
     Deferred..........................................................  14,281
     Deferred tax recorded upon Recapitalization.......................   6,141
                                                                        -------
                                                                         24,187
                                                                        -------
   State:
     Current...........................................................     565
     Deferred..........................................................   3,276
     Deferred tax recorded upon Recapitalization.......................   1,379
                                                                        -------
                                                                          5,220
                                                                        -------
                                                                        $29,407
                                                                        =======
</TABLE>
 
  The 1997 provision for income taxes differs from the amount as determined by
applying the U.S. statutory federal tax rate of 35% to income before income
taxes as a result of the following:
 
<TABLE>
   <S>                                                                     <C>
   Federal income taxes................................................... 35.0%
   State income taxes, net of federal benefit.............................  4.8%
   Cumulative deferred taxes recorded upon Recapitalization............... 21.0%
   Loss prior to Recapitalization excluded from taxable income............ 21.1%
   Other..................................................................  0.4%
                                                                           ----
                                                                           82.3%
                                                                           ====
</TABLE>
 
  The unaudited pro forma provision for income taxes differs from the amount
of income tax determined by applying the U.S. statutory federal income tax
rate of 35% to income before income taxes as a result of the following:
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED
                                                                DECEMBER 31,
                                                               ----------------
                                                               1995  1996  1997
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Federal income taxes....................................... 35.0% 35.0% 35.0%
   State income taxes, net of federal benefit.................  5.3%  4.9%  4.8%
   Other......................................................  0.8%  0.3%  0.4%
                                                               ----  ----  ----
                                                               41.1% 40.2% 40.2%
                                                               ====  ====  ====
</TABLE>
 
                                     F-12
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year
in which the differences are expected to reverse. Deferred income tax expenses
or credits are based on the changes in the deferred income tax assets or
liabilities from period to period.
 
  Deferred tax assets (liabilities) are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                        1997
                                                                    ------------
   <S>                                                              <C>
   Self-insurance reserves.........................................   $  4,944
   Compensation related accruals...................................      1,674
   Allowances for doubtful accounts................................      2,079
   State income taxes..............................................      1,636
   Others, net.....................................................        924
                                                                      --------
                                                                        11,257
   Depreciation....................................................    (36,334)
                                                                      --------
                                                                      $(25,077)
                                                                      ========
</TABLE>
 
8. COMMITMENTS AND CONTINGENCIES
 
  Operating leases
 
  The Company leases certain facilities under operating leases which contain
renewal options and provide for periodic cost of living adjustments. Rental
expense was $3,365,000, $3,681,000, and $5,374,000 for each of the three years
in the period ended December 31, 1997, respectively.
 
  Future minimum rental commitments as of December 31, 1997, under
noncancelable operating leases are (in thousands):
 
<TABLE>
   <S>                                                                   <C>
   1998................................................................. $ 6,445
   1999.................................................................   5,353
   2000.................................................................   4,439
   2001.................................................................   3,678
   2002.................................................................   2,545
   Thereafter...........................................................   8,237
                                                                         -------
                                                                         $30,697
                                                                         =======
</TABLE>
 
 Legal matters
 
  The Company is party to legal proceedings and potential claims arising in
the ordinary course of its business. In the opinion of management, the Company
has adequate legal defense, reserves, or insurance coverage with respect to
these matters so that the ultimate resolution will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows. The Company has accrued $12,011,000 and $9,563,000 at December 31, 1996
and 1997, respectively, to cover the uninsured portion of possible costs
arising from these pending claims and other potential unasserted claims.
 
                                     F-13
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Environmental matters
 
  The Company and its operations are subject to various laws and related
regulations governing environmental matters. Under such laws, an owner or
lessee of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances located on or in, or emanating from,
such property, as well as investigation of property damage. The Company incurs
ongoing expenses associated with the removal of underground storage tanks and
the performance of appropriate remediation at certain of its locations. The
Company believes that such removal and remediation will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
 
9. STOCK OPTION PLAN
 
  Effective February 20, 1997, the Board of Directors of the Company adopted
the 1997 Performance Award Plan under which stock options and other awards can
be granted to key employees and directors at prices and terms established by
the Board of Directors at the date of grant. The exercise price of all options
issued during 1997 equaled the fair value of the stock on the grant date which
ranged from $17.88 to $26.88. Accordingly, no compensation expense has been
recognized. Options outstanding at December 31, 1997, vest ratably over
periods ranging from five to ten years and expire in 2007.
 
  The following table summarizes the activity under the stock option plan:
 
<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                         NUMBER      AVERAGE
                                                        OF SHARES EXERCISE PRICE
                                                        --------- --------------
   <S>                                                  <C>       <C>
   Shares under option:
     Outstanding at December 31, 1996..................       --      $  --
      Granted: ($17.88-$20.00)......................... 3,867,387     $19.99
      ($23.44-$26.88)..................................   206,500     $25.78
                                                        ---------
   Outstanding at December 31, 1997.................... 4,073,887     $20.29
                                                        =========
</TABLE>
 
  There were no vested options outstanding and 526,113 shares were available
for future grants under the stock option plan at December 31, 1997.
 
  For purposes of the pro forma disclosures required by SAFS 123, the
estimated fair value of options is amortized to expense over the options'
vesting period. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model. The Black-Scholes model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly sensitive assumptions, including
the expected stock price volatility, which are subject to change from time to
time. For this reason, the resulting pro forma compensation costs are not
necessarily indicative of costs to be expected in future years.
 
  Pro forma unaudited net income, pro forma basic unaudited net income per
share, and pro forma diluted unaudited net income per share in 1997, after
giving effect to the Recapitalization would be $18,065,000, $.62, and $.60,
respectively, if the Company had accounted for its stock options using the
fair value based method of accounting established by SFAS 123. The following
weighted average assumptions were used in the option pricing model to
determine the fair value of the options: dividend yield of 0%, expected
volatility of 32%, risk-free interest rate ranging from 5.84% to 6.61%, and
expected lives ranging from 3 to 5.25 years.
 
                                     F-14
<PAGE>
 
                              U.S. RENTALS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
10. EMPLOYEE BENEFIT PLANS
 
  The Company sponsors a defined contribution 401(k) retirement plan (the
Plan) which is subject to the provisions of ERISA. Under the Plan, which was
implemented in 1994, the Company matches a minimum of 50% of the participants'
contributions up to a specified amount as determined by the Board of
Directors. Company contributions to the Plan were $246,000, $122,000, and
$136,000 for each of the three years in the period ended December 31, 1997,
respectively.
 
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
 Selected financial data
 
  The following table of quarterly financial information has been prepared
from unaudited financial statements of the Company, and reflects adjustments
which are, in the opinion of management, necessary for a fair presentation of
the interim periods presented. The Company has determined that the one-time
charge to establish the cumulative deferred tax liability as of the date of
the Company's IPO associated with becoming subject to C corporation taxes
should have been $7.5 million instead of $9.3 million as previously reported
in Form 10-Q for the third quarter of 1997. The loss before extraordinary item
and net loss presented below reflect this change.
 
<TABLE>
<CAPTION>
                                               FIRST   SECOND   THIRD    FOURTH
                                              QUARTER  QUARTER QUARTER  QUARTER
                                              -------  ------- -------- --------
<S>                                           <C>      <C>     <C>      <C>
Year ended December 31, 1997
  Total revenues............................. $80,981  $96,434 $114,026 $133,252
  Gross profit...............................  18,108   27,277   34,915   37,400
  Income (loss) before extraordinary item.... (22,750)   8,015   10,857   10,219
  Extraordinary item.........................   1,511       --       --       --
  Net income (loss).......................... (24,261)   8,015   10,857   10,219
Year ended December 31, 1996
  Total revenues............................. $58,643  $71,172 $ 86,647 $ 89,375
  Gross profit...............................  14,262   18,292   25,244   27,818
  Net income.................................   4,205    6,835   11,596   10,448
</TABLE>
 
 Price range of common stock
 
  The Company's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol USR. The following table provides the high and low closing
sales prices of the common stock as reported by the NYSE for each quarter of
1997.
 
<TABLE>
<CAPTION>
                                                  FIRST  SECOND   THIRD  FOURTH
                                                 QUARTER QUARTER QUARTER QUARTER
                                                 ------- ------- ------- -------
   <S>                                           <C>     <C>     <C>     <C>
   High......................................... $20.13  $27.50  $29.31  $27.38
   Low.......................................... $17.00  $15.38  $24.25  $23.13
</TABLE>
 
                                     F-15