<PAGE>1




"It is our mission at Payless  Cashways,  Inc. to be the building  materials and
home improvement supplier of first choice for the professional builder,  remodel
and repair contractor,  institutional buyer, and project-oriented  consumer. Our
team will  leverage  our  merchandising  expertise  and vendor  partnerships  to
provide  professional  quality  assortments and superior  customer service while
growing revenue, earnings and stockholder value."


<PAGE>2


Dear Stockholder:

As the Non-Executive Chairman of the new Board of Directors of Payless Cashways,
Inc., I report to you on our first full year of operation.  Payless emerged from
protection under Chapter 11 of the United States  Bankruptcy Code on December 2,
1997. A new Board of  Directors  of  experienced,  successful  and  enthusiastic
individuals  went to work on your  behalf.  Donald  E.  Roller,  a member of the
Board,  agreed to serve as Acting Chief Executive Officer and a search began for
a permanent President/Chief Executive Officer. Mr. Roller continued in that role
through  June 1998,  making  good  progress  as the Board and senior  management
worked to reduce expense,  establish  controls,  and reexamine the strategy.  We
thank him for his excellent work.

Millard E.  Barron  joined the Company in June 1998 as the  President  and Chief
Executive  Officer  of  Payless  Cashways,  Inc.  He is a person  of  remarkable
capacity,  both as a merchant  and as a driving  force behind the rebirth of the
Company.  With over thirty years of experience in retail with Hill's  Department
Stores,  WAL-MART,  and Hudson's Bay Company  (Zeller's),  he brings a wealth of
knowledge,  experience and well-honed  customer-focus.  His energy,  enthusiasm,
determination, and customer-focused/merchandise-driven  approach is transforming
the Company.  Payless  Cashways,  an industry leader with a long and proud past,
needed such a retail leader to drive its recovery  toward  financial  health and
prosperity.  He has the  confidence  of the  Board,  and he is proving to be the
right person for this critical role.

In  addition  to Millard  Barron,  Don  Roller  and me,  the Board of  Directors
includes H. D. (Harry) Cleberg,  President/Chief  Executive  Officer of Farmland
Industries,  Inc.;  David G.  Gundling,  President/Chief  Executive  Officer  of
Hagemeyer  Foods  N.A.,  Inc.;  Max  D.  Hopper,  Principal  of  Max  D.  Hopper
Associates,  Inc.; and Peter M. Wood,  Former Managing Director of J.P. Morgan &
Co.,  Incorporated.  David M. Chamberlain,  Chairman of Genesco,  Inc., made the
decision to step down as a Director due to other  obligations.  His guidance was
extraordinarily  helpful  in his  tenure  on the  Board,  and we  thank  him for
serving.  This is an exceptional group of successful business  executives,  each
with an  individual,  proven record of  accomplishment  in his own  professional
career.  They bring  experience  in the building  materials  industry,  finance,
marketing, technology and turnaround situations. They have met tirelessly during
this past year, actively addressing the issues facing the Company.

As a Board,  we understand  that  sustained  growth in sales and earnings is the
fundamental  key to improving  stockholder  value.  We believe that  progress is
being made as evidenced by the Company recording three quarters of net income in
1998.  Millard Barron has undertaken the difficult tasks of reshaping his senior
staff,  addressing  relationship  issues with  vendors,  motivating  associates,
eliminating  impaired assets where  necessary,  assigning  accountabilities  and
creating a clear vision of future  success for Payless as a premier  supplier to
the professional customer. We expect the Company to grow in 1999.

We thank you for your patience and support during this time of  transition.  The
Board is engaged,  committed to success,  and resolute about improving  outcomes
for Payless Cashways and for you.

/s/ Peter G. Danis

Peter G. Danis
Non-Executive Chairman of the Board




Dear Stockholder:

When I joined  Payless  Cashways,  Inc. in June of 1998, I was excited about the
Company,  the heritage,  the people,  the market niche position and the business
opportunity. As I write to you, I am happy to report that I am even more excited
now about our Company position and potential for the future.

During the second half of 1998,  my primary focus has been in several key areas.
They included:
     1)   Stabilizing the organization,
     2)   Turning the sales and earnings momentum,
     3)   Assembling an effective senior management team and structure, and
     4)   Communications, communications, communications.

We also developed and implemented a corporate  mission  statement and a cultural
core values statement,  both of which appear in this annual report. I have found
the  traditional  and most basic ethics and  practices of our Company to be very
solid, grounded in integrity,  honesty, and fairness. I believe we have in place
the right  kind of  foundation  upon  which we can build a  growing,  profitable
company in the future.


<PAGE>3

Stabilizing the  organization  has involved a myriad of activities  ranging from
gaining control of all company expenses,  to reducing  non-performing  inventory
and eliminating unproductive,  impaired assets. I believe that positive earnings
results in the last three  quarters  of the year  demonstrate  good  progress in
these areas and a very positive  directional  change. And, we also did, in fact,
turn the  sales  momentum  from a low  point in the  second  quarter  of a 13.2%
same-store  sales  decrease to a 1.1%  same-store  sales  decrease in the fourth
quarter.  Of course,  we will never be happy with decreases and are committed to
same-store  sales  increases  for  1999.  However,  the  trend  is  encouraging,
particularly  in sales with the Pro customer  where we were up 9% in  same-store
sales for the fourth quarter.

I am also  pleased to report  that our  Company is  populated  with  wonderfully
talented and dedicated  people  throughout the  organization up to and including
our Board of Directors.  We have assembled a strong new senior  management team,
for the most part from within the Company,  as only I and our new Vice President
of  Information  Systems,  Jim  Deats,  come  from  outside  the  Company.  And,
throughout the  chain-of-leadership,  we have restructured  where appropriate to
ensure  that the  Payless  corporate  pyramid  has our  customers  and our store
associates at the top and everybody else supporting and focusing on them.

Also,  first,  last,  and  always,  I am  committed  to  continuous,  proactive,
effective  communications,  both within our  organization and with all other key
constituencies.  Our Company is going through an incredible  amount of necessary
internal change and, at the same time, we have many external  relationships that
we must  repair,  improve and  leverage  to our  benefit in the future.  We will
continue to  over-communicate  as  appropriate as we move the Company in our new
direction. Our amazing associates, clearly our most important asset, require and
deserve to be well trained and well informed. Our vendors, our lenders, and you,
our stockholders, also have been very supportive and, again, require and deserve
to be well  informed.  Our Company needs the positive  leverage  that  effective
communication can provide.

This past year  represented a turn-around  year for  Payless Cashways.  While we
are only in the early stages of reinventing  ourselves,  the worst is behind us.
We now have loyal  associates  and customers,  increasing  vendor  support,  and
continued  financial  support  from our lenders.  Through an intense,  thorough,
ongoing,  almost  fanatical focus  on our  customers, we will continue to change
and reorganize  everything we do around the objectives we set. By moving to be a
merchandising-driven,  customer-focused  company and raising  all  standards  of
execution,  we will begin to grow market  share  again.  Our  strategy to be the
premier  supplier of goods and services to our Pro builder,  remodeling,  repair
and property maintenance  professionals is in place and already showing positive
results.  Our  full-line,   drive-through  lumberyards,   and  "hardware  store"
showrooms  are well  positioned  for the Pro and,  at the same  time,  provide a
unique,   desirable,   solution-oriented   shopping   experience  for  our  many
project-oriented  do-it-yourself  customers,  who also happen to enjoy  shopping
where the Pro shops.  Our extensive  customer service  expertise,  combined with
many value-added services,  provide an attractive overall package to support our
more than 800,000 customers who shop our stores in an average week.

As we look forward to 1999, we have  allocated a capital  expenditure  budget of
nearly $60 million to provide the tools and  improvements  necessary to fuel our
growth.  We are  investing  $7 million in  technology  to improve our  inventory
productivity and to provide timely, effective  decision-support  information for
our merchants. We will use $14 million to purchase ten previously leased stores,
and an additional $19 million is earmarked for investments that will improve our
capabilities  to service the Pro,  including  potential  acquisitions  of retail
operations and/or manufacturing  facilities,  store remodels and new stores. The
remainder will fund routine capital  expenditures  needed to maintain our stores
and distribution centers.

I am delighted to have the opportunity to lead the new team at Payless Cashways.
It is my commitment that our Company become profitable again and that we enhance
stockholder value. In closing, to our associates,  I say, thank you for all that
you do for our  customer.  To our  vendors,  I say,  come on in and  let's  grow
profitably together. And, to our lenders and our stockholders,  I say, thank you
for your continued support. We will be successful.

/s/ Millard E. Barron

Millard E. Barron
President and Chief Executive Officer



<PAGE>

      [Page 4 through  8 of the  original  document,  which  contained  text and
pictures, have been omitted from the EDGAR filing.]





<PAGE>9


Payless Cashways, Inc.

Board of Directors

Peter G. Danis +
Non-executive Chairman of the Board
Payless Cashways, Inc.
Former Chief Executive Officer
Boise Cascade Office Products Corporation

Millard E. Barron
President and Chief Executive Officer
Payless Cashways, Inc.

H. D. Cleberg * @
President and Chief Executive Officer
Farmland Industries, Inc.

David G. Gundling + #
President and Chief Executive Officer
Hagemeyer Foods N.A., Inc.

Max D. Hopper @ #
Principal
Max D. Hopper Associates, Inc.

Donald E. Roller + #
Former Executive Vice President
North American Gypsum USG Corporation

Peter M. Wood * @
Former Managing Director
J. P. Morgan & Co., Incorporated


*    Member of Audit Committee
+    Member of Compensation Committee
@    Member of Corporate Governance and
         Nominating Committee
#    Member of Finance Committee




Officers

Millard E. Barron
President and Chief Executive Officer
Payless Cashways, Inc.

Stanley K. Boyd
Senior Vice President - Store Operations

Richard G. Luse
Senior Vice President - Finance and
Chief Financial Officer

Kelly R. Abney
Vice President - Logistics, Replenishment and Facilities

James L. Deats
Vice President - Information Systems

Renae G. Gonner
Vice President - Marketing and Advertising

Shawn J. Hepinstall
Vice President - Merchandising

Louise R. Iennaccaro
Vice President - Human Resources

David J. Krumbholz
Vice President - Professional Business

Ronald D. Long
Vice President - Merchandising Display and Productivity

Timothy R. Mertz
Vice President - Treasury

Kenneth G. Frank, Jr.
Regional Vice President

Dennis R. Knowles
Regional Vice President

David L. Wenman
Regional Vice President



<PAGE>10

<TABLE>

Payless Cashways, Inc.

QUARTERLY STATEMENTS OF OPERATIONS (unaudited)


In thousands, except per share amounts
<CAPTION>
                                                                                          Reorganized Company
                                                                ---------------------------------------------------------------
                                                                     First           Second             Third           Fourth
Fiscal Year Ended November 28, 1998                                 Quarter          Quarter           Quarter          Quarter
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>              <C>               <C>

Income
    Net sales                                                   $  394,271        $  505,919       $  523,508        $  483,164
    Other income                                                       789               991              908               310
                                                                ---------------------------------------------------------------
                                                                   395,060           506,910          524,416           483,474

Costs and expenses
    Cost of merchandise sold                                       291,909           374,971          393,021           360,886
    Selling, general and administrative                            112,170           112,196          112,382           110,188
    Special charges                                                  5,584                --              837             1,000
    Provision for depreciation and amortization                      8,312             8,855            7,835             8,137
    Interest expense                                                10,235             9,915            8,994             8,018
                                                                ---------------------------------------------------------------
                                                                   428,210           505,937          523,069           488,229
                                                                ---------------------------------------------------------------
         INCOME (LOSS) BEFORE INCOME TAXES                         (33,150)              973            1,347            (4,755)

Federal and state income taxes                                      (8,188)              241              332            (5,603)
                                                                ----------------------------------------------------------------


                                 NET INCOME (LOSS)              $  (24,962)       $      732       $    1,015        $      848
                                                                ===============================================================

Weighted average common shares outstanding                          20,000            20,000           20,000            20,000
                                                                ---------------------------------------------------------------

Net income (loss) per common share-basic                        $    (1.25)       $    0.04        $     0.05        $    0.04
                                                                ==============================================================

Weighted average common and dilutive
    common equivalent shares outstanding                            20,000            20,111           20,004            20,034
                                                                ---------------------------------------------------------------

Net income (loss) per common share-diluted                      $    (1.25)       $    0.04        $     0.05        $    0.04
                                                                ==============================================================


<FN>
A  lower-than-anticipated   rate  of  inflation  decreased  the  LIFO  inventory
provision,  after tax, by $1.7 million in the fourth  quarter.  Special  charges
($3.4 million after tax) reflected in the first quarter consist of costs related
to  the  elimination  of  staff  at  the  Company's  headquarters  and  regional
administrative  centers.  Special  charges  were also  recorded in the third and
fourth  quarter  ($0.5  million and $0.6  million,  respectively,  after tax) in
connection  with store closings.  In addition,  third and fourth quarter cost of
merchandise sold reflect  inventory  write-downs ($0.8 million and $2.0 million,
respectively,  after tax) in connection  with these store  closings.  The fourth
quarter  income tax benefit  includes a $3.8  million tax benefit to reflect the
effect of a fourth quarter revision of the effective tax rate on the first three
quarters.
</FN>
</TABLE>



<PAGE>11

<TABLE>
Payless Cashways, Inc.

QUARTERLY STATEMENTS OF OPERATIONS (unaudited) (cont'd.)


In thousands
<CAPTION>
                                                                                          Predecessor Company
                                                                 --------------------------------------------------------------
                                                                     First           Second             Third           Fourth
Fiscal Year Ended November 29, 1997                                 Quarter          Quarter           Quarter          Quarter
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>              <C>               <C>
Income
   Net sales                                                     $  487,550        $  661,191       $  632,107        $  504,433
   Other income                                                       1,205             1,264            1,191             1,274
                                                                 ---------------------------------------------------------------
                                                                    488,755           662,455          633,298           505,707

Costs and expenses
   Cost of merchandise sold                                         348,247           483,093          478,038           367,280
   Selling, general and administrative                              138,407           151,147          148,166           121,097
   Reorganization items                                                  --                --            5,121            20,334
   Fresh-start revaluation                                               --                --               --           355,559
   Special charges                                                       --                --           13,056                --
   Asset impairment charges                                              --                --           60,483                --
   Provision for depreciation and amortization                       12,804            13,037           12,768            12,501
   Interest expense                                                  16,055            16,274           14,663            14,259
                                                                 ---------------------------------------------------------------
                                                                    515,513           663,551          732,295           891,030
                                                                 ---------------------------------------------------------------
                       LOSS BEFORE INCOME TAXES                     (26,758)           (1,096)         (98,997)         (385,323)

Federal and state income taxes                                      (18,623)           12,133          (33,595)          (50,321)
                                                                 ----------------------------------------------------------------

                LOSS BEFORE EXTRAORDINARY ITEMS                      (8,135)          (13,229)         (65,402)         (335,002)

Extraordinary items, net of income taxes                                 --                --               --           133,176
                                                                 ---------------------------------------------------------------

                                       NET LOSS                  $   (8,135)       $  (13,229)      $  (65,402)       $ (201,826)
                                                                 ================================================================


<FN>
In connection  with its Chapter 11 filing on July 21, 1997,  discussed at Note B
to the Financial  Statements,  the Company recorded  reorganization items in the
third  and  fourth   quarters   ($3.2  million  and  $12.5  million  after  tax,
respectively).  The Company also adopted  fresh-start  accounting,  discussed at
Note C to the Financial Statements,  as of November 29, 1997, as a result of its
emergence  from  bankruptcy  under its plan of  reorganization  effective  date,
December  2, 1997.  Fresh-start  revaluation  charges,  after tax,  were  $312.1
million.  An  extraordinary  gain of $138.2  million  after tax  related  to the
discharge of debt pursuant to the  consummation  of the Plan was recorded in the
fourth quarter. In addition,  an extraordinary  charge of $5.0 million after tax
related  to the early  extinguishment  of debt was also  recorded  in the fourth
quarter. A lower-than-anticipated rate of inflation decreased the LIFO inventory
provision,  after tax, by $3.0 million in the fourth  quarter.  Special  charges
($8.1  million  after  tax)  reflected  in the third  quarter  consist  of costs
associated with the closing of 29 stores. Third quarter cost of merchandise sold
reflects an inventory  write-down  ($6.6 million  after tax) in connection  with
these store  closings.  The Company  also  recorded an asset  impairment  charge
($43.9 million after tax) in the third quarter.
</FN>
</TABLE>



<PAGE>12


Payless Cashways, Inc.

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



Results of Operations

The following  discussion of the  Company's  financial  condition and results of
operations should be read in conjunction with the Financial Statements and notes
thereto included  elsewhere in this Annual Report to  Stockholders.  The Company
has  implemented the required  accounting for entities  emerging from bankruptcy
under  Chapter  11,  Title  11 of the  United  States  Code  ("Chapter  11")  in
accordance  with  the  American  Institute  of  Certified  Public   Accountants'
Statement of Position  90-7 ("SOP  90-7"),  "Financial  Reporting by Entities in
Reorganization   Under  the  Bankruptcy  Code"  ("fresh-start   reporting")  and
reflected  the effects of such  adoption in the balance sheet as of November 29,
1997.  Under  fresh-start  reporting,  the balance  sheet of November  29, 1997,
became the opening  balance  sheet of the  Reorganized  Company.  The  financial
statements  of the  Predecessor  Company  prior to November  29,  1997,  are not
comparable in material  respects to the financial  statements of the Reorganized
Company.


<TABLE>

Operating Data
<CAPTION>
                                                                                 Reorganized    |
                                                                                   Company      |      Predecessor Company
                                                                           -------------------- | ---------------------------
                                                                              Fiscal Year Ended |       Fiscal Year Ended
                                                                           -------------------- | ---------------------------
percent of net sales                                                            Nov. 28,        |Nov. 29,          Nov. 30,
                                                                                  1998          |  1997              1996
                                                                           ---------------------|----------------------------
<S>                                                                               <C>           |   <C>              <C>
Net sales.......................................................                  100.0 %       |   100.0 %          100.0 %
Other income....................................................                    0.1         |     0.2              0.3
Cost of merchandise sold........................................                   74.5         |    73.4             72.1
Selling, general and administrative.............................                   23.4         |    24.4             23.3
Reorganization items............................................                    --          |     1.1              --
Fresh-start revaluation.........................................                    --          |    15.6              --
Special charges.................................................                    0.4         |     0.6              0.3
Asset impairment charges........................................                    --          |     2.6              2.3
Provision for depreciation and amortization.....................                    1.7         |     2.2              2.1
Interest expense................................................                    2.0         |     2.7              2.3
Interest income.................................................                    --          |     --              (0.2)
                                                                           ---------------------|----------------------------
Loss before income taxes........................................                   (1.9)        |   (22.4)            (1.9)
                                                                                                |
Federal and state income taxes..................................                   (0.7)        |    (4.0)            (1.2)
                                                                           ---------------------|----------------------------
Loss before extraordinary items.................................                   (1.2)        |   (18.4)            (0.7)
                                                                                                |
Extraordinary items.............................................                    --          |     5.8              --
                                                                           ---------------------|----------------------------
Net loss........................................................                   (1.2) %      |   (12.6) %          (0.7) %
                                                                           =====================|============================
</TABLE>


Sales

Net sales for fiscal 1998 decreased  16.6% in total from fiscal 1997 and 7.3% on
a same-store basis. Same-stores are those open one full year. Both 1998 and 1997
were 52-week years.  Management believes continuing competitive pressure and the
lingering  effects  of the  Chapter  11  filing  contributed  to sales  declines
throughout 1998,  although  same-store sales have improved  steadily in the last
three quarters of 1998--from a 13.2% decrease in the second  quarter,  to a 6.7%
decrease in the third quarter, to


<PAGE>13


a 1.1%  decrease  in  the  fourth  quarter.  On a  same-store  basis,  sales  to
professional  customers  were flat,  while sales from the  consumer  side of the
business decreased 13.7% in fiscal 1998.

Net sales for fiscal 1997, a 52-week year,  decreased  13.5% from fiscal 1996, a
53-week year. On a 52-week basis, net sales for fiscal year 1997 decreased 11.9%
compared to fiscal 1996. Same-store sales, on a 52-week basis, decreased by 6.6%
for fiscal 1997. Net sales for 1997 reflect continuing competitive pressure and,
in the second half,  the  disruption in the supply of product and the erosion of
customer  confidence  caused by the Chapter 11 filing.  On a  same-store  basis,
sales to professional  customers  increased 0.2%,  while sales from the consumer
side of the business decreased 11.9% in fiscal 1997.

The Company  closed  four stores  during  1998.  Twenty-four  stores were closed
during  the third  quarter  of 1997 (one of which had been  announced  in fiscal
1996),  and an  additional  six stores  were closed in the fourth  quarter.  The
Company  closed six stores in early fiscal 1996 and another  eight stores in the
fourth  quarter of 1996.  Closed  stores  accounted for $34.4 million and $269.2
million of sales in 1998 and 1997, respectively.



Costs and Expenses

The cost of merchandise  sold, as a percent of sales,  was 74.5% in fiscal 1998,
73.4% in fiscal 1997,  and 72.1% in fiscal 1996.  Third and fourth  quarter 1998
inventory  write-downs  of  $4.4  million,  related  to  the  closing  of  eight
underperforming  stores,  was  0.2%  of  sales  for  fiscal  1998.  Likewise,  a
third-quarter  inventory write-down of $10.7 million,  related to the closing of
29  underperforming  stores,  was 0.5% of sales for fiscal 1997.  Excluding  the
effects of inventory write-downs related to store closings, the increase in cost
of merchandise  sold as a percent of sales during 1998 was primarily due to more
competitive  pricing designed to regain customer traffic lost during the Chapter
11 period of 1997.  The decrease in gross  margins  during 1997,  excluding  the
effect of inventory  write-downs,  was primarily due to competitive pressure and
the growth in sales to the  professional  customer whose  merchandise  purchases
include a higher  percentage of commodity  goods at margin rates  somewhat lower
than the Company's  average.  The disruption in the supply of product  resulting
from the  Chapter 11 filing  caused  some  increase in cost of goods sold due to
purchasing  product from secondary  sources at higher costs. Cost of merchandise
sold in fiscal  1998,  1997,  and 1996  benefited  from a $2.4  million,  a $0.7
million, and a $3.2 million LIFO credit,  respectively,  related to liquidations
of LIFO inventories and deflation.

Selling, general and administrative expenses, as a percent of sales, were 23.4%,
24.4%,  and  23.3%  for  fiscal  1998,  1997 and  1996,  respectively.  The 1998
reductions in selling,  general and administrative expenses, both in dollars and
as a percent of sales,  were primarily the result of closed  stores,  as well as
initiatives  undertaken  in 1998 to  reduce  store  as well as  corporate  level
personnel  costs.  The  increase  as a percent of sales for fiscal  1997 was due
primarily  to lower  sales.  The 1997  decrease in dollars was due  primarily to
savings from the store closings, discussed above.

In connection with its Chapter 11 filing,  the Company  recorded  reorganization
items  of  $25.5  million  during  fiscal  1997.   Additional   details  on  the
reorganization  items are set forth in Note I to the Financial  Statements.  The
Company  also  recorded  fresh-start  revaluation  charges of $355.6  million in
fiscal  1997.  See  Note C to the  Financial  Statements  for  more  details  on
fresh-start reporting and these related charges.

A special  charge of $5.6 million  ($3.4  million after tax) was recorded in the
first quarter of 1998 for severance costs related to the elimination of staff at
the  Company's  home office and regional  administrative  centers.  In addition,
special  charges of $0.8 million ($0.5 million after tax) and $1.0 million ($0.6
million  after  tax) were  recorded  in the third and fourth  quarters  of 1998,
respectively,  in connection with the closing of three and five  underperforming
stores,  respectively.  A special  charge of $13.1  million  ($8.1 million after
tax),  primarily a cash charge, was recorded in the third quarter of fiscal 1997
to reflect real estate disposal and severance costs related to the closing of 29
underperforming stores as part of the Company's reorganization under Chapter 11.
A special  charge of $8.2 million  ($5.0  million  after tax),  primarily a cash
charge, was recorded in the third quarter of fiscal 1996 to reflect future store
rentals  and  real  estate  disposal  costs  related  to  the  closing  of  nine
underperforming stores.  Additional details on the special charges are set forth
in Note K to the Financial Statements.


<PAGE>14

The Company recorded an asset impairment  charge of $60.5 million ($43.9 million
after tax) and $59.7 million  ($44.6 million after tax) in the third quarters of
1997 and 1996,  respectively.  Primarily  because the  environment  for building
materials retailing continued to be increasingly competitive,  the Company first
conducted its review in the third quarter of 1996 and determined  certain assets
were  impaired.  In the third  quarter of 1997,  the Company  again  conducted a
review of  underperforming  stores and determined that certain additional assets
were impaired,  including assets related to 29 stores, which the Company closed.
The asset  impairment  charges  were  recorded  after  considering  current  and
expected  future  operating  cash flows for  certain  stores  together  with the
proceeds  the Company  could  expect to receive  upon the sale of these  assets.
Additional  details on the asset  impairment  charges are set forth in Note J to
the  Financial  Statements.  The  Company  will  continue  to review  assets for
impairment,  particularly given the ongoing competitive environment for building
materials retailing.

The  provision  for  depreciation  and  amortization  for fiscal 1998  decreased
compared to fiscal 1997  primarily  because  goodwill was written off and assets
were written down in fresh-start  reporting  related to the Company's  emergence
from  reorganization  under  Chapter 11. In  addition,  assets were removed from
service in connection with the store closings  mentioned  above. The decrease in
the  provision for  depreciation  and  amortization  for fiscal 1997 compared to
fiscal 1996 was also  primarily due to assets removed from service in connection
with store closings.

Interest  expense  decreased  $24.1  million  to $37.2  million  in fiscal  1998
compared to fiscal 1997 due primarily to lower levels of debt resulting from the
cancellation of  indebtedness in connection with the Chapter 11  reorganization.
Interest expense increased $0.8 million to $61.3 million in fiscal 1997 compared
to fiscal 1996 due  primarily to higher  interest  rates.  Interest  expense for
fiscal 1997 would have increased an additional $5.7 million had certain debt not
been  compromised by the Chapter 11 filing.  The Company also recorded  interest
income of $4.9 million  ($2.9  million  after tax) in the third quarter of 1996,
related  to a  pending  tax  refund  arising  out of  recent  legislation  and a
settlement with the Internal Revenue Service ("IRS").

The effective tax rate for fiscal 1998 was different from the 35% statutory rate
primarily because of state income taxes. The effective tax rates for fiscal 1997
and 1996  differed from the 35%  statutory  rate  primarily due to the effect of
goodwill  amortization  and  the  write-off  of  goodwill,  both  of  which  are
non-deductible  for income tax  purposes.  In  addition,  for fiscal  1996,  the
effective  tax rate was  significantly  affected by the tax  benefit  related to
income tax  legislation  and an IRS  settlement.  On August 20, 1996,  the Small
Business Job Protection Act of 1996 was signed into law.  Certain  provisions of
this legislation clarified the Tax Reform Act of 1986 and made retroactively tax
deductible certain costs and expenses previously recorded by the Company without
any related tax benefit. In addition,  during 1996, the Company settled with the
IRS  regarding  several tax  issues.  As a result,  the  Company  recorded a tax
benefit of $23.7 million and related interest income, discussed above.

Net Income (Loss)

The  Company  had losses  before  extraordinary  items of $22.4  million in 1998
compared  to $421.8  million in 1997 and $19.1  million  in 1996.  The 1998 loss
before  extraordinary items reflects the special charges for severance and store
closings,  discussed  above. The 1997 loss before  extraordinary  items reflects
reorganization items,  fresh-start  revaluation charges,  store closing charges,
and an asset  impairment  charge,  all  discussed  above.  The 1996 loss  before
extraordinary item reflects store closing charges, an asset impairment charge, a
federal income tax benefit and related  interest  income,  all discussed  above.
Excluding the non-routine  items recorded during fiscal 1998, 1997 and 1996, net
loss  for 1998 and 1997  would  have  been  $14.9  million  and  $35.5  million,
respectively, and net income for 1996 would have been $7.4 million.



<PAGE>15
<TABLE>

Comparative Operating Data 
<CAPTION>
                                    Reorganized Company         |                          Predecessor Company
                            ------------------------------------|------------------------------------------------------------------
                                    Fiscal Year Ended           |                           Fiscal Year Ended
                                                                |------------------------------------------------------------------
                                     November 28, 1998          |      November 29, 1997                   November 30, 1996
                            ------------------------------------|----------------------------------  ------------------------------
In thousands                    Pro Forma         Historical    |     Pro Forma      Historical        Pro Forma      Historical
                               (Excluding         (Including    |    (Excluding      (Including       (Excluding      (Including
                               Non-Routine        Non-Routine   |    Non-Routine     Non-Routine      Non-Routine     Non-Routine 
                                  Items)            Items)      |       Items)          Items)           Items)          Items)
                            ----------------  ----------------  | ---------------  --------------  ---------------  ---------------
<S>                           <C>               <C>             |    <C>             <C>             <C>              <C>
Net sales and other income    $ 1,906,862       $ 1,906,862     |    $ 2,290,215     $ 2,290,215     $ 2,650,905      $ 2,650,905
Income (loss) from                                              |
 operations before                                              |
 interest, depreciation                                         |
 and amortization             $    46,577       $    42,137     |    $    65,433     $  (399,813)    $   134,552      $    60,824
Net income (loss)             $   (14,913)      $   (22,367)    |    $   (35,451)    $  (288,592)    $     7,428      $   (19,078)

</TABLE>


New Accounting Pronouncements

In June of 1998, the Financial  Accounting  Standards Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities" ("SFAS 133"). This statement establishes  accounting and
reporting standards for derivative  instruments and all hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities  at their fair  market  values.  Accounting  for changes in the fair
value  of a  derivative  depends  on  its  designation  and  effectiveness.  For
derivatives that qualify as effective hedges, the change in fair value will have
no impact on earnings until the hedged item affects  earnings.  For  derivatives
that are not designated as hedging  instruments,  or for the ineffective portion
of a hedging  instrument,  the change in fair value will affect  current  period
earnings.  The  Company  will adopt SFAS 133 during the first  quarter of fiscal
2000 and does not presently  believe that it will have a  significant  effect on
the results of its operations or cash flows.

Effects of Inflation

The Company  experienced  slight deflation in its non-lumber  inventories during
fiscal 1998 and fiscal 1997.  Approximately  80% of the  Company's  inventory is
valued using the LIFO inventory accounting method; therefore,  current costs are
reflected in the cost of merchandise sold, rather than in inventory balances.

Market Risk

The Company's most significant  market risk exposure is changing interest rates.
To manage this potential risk, the Company may use interest rate swap agreements
to limit the effect of  increases  in the  interest  rates on  variable  debt by
fixing the rate  without the  exchange of the  underlying  principal or notional
amount.  Net amounts  paid or received  are added to or deducted  from  interest
expense in the period accrued.  The table below provides  information  about the
Company's  variable rate debt obligations and presents  principal cash flows and
related weighted average interest rates by expected  maturity dates. The Company
does not hold or issue derivative instruments for trading purposes.

   Expected         Principal Due on          Weighted
Maturity Date      Variable Rate Debt   Average Interest Rate
                      In thousands
     1999            $    10,921               7.52%
     2000                 10,000               7.73%
     2001                 10,000               7.73%
     2002                221,806               7.85%
     2003                  4,000               5.25%
     Thereafter           89,809               5.25%
                     -----------               -----
     Total           $   346,536               7.13%
                     ===========               =====

   Fair Value        $   346,536               7.13%
                     ===========               =====

To reduce the  impact of  changes in the  interest  rates,  the  Company  has an
interest  rate  swap  agreement  under  which it pays a  6-9/16%  fixed  rate of
interest quarterly through December 1, 1999 in exchange for quarterly receipt of
LIBOR on a $36 million notional amount.

Petition For Relief Under Chapter 11

While the Company had sufficient  liquidity to fund its current operations,  the
operating  performance  of the Company during the second quarter of fiscal 1997,
which

<PAGE>16


was well below the Company's  expectations,  led  management to conclude that it
was  unlikely  that the  Company  would  be able to  comply  with the  covenants
contained in its principal credit agreements at the end of the 1997 fiscal year.
In the course of the Company's  subsequent  negotiations with its senior lenders
to  restructure  its debt and  after  considering  with its  financial  adviser,
Houlihan Lokey Howard & Zukin, all other alternatives, including the sale of the
Company and  liquidation,  the Company  concluded  that a Chapter 11  proceeding
provided the best approach for a comprehensive  financial  restructuring  of the
Company.  This action was intended to improve the Company's competitive position
by establishing a more appropriate  capital structure to operate the business in
this period of unprecedented competitive pressure after a decade of dealing with
a highly leveraged balance sheet, which had limited capital expenditures.

On July 21, 1997,  the Company filed a voluntary  petition to  reorganize  under
Chapter 11 and filed a plan of reorganization  for its emergence from Chapter 11
(the "Plan" or "Plan of Reorganization") as well as a Disclosure Statement.  The
Company  operated  its  business  as  a  debtor-in-possession,  subject  to  the
jurisdiction of the Court, while pursuing its reorganization plan to restructure
the  Company's  capitalization.  The Chapter 11 filing  resulted in an automatic
stay of the commencement or prosecution of claims against the Company that arose
before the petition date.

The  Disclosure  Statement  and Plan were  subsequently  amended on September 5,
1997, and modified on October 9, 1997. On October 10, 1997, the Court determined
that  the  Disclosure  Statement  contained  adequate  information  to  permit a
creditor to make an informed  decision  about the Plan.  The Company's  impaired
creditors and equity security holders accepted the Plan, the Court confirmed the
Plan  on  November  19,  1997,  and,  after  the  satisfaction  of a  number  of
conditions,  the Plan became effective  December 2, 1997 (the "Effective Date").
For a  summary  description  of the  Plan,  see  Note B to  Notes  to  Financial
Statements.

Financing Activities

On August 13,  1998,  the Company  amended its 1997 Credit  Agreement  to modify
various  covenants,  including  required  minimum cash flow (defined as earnings
before interest, taxes, depreciation,  and amortization,  "EBITDA"), and maximum
debt  to  EBITDA.  These  covenants  are  detailed  in  Note D to the  Financial
Statements.  Subsequent  to  fiscal  year end 1998,  the  Company  entered  into
preliminary  discussions  with  new,  as well  as  existing,  lenders  regarding
restructuring  a major  portion of its 1997  Credit  Agreement.  This  action is
intended to improve the Company's  operating  flexibility through elimination of
certain of its current restrictive covenants.

As a result of the  Chapter  11 filing on July 21,  1997,  borrowings  under the
revolving credit facility of the Prior Credit Agreement,  defined below, were no
longer  available to the  Company.  During the period from July 21, 1997 through
December 2, 1997,  the Company  utilized  debtor-in-possession  financing  which
consisted of a $125 million revolving credit facility (the "DIP Agreement").  On
or prior to the Effective Date, the Company paid all amounts  outstanding  under
the DIP Agreement and the Prior Credit Agreement with cash, New Common Stock and
new notes under the 1997 Credit  Agreement.  The 1997 Credit Agreement  includes
term loans of $283.1 million and a $150 million revolving credit facility with a
$40  million  letters-of-credit   sublimit.  In  accordance  with  the  Plan  of
Reorganization,  on the Effective Date, the Company's  mortgage loan, secured by
certain real estate,  was retired and replaced  with a new mortgage loan secured
by the same real  estate,  and the  Company's  senior  subordinated  notes  were
terminated  and  canceled.  Holders of these  subordinated  notes  hold  general
unsecured  claims under the Plan. On the Effective Date, the Company also issued
a note for $16 million, secured by three store facilities,  in settlement of the
secured  portion of the claims  arising from a lease  agreement  involving  five
store  facilities.  The note contained  prepayment  provisions  that allowed the
Company to prepay the note by certain  dates at various  discounts.  On February
26, 1998, the Company borrowed an additional $13 million under the mortgage loan
and prepaid this note in full.

At  November  28,  1998,  the  Company  had  approximately   $347.6  million  of
indebtedness. The Company expects from time to time to incur additional seasonal
indebtedness.

The Year 2000 Issue

The Year 2000 issue is the result of computer  programs  being written using two
digits rather than four digits to define the applicable  year. Any programs that
have time-


<PAGE>17


sensitive  software  may  recognize  a date  using "00" as the year 1900  rather
than the Year  2000.  This could  result in system failure or miscalculations.

The Company has  completed an  assessment  of the impact of the Year 2000 on its
computer systems, both hardware and software, and has developed a plan to timely
address the Year 2000 issue. Systems that interact with customers and that focus
on the core business functions of buying, selling and accounting have been given
the highest priority.  Some of the Company's current systems are being renovated
and others are being replaced with Year 2000-compliant  systems.  All renovation
code and  system  replacements  are  being  unit-tested  as they are  completed.
Integrated  full-system  testing will begin in the first  quarter of 1999 and is
expected to continue  through the third quarter of 1999.  Code renovation is 99%
complete as of January 1, 1999. All core business systems requiring  replacement
will be complete by mid-1999. The Company has spent approximately $3 million, to
date, in the execution of the Year 2000 plan and estimates that  expenditures to
complete  execution  of the Year 2000  plan will  range  from $2  million  to $3
million. Most of such expenditures are being charged to expense as incurred. The
Company currently  believes that it will complete all phases of the plan without
any material  adverse  consequences  to its business,  operations,  or financial
condition.

All  non-information  technology,  which  contains  or  might  contain  imbedded
software chips that utilize a date  function,  such as  distribution  conveyance
systems,  security systems,  climate controls, and other electronic devices used
in  daily  business  operations,   have  been  inventoried  and  assessed.   All
non-compliant systems are being upgraded and tested as compliant versions become
available. This work is expected to continue throughout 1999.

The  Company is in the process of  assessing  the extent to which the Company is
vulnerable  to the failure of  significant  suppliers and other third parties to
remediate  their own Year 2000 issues.  The Company expects that this assessment
will be completed by April 1999 and believes testing of interfaces with business
partners and vendors will continue through 1999. The Company does not anticipate
the cost of Year 2000  compliance  by  suppliers to be passed on to the Company.
However,  there can be no assurances that failure to address the Year 2000 issue
by a third party on whom the  Company's  systems  rely would not have a material
adverse effect on the Company.

As testing and assessment of third parties is completed,  the Company intends to
develop  contingency  plans for possible  Year 2000  problems.  The costs of the
Company's Year 2000 project and the date on which it will be completed are based
on management's  best estimates.  However,  there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.


Liquidity and Capital Resources

The  Company's  principal  source of cash is from  operations.  Cash provided by
operating  activities  was $49.2  million  for fiscal  1998,  compared  to $32.0
million for fiscal 1997 and $32.4 million for fiscal 1996.  The 1998 increase in
cash provided by operating  activities  was primarily due to lower 1998 interest
costs  resulting from the  cancellation  of  indebtedness in connection with the
Chapter  11  reorganization.  Cash  provided  by  operating  activities  in 1997
benefited from the compromise and  extinguishment  of general  unsecured claims,
including trade accounts payable,  pursuant to the Plan of  Reorganization  that
would have  otherwise  required  cash.  During fiscal 1998 and 1997, the Company
used cash of  approximately  $4.2 million and $14.3  million,  respectively,  in
operating  activities  related  to the  execution  of the  1997,  1996  and 1995
restructuring  plans and $10.2  million in fiscal 1998 for costs  related to the
Chapter 11 filing. In addition,  the Company used $5.7 million in fiscal 1998 to
pay  severance  costs  related  to the  elimination  of staff  at the  Company's
headquarters  and  regional  administrative  centers  and to  effect  the  store
closings announced in September 1998.

Borrowings  are available  under the 1997 Credit  Agreement to  supplement  cash
generated by operations.  At November 28, 1998,  $94.4 million was available for
borrowing.  Working  capital was $196.2 million and $258.4 million at the end of
fiscal 1998 and fiscal 1997,  respectively.  The current ratio was 2.08 to 1 and
2.15 to 1 at the end of fiscal 1998 and fiscal 1997,  respectively.  The primary
reasons for the decrease in working  capital and the current ratio was decreased
merchandise  inventory.  The Company's inventory levels are at the lowest levels
during the seasonally low sales months of December  through  February and are at
the highest levels during the peak selling months of


<PAGE>18


May through  September.  During the peak  period,  inventory is financed by cash
from operations and trade accounts payable. During the winter months,  inventory
is financed by cash from operations, trade accounts payable and borrowings under
the 1997 Credit Agreement,  as needed.  The Company believes that cash generated
from operations and borrowings  under the 1997 Credit  Agreement will adequately
meet its working  capital needs,  debt service and other  obligations  that will
become due in fiscal 1999.

During fiscal 1998,  the Company's  primary  investing  activities  were capital
expenditures  principally  for the renovation of existing  stores and additional
equipment.  The 1997 Credit Agreement governs the amount of capital expenditures
that can be made, and the permitted levels of capital expenditures in the future
are as follows:  $52.1 million in 1999;  $41.2 million in 2000; $51.3 million in
2001; and $52.3 million in 2002. The Company spent  approximately $23.3 million,
$62.9 million and $41.7 million in fiscal 1998, 1997 and 1996, respectively, for
renovation of existing  stores and  additional  equipment.  In 1997 and 1996 the
Company's  capital   expenditures  also  included   expenditures  for  strategic
initiatives,  including  the  acquisition  of a door  and trim  manufacturer  in
Phoenix,  AZ, during January 1996. For fiscal 1998, the Company ceased  spending
for strategic  initiatives while it analyzed its competitive  positioning in the
market and related capital  expenditures.  For fiscal 1997 and 1996, the Company
shifted its emphasis from new store openings to initiatives that further address
the needs of the professional and do-it-yourself customers.  During fiscal 1996,
in support of the professional  customer,  the Company completed the acquisition
of the manufacturer mentioned above and expanded the manufacturing capability of
one of its existing door plants.  During 1998 and 1997,  the Company sold 26 and
eight real estate properties,  respectively, related to stores previously closed
for  approximately  $41.6  million  and  $14.3  million,  respectively,  of cash
proceeds.  Sale of closed store properties will continue in fiscal 1999.  During
the first quarter of 1996, the Company sold a distribution  center in connection
with the 1995 restructuring plan, providing  approximately $11.9 million of cash
proceeds.  The Company leased one new store in 1996, which it opened in 1997. In
addition,  the Company  purchased and opened an existing store  facility  during
1997. In fiscal 1998,  the Company also received $5.8 million from the surrender
of certain life  insurance  policies  related to a terminated  benefit plan. The
Company's  approximately  $60 million 1999 capital  expenditure  budget consists
primarily of the purchase of ten previously  leased stores,  described at Note H
to the Financial Statements, improved technology, and investments to improve the
Company's  capabilities to service the Pro customer,  including  acquisitions of
retail operations and manufacturing  facilities,  store remodels and expansions,
and/or new stores.  Capital  expenditures  in 1999 will be  financed  with funds
generated from operations,  sales of real estate,  and borrowings under the 1997
Credit Agreement.

The Company's most significant financing activity is and will continue to be the
retirement of indebtedness.  As a result of the Company's  reorganization  under
Chapter 11, the indebtedness of the Company was reduced  significantly in fiscal
1997 as described  above in "Financing  Activities"  and in Notes B, C, and D to
the Financial Statements.  Although the Company's  consolidated  indebtedness is
and will continue to be substantial,  management  believes that,  based upon its
analysis of the Company's  financial  condition,  the cash flow  generated  from
operations  during the past 12 months and the expected  results of operations in
the future, cash flow from operations and borrowing  availability under the 1997
Credit  Agreement  should  provide   sufficient   liquidity  to  meet  all  cash
requirements for the next 12 months without additional financing, subject to the
possible  adverse impact of loan covenants  described  below. As a result of the
Chapter 11 filing,  trade creditors  significantly  shortened  credit terms. The
Company   believes  that  progress   with  regard  to   lengthening   terms  and
reestablishing  trade credit is  continuing,  but  availability  of trade credit
cannot be assured.  The 1997  Credit  Agreement  contains a number of  financial
covenants  with which the Company must comply.  Certain of these  covenants  are
detailed in Note D to the  Financial  Statements.  As  discussed  in  "Financing
Activities",  the Company  amended its 1997 Credit  Agreement to modify  various
covenants during fiscal 1998.  Management currently expects that it will achieve
compliance  with  these  covenants  throughout  1999;  however,  factors  beyond
management's  control,  including competitive  conditions,  economic conditions,
supplier support,  lumber prices,  and weather,  could cause  noncompliance.  If
compliance with these covenants is not achieved, the Company may be


<PAGE>19


required to  renegotiate  its  existing  covenants  with lenders or to refinance
borrowings.  Success in achieving any such renegotiations or refinancing, or the
specific terms thereof,  including interest rates, capital expenditure limits or
borrowing  capacity,  cannot  be  assured.  If  the  Company  fails  to  achieve
compliance  with these covenants or, in the absence of such  compliance,  if the
Company  fails to amend  such  financial  covenants  on terms  favorable  to the
Company,  the Company may be in default  under such  covenants.  If such default
occurred,  it would  permit  acceleration  of its  debt  under  the 1997  Credit
Agreement which, in turn, would permit  acceleration of substantially all of the
Company's other long-term debt.

Subsequent  to fiscal  year end  1998,  the  Company  entered  into  preliminary
discussions  with new, as well as existing,  lenders  regarding  restructuring a
major portion of its 1997 Credit  Agreement.  This action is intended to improve
the  Company's  operating  flexibility  through  elimination  of  certain of its
current restrictive covenants.  In addition, the current commercial and consumer
credit contracts will not be renewed after November 1999.  Approximately  40% of
the  Company's  fiscal  1998 sales were made  pursuant  to these  programs.  The
Company is in discussions  with other providers and believes that it will secure
an alternative  provider prior to termination of the current programs,  although
the Company's ability to secure an alternative provider or the terms of any such
agreement  cannot be assured.  If the Company were unable to secure  replacement
providers  for these  services,  it would be in  default  under the 1997  Credit
Agreement.  Commercial  credit is a key  component  of the  services the Company
offers  to the  professional  customer,  and  the  Company  believes  that  this
transition creates an opportunity to enhance customer satisfaction.

Forward-Looking Statements

Statements above in the letters to Stockholders and in the subsections  entitled
"Costs and Expenses,"  "New Accounting  Pronouncements,"  "The Year 2000 Issue,"
and  "Liquidity   and  Capital   Resources,"   such  as  "unlikely",   "intend",
"estimated", "believe", "expect", "anticipate" and similar expressions which are
not  historical   are   forward-looking   statements   that  involve  risks  and
uncertainties.  Such  statements  include,  without  limitation,  the  Company's
expectation as to future performance.

Such forward-looking  statements are made pursuant to the safe harbor provisions
of the  Private  Securities  Litigation  Reform Act of 1995.  There are  certain
important  factors  that could  cause  results to differ  materially  from those
anticipated  by  the  forward-looking   statements  made  above.  Investors  are
cautioned that all  forward-looking  statements  involve risks and  uncertainty.
Among the factors that could cause actual  results to differ  materially are the
following: competitor activities; stability of customer demand; stability of the
work force; supplier support; consumer spending and debt levels; interest rates;
housing activity; lumber prices; product mix; growth of certain market segments;
weather;  an excess of retail space  devoted to the sale of building  materials;
the success of the Company's strategy;  and success of the Company's remediation
for the Year  2000  issue.  Additional  information  concerning  these and other
factors  is  contained  in the  Company's  Securities  and  Exchange  Commission
filings,  including  but not  limited  to the Form  10-K,  copies  of which  are
available  from  the  Company  without  charge  or on the  Company's  web  site,
payless.cashways.com.



<PAGE>20


Payless Cashways, Inc.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
                                                                           Reorganized   |                Predecessor
                                                                             Company     |                  Company
                                                                      -------------------|--------------------------------------
                                                                      Fiscal Year Ended  |             Fiscal Year Ended
                                                                                         |--------------------------------------
                                                                        November 28,     |   November 29,         November 30,
In thousands, except per share amounts                                      1998         |       1997                 1996
-----------------------------------------------------------------------------------------|--------------------------------------
<S>                                                                    <C>               |   <C>                  <C>
Income                                                                                   |
     Net sales                                                         $    1,906,862    |   $   2,285,281        $   2,642,829
     Other income--Note A                                                       2,998    |           4,934                8,076
                                                                       ------------------|--------------------------------------
                                                                            1,909,860    |       2,290,215            2,650,905
Costs and expenses                                                                       |
     Cost of merchandise sold                                               1,420,787    |       1,676,658            1,906,734
     Selling, general and                                                                |
         administrative--Notes G and H                                        446,936    |         558,817              615,466
     Reorganization items--Note I                                                  --    |          25,455                   --
     Fresh-start revaluation--Note C                                               --    |         355,559                   --
     Special charges--Note K                                                    7,421    |          13,056                8,184
     Asset impairment charges--Note J                                              --    |          60,483               59,697
     Provision for depreciation and amortization                               33,139    |          51,110               55,016
     Interest expense (contractual interest of                                           |
         $66,973 in 1997)--Note D                                              37,162    |          61,251               60,488
     Interest income--Note F                                                       --    |              --               (4,900)
                                                                       ---------------------------------------------------------
                                                                            1,945,445    |       2,802,389            2,700,685
                                                                       ---------------------------------------------------------
                                                                                         |
                                       LOSS BEFORE INCOME TAXES               (35,585)   |        (512,174)             (49,780)
                                                                                         |
Federal and state income taxes--Note F                                        (13,218)   |         (90,406)             (30,702)
                                                                       ---------------------------------------------------------
                                                                                         |
                                LOSS BEFORE EXTRAORDINARY ITEMS               (22,367)   |        (421,768)             (19,078)
                                                                                         |
Extraordinary items, net of income taxes--Notes C and D                            --    |         133,176                   --
                                                                       ---------------------------------------------------------
                                                                                         |
                                                       NET LOSS        $      (22,367)   |   $    (288,592)       $     (19,078)
                                                                       =========================================================
                                                                                         |
Weighted average common shares outstanding                                     20,000    |
                                                                       ------------------|
Net loss per common share-basic and diluted--Notes A and E             $        (1.12)   |
                                                                       ===================



<FN>
See notes to financial statements
</FN>
</TABLE>



<PAGE>21


Payless Cashways, Inc.
<TABLE>
BALANCE SHEETS
<CAPTION>

                                                                                             Reorganized Company
                                                                                      ----------------------------------
                                                                                       November 28,         November 29,
In thousands                                                                               1998                 1997
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                   <C>
ASSETS
     CURRENT ASSETS
         Cash and cash equivalents                                                    $      1,950          $     11,961
         Merchandise inventories--Notes A and D                                            349,452               414,882
         Prepaid expenses and other current assets                                          17,506                14,705
         Income taxes receivable--Note F                                                     1,338                32,232
         Deferred income taxes--Note F                                                       8,026                 8,665
                                                                                      ----------------------------------
                                                      TOTAL CURRENT ASSETS                 378,272               482,445

     OTHER ASSETS
         Real estate held for sale--Notes A and J                                           14,144                48,562
         Deferred financing costs--Notes A and D                                             3,319                 2,600
         Other                                                                               6,897                14,316

     LAND, BUILDINGS AND EQUIPMENT--Notes A and D
         Land and land improvements                                                         99,402                98,390
         Buildings                                                                         225,426               219,244
         Equipment                                                                          39,114                35,048
         Automobiles and trucks                                                              8,439                 2,196
         Construction in progress                                                            5,487                 8,540
         Allowance for depreciation and amortization                                       (32,146)                   --
                                                                                      ----------------------------------
                                       TOTAL LAND, BUILDINGS AND EQUIPMENT                 345,722               363,418
                                                                                      ----------------------------------
                                                                                      $    748,354          $    911,341
                                                                                      ==================================

LIABILITIES AND STOCKHOLDERS' EQUITY
     CURRENT LIABILITIES
         Current portion of long-term debt--Note D                                    $     11,068          $      9,354
         Trade accounts payable                                                             52,325                75,583
         Salaries, wages and bonuses                                                        24,298                29,051
         Accrued vacation expense                                                           12,045                13,035
         Other accrued expense--Notes G, J and K                                            66,727                73,656
         Taxes, other than income taxes                                                     13,275                20,999
         Income taxes payable--Note F                                                        2,350                 2,362
                                                                                      ----------------------------------
                                                 TOTAL CURRENT LIABILITIES                 182,088               224,040

     LONG-TERM DEBT, less portion classified as current
         liability--Note D                                                                 336,557               424,031

     NON-CURRENT LIABILITIES
         Deferred income taxes--Note F                                                      47,142                58,788
         Other--Note G                                                                      21,134                20,682

     STOCKHOLDERS' EQUITY--Notes A, B, D and E
         Common Stock, $.01 par value, 50,000,000 shares authorized,
           20,000,000 shares issued                                                            200                   200
         Additional paid-in capital                                                        183,600               183,600
         Accumulated deficit                                                               (22,367)                   --
                                                                                      ----------------------------------
                                                TOTAL STOCKHOLDERS' EQUITY                 161,433               183,800
                                                                                      ----------------------------------
     COMMITMENTS AND CONTINGENCIES--Notes G, H, and L
                                                                                      $    748,354          $    911,341
                                                                                      ==================================
<FN>
See notes to financial statements
</FN>
</TABLE>


<PAGE>22


Payless Cashways, Inc.
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                            Reorganized     |             Predecessor
                                                                              Company       |               Company
                                                                         -------------------|-----------------------------------
                                                                         Fiscal Year Ended  |          Fiscal Year Ended
                                                                                            |-----------------------------------
                                                                            November 28,    |  November 29,        November 30,
In thousands                                                                    1998        |      1997                1996
--------------------------------------------------------------------------------------------|-----------------------------------
<S>                                                                      <C>                |  <C>                 <C> 
                                                                                            |
Cash Flows from Operating Activities                                                        |
      Net loss                                                           $    (22,367)      |  $   (288,592)       $    (19,078)
      Adjustments to reconcile net loss                                                     |
          to net cash provided by operating activities:                                     |
        Depreciation and amortization                                          33,139       |        51,110              55,016
        Asset impairment charges--Note J                                           --       |        60,483              59,697
        Deferred income taxes                                                 (11,007)      |       (72,237)            (12,270)
        Non-cash reorganization items--Note I                                      --       |         2,481                  --
        Non-cash interest                                                         829       |         5,031               2,534
        Non-cash extraordinary items--Notes C and D                                --       |      (133,176)                 --
        Fresh-start revaluation--Notes B and C                                     --       |       355,559                  --
        Special charges--Note K                                                 7,421       |        13,056               8,184
        Other                                                                     452       |        (1,467)              1,337
      Changes in assets and liabilities:                                                    |
        Decrease (increase) in merchandise inventories                         65,430       |         7,462              (6,406)
        (Increase) decrease in prepaid expenses                                             |
             and other current assets                                            (901)      |         6,926              (4,763)
        Decrease (increase) in income taxes receivable                         30,882       |       (14,505)            (15,200)
        (Decrease) increase in trade accounts payable                         (23,258)      |        44,252             (37,953)
        (Decrease) increase in other current liabilities                      (31,380)      |        (4,359)              1,349
                                                                         -------------------|-----------------------------------
    NET CASH PROVIDED BY OPERATING ACTIVITIES                                  49,240       |        32,024              32,447
                                                                                            |
Cash Flows from Investing Activities                                                        |
      Additions to land, buildings and equipment                              (23,349)      |       (61,925)            (40,117)
      Proceeds from sale of land, buildings and equipment                      43,987       |        18,775              14,709
      Acquisition of business, excluding working capital:                                   |
        Land, buildings and equipment                                              --       |            --                (193)
        Purchase price in excess of net assets acquired                            --       |        (1,015)             (1,360)
      Decrease (increase) in other assets                                       7,419       |        (1,745)              1,435
                                                                         -------------------|-----------------------------------
    NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                        28,057       |       (45,910)            (25,526)
                                                                                            |
Cash Flows from Financing Activities                                                        |
      Net (payments) proceeds related to revolving credit                                   |
        facility--Note D                                                       (2,000)      |        62,386              28,000
      Principal payments on long-term debt--Note D                            (83,760)      |       (32,795)            (31,092)
      Fees and financing costs paid in connection with debt                                 |
        refinancing--Notes A and D                                             (1,548)      |        (3,365)             (3,670)
      Other                                                                        --       |          (804)               (694)
                                                                         -------------------|-----------------------------------
    NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                       (87,308)      |        25,422              (7,456)
                                                                         -------------------|-----------------------------------
                                                                                            |
Net (decrease) increase in cash and cash equivalents                          (10,011)      |        11,536                (535)
Cash and cash equivalents, beginning of period                                 11,961       |           425                 960
                                                                         -------------------|-----------------------------------
Cash and cash equivalents, end of period                                 $      1,950       |  $     11,961        $        425
                                                                         ===================|===================================
<FN>
See notes to financial statements
</FN>
</TABLE>



<PAGE>23


Payless Cashways, Inc.
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
                                            Preferred       Common    Additional   Adjustment for
                                              Stock          Stock      Paid-in    Minimum Pension    Accumulated
In thousands                            $1.00 Par Value $.01 Par Value  Capital       Liability         Deficit       Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>          <C>           <C>            <C>            <C>
Balance at November 25, 1995                $  40,600     $    399     $ 487,083     $       --     $ (219,919)    $  308,163

   Net loss for the year                                                                               (19,078)       (19,078)
   Sale of Voting Common Stock under
     stock option plan                                           1           463                                          464
   Tax benefit from stock option
     exercises--Note F                                                       (24)                                         (24)
   Restricted Stock                                             --           206                                          206
                                            ----------------------------------------------------------------------------------

Balance at November 30, 1996                $  40,600     $    400     $ 487,728     $       --     $ (238,997)    $  289,731

   Net loss for the year                                                                              (288,592)      (288,592)
   Restricted Stock                                             --           131                                          131
   Issuance of Voting Common Stock
     under Director Deferred
     Compensation Plan                                          --            17                                           17
   Conversion of Non-Voting Class A
     Common Stock to Voting Common
     Stock--Note E                                              --                                                         --
   Minimum pension liability
     adjustment--Note G                                                                  (1,287)                       (1,287)
   Eliminate predecessor equity accounts
     in connection with fresh start
     reporting--Note C                        (40,600)        (400)     (487,876)         1,287        527,589             --
   Issuance of New Common
     Stock pursuant to Plan of
     Reorganization--Notes B, C and E                          200       183,600                                      183,800
                                            ----------------------------------------------------------------------------------

Balance at November 29, 1997                $      --     $    200     $ 183,600     $       --     $       --     $  183,800

   Net loss for the year                                                                               (22,367)       (22,367)
                                            ----------------------------------------------------------------------------------

Balance at November 28, 1998                $      --     $    200     $ 183,600     $       --     $  (22,367)    $  161,433
                                            ==================================================================================

<FN>
See notes to financial statements
</FN>
</TABLE>


<PAGE>24


Payless Cashways, Inc.

NOTES TO FINANCIAL STATEMENTS



Note A-Summary of Significant Accounting Policies

Description   of  Business:   The  Company  is  engaged  in  only  one  line  of
business--the  retail sale of building  materials and supplies.  At November 28,
1998,  the  Company  operated  161 stores in 20 states  located in the  Midwest,
Southwest,  Pacific  Coast,  and Rocky  Mountain  areas.  The Company's  primary
customers  include  professionals  and  project-oriented  do-it-yourselfers.  In
recent  years,  the  building  materials   retailing  industry  has  experienced
increased  levels of competition as several  national chains have expanded their
operations.

Fresh-Start  Reporting:  The Company has implemented the required accounting for
entities  emerging from bankruptcy in accordance with the American  Institute of
Certified  Public   Accountants'   Statement  of  Position  90-7  ("SOP  90-7"),
"Financial  Reporting by Entities in Reorganization  Under the Bankruptcy Code,"
and  reflected  the effects of such adoption in the balance sheet as of November
29, 1997. Under fresh-start  reporting,  the balance sheet of November 29, 1997,
became the opening  balance  sheet of the  Reorganized  Company.  The  financial
statements of the Predecessor Company are not comparable in material respects to
the financial  statements of the Reorganized  Company.  Accordingly,  a vertical
line is shown to separate financial  information of the Predecessor  Company and
the Reorganized Company.

Use of Estimates and Other Uncertainties:  In preparing the financial statements
in conformity with generally accepted accounting principles, management has made
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

The Company's future results could be adversely affected by a number of factors,
including:  competitive  pressure  on sales and  pricing  from  well-capitalized
warehouse-format  home centers; the Company's ability to effectively execute its
business  strategy;  weather  conditions;  consumer  spending  and debt  levels;
interest rates; housing activity,  including existing-home turnover and new-home
construction;  lumber  prices;  product mix; sales of real estate held for sale;
and growth of certain market segments.

Merchandise   Inventories:   Inventories   are  stated  at  the  lower  of  cost
(approximately 80% at last-in,  first-out method, and the remainder at first-in,
first-out  method) or market.  Had the first-in,  first-out method been used for
all inventories,  the carrying value of these  inventories  would have decreased
approximately  $2.4  million  at  November  28,  1998.  At  November  29,  1997,
inventories   were  reported  at  fair  market  value  pursuant  to  fresh-start
accounting as described at Note C. In 1998 the  liquidation of LIFO  inventories
increased cost of  merchandise  sold and,  therefore,  increased the loss before
income  taxes by $0.4  million.  In 1997  the  liquidation  of LIFO  inventories
decreased cost of merchandise sold and,  therefore,  decreased the losses before
income taxes by $0.9 million.

Property and  Depreciation:  Provisions for  depreciation of land  improvements,
buildings and equipment are computed primarily by the straight-line  method over
the  estimated  useful  lives of the assets or the terms of the related  leases,
which range from three to 39 years.

The  accompanying  1996  statements of operations  reflect $2.3 million as other
income  related to an insurance  reimbursement  for lost profits and  settlement
proceeds in excess of net book value for buildings and equipment  destroyed in a
fire loss.

Deferred  Financing  Costs:  Deferred  financing  costs are being amortized over
the respective  borrowing terms using the interest method.

Cost in  Excess  of Net  Assets  Acquired:  Prior to  fresh-start  reporting  at
November 29, 1997,  the cost in excess of the fair value of net assets  acquired
(goodwill)  was amortized  using the  straight-line  method over 40 years.  When
facts and circumstances indicate potential impairment, the Company evaluates the
recoverability of asset carrying values,  including associated  goodwill,  using
estimates of  undiscounted  future cash flows over remaining  asset lives.  When
impairment  is  indicated,  any  impairment  loss is  measured  by the excess of
carrying values over fair values. The Company


<PAGE>25


adopted  Statement  of   Financial  Accounting  Standards  No.  121  (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," in the third quarter of fiscal 1996.  See Note J.

Earnings Per Common  Share:  Basic  earnings per common share has been  computed
based on the  weighted-average  number of common shares  outstanding  during the
period.   Dilutive   earnings  per  common  share  is  computed   based  on  the
weighted-average   number  of  common  shares  plus   potential   common  shares
outstanding  during the  period,  when  dilutive,  consisting  of certain  stock
options.  Given the net loss  reported  for the fiscal year ended  November  28,
1998, the impact of considering such stock options would be antidilutive.

Earnings per common  share has not been  computed  for the  Predecessor  Company
because,  as described at Note B, Old Preferred  Stock and Old Common Stock were
canceled on the Plan Effective  Date.  Presentation of earnings per common share
based on Predecessor  Company average shares  outstanding would therefore not be
meaningful.  New Common Stock was not  outstanding  during fiscal years 1997 and
1996.

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

Pensions and Other  Postretirement  Benefit Plans:  Effective November 28, 1998,
the Company adopted  Statement of Financial  Accounting  Standards No. 132 (SFAS
132), "Employers' Disclosures about Pensions and Other Postretirement Benefits".
The provisions of SFAS 132 revise employers' disclosures about pension and other
postretirement  benefit  plans.  SFAS 132 does not  change  the  measurement  or
recognition of these plans.  It  standardized  the disclosure  requirements  for
pensions and other postretirement benefits to the extent practicable.

Statement  of Cash Flows:  For  purposes  of the  statement  of cash flows,  the
Company  considers  investments in debt instruments with original  maturities of
three months or less to be cash equivalents.

During fiscal 1998,  1997 and 1996, federal and state income tax refunds, net of
payments,  were $32.9  million,  $0.6 million and $8.8 million, respectively.

Cash paid for interest,  net of interest capitalized,  was $35.2 million, $55.4
million, and $62.2 million during fiscal 1998, 1997, and 1996, respectively.

Sale of  Receivables:  The Company  sells its  commercial  credit  accounts to a
third-party administrator pursuant to an agreement. A substantial portion of the
Company's  commercial credit sales are to remodelers and contractors.  Under the
agreement,  the Company  pays a servicing  fee and assumes the credit  risk.  At
November 28, 1998, and November 29, 1997, the outstanding  balance of commercial
credit accounts sold to the third-party  administrator was  approximately  $95.6
million and $87.5 million,  respectively.  The Company has provided a reserve of
$5.9 million at November 28, 1998, and November 29, 1997, respectively, which is
believed to adequately cover its credit risk related to these accounts.

Under  a  third-party  administrative  servicing  agreement  for  the  Company's
private-label  charge  card  program,  charge  card  accounts  are  sold  to the
administrator and the Company assumes no credit risk.

Real Estate Held for Sale:  Real estate held for sale,  consisting  primarily of
closed store  facilities,  is  reflected  at the lower of cost less  accumulated
depreciation or estimated fair value less cost to sell.

Advertising Costs: Advertising costs, which are expensed as incurred, aggregated
$23.2 million,  $27.5 million and $26.0 million for fiscal  1998, 1997 and 1996,
respectively.

Fair Value of Financial  Instruments:  Based on the  borrowing  rates  currently
available to the Company for debt issuances  with similar terms and  maturities,
the fair value of long-term debt including the current portion is  approximately
$347.6 million and $433.4 million at November 28, 1998,


<PAGE>26


and November 29, 1997,  respectively.  The Company believes the carrying amounts
of cash and cash  equivalents,  trade  receivables,  trade accounts  payable and
accrued expenses are a reasonable estimate of their fair value.

Derivative Financial Instruments:  Premiums paid for purchased interest rate cap
agreements  are  amortized to interest  expense over the term of the  agreement.
Unamortized  premiums  are included in deferred  financing  costs in the balance
sheets.  If  amounts  were  received  under  the cap  agreement,  they  would be
reflected as a reduction of interest expense. Amounts received or paid under the
interest  rate  swap  agreement  discussed  at Note H have been  reflected  as a
reduction or increase of rent expense prior to fresh-start accounting.

At  November  29,  1997,  the  premiums  paid for  purchased  interest  rate cap
agreements were fully amortized. The estimated amount the Company would have had
to pay at November  28, 1998,  and November 29, 1997,  to cancel or transfer the
agreements to other parties, was approximately $0.7 million.

Accounting  Period:  The  Company's  fiscal  year ends on  the last  Saturday in
November.  Fiscal years 1998 and 1997 consisted of 52 weeks each and fiscal year
1996 consisted of 53 weeks.



Note B-Reorganization and Emergence From Chapter 11

On July 21, 1997 (the "Petition  Date"),  the Company commenced a reorganization
case (the "Case") by filing a voluntary  petition  for relief under  Chapter 11,
Title 11 of the United States Code ("Chapter 11") in the U.S.  Bankruptcy  Court
for the Western District of Missouri in Kansas City (the "Court").

While the Company had sufficient  liquidity to fund its current operations,  the
operating  performance  of the Company during the second quarter of fiscal 1997,
which was well below the Company's expectations, led management to conclude that
it was  unlikely  that the Company  would be able to comply  with the  covenants
contained in its principal  credit  agreements at the end of fiscal 1997. In the
course of the  Company's  subsequent  negotiations  with its  senior  lenders to
restructure  its debt, and after  considering  all other  alternatives  with its
financial  adviser,  Houlihan  Lokey Howard & Zukin,  including  the sale of the
Company and  liquidation,  the Company  concluded  that a Chapter 11  proceeding
provided the best approach for a comprehensive  financial  restructuring  of the
Company.

On the Petition  Date,  the Company  filed a Disclosure  Statement and a Plan of
Reorganization  with the  Court.  The  Disclosure  Statement  and the Plan  were
subsequently  amended on September 5, 1997, and modified on October 9, 1997. The
Plan of  Reorganization,  as amended and modified,  is referred to herein as the
"Plan" or "Plan of  Reorganization."  The  following  summary  of the Plan omits
certain  information  set forth in the Plan.  Any  statements  contained  herein
concerning  the Plan are not  necessarily  complete,  and in each such  instance
reference is made to the Plan.  On November 19, 1997,  the Court  confirmed  the
Plan and  after the  satisfaction  of a number of  conditions,  the Plan  became
effective December 2, 1997 (the "Effective Date").

Under the  Plan,  the  Company  reincorporated  as a  Delaware  corporation  and
canceled   outstanding   shares  of  common  and  preferred   stock  and  issued
approximately 20,000,000 shares of newly reorganized Payless Cashways, Inc. (the
"Reorganized  Company")  common  stock (the "New Common  Stock"),  as  described
below.

The Plan generally provided for the following:  (I) The secured bank group under
the credit  agreement  in  existence  at the  Petition  Date (the "Prior  Credit
Agreement"),  on or prior to the Effective Date, received (a) payment of accrued
interest, fees and expenses, (b) Net Cash Proceeds (as defined in the Plan) from
the sale of certain  collateral  securing  the Prior  Credit  Agreement  and the
collection of certain  promissory  notes pledged to the secured bank group,  (c)
their  allocable  portion of $283.1 million of new term loans and (d) 10,730,671
shares  of New  Common  Stock  (approximately  54% of the  shares  of the  newly
reorganized  Company),  of which 460,000 shares were  distributed to the lenders
providing a $150  million  revolving  credit  facility to supply  post-emergence
working capital financing in consideration for their commitment to provide


<PAGE>27


such facility.  See Note D for a description of the term loans and the revolving
credit facility (together,  the "1997 Credit Agreement").  (II) On the Effective
Date, UBS Mortgage Finance,  Inc. ("UBS"), the holders of notes under a mortgage
loan in  existence at the Petition  Date,  received new notes  pursuant to a new
mortgage  loan.  See Note D for a description  of the new mortgage  loan.  (III)
Unsecured  claims  against  the  Company  by  vendors  and  suppliers  for goods
delivered and services rendered prior to the Petition Date, claims in respect of
the 9-1/8% senior subordinated notes,  contingent unliquidated claims and claims
for damage arising from the rejection by the Company  pursuant to Section 365 of
the Bankruptcy Code of executory  contracts and unexpired leases  (collectively,
"General  Unsecured  Claims")  are  receiving  their pro rata share of 8,269,329
shares  of New  Common  Stock or  approximately  41% of the  shares of the newly
reorganized  Company.  The  remaining  shares of New  Common  Stock are held for
future  distributions to holders of General Unsecured Claims,  pending the final
resolution of disputed claims.  (IV) The holder of issued and outstanding shares
of existing  preferred stock ("Old Preferred  Stock") received 600,000 shares of
New  Common  Stock  (approximately  3% of the  shares of the  newly  reorganized
Company).  (V) Holders of issued and outstanding shares of existing common stock
("Old Common Stock") are receiving their pro rata share of 400,000 shares of New
Common Stock  (approximately 2% of the shares of the newly reorganized  Company)
upon  surrender  of their Old  Common  Stock.  In  addition,  any stock  options
relating to outstanding  Old Preferred  Stock and Old Common Stock were canceled
on the Effective Date.

Fractional  shares  of New  Common  Stock  will not be issued  to  creditors  or
stockholders in connection  with the Plan. In addition,  no distribution of less
than $5.00 will be made for  fractional  share  interests.  As a result of these
provisions,  many holders of Old Common Stock received no  distribution of stock
or cash under the Plan.

On July 21, 1997,  the Company also announced its plan to close 29 stores and to
eliminate  approximately  15% of the  staff at the  Company's  headquarters  and
regional  administrative  centers. The Court subsequently  approved such plan on
August 6, 1997.

See Notes I, J, and K for a description of related charges recorded in the third
quarter of 1997.


Note C-Fresh Start Reporting

On December 2, 1997, the Company emerged from bankruptcy. In accordance with SOP
90-7, the Company adopted fresh-start  reporting.  For accounting purposes,  the
Effective Date was deemed to be November 29, 1997.

In fresh-start  reporting,  an aggregate value of $183.8 million was assigned to
the  Company's  New Common  Stock.  Management  established  this value with the
assistance of its financial  advisors.  This valuation  considered the Company's
expected future  performance,  relevant  industry and economic  conditions,  and
analyses and comparisons with comparable companies.

The  reorganization  value of the Company has been allocated to the  Reorganized
Company's  assets and  liabilities in a manner similar to the purchase method of
accounting  for a business  combination.  Management  obtained  valuations  from
independent third parties which, along with other market and related information
and analyses, were utilized in assigning fair values to assets and liabilities.




<PAGE>28




A summary of the impact of the Plan and the related  fresh-start  adjustments is
presented below:
<TABLE>
<CAPTION>
                                                                               November 29, 1997
                                         ------------------------------------------------------------------------------------------
                                             Predecessor       Discharge of       Fresh-Start            Other          Reorganized
                                               Company       Indebtedness (a)   Adjustments (b)     Adjustments (c)       Company
                                         ----------------   ----------------  ------------------  -----------------  --------------
<S>                                      <C>                <C>               <C>                 <C>                <C>
Current Assets:
    Cash and cash equivalents            $     11,961       $                 $                   $                  $     11,961
    Merchandise inventories                   391,548                                 23,334                              414,882
    Prepaid expenses and
       other current assets                    15,702                                   (997)                              14,705
    Income taxes receivable                    29,705              2,527                                                   32,232
    Deferred income taxes                      24,070             (9,448)             (5,957)                               8,665
                                         -----------------  ----------------  ------------------  -----------------  ------------
       Total Current Assets                   472,986             (6,921)             16,380                --            482,445

Other Assets:
    Real estate held for sale                  37,078                                 11,484                               48,562
    Cost in excess of net
       assets acquired                        265,949                               (265,949)                                  --
    Deferred financing costs                    8,690             (7,590)              1,500                                2,600
    Other                                      14,663                                   (347)                              14,316

Land, Buildings and Equipment, net            456,736                                (93,318)                             363,418
                                         -----------------  ----------------  ------------------  -----------------  ------------
    TOTAL ASSETS                         $  1,256,102       $    (14,511)     $     (330,250)     $         --       $    911,341
                                         =================  ================  ==================  =================  ============

Current Liabilities:
    Current portion of long-term debt    $   492,930        $                 $     (483,576)     $                  $      9,354
    Trade accounts payable                    54,203              21,380                                                   75,583
    Other current liabilities                128,755                                   7,986                              136,741
    Income taxes payable                       8,711                                  (6,349)                               2,362
                                       -------------------  ----------------  ------------------  -----------------  ------------
       Total Current Liabilities             684,599              21,380            (481,939)               --            224,040

Long-Term Debt                                    --                                 424,031                              424,031

Non-Current Liabilities:
    Deferred income taxes                     16,961              84,928             (43,101)                              58,788
    Other                                     24,272                                  (3,590)                              20,682
                                       -------------------  ----------------  ------------------  -----------------  ------------
       Total Non-Current Liabilities          41,233              84,928             (46,691)               --             79,470

Liabilities Subject to Compromise            351,381            (329,990)            (21,391)                                  --

Stockholders' Equity:
    Old Preferred Stock                       40,600                                                   (40,600)                --
    Old Common Stock                             400                                                      (400)                --
    New Common Stock                              --                  83                 117                                  200
    Additional paid-in capital               487,876              75,912             107,688          (487,876)           183,600
    Adjustment for minimum pension
       liability                              (1,287)                                                    1,287                 --
    Accumulated deficit                     (348,700)            133,176            (312,065)          527,589                 --
                                       -------------------  ----------------  ------------------  -----------------  ------------
       Total Stockholders' Equity            178,889             209,171            (204,260)               --            183,800
                                       -------------------  ----------------  ------------------  -----------------  ------------

    TOTAL LIABILITIES AND
       STOCKHOLDERS' EQUITY              $ 1,256,102        $    (14,511)     $     (330,250)     $         --       $    911,341
                                       ===================  ================  ==================  =================  ============
</TABLE>


<PAGE>29



(a)  To  record  the  discharge  of  indebtedness  pursuant  to the  Plan and to
     write-off deferred  financing costs related to the early  extinguishment of
     certain predecessor company debt; see Note D. The discharge of indebtedness
     relates  to all  general  unsecured  claims,  as  described  in  Note B. It
     includes the elimination and, in certain cases, the reclassification of the
     liabilities  subject to compromise related to these claims, the issuance of
     New Common Stock in  settlement  of unsecured  claims,  and the related tax
     effect of these  transactions.  The excess of indebtedness  eliminated over
     the estimated  fair value of  securities  issued in settlement of claims is
     reflected as an extraordinary  gain of $232.6 million ($138.2 million after
     tax) in the accompanying 1997 statement of operations.

(b)  To record transactions with the secured creditors and holders of Old Common
     Stock and Old Preferred Stock, as described at Note B, and to adjust assets
     and liabilities to fair values.

     Transactions  include the  extinguishment  of old debt; the issuance of new
     debt and New Common  Stock;  the  reclassification  of accrued  interest to
     principal and the reclassification of debt between current and non-current,
     based upon debt agreement terms.

     Significant   elements  of  the  fair  value   adjustments  to  assets  and
liabilities are summarized below:

      -Adjustment to reflect  inventories at current market value
      -Adjustments to write-up real estate held for sale to fair market value
      -Adjustment to eliminate cost in excess of net assets acquired
      -Adjustments to eliminate accumulated depreciation and to write-down land,
       buildings,  and equipment to fair market value
      -Adjustments to  reflect liabilities at fair market value  including:  the
       reversal of unrecognized prior service costs and  unrecognized gains  and
       losses  on  the  Company's   pension  and post-retirement  benefit  plans
       (see also Note G);  the  write-off  of deferred  rent  liabilities due to
       lease  amendments  and  terminations;  and  the  elimination of insurance
       accruals covered by bank letters of credit
      -Adjustments  to deferred  and  currently payable tax  accounts  to record
       the tax effect of all  fresh-start  reporting adjustments

     Fresh-start  adjustments of $355.6 million  ($312.1 million net of tax) are
     reflected  as  fresh-start  revaluation  charges in the  accompanying  1997
     statement of operations.

(c)  To record the elimination of the Old Preferred Stock, Old Common Stock, and
     predecessor  company  additional  paid-in-capital  and accumulated  deficit
     after reflecting the adjustments at (a) and (b) above.



Note D--Long-Term Debt

Long-term debt consisted of the following:

In thousands                             1998        1997
                                     ------------------------

1997 Credit Agreement, secured by
inventory, certain real estate, 
and equipment,variable interest
rate, payablein varying amounts 
through 2002                         $  251,458    $  317,133

Mortgage loan, secured by
certain real estate, variable
interest rate, payable in varying
amounts through 2004                     95,078       102,010

Note payable, secured by certain
real estate, variable interest rate,
payable in 2002                              --        13,000

Other senior debt, 11% to 12%,
payable in varying amounts
through 2004                              1,089         1,242
                                     -------------------------
                                        347,625       433,385
Less portion classified
as current liability                    (11,068)       (9,354)
                                     -------------------------
                                     $  336,557    $  424,031
                                     =========================

The 1997  Credit  Agreement  includes  term loans of $283.1  million  and a $150
million revolving credit facility with a $40 million letters-of-credit sublimit.
At November 28, 1998,  there were  combined  borrowings  under the  agreement of
$251.5 million as well as outstanding standby letters of credit of $17.9 million
and outstanding  documentary letters of credit of $5.7 million.  The Company had
$94.4 million available for borrowing under this agreement at November 28, 1998.
The term loans  require  annual  principal  payments  of $10  million  beginning
September


<PAGE>30


15,  1998,  with final  maturity on November  30,  2002.  The  revolving  credit
facility  matures on May 31, 2002. In addition,  the Company will be required to
repay  borrowings  under the 1997  Credit  Agreement  with  proceeds  of certain
collateral  sales and  certain  other  transactions  and with 65% of excess cash
flow,  as defined.  The effect of these  provisions is generally to require that
substantially all cash flows not applied to the repayment of other  indebtedness
or  permitted  capital  expenditures  are  to be  applied  to the  repayment  of
borrowings  under  the  1997  Credit  Agreement.  The  loans  bear  interest  at
fluctuating rates of either the alternate base rate (7.75% at November 28, 1998)
plus  1-1/2% per annum or LIBOR  (5.14% at  November  28,  1998) plus 2-1/2% per
annum.  The 1997 Credit  Agreement is secured by  substantially  all merchandise
inventories,  certain real estate  including  second  priority liens on all real
estate pledged to other creditors,  and  substantially  all the equipment of the
Company.

The 1997 Credit  Agreement  contains a number of covenants,  including,  but not
limited to,  minimum  cash flow  (defined as earnings  before  interest,  taxes,
depreciation,  and amortization,  "EBITDA"), a maximum debt to EBITDA ratio, and
limitations on capital  expenditures and capitalized leases. The Company is also
prohibited  from  incurring  additional   indebtedness,   with  certain  limited
exceptions,  and making  dividend,  redemption and certain other payments on its
capital  stock.  The 1997  Credit  Agreement  also  contains  certain  customary
financial covenants and events of default for financing of this type,  including
a change of control  covenant.  Compliance  with the  minimum  cash flow and the
maximum debt to EBITDA covenants is determined on a rolling-four-quarter  basis.
On August 13,  1998,  the Company  amended its 1997 Credit  Agreement  to modify
various  covenants,  including  required  minimum  cash flow and maximum debt to
EBITDA.  For the fiscal year ended  November 28, 1998,  actual  EBITDA was $46.6
million  and the  ratio  of debt to  EBITDA  was 7.5 to 1.  The  Company  was in
compliance  with  all of  its  debt  covenants  as of  November  28,  1998.  The
measurements  for those  covenants,  as amended,  over the remaining term of the
1997 Credit Agreement, are as follows:

 Fiscal Quarter      Minimum Cash Flow    Maximum Debt to
   Ending                 (EBITDA)            EBITDA
---------------      -----------------    ---------------

November 1998            44,600,000          9.0 to 1
February 1999            47,400,000          9.8 to 1
May 1999                 44,300,000         10.5 to 1
August 1999              44,900,000         10.2 to 1
November 1999            59,000,000          7.5 to 1
February 2000            78,800,000          5.6 to 1
May 2000                 87,000,000          4.9 to 1
August 2000              95,700,000          4.2 to 1
November 2000           101,000,000          3.7 to 1
February 2001           103,000,000          4.0 to 1
May 2001                106,200,000          3.9 to 1
August 2001             109,100,000          3.6 to 1
November 2001           113,400,000          3.3 to 1
February 2002           113,700,000          3.7 to 1
May 2002                113,100,000          3.7 to 1
August 2002             115,800,000          3.4 to 1

The Company's  mortgage loan is secured by certain real estate having a net book
value of  approximately  $218.9  million at November 28, 1998. The mortgage loan
bears  interest at LIBOR plus 4% per annum and interest is paid monthly.  Annual
principal  payments of $4 million are required  beginning December 2, 1998, with
final maturity on December 2, 2004.  Prepayments are required when collateral is
sold and such  prepayments  have been applied as a credit  toward the  scheduled
annual payments.

The early  extinguishment  of the Prior Credit  Agreement and the prior mortgage
loan,  part of the Plan of  Reorganization  described at Note B,  resulted in an
extraordinary  charge  of  approximately  $5.0  million,  net  of  tax,  in  the
accompanying 1997 statement of operations.

On the  Effective  Date,  in  settlement  of the  secured  portion of the claims
arising from a lease  agreement  involving five store  facilities,  described at
Note H, the Company issued a note for $16 million. The note contained prepayment
provisions  that  allowed  the  Company to prepay  the note by certain  dates at
various discounts.  On February 26, 1998, the Company borrowed an additional $13
million under the mortgage loan and prepaid this note in full.

<PAGE>31


Scheduled  maturities of long-term debt,  including  sinking fund  requirements,
are:

In thousands
                1999                $       11,068
                2000                        10,165
                2001                        10,185
                2002                       222,013
                2003                         4,232
                Thereafter                  89,962
                                    --------------
                                    $      347,625
                                    ==============



Note E--Stockholders' Equity

The Company has the  authority to issue  50,000,000  shares of New Common Stock,
$.01 par value.  Each  outstanding  share of New Common Stock is entitled to one
vote on each matter on which  stockholders are entitled to vote. As discussed at
Note B, the Company  canceled  existing  shares of Old  Preferred  Stock and Old
Common Stock and issued  approximately  20,000,000 shares of New Common Stock on
or about the Effective Date.

All classes of Old Common Stock were  substantially  identical except for voting
rights. Shares of Non-Voting Class A Common Stock were convertible at the option
of the holder, subject to certain restrictions,  into a like number of shares of
Voting  Common  Stock.  During  fiscal  1997,  2,250,000  outstanding  shares of
Non-Voting  Class A Common Stock were  converted into a like number of shares of
Voting  Common  Stock under this right of  conversion.  As  described at Note B,
holders  of Old  Common  Stock  received  approximately  2% of the shares of New
Common Stock issued under the Plan.

The Old  Preferred  Stock  was  100%  owned  by Masco  Capital  Corporation,  an
affiliate of one of the Company's suppliers.  As described at Note B, holders of
Old Preferred Stock received  approximately 3% of the shares of New Common Stock
issued  under  the Plan.  The  terms of the Old  Preferred  Stock  provided  for
dividends at an annual rate of 8% until 2008 (at which time the rate  increased)
on a cumulative  basis,  whether or not declared.  Each share of Preferred Stock
was generally entitled to 5.9994 votes on all matters on which holders of Common
Stock were entitled to vote.

The Payless  Cashways 1998 Omnibus  Incentive  Plan (the  "Incentive  Plan") was
established  January 15, 1998, to attract and retain outstanding  individuals in
certain key  positions.  The Incentive  Plan provides for the grant of incentive
stock  options,   non-qualified  stock  options,   stock  appreciation   rights,
restricted  stock awards and performance  awards.  There are 2,400,000 shares of
Common  Stock  reserved  for  issuance  under the  Incentive  Plan,  subject  to
adjustment as provided by the Incentive  Plan.  The exercise price for any stock
options  will be at least 100% of the fair market  value of the Common  Stock at
the date of grant.

The fair value of each option  grant is estimated on the date of the grant using
the Black-Scholes  option-pricing model. For options granted in fiscal 1998, the
following  assumptions  were  used to price  the  options:  no  dividend  yield;
expected volatility of 144 percent; risk-free interest rate of 5.04 percent; and
an expected  life of eight  years.  The  weighted-average  fair value of options
granted during fiscal 1998 was $2.40 per share. The options granted to date vest
ratably over four years.

The following is a summary of the Incentive Plan:

                                 1998 Omnibus Incentive Plan
                              --------------------------------
                                 Number       Weighted-Average
                                Of Shares      Exercise Price
                              --------------  ----------------
Fiscal Year 1998:              In thousands

    Options granted               2,360            $   2.49

    Options exercised                --                  --

    Options forfeited              (240)               3.13
                              --------------------------------

    Options outstanding at
      November 28, 1998           2,120            $   2.41
                              ================================

    Options exercisable at
      November 28, 1998              --            $     --
                              ================================


<PAGE>32



The following table summarizes  information  about stock options at November 28,
1998:
<TABLE>
<CAPTION>
                                         Options Outstanding                                        Options Exercisable
                      -----------------------------------------------------------         ---------------------------------
                           Number           Weighted-Average                                   Number
     Range  of           Outstanding           Remaining        Weighted -Average            Exercisable   Weighted-Average
  Exercise Prices        at 11/28/98        Contractual Life     Exercise Price              at 11/28/98    Exercise Price
  ---------------     ----------------      ----------------    -----------------         ---------------- ----------------
   <S>                    <C>                      <C>                  <C>                       <C>              <C>

   $0.875 -$2.938           810,000                9.74                 $1.49                     --               $--
   $2.969 -$3.031         1,310,000                9.21                 $2.98                     --               $--
   --------------     ----------------      ----------------    -----------------         ---------------- ----------------
   $0.875 -$3.031         2,120,000                9.41                 $2.41                     --               $--
   ==============     ================      ================    =================         ================ ================
</TABLE>


As  permitted  under  Statement  of  Financial  Accounting  Standards  No.  123,
"Accounting for Stock-Based  Compensation" ("SFAS 123"), the Company applies APB
No.  25 and  related  interpretations  in  accounting  for the  Incentive  Plan.
However,  pro forma disclosure,  as if the Company adopted the  fair-value-based
method of  measurement  for  stock-based  compensation  plans under SFAS 123, is
presented below.

Had  compensation  cost for the Company's  grants for  stock-based  compensation
plans been determined  using the fair value method under SFAS 123, the Company's
pro  forma  net loss,  and net loss per  common  share  for  fiscal  1998  would
approximate the amounts below (in thousands, except per share data):

                                      Fiscal Year Ended
                                      November 28, 1998
                                -----------------------------
                                As Reported         Pro Forma
                                ------------       ----------

Net loss                         $ (22,367)        $ (22,896)
Net loss per common share        $   (1.12)        $  (1.14)

Prior  to the  Plan of  Reorganization,  the  Company  had  adopted  a  deferred
compensation  plan (the  "Director  Deferred Comp Plan") and an option plan (the
"Director Option Plan") for the benefit of non-employee directors.  The Director
Deferred Comp Plan was terminated  effective as of the Petition Date and options
outstanding and unexercised  under the Director Option Plan were canceled on the
Effective Date.

In order to attract and retain outstanding individuals in certain key positions,
the Company had  established  the Payless  Cashways 1992 Incentive Stock Program
(the "Stock Program") and the 1988 Payless  Cashways,  Inc.  Employee Stock Plan
(the "Stock Plan").  Options  outstanding and  unexercised  under both the Stock
Program and the Stock Plan were  canceled on the Effective  Date.  Approximately
40,000  shares of  Restricted  Stock  outstanding  and unvested  under the Stock
Program vested on the Effective Date.



Note F-Income Taxes

For the year ended November 28, 1998, an income tax benefit of $13.2 million was
recorded.  The Company has federal net  operating  loss  carryforwards  totaling
$74.5  million  which  expire   through  fiscal  2015  and  federal  tax  credit
carry-forwards  totaling  $17.3 million which begin to expire in fiscal 2006 and
expire  over an  indefinite  period.  The  Company  believes,  based upon future
earnings  coupled with recognition of existing  taxable  temporary  differences,
that it is more  likely than not,  that the Company  will be able to utilize tax
benefits accumulated through November 28, 1998, in future periods.

Income taxes for the year ended November 29, 1997, were allocated to loss before
extraordinary items, and to extraordinary items related to the discharge of debt
pursuant to the  consummation  of the Plan and for the early  extinguishment  of
debt;  see  Note  D.  The  income  tax  benefit  allocated  to the  loss  before
extraordinary  items was $90.4 million;  the income tax expense allocated to the
extraordinary  items was $91.8  million.  Included  in the  income  tax  benefit
allocated  to the loss  before  extraordinary  items are income tax  benefits of
$43.5 million resulting from the fresh-start revaluation; see Note C. The income
tax expense allocated to the extraordinary items of


<PAGE>33


$91.8 million was comprised of $2.5 million  current tax benefit  related to the
early  extinguishment  of debt and $94.3  million  tax  expense  related  to the
discharge  of debt which  resulted in  deferred  tax  balance  changes  from the
write-down  of the tax basis of fixed  assets in  accordance  with the  Internal
Revenue Code of 1986, as amended.

For the year ended November 30, 1996, an income tax benefit of $30.7 million was
recorded.  On August 20, 1996, the Small Business Job Protection Act of 1996 was
signed into law.  Certain  provisions  of this Act clarify the Tax Reform Act of
1986 and make retroactively tax deductible certain costs and expenses previously
recorded by the  Company  without any related  tax  benefit.  In  addition,  the
Company settled with the Internal Revenue Service  regarding several tax issues.
As a result,  the Company  recorded a tax  benefit of $23.7  million and related
interest income of $4.9 million ($2.9 million after tax) in the third quarter of
1996. This tax benefit  includes  recoverable  income taxes of $10.0 million and
non-cash tax benefits of $13.7 million. A debit of $24,000 to additional paid-in
capital  reflected  the tax effect of excess  expense  recognized  for financial
reporting purposes over the tax deduction for employee stock options.

Income  tax  expense   (benefit)   attributable  to  the  income  (loss)  before
extraordinary items consisted of the following:

In thousands
                   1998           1997          1996
               ---------------------------------------

Currently receivable

     Federal   $     (959)  $   (17,169)   $  (18,901)
     State         (1,252)       (1,000)          469
               ---------------------------------------
                   (2,211)      (18,169)      (18,432)

Deferred

     Federal   $  (10,124)  $   (63,129)   $  (11,534)
     State           (883)       (9,108)         (736)
               ---------------------------------------
                  (11,007)      (72,237)      (12,270)
               ---------------------------------------
               $  (13,218)  $   (90,406)   $  (30,702)
               =======================================

The  differences  between  actual income tax expense and the amount  computed by
applying the statutory  federal  income tax rate to the loss before income taxes
and extraordinary items were as follows:

                                 1998     1997      1996
                                ---------------------------

Federal statutory rate          (35.0)%  (35.0)%    (35.0)%
State income taxes,
     net of federal tax benefit  (3.9)    (2.0)      (1.5)
Amortization and write-off
     of goodwill                   --     20.1       22.7
Benefit from new law and
     tax settlements               --     (1.8)     (47.6)
Permanent tax differences         0.5      0.7        0.4
Difference between statutory
     and carry-back tax rates      --      0.3        --
Other                             1.3        --      (0.7)
                                ---------------------------
                                (37.1)%  (17.7)%    (61.7)%
                                ===========================



<PAGE>34



The tax  effects of  temporary  differences  and tax  credits  that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>

In thousands                                                                           1998                       1997
                                                                                    -------------------------------------
<S>                                                                                 <C>                       <C>

Deferred tax assets:
     Tax credit and net operating loss carry-forwards                               $   47,097                $   30,981
     Insurance reserves                                                                  7,990                    10,322
     Retirement, deferred compensation, restricted stock
       and stock option plans                                                            9,719                     8,651
     Post-retirement benefits                                                            7,069                     6,656
     Vacation reserves                                                                   3,764                     3,968
     Reserves for bad debts                                                              2,155                     2,800
     Lease liability                                                                     1,366                     2,615
     Other                                                                               7,978                     8,971
                                                                                    -------------------------------------

                                           Total deferred tax assets                    87,138                    74,964
                                           Less valuation allowance                      7,981                     7,981
                                                                                    -------------------------------------
                                           Net deferred tax assets                      79,157                    66,983
                                                                                    -------------------------------------

Deferred tax liabilities:
     Land, buildings and equipment                                                     (96,637)                  (90,835)
     Inventory basis difference                                                        (19,100)                  (19,441)
     Other                                                                              (2,536)                   (6,830)
                                                                                    -------------------------------------
                                           Total deferred tax liabilities             (118,273)                 (117,106)
                                                                                    -------------------------------------
                                           Net deferred tax liability               $  (39,116)               $  (50,123)
                                                                                    =====================================
</TABLE>



Note G--Pension and Other Postretirement Benefit Plans

The  Company  has a  non-contributory  defined  benefit  pension  plan  covering
substantially  all  full-time  employees.  Benefits  under the plan are based on
years of service and an employee's average  compensation.  The Company's funding
policy is to contribute  annually the amount  actuarially  determined to provide
the plan with  sufficient  assets to meet future benefit  payment  requirements.
Assets of the pension plan are maintained in trust funds.

Effective  July 21, 1997,  the Company  terminated a  supplemental  pension plan
covering  certain of its  officers.  The plan was an unfunded,  non-contributory
defined  benefit  pension plan.  Benefits  under the plan were based on years of
service, age and the employees' average  compensation.  The supplemental pension
plan was terminated as part of the Plan of Reorganization. Net pension costs for
the  supplemental  pension  plan were $0.9  million in 1997 and $1.3  million in
1996.

A  curtailment  gain of $0.2  million and $37,000 was recorded in the year ended
November 29, 1997, for pension benefits and other benefits,  respectively. These
gains were  recorded as a result of the closing of 29 stores and are included in
special charges in the accompanying  1997 statements of operations;  see Note K.
The Company wrote off $15.9  million and  recognized a $531,000 gain for pension
benefits  and  other  benefits,  respectively,   related  to  the  write-off  of
unrecognized  prior service cost and  unrecognized net loss from past experience
different  from  that  assumed  as part of the  fresh-start  revaluation  in the
accompanying 1997 statement of operations; see Note C.

At November  29,  1997,  an  additional  minimum  liability  of $1.6 million was
recorded to reflect the excess of the unfunded  accumulated  benefit  obligation
over accrued pension costs.  This amount,  along with a  corresponding  asset of
$0.3  million and a charge to  additional  paid-in-capital  of $1.3 million were
eliminated in applying fresh-start reporting; see Note C.

The Company has certain  unfunded  post-retirement  defined  benefit  plans that
provide health and life insurance benefits for retirees and eligible dependents.
The health plan is  contributory  and  contains  cost-sharing  features  such as
deductibles and coinsurance.



<PAGE>35


The following provides a reconciliation of benefit obligations,  plan assets and
funded status of the plans:
<TABLE>
<CAPTION>
                                                                     Pension Benefits                   Other Benefits
                                                              --------------------------         --------------------------
In thousands                                                       1998         1997                  1998         1997
                                                              --------------------------         --------------------------
<S>                                                              <C>          <C>                   <C>           <C>
      Change in Benefit Obligation
Benefit obligation at beginning of year                          $  76,693    $  57,098             $  16,689     $ 13,968
Service cost-benefits earned during the period                       4,915        4,190                   701          636
Interest cost                                                        5,254        4,256                 1,134        1,019
Plan participants' contributions                                        --           --                   166           90
Curtailments                                                            --         (958)                   --         (690)
Fresh-start accounting adjustment                                       --          295                    --           86
Actuarial (gain) loss                                                  804       17,182                  (289)       2,334
Benefits paid                                                       (5,868)      (5,370)                 (970)        (754)
                                                              --------------------------         --------------------------
Benefit obligation at end of year                                   81,798       76,693                17,431       16,689
                                                              --------------------------         --------------------------

      Change in Plan Assets
Fair value of plan assets at beginning of year                      54,260       48,993                    --           --
Actual return on plan assets                                         1,540        7,042                    --           --
Employer contributions                                               3,814        3,458                    --           --
Plan participants' contributions                                        --           --                    --           --
Fresh-start accounting adjustment                                       --          137                    --           --
Benefits paid                                                       (5,868)      (5,370)                   --           --
                                                              --------------------------         --------------------------
Fair value of plan assets at end of year                            53,746       54,260                    --           --
                                                              --------------------------         --------------------------

Funded status                                                      (28,052)     (22,433)              (17,431)     (16,689)
Unrecognized net actuarial (gain) loss                               3,754           --                  (289)          --
Unrecognized prior service cost                                         --           --                    --           --
                                                              --------------------------         --------------------------
Accrued benefit cost included in other accrued expenses
      and/or non-current liabilities                             $ (24,298)   $ (22,433)            $ (17,720)    $(16,689)
                                                              ==========================         ==========================
</TABLE>


In fiscal 1998,  1997, and 1996, the health-care  cost trend rate was assumed to
decrease gradually to 5.9% by the year 2001 and remain at that level thereafter.
The effect of a 1.0% annual  increase in these  assumed  health-care  cost trend
rates would increase the November 28, 1998, accumulated  post-retirement benefit
obligation  by $954,000  and the  aggregate  of the service  and  interest  cost
components  of net  periodic  post-retirement  benefit  cost for the fiscal year
ended  November 28, 1998,  by $62,000.  The effect of a 1.0% annual  decrease in
these assumed health-care cost trend rates would decrease the November 28, 1998,
accumulated  post-retirement benefit obligation by $822,000 and the aggregate of
the service and interest cost components of net periodic post-retirement benefit
cost for the fiscal year ended November 28, 1998, by $57,000.

The  accumulated  benefit  obligation  was $68.4  million  and $62.4  million at
November 28, 1998, and November 29, 1997, respectively.



<PAGE>36

<TABLE>
Components of Net Periodic Benefit Cost
<CAPTION>
In thousands                                         Pension Benefits                            Other Benefits
                                     -----------------------------------------    ----------------------------------------
                                          1998          1997           1996            1998           1997           1996
                                     -----------------------------------------    ----------------------------------------
<S>                                     <C>          <C>           <C>                <C>             <C>         <C>
Service cost - benefits earned
 during the period                      $ 4,915      $ 4,190       $  4,548           $   701         $  636      $   642
Interest cost                             5,254        4,256          3,983             1,134          1,019        1,084
Expected return on plan assets           (4,490)      (4,139)        (8,167)               --             --           --
Amortization of prior service cost           --          119          5,074                --             37           47
Amortization of unrecognized loss            --           --             --                --            (99)          --
                                     ------------------------------------------   -----------------------------------------
Net periodic post-retirement 
 benefit cost                           $ 5,679      $ 4,426       $  5,438           $ 1,835         $1,593      $ 1,773
                                     ==========================================   =========================================
</TABLE>

<TABLE>
Weighted Average Assumptions
<CAPTION>
In thousands                                         Pension Benefits                                Other Benefits
                                     --------------------------------------------    -----------------------------------------
                                          1998          1997           1996                1998           1997           1996
                                     --------------------------------------------    -----------------------------------------
<S>                                       <C>          <C>             <C>                <C>            <C>             <C>

Discount rate                             6.75%        7.00%           7.50%              6.75%          7.00%           7.50%
Expect return on plan assets              8.50%        8.50%           8.50%                --%            --%             --%
Rate of increase in future
 compensation levels                      5.00%        6.00%           5.00%                --%            --%             --%
Healthcare cost trend rate                  --%          --%             --%              6.70%          7.10%           7.60%

</TABLE>


In addition, the Company has sponsored several defined contribution plans. Under
the Payless Cashways, Inc. Employee Savings Plan, which covers substantially all
employees, the Company contributed an amount equal to a percentage of the amount
contributed  by employees  into the plan.  The  aggregate  contributions  to all
defined contribution plans were $2.1 million,  $2.8 million, and $3.1 million in
1998, 1997, and 1996, respectively.



Note H--Leases

The Company  leases  certain stores and other  facilities  under  non-cancelable
operating  leases.   Aggregate  minimum  future  rentals  under   non-cancelable
operating  leases  for the next five  years are:  1999 --  $14,884,000;  2000 --
$12,872,000;  2001 --  $11,071,000;  2002  --  $7,995,000;  2003 --  $4,752,000;
thereafter  --  $15,020,000.  Rental  expense under  operating  leases was $20.8
million, $29.3 million and $30.6 million for 1998, 1997, and 1996, respectively.

On December  31,  1998,  the Company  entered  into an agreement to purchase ten
locations  previously  under  operating  lease  agreements.  The  $14.4  million
purchase  is  expected  to be  completed  during the first half of fiscal  1999.
Aggregate  minimum  future  rentals for these  stores have been  included  above
through January 31, 1999, in accordance with the terms of the agreement.

During 1995, the Company  entered into an agreement  providing for the operating
lease of five stores,  including a new store that opened in 1997. Under the Plan
of  Reorganization,  the Company  acquired three of the stores and issued a note
payable to the lessor as described at Note D.

Rental  payments  under this lease varied with the level of interest  rates.  To
reduce the impact of changes in the interest  rates  related to this lease,  the
Company,  during 1995,  entered into an interest rate swap agreement under which
it pays a 6-9/16% fixed rate of interest  quarterly through December 1, 1999, in
exchange for quarterly receipt of LIBOR on $36 million.  The Company's liability
with  respect  to the  remaining  term of this  interest  rate  swap  agreement,
estimated to be $0.4 million and $0.7 million at November 28, 1998, and November
29, 1997, respectively, was accrued in fresh-start accounting.


<PAGE>37


Note I--Reorganization Items

In connection with its Chapter 11 filing on July 21, 1997,  discussed at Note B,
reorganization  items of $25.5  million are  reflected in the 1997  statement of
operations.  Reorganization items for this period consisted of professional fees
and case  administrative  expenses of $17.6  million,  the write-off of deferred
financing costs of $2.5 million, retention bonuses of $5.7 million, and interest
income of $0.3 million.



Note J--Asset Impairment Charges

The Company recorded an asset impairment  charge of $60.5 million ($43.9 million
after tax) and $59.7 million  ($44.6 million after tax) in the third quarters of
1997 and 1996,  respectively.  The asset impairment  charges were recorded after
considering  current and expected future operating cash flows for certain stores
together  with the proceeds the Company could expect to receive upon the sale of
these assets.

The Company  adopted SFAS 121 in 1996.  Primarily  because the  environment  for
building materials retailing has continued to be increasingly  competitive,  the
Company first  conducted its review in the third quarter of 1996 and  determined
certain  assets were  impaired.  In the third quarter of 1997, the Company again
conducted  a review  of  underperforming  stores  and  determined  that  certain
additional assets were impaired,  including assets related to twenty-nine stores
which the  Company  determined  to close  (see Note K).  These  assets  included
certain real estate,  including future store lease  obligations,  and associated
goodwill which is attributable to those assets and which was established in 1988
as part of the Company's leveraged buyout.

In 1997 as a result of the  impairment  charge,  certain  real  estate  carrying
values were reduced  $28.8  million,  goodwill was reduced  $18.7  million and a
$13.0 million liability for future store lease payments was recorded. In 1996 as
a result of the impairment charge,  goodwill was reduced $22.4 million,  certain
real estate  carrying  values were  reduced  $25.7  million and a $11.6  million
liability  for future store lease  payments,  net of $6.0 million in amounts the
Company estimated to be recoverable, was recorded.

The Company will continue to review assets for  impairment,  particularly  given
the ongoing competitive environment for building materials retailing.



Note K--Special Charges

The Company recorded special charges of $5.6 million ($3.4 million after tax) in
the first quarter of fiscal 1998 for severance  costs related to the elimination
of staff at the  Company's  home  office and  regional  administrative  centers.
Special  charges of $0.8 million ($0.5 million after tax) and $1.0 million ($0.6
million  after tax) were  recorded  in the third and fourth  quarters  of fiscal
1998,   respectively,   in  connection  with  the  closing  of  three  and  five
underperforming stores,  respectively.  These are primarily cash charges. One of
the eight stores was closed at November 28, 1998, and the other seven will close
during  the first  half of fiscal  1999.  In  connection  with  these same store
closings,  the Company  recorded  inventory  write-downs  of $1.3 million  ($0.8
million  after  tax)  and  $3.1  million  ($2.0  million  after  tax) in cost of
merchandise   sold  during  the  third  and  fourth  quarters  of  fiscal  1998,
respectively.

Historical  financial data for the closing of the 8 stores is as follows for the
fiscal years presented:

In thousands                    1998       1997       1996
                            ---------------------------------

Net sales                    $  60,103  $  67,809  $  76,872
Net operating income (loss)  $  (4,027) $    (114) $   2,801


The fiscal 1998 special charge includes:
<TABLE>
<CAPTION>
                                                                  Amount                  Amount
                                                                  Charged            Utilized Through           Reserve at
       In millions                                                 1998                Nov. 28, 1998           Nov. 28, 1998
                                                              --------------------------------------------------------------
       <S>                                                     <C>                      <C>                    <C>
       Real estate disposal costs                              $       0.7              $       0.1            $      0.6
       Severance costs                                                 5.6                      5.6                    --
       Other costs                                                     1.1                       --                   1.1
                                                              --------------------------------------------------------------
                                                               $       7.4              $       5.7            $      1.7
                                                              ==============================================================
</TABLE>

<PAGE>38


A special  charge of $13.1 million  ($8.1  million after tax),  primarily a cash
charge,  was recorded in the third quarter of fiscal 1997 in connection with the
closing of 29 stores as part of the Company's  reorganization  under Chapter 11.
All 29 stores were closed prior to November 29, 1997.  In addition,  the Company
recorded an inventory  write-down  of $10.7  million  ($6.6  million after tax),
included in cost of merchandise sold, in connection with the store closings.

Historical financial data for the closing of the 29 stores is as follows for the
fiscal years presented:

In thousands                       1997         1996
                             --------------------------

Net sales                      $  209,898    $  328,541
Net operating income (loss)    $   (9,153)   $    5,990


The fiscal 1997 special charge includes:
<TABLE>
<CAPTION>
                                                        Amount            Amount            Reclass From
                                                        Charged       Utilized Through       1995 & 1996     Reserve at
       In millions                                       1997          Nov. 28, 1998           Reserve       Nov. 28, 1998
                                                    ----------------------------------------------------------------------
       <S>                                           <C>                 <C>                 <C>               <C>
       Real estate disposal costs                    $       6.8         $      7.5          $     3.4         $      2.7
       Severance costs                                       6.3                6.3                  --                --
                                                    ---------------------------------------------------------------------
                                                     $      13.1         $     13.8          $     3.4         $      2.7
                                                    =====================================================================
</TABLE>


A special  charge of $8.2 million  ($5.0  million  after tax),  primarily a cash
charge,  was recorded in the third quarter of fiscal 1996 in connection with the
closing of nine under-performing stores. Eight of the nine stores were closed at
November  30,  1996,  and the  remaining  store was closed in fiscal  1997.  The
Company also  recorded an inventory  write-down  of $5.8 million  ($3.5  million
after tax),  included in cost of merchandise  sold, in connection with the store
closings.


Historical  financial  data for the closing of the nine stores is as follows for
the fiscal years presented:

In thousands                   1996
                           -----------
Net sales                   $  63,088
Net operating  loss         $  (7,636)


The fiscal 1996 special charge includes:
<TABLE>
<CAPTION>
                                                                                              Discharge of
                                       Amount           Amount               Reclass          Indebtedness
                                       Charged     Utilized Through       1996 Reserve       in Fresh-Start      Reserve at
       In millions                      1996         Nov. 28, 1998       to 1997 Reserve       Accounting     Nov. 28, 1998
                                    ---------------------------------------------------------------------------------------
       <S>                            <C>            <C>                  <C>                   <C>               <C>

       Future store rentals           $     3.7      $       1.3          $         --          $      (2.4)      $      --
       Real estate disposal costs           4.5              3.3                  (1.2)                  --              --
                                    ---------------------------------------------------------------------------------------
                                      $     8.2      $       4.6          $       (1.2)         $      (2.4)      $      --
                                    =======================================================================================
</TABLE>


<PAGE>39


Note L--Litigation

The Company is a defendant in a lawsuit  brought in connection  with a reduction
in force pursuant to a January 1994  restructuring.  The suit asserted a variety
of  claims  including  federal  and  state  securities  fraud  claims,   alleged
violations of the Racketeer  Influenced and Corrupt  Organizations Act ("RICO"),
federal  and  state  claims of age  discrimination,  alleged  violations  of the
Employment  Retirement Income Security Act of 1974, and various state law claims
including,  but not  limited to,  fraudulent  misrepresentation  allegations.  A
ruling has been  entered on the  Company's  motion to dismiss  the  majority  of
pending claims,  substantially  narrowing plaintiffs' legal claims by dismissing
some age  discrimination  counts,  all federal securities counts and RICO counts
except one each, and all state law counts related to an alleged partnership. The
plaintiffs' motion for class  certification has been denied on all claims except
the age  discrimination  claims.  The court granted the  plaintiffs'  motion for
class  certification of certain age  discrimination  claims. As a result of this
ruling,  eight  additional  individuals  chose to  participate in the age claims
asserted in this suit. Each of the parties has conducted  discovery  pursuant to
the court's scheduling order and discovery plan. The lawsuit was formally stayed
pursuant to the  automatic  stay issued by the  Bankruptcy  Court  following the
voluntary Chapter 11 reorganization  filing on July 21, 1997. During the Chapter
11  reorganization,  plaintiffs  timely  filed  proofs  of  claim,  including  a
purported claim on behalf of the potential Age  Discrimination in Employment Act
opt-in  class,  for an  aggregate  of $37  million,  which  was  limited  by the
Bankruptcy Court to a maximum of $22 million.  The case has been returned to the
United States  District  Court for the Southern  District of Iowa for resolution
with mediation  scheduled for April 1999 and a trial date currently set for July
1999. Any recovery for the plaintiffs  against the Company would be treated as a
general  unsecured  claim  entitling  the  plaintiffs to their pro rata share of
8,269,329 shares of New Common Stock reserved for such claims.

The Company  denies any and all claimed  liability and is  vigorously  defending
this  litigation,  but is unable  to  estimate  a  potential  range of  monetary
exposure,  if any,  to the  Company  or to predict  the  likely  outcome of this
matter.


--------------------------------------------------------------------------------
                           [KPMG LLP Letterhead]


INDEPENDENT AUDITORS' REPORT


The Board of Directors
Payless Cashways, Inc.:

We have audited the accompanying balance sheets of Payless Cashways,  Inc. as of
November  28,  1998  and  November  29,  1997  and  the  related  statements  of
operations, stockholders' equity, and cash flows for each of the fiscal years in
the three-year  period ended November 28, 1998.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Payless Cashways,  Inc. as of
November 28, 1998 and November  29, 1997 and the results of its  operations  and
its cash  flows for each of the  fiscal  years in the  three-year  period  ended
November 28, 1998, in conformity with generally accepted accounting principles.

As discussed in Note B to the financial  statements,  the  financial  statements
reflect the  application of  fresh-start  reporting as of November 29, 1997 and,
therefore,  are not  comparable in all respects to the financial  statements for
periods prior to such date. As discussed in Note J to the financial  statements,
the  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 121,
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
Be Disposed Of, in fiscal 1996.


                                                      /s/ KPMG  LLP

Kansas City, Missouri
January 15, 1999


<PAGE>40


Payless Cashways, Inc.
<TABLE>
FIVE-YEAR FINANCIAL SUMMARY
<CAPTION>
                                                  Reorganized         |
                                                    Company           |                Predecessor Company
                                          ----------------------------|------------------------------------------------------------
In thousands, except per share                                        |
amounts, percentages and ratios                1998           1997    |     1997            1996           1995             1994
----------------------------------------------------------------------|------------------------------------------------------------
<S>                                      <C>              <C>         |  <C>           <C>             <C>             <C>
Net sales and other income (a)           $   1,909,860    $       N/A |  $2,290,215    $ 2,650,905     $ 2,685,670     $ 2,733,182
Cost of merchandise sold                     1,420,787            N/A |   1,676,658      1,906,734       1,912,620       1,918,674
Selling, general and administrative            446,936            N/A |     558,817        615,466         619,589         594,024
Reorganization items (b)                            --            N/A |      25,455             --              --              --
Fresh-start revaluation (b)                         --            N/A |     355,559             --              --              --
Special charges (c)                              7,421            N/A |      13,056          8,184         153,667              --
Asset impairment charges (d)                        --            N/A |      60,483         59,967              --              --
Depreciation and amortization                   33,139            N/A |      51,110         55,016          60,356          58,692
Interest expense                                37,162            N/A |      61,251         60,488          61,067          65,571
Interest income (e)                                 --            N/A |          --          4,900              --              --
                                         -----------------------------|------------------------------------------------------------
Income (loss) before income taxes              (35,585)           N/A |    (512,174)       (49,780)       (121,629)         96,221
Federal and state income taxes (e)             (13,218)           N/A |     (90,406)       (30,702)         (4,911)         41,808
                                         -----------------------------|------------------------------------------------------------
Income (loss) before equity in loss of                                |
   joint venture and extraordinary item             --            N/A |    (421,768)       (19,078)       (116,718)         54,413
Equity in loss of joint venture (f)                 --            N/A |          --             --         (11,831)         (2,281)
Extraordinary item (g)                              --            N/A |     133,176             --              --          (7,243)
                                         -----------------------------|------------------------------------------------------------
Net income (loss)                              (22,367)   $       N/A |  $ (288,592)   $   (19,078)    $  (128,549)    $    44,889
                                         =============================|============================================================
                                                                      |
Current ratio                                      2.08          2.15 |         N/A            1.41           1.29            1.45
Working capital                          $     196,184    $   258,405 |         N/A    $   131,004     $    98,400     $   139,128
Total assets                             $     748,354    $   911,341 |         N/A    $ 1,293,118     $ 1,344,436     $ 1,495,882
Long-term debt                           $     336,557    $   424,031 |         N/A    $   618,667     $   608,627     $   654,131
Stockholders' equity                     $     161,433    $   183,800 |         N/A    $   289,731     $   308,163     $   435,865
Capital expenditures                     $      23,349    $       N/A |  $   62,940    $    41,670     $    67,281     $    81,906
Income from operations before interest,                               |
   depreciation and amortization (h)     $      46,577    $       N/A |  $   65,433    $   134,552     $   153,461     $   220,484
</TABLE>

(a)  Net sales and other income include gains of $2.3 million in 1996 related to
     settlements of 1995  fire losses and gains of  $5.9 million in 1994 related
     to settlements of 1993 flood losses.

(b)  In  connection  with its Chapter 11 filing on July 21,  1997,  discussed at
     Note B, the Company recorded reorganization items in 1997. The Company also
     adopted  fresh-start  accounting,  discussed  at Note C, as of November 29,
     1997,  as a result  of its  emergence  from  bankruptcy  under  its plan of
     reorganization effective date, December 2, 1997.

(c)  In 1998, special charges consisted of costs associated with the elimination
     of staff at the Company's headquarters and regional  administration centers
     and the  closing  of  eight  stores.  Special  charges  for  1997  and 1996
     consisted  of costs  associated  with the  closing  of 29  stores  and nine
     stores,  respectively.  Special  charges for 1995  consisted of restructure
     costs associated with the closing of six stores, the sale of a distribution
     center  and the  reorientation  of  several  stores to  concentrate  on the
     professional customer.

(d)  Asset  impairment  charges  for 1997 and 1996  consist  of a  reduction  of
     goodwill and certain real estate carrying values,  net of amounts estimated
     to be recoverable,  and the recording of a liability for future store lease
     payments. The Company adopted SFAS 121 in 1996.

(e)  During  1996,  the Company  recorded a federal  income tax benefit of $23.7
     million and related interest income of $4.9 million pursuant to legislation
     and a settlement with the Internal Revenue Service.

(f)  During 1995,  the Company recorded an  $8.0 million loss on the sale of its
     Mexican joint venture investment.

(g)  During 1997, the Company recorded a $5.0 million charge, after tax, related
     to the  early  extinguishment  of debt and a $138.2  million  extraordinary
     gain,   after  tax,   related  to  debts   discharged  in  its  Chapter  11
     reorganization.  During 1994, the extraordinary items also represent losses
     on early extinguishment of debt.

(h)  Income from operations  before  interest,  depreciation and amortization is
     utilized  by the  Company  as a  measure  for  managing  cash  flow  in its
     day-to-day  operations.  The amounts are before the  reorganization  items,
     fresh-start  revaluation,  special  charges and asset  impairment  charges.
     Inventory write-downs in 1998, 1997 and 1996 of $4.4 million, $10.7 million
     and $5.8  million,  respectively,  related to the closing of eight,  29 and
     nine underperforming stores, respectively, are also excluded.
<PAGE>41


Payless Cashways, Inc.
<TABLE>
FIVE-YEAR OPERATIONAL SUMMARY
<CAPTION>
                                                Reorganized |
Average sales per facility, number                Company   |                           Predecessor Company
of customers, gross square feet and            -------------|-------------------------------------------------------------------
retail square feet are in thousands                 1998    |        1997           1996 (a)            1995             1994
------------------------------------------------------------|-------------------------------------------------------------------
<S>                                             <C>         |    <C>               <C>              <C>               <C>
                                                            |
Number of retail facilities                            161  |           164               192              206               202
Average same-store sales per facility           $   11,711  |    $   12,600        $   13,107       $   13,114        $   13,716
Number of customers                                 42,741  |        50,743            56,736           59,685            60,812
Average sales per customer                      $    44.61  |    $    45.04        $    45.81       $    44.91        $    44.77
Number of employees                                 10,930  |        12,782            16,664           18,122            18,406
Average sales per employee                      $  171,316  |    $  162,099        $  152,228       $  147,894        $  147,778
Gross square feet (total)                           14,491  |        15,550            17,578           19,453            18,730
Retail square feet (inside)                          5,251  |         5,334             6,209            6,740             6,468
Sales per retail square foot                    $   356.59  |    $   388.44        $   408.56       $   397.65        $   420.53
Percent increase (decrease) in same-                        |
  store sales                                       (7.3)%  |        (6.6)%            (2.5)%           (4.5)%              3.3%
<FN>
 (a) Fiscal 1996 was a 53-week year.  All 1996 data has been computed on a 52-week basis.
</FN>
</TABLE>
--------------------------------------------------------------------------------

Payless Cashways, Inc.

RESPONSIBILITY FOR FINANCIAL STATEMENTS


The  financial  statements  of Payless  Cashways,  Inc.  have been  prepared  by
management in accordance  with  generally  accepted  accounting  principles  and
necessarily  include amounts based on management's  judgment and best estimates.
The presentation,  integrity and consistency of the financial statements are the
responsibility of management.

The financial  statements have been audited by KPMG LLP,  independent  auditors.
Their   responsibility  is  to  audit  the  Company's  financial  statements  in
accordance  with  generally  accepted  auditing  standards  and to express their
opinion on these  statements  with  respect to fairness of  presentation  of the
Company's financial position, results of operations and cash flows.

To fulfill its  responsibilities,  management has developed a system of internal
controls designed to provide  reasonable  assurance that assets are safeguarded,
transactions  are executed in accordance with  management's  authorizations  and
financial  records provide a reliable basis for preparing  financial  statements
and other data.  Management  believes  the controls in place are  sufficient  to
provide this reasonable  assurance.  The controls include careful  selection and
training of  qualified  personnel,  appropriate  division  of  responsibilities,
communication  of written  policies and procedures  throughout the Company and a
program of internal audits.

The Board of Directors,  through its Audit  Committee  composed of Directors who
are neither  officers  nor  employees  of the Company,  is  responsible  for the
maintenance of a strong control environment and quality financial reporting. The
Board, on the  recommendation  of the Audit  Committee,  selects and engages the
independent  auditors.  The Audit Committee meets  periodically with management,
the  independent  auditors and internal  auditors to discuss the results of both
independent and internal audits, the adequacy of internal controls and financial
reporting  matters.  The  independent  auditors and the internal  auditors  have
direct access to the Audit  Committee  without the presence of management,  when
deemed appropriate.


/s/ Millard E. Barron                    /s/ Richard G. Luse

Millard E. Barron                        Richard G. Luse
President and Chief Executive Officer    Senior Vice President-Finance and
                                         Chief Financial Officer


<PAGE>42


Payless Cashways, Inc.

DISTRIBUTION CENTERS

Chandler, Arizona

Sacramento, California

Denver, Colorado

Indianapolis, Indiana

Kansas City, Missouri

Sedalia, Missouri

Lake Dallas, Texas



STORE LOCATIONS


Arizona
Phoenix 4, Tucson 3

California
Bakersfield 2, Fresno 2, Modesto 1,
Redding 1, Sacramento 6, Visalia 1

Colorado
Boulder 1, Colorado Springs 3,
Denver 13, Greeley 1

Illinois
Quincy 1, Silvis 1, Springfield 1

Indiana
Anderson 1, Bloomington 1, Indianapolis 5, Kokomo 1,
Lafayette 1, Muncie 1

Iowa
Altoona 1, Cedar Rapids 1, Coralville 1, Davenport 2,
Des Moines 2, Fort Dodge 1, Sioux City 1, Waterloo 1

Kansas
Elwood 1, Kansas City 5, Lawrence 1, Salina 1, Topeka 1,
Wichita 2

Kentucky
Florence 1, Lexington 1, Louisville 3

Minnesota
Minneapolis/St. Paul 8

Missouri
Columbia 1, Kansas City 5,
Springfield 1, St. Joseph 1

Nebraska
Lincoln 2, Omaha 2

Nevada
Las Vegas 4, Reno 1, Sparks 1

New Mexico
Albuquerque 1, Santa Fe 1

Ohio
Dayton 2, Cincinnati 6, Findlay 1,
Huber Heights 1, Lima 1, Springfield 1


<PAGE>43


Oklahoma
Norman 1, Oklahoma City 2, Tulsa 2

Oregon
Eugene 1, Salem 1

Tennessee
Memphis 3

Texas
Abilene 1, Amarillo 1, Austin 3,
College Station 1, Conroe 1,
Dallas/Ft. Worth 13, Longview 1,
Lubbock 2, Sherman 1, Texarkana 1,
Tyler 1, Waco 1



<PAGE>44


Payless Cashways, Inc.

STOCKHOLDER INFORMATION


As of the July 21, 1997,  Chapter 11 filing date,  Payless  Cashways' Old Common
Stock ceased  trading on the New York Stock  Exchange  (ticker  symbol PCS), was
subsequently delisted and began trading  over-the-counter (ticker symbol PYLSQ).
On  December  2,  1997,   the  Effective   Date  for  the   Company's   Plan  of
Reorganization,  the Company  canceled Old Common Stock and Old Preferred  Stock
and began  issuing  shares of New Common  Stock  (ticker  symbol  PCSH) which is
trading  on  the  over-the-counter   bulletin  board.  Therefore,  the  required
information presented below with respect to the Old Common Stock for fiscal 1997
is not meaningful and has not been converted to the current trading price of the
New Common Stock.  The number of registered  holders of the Company's New Common
Stock at November 28, 1998,  was 4,636.  No cash dividends have been declared on
either  Old or New Common  Stock  since  1988.  Certain  of the  Company's  debt
instruments contain restrictions on the declaration and payment of dividends on,
or the making of any  distribution to the holders of, or the acquisition of, any
shares of Common Stock.


                                  New Common Stock          Old Common Stock
                                        1998                      1997
----------------------------- ------------------------- ------------------------
 Price range of Common Stock      High          Low         High         Low
----------------------------- ------------ ------------ ------------ -----------

        First quarter            3.875         1.000        2.500       1.125

        Second quarter           5.250         2.531        2.125       1.375

        Third quarter            3.188         1.125        1.750       0.130

        Fourth quarter           1.938         0.781        0.360       0.053



Copies of the Payless  Cashways,  Inc. Form 10-K for fiscal 1998, filed with the
Securities and Exchange  Commission,  are available  without charge. To obtain a
copy, please write to:

                               Payless Cashways, Inc.
                                 Investor Relations
                                   P.O. Box 419466
                             Kansas City, MO 64141-0466
                          (Web site: payless.cashways.com)


Annual Meeting - April 21, 1999, 10:00 a.m.    Independent Auditors
Kansas City Marriott Downtown                  KPMG LLP
200 West 12th Street                           Kansas City, MO
Kansas City, MO

Registrar and Transfer Agent                   Telephone Number of
UMB Bank, n.a.                                 Payless Cashways, Inc. is
Kansas City, MO                                (816) 234-6000
(816) 860-7786