<PAGE>1

                                                    UNITED STATES
                                         SECURITIES AND EXCHANGE COMMISSION
                                               Washington, D.C.  20549
                                                      FORM 10-K
         (Mark One)
                  / X /    Annual report pursuant to Section 13 or 15(d) of the
                           Securities Exchange Act of 1934 [No fee required]

                           For the fiscal year ended November 25, 2000
                                                             OR
                  /    /   Transition report pursuant to Section 13 or 15(d)  of
                           the Securities Exchange Act of 1934 [No fee required]

                           For the transition period from __________to__________

                                            Commission file number 0-4437

                                               PAYLESS CASHWAYS, INC.
                          (Exact Name of Registrant as Specified in Its Charter)

Delaware                                                              42-0945849
State or Other Jurisdiction of                                  (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

800 NW Chipman Road, Suite 5900
P.O. Box 648001
Lee's Summit, Missouri                                                64064-8001
(Address of Principal Executive Offices)                              (Zip Code)
                                 (816) 347-6000
              (Registrant's Telephone Number, Including Area Code)

            Securities  registered pursuant to Section 12 (b) of the Act:

                                                        Name of Each Exchange on
Title of Each Class                                             which Registered

Common Stock, $.01 par value                                                None


Securities registered pursuant to Section 12 (g) of the Act: Common Stock,  $.01
par value

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required  to be filed by  Section  13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter  period that the regis-
trant  was  required  to file such  reports), and (2) has been  subject to  such
filing requirements for the past 90 days.                YES / X /     NO /    /

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / X /

The aggregate market value of the Common Stock, par value $.01 per share, of the
registrant held by  nonaffiliates of the registrant as of February 13, 2001, was
$19,238,690.

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distributions of securities under a plan
confirmed by a court.
YES / X /       NO /     /

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. There were 20,000,000 shares of
Common Stock, $.01 par value, outstanding as of February 13, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE:

Portions  of the  Annual  Proxy  Statement  for the  Annual   Meeting  of Stock-
holders to be held April 18, 2001 -- Part III.


<PAGE>2


                                    PART I

Item 1.  BUSINESS.
-------  ---------

General

         Payless  Cashways,  Inc.  ("Payless"  or the  "Company")  is the fourth
largest  retailer of building  materials  and home  improvement  products in the
United  States as measured by sales.  The Company  operates 128 retail  building
materials stores,  (excluding 22 locations which were closed in January of 2001)
and 5  Builders  Resource  wholesale  facilities  in 17  states  located  in the
Midwestern,  Southwestern,  Pacific Coast,  and Rocky Mountain areas. The stores
operate under the names Payless  Cashways  Building  Materials,  Furrow Building
Materials, Lumberjack Building Materials, Hugh M. Woods Building Materials, Knox
Lumber, Contractor Supply and PCI Builders Resource. Each store is designed as a
one-stop  source that  provides  the  professional  builder,  remodel and repair
contractor,  institutional buyer, and project-oriented  do-it-yourself  customer
with a dominant  selection of quality  products  and  services  needed to build,
improve,  and maintain home,  business,  farm or ranch properties at competitive
prices.  The Company's  merchandise  assortment  in each retail store  currently
averages approximately 27,000 items in the following categories: lumber, plywood
and building materials;  millwork; farm and ranch products;  tools; hardware and
housewares;  electrical  and plumbing  products;  paint;  lighting;  home decor;
kitchens; decorative plumbing and bath; heating, ventilating and cooling (HVAC);
work apparel; and seasonal items. The Company believes that the combination of a
full-line  lumberyard,  an attractive hardware  store/showroom  offering, a deep
product  mix  tailored  to serve  the  professional  customer,  a high  level of
in-store customer assistance concerning product usage and installation, an array
of services including credit,  delivery,  estimating and design services as well
as  targeted   marketing   distinguishes   Payless   retail  outlets  from  most
competitors. Additionally, the Builders Resource wholesale locations utilize the
Company's  existing  Distribution  center sites and manufacturing  facilities to
better serve the professional builder market segment.

         The  Company's   primary  focus  is  on  the   professional   customer.
Professionals  ("Pros")  include  professional  builders,   remodel  and  repair
contractors,  and institutional  buyers. In their retail stores the Company also
serves  do-it-yourselfers  ("DIY-ers")  who enjoy shopping "where the Pros shop"
for both  project-oriented  projects and for convenience items. With a full-line
lumberyard,  a complete  hardware store and outstanding  customer  service,  the
Company  is well  positioned  to  compete.  The  Company's  2000  revenues  were
approximately  57% from sales to the Pro  customer and 43% from sales to the DIY
customer.

         The  Company's  business is  somewhat  seasonal  with the peak  selling
months  being May through  September,  and the lower sales  months  occurring in
December  through  February.  Because of this  seasonality,  the Company  builds
inventory in the lower sales months in  anticipation of the peak selling season.
This inventory build is financed by trade accounts  payable and borrowings under
the 1999 Credit Agreement and a seasonal credit facility overline, as needed. An
average Payless store currently carries approximately $1.8 million of inventory,
and during fiscal 2000,  sales at Payless stores  averaged  approximately  $10.0
million per store.

Industry Overview

         Building  materials and home  improvement  products are sold  primarily
through two distribution  channels -- wholesale supply outlets and retail units.
Retail distribution channels include neighborhood hardware stores, home centers,
warehouse  stores,  specialty  stores  (such  as  paint  and  tile  stores)  and
lumberyards.  Although  the  industry  remains  highly  fragmented,  the  retail
distribution   channel  has  consolidated   somewhat  in  the  last  ten  years,
particularly in metropolitan areas.

         In  general   terms,   customers   may  be   characterized   as  either
wholesale-oriented  (professional) or retail-oriented  (consumer).  Purchases by
professionals  tend to be larger in volume and require  specialized  merchandise
assortments, personal service representatives, competitive bid pricing, superior
lumber  quality,  telephone  order  placement,  commercial  credit and  job-site
delivery.  The  consumer  segments,  as defined by the  Company,  include  light
DIY-ers  who spend  less than  $200  annually  on  building  materials  and home
improvement  products;  moderate  DIY-ers who make annual  purchases  of $200 to
$1,000;  and  project-oriented  DIY-ers who make annual  purchases  in excess of
$1,000.

Mission

         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  consumers.  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>3

Business Strategy

         Objectives

         The Company's principal financial objectives are to:
1)  increase market share in the professional segment,
2)  maintain a  substantial  share of  business  with the  project-oriented  DIY
    segment,
3)  continue to improve its balance sheet, and
4)  grow revenue, earnings and stockholder value.

         Strategy

         The Company  believes it is particularly  well-positioned  to serve the
needs of professional  customers. It enjoys economies of scale, buying power and
professional  management that the traditional outlets supplying the professional
customer commonly do not have. These advantages, along with the tailored product
assortment,  a full array of services  and outside  sales force,  position  each
outlet to supply local Pros and national professional customers.

         A  specialized  and  separate  sales and service  staff is dedicated to
serving the  professional  customer.  Professional  sales  representatives  have
assigned  customers  for whom they provide  service  tailored to the  customer's
business needs. Sales  representatives  call on professional  customers at their
places of  business  and job  sites.  The sales  representatives  have  detailed
information regarding account purchases and the profitability of their accounts.
The  Company  believes  that this level of  customer  service  and type of sales
management   system  are  effective  in   increasing   purchases  and  improving
profitability from current  professional  customers as well as building customer
loyalty.  These sales people work from the contractor sales offices and serve by
phone customers who do not require job site presence.  In certain markets,  this
activity has been  centralized by establishing  call-centers.  The outside sales
representatives are managed and directed by 17 Market Sales Managers who provide
a uniform approach to personnel  selection,  training and sales activities.  The
Company also has national  account  managers who target  businesses,  often with
geographically dispersed sites, that utilize large amounts of building materials
and improvement products for repair and maintenance,  new construction projects,
and insurance rehabilitation work.

         Each store has a separate  commercial  sales area for the  professional
customer to use. These offices speed the purchase  process for the Pro,  provide
professional  estimating services including blueprint  take-offs,  allow private
discussions between customers and their sales  representatives,  and offer small
amenities to these  customers  such as coffee and phone access.  The Company has
drive-through  lumberyards  that  significantly  reduce  the  time  required  to
complete  a  purchase  and meet the  Pro's  requirement  for fast and  efficient
service.

         The Company's  merchandise  assortment is specifically  tailored to the
Pro.  Preferred brands,  commercial grade items,  contractor packs and extensive
special   order   capabilities   ensure  that  the  Company  meets  the  product
requirements  of this  customer  segment.  The Company has  negotiated  purchase
arrangements  with key lumber suppliers that ensure a consistent  source of high
quality lumber.

         The Company  offers a number of special  services  that are tailored to
meet  the  needs of  various  professional  and  commercial  customer  segments.
Delivery  services  include  on-time  job-site  delivery and roof top  delivery.
Credit programs include a full-service  commercial  credit program that provides
job-based billing and other more  sophisticated  credit features.  Additionally,
all  stores  offer  automated  blueprint  estimating  services  featuring  rapid
turnaround. This estimating system utilizes a digitizer that ensures accuracy in
the measurement  process,  and it is fully  integrated into the store's point of
sale  ("POS")  system.  The Company also  supports the Pro with joint  marketing
programs such as its contractor referral database.

         Strategic Initiatives

         The Company's ongoing market research regarding the Pro indicates that,
while  the  Company  has  established  significant  business  with  this  group,
substantial  growth  opportunities  remain.  Industry research  indicates that a
significant  number of customers prefer a distinctly  different type of shopping
experience   (human  scale;   finished,   well-lighted   showrooms;   full-line,
drive-through  lumberyards)  as compared to a  warehouse-store  format.  Payless
Cashways retail stores offer such a shopping experience. The Company expects the
professional  builder, the remodel and repair contractor and institutional buyer
to continue to be the primary  source of growth in their  retail  locations.  In
order to increase market share with these customers,  the Company has planned to
attract and retain more  large-volume  accounts whose business is often job-site
direct.  The 5 Builders  Resource  wholesale  locations  leverage the  Company's
existing  Distribution  channels as well as the dedicated outside sales force to
better serve the professional builder market segment.

         The Company is currently implementing systems to utilize its e-commerce
strategy to generate  sales and  increase  customer  service.  The  evolution of
e-commerce  provides  the Company  additional  opportunities  to  interact  with
customers  and  increase  sales.   The  Company  believes  it  is  strategically
positioned  to take  advantage  of this  evolving  convergence  of  "bricks  and
clicks".

<PAGE>4


Development is complete that will  provide Internet  or phone  order fulfillment
through currently  under-utilized  distribution  channels to provide  nationwide
product sourcing and delivery.  The  Company  has  deployed a web-based  special
order  procurement  system to all of its locations and is developing the ability
to create category specific  e-catalogs.  The Company has  also  partnered  with
select  Internet firms  to provide  their customers  with the ability  to  order
products and delivery services via the Internet.  Additionally,  the Company has
developed  its own wireless  communications  applications  to provide  customers
greater accessibility to its store locations and the Store Support Center.

         Manufacturing capabilities have been added in certain markets to better
serve the needs of professional  customers.  The Company recognizes  significant
opportunity in this area and owns and operates four facilities that  manufacture
doors and trim products and a plant that manufactures  engineered roof and floor
trusses,  wall and floor panels,  and stair systems.  The Company  believes that
these  capabilities  help  position  it to be the  supplier  of  choice  for the
large-volume professional builder and remodeler and plans to continue developing
these in additional markets.

         The  Company's  strategy of focusing on the Pro customer has the effect
of  drawing  project-oriented  consumers  as  well.  Sales  to  project-oriented
consumers  make up about 43% of the Company's  current  revenues,  and while the
Company  will focus on the Pro, it intends to continue to serve this  profitable
segment of customers.  Knowledgeable employees, high quality products with brand
names, full-line,  drive-through lumberyards,  consistent in-stock position, all
the  products  needed to  complete a project  and a well  merchandised  shopping
environment are important to the project-oriented  DIY customer,  as well as the
Pro. In the retail  locations,  project-oriented  DIY-ers are similar to the Pro
customer with regard to the brands preferred and the importance of stocking high
quality  lumber.  The  Company  believes  that many of the steps it has taken to
serve  the Pro  customer  have  also  had a  positive  impact  on  sales  to the
project-oriented DIY customer. The Company also recognizes that the lifestyle of
the target Pro  customer  includes  products  for the Pro's own home and family.
Most of these Pro customers are already in the Company's  locations on a regular
basis, and the Company intends,  as a convenience to that customer,  to identify
and stock certain related  items  that might  otherwise  be purchased elsewhere.
These products are also appealing to the  project-oriented  do-it-yourselfer who
likes to shop where the Pro shops.

         Payless  Cashways  is  known  for  its  well-trained  work  force.  The
Company's  knowledgeable  employees  study,  take tests, and become certified in
various product categories.  Employees who successfully master product areas can
become  certified  and wear a symbol of that  achievement  on their name badges.
Customer service is a priority for the Company.  The outside sales force, inside
sales  representatives  and employees who staff the service  counter and product
departments  in each  store  location  are among the most  knowledgeable  in the
industry.  They are trained to build  customer  relationships  by supporting the
customer  through  delivery,   credit,  special  orders,  and  attentiveness  to
customers'  needs.  A  recognition  program  is in  place to  promote  excellent
customer service, which drives a higher average ticket and repeat business.

Merchandising and Marketing

         During 2000,  Payless'  full-line  retail  stores sold a broad range of
building material products, currently averaging approximately 27,000 items, many
of which are nationally  advertised  brand-name  items. The Company continues to
improve its  attractiveness  to  customers  through  reviewing  its  assortment,
bringing in new products,  determining the best supplier, and updating displays.
The focus is on  categories  where the Company  can be dominant  such as lumber,
building materials,  hardware, tools, plumbing,  electrical,  and paint. Payless
categorizes its product offerings into the classes described below:

         Lumberyard - Dimensional lumber,  plywood,  siding,  roofing materials,
             fencing materials,  windows, doors and moldings,  paneling, ceiling
             tiles, insulation materials, and drywall.

         Hardware - Electrical wire and wiring  materials,  plumbing  materials,
             power and hand tools, paint and painting supplies,  lawn and garden
             products,  door locks,  fasteners,  heating  and cooling  products,
             housewares,  work apparel, interior and exterior lighting, bathroom
             fixtures   and   vanities,   kitchen   cabinets,    flooring,   and
             wallcoverings.

         During the last  three  fiscal  years,  these  product  classifications
accounted for the following percentages of Payless' sales:

<TABLE>
<CAPTION>
                                       2000              1999            1998
                                       ----              ----            ----
           <S>                          <C>               <C>             <C>
           Lumberyard                   53 %              53 %            51 %
           Hardware                     47                47              49
                                       ----              ----            ----
                                       100 %             100 %           100 %
                                       ====              ====            ====
</TABLE>

         Payless  addresses  its  primary  target  customers  through  a mix  of
targeted  mailings,   special  customer  events,   and  newspaper   advertising.
Additionally,  the  Company  participates  in or hosts a variety of  Pro-focused
events,  national trade association  shows, and conferences.  In fiscal 2000 the
Company  shifted it's  marketing  emphasis from a mass  advertising  format to a
targeted  marketing approach.

<PAGE>5


Consequently , during fiscal 2000, the  Company's  expenditures on  all forms of
marketing,  net of vendor program allowances, totaled approximately $8.9 million
or 0.6% of sales, versus $20.0 million or 1.1% of sales during fiscal 1999.


Store Management and Personnel

         Payless  coordinates the operation of its 128 retail building materials
stores through 128 Store  Managers,  each of whom reports  directly to one of 19
District   Managers  who  in  turn  reports  to  one  of  three   Regional  Vice
Presidents/Managers.  Supervision  and control  over the  individual  stores are
facilitated  by means of detailed  operating  reports and regular  store visits.
Most of Payless   Store  Managers,  and all of Payless   District  Managers  and
Regional Vice Presidents/Managers have been promoted from within Payless or from
within the stores Payless has acquired.  In addition,  the Company  continues to
attract  new  talented  store  management  from the  retail  industry.  District
Managers and Store Managers have, on average,  more than ten years of experience
with the  Company.  In  addition  to the retail  operations  staff,  a dedicated
outside  sales  group,  managed  and  directed  by  17  Market  Sales  Managers,
coordinates sales to the professional market segment.

         The stores  utilize a  departmental  management  structure  designed to
provide a superior level of service to customers. Sales personnel are trained in
customer service, product knowledge, selling skills, and systems and procedures.
Formal classroom  training  sessions are  supplemented  with product clinics and
special assignments.

Information Systems

         The Company has invested substantial time, effort, and dollars ensuring
that technology and information are leveraged for maximum benefit throughout its
entire enterprise.  In-store-processors  based upon current technology standards
are an integral  part of store  management  and support  customer  services with
programs  designed  to enhance  the  shopping  experience.  Each of the  Company
facilities  transmits daily transaction  detail data including  item-level sales
from point-of-sale  terminals  equipped with the latest in scanning  technology.
This network also serves to provide  automatic check  authorization  and on-line
credit card  processing.  In addition to sales support and data  gathering,  the
Company  has  built  merchandising,   inventory  management,  distribution,  and
promotional systems which are utilized at the store support center to manage the
purchasing,  movement,  and marketing of product lines. A new global  integrated
purchasing system was implemented in fiscal 2000, which management believes will
greatly improve inventory efficiency and replenishment.

Distribution and Suppliers

         The  Company  operates a total of seven  distribution  centers and five
manufacturing  locations. The distribution centers maintain inventories and ship
product  to  stores  one  to  three  times  per  week.  The  Sedalia,   Missouri
distribution center handles  small-sized,  conveyable,  high value items such as
hardware,  plumbing  and  electrical  supplies,  and  hand  tools.  The  Sedalia
distribution   center   serves  all  128  stores  with  some  or  all  of  their
distribution-center-sourced  replenishment,  utilizing  computerized  receiving,
storage and selection  technology.  The other six  distribution  centers  handle
commodity  products and bulky manufactured  products such as tubs,  paneling and
ceiling tile,  operating with manual storage and selection systems to all retail
and wholesale  locations.  The manufacturing  locations assemble pre-hung doors,
customized  windows,  engineered roof and floor trusses,  wall and floor panels,
and stair systems.

         In  fiscal  2000,  52%  of  merchandise   was  channeled   through  the
distribution  centers for redistribution to individual stores. This benefits the
Company in the areas of product cost, in-stock positions and inventory turnover.

         Payless   purchases   substantially   all  of  its   merchandise   from
approximately 3,100 suppliers, no one of which accounted for more than 5% of the
Company's purchases during fiscal 2000.

Credit

         The Company offers credit to both its DIY and Pro customers.  Purchases
under national credit cards and the Company's  private-label credit card program
as a percentage of sales represented 27.1% in fiscal 2000, 27.0% in fiscal 1999,
and 27.1% in  fiscal  1998.  Purchases  under the  Company's  commercial  credit
program as a percentage  of sales  represented  38.8% in fiscal  2000,  37.7% in
fiscal 1999, and 34.8% in fiscal 1998.

         The Company's  private-label  credit card program and commercial credit
program are administered  through  agreements with a third-party  administrator.
Under  these  agreements,  the costs of the credit  programs  represent  a fixed
percentage fee of charge sales. In addition,  the Company  substantially absorbs
the cost of  uncollectible  commercial  accounts.  Accounts  written off (net of
recoveries)

<PAGE>6


under the commercial credit program for the last three fiscal years were approx-
imately:  $6.2  million or 1.1% of net  commercial  credit sales for 2000, $10.9
million or 1.6% of  net  commercial  credit sales for 1999, and $4.0 million  or
0.6% of net commercial sales for 1998.

         In addition to the traditional commercial program, the Company offers a
business  revolving  charge account as an alternative for commercial  customers.
Commercial  credit is a key component of the services the Company  offers to the
professional  customer  and  management  believes  that this  option  creates an
opportunity to enhance customer satisfaction while reducing costs.

Competition

         The business of Payless is highly competitive. As a result of its focus
on the  professional  customer,  the  Company  competes  with local  independent
lumberyards,  independent  wholesalers,  supply  houses,  retail  and  wholesale
distributors  who market primarily to commercial and  professional  users.  With
regard to remodel and repair  contractors  and  industrial  buyers,  the Company
competes  with  local  and  national  chains.  On  the  consumer  side,  Payless
encounters competition from national and regional chains, including those with a
warehouse  format,  and from local  independent  wholesalers,  supply houses and
distributors.  In recent years, the building  materials  retailing  industry has
experienced  increased  levels of  competition as several  national  chains have
expanded their  operations.  Certain of these competitors are larger in terms of
capital  and sales  volume  and have  been  operating  longer  than  Payless  in
particular areas.  Although there are a few national chains larger than Payless,
its size and capabilities give Payless significant  advantages over the hundreds
of smaller  distributors  in the highly  fragmented  retail  building  materials
industry.  Payless'  competition  varies by  geographical  area, and the Company
continues to differentiate itself by targeting the professional customer and the
project-oriented  DIY-er.  Payless offers a full-line lumberyard,  a deep mix of
high  quality  products,  high  levels  of  customer  service  by  knowledgeable
employees and a well merchandised shopping environment in the retail stores, and
market  competitive  pricing and service tailored to the  professional  builders
business needs at the Builders Resource wholesale facilities.

Employees

         At November 25, 2000, Payless employed approximately 8,100 persons, 19%
of whom were part-time,  although the number of employees fluctuates seasonally.
Management  believes that employee  relations are satisfactory.  Less than 1% of
Payless' employees are represented by a union.

         Forward-looking  statements in the "Business" section of this Form 10-K
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.  These  statements  are based on the  current  plans and
expectations of the Company and 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;
interest  rates;  stability  of customer  demand;  stability  of the work force;
supplier and lender support; consumer spending and debt levels; new and existing
housing activity; commodity  prices-specifically lumber and wallboard;  customer
and product mix; growth of certain market segments; weather; an excess of retail
space  devoted  to the  sale  of  building  materials;  and the  success  of the
Company's strategy, including its e-commerce opportunities.

<PAGE>7


EXECUTIVE OFFICERS OF THE REGISTRANT

         The  following  table  sets  forth  the name  and age of all  executive
officers of Payless and their present positions and recent business  experience.

                                                        Principal Occupation and
Name                      Age                       Five-Year Employment History
----                      ---                       ----------------------------

Millard E. Barron.........51              President and Chief Executive  Officer
First elected a director:                 of Payless  since June 1998; President
1998                                      of Zellers, Inc.   and  Executive Vice
                                          President of Hudson's Bay Company from
                                          September 1996 to February 1998;Senior
                                          Vice President  and  Chief   Operating
                                          Officer of the  International Division
                                          of Wal-Mart Stores,  Inc. from  August
                                          1994 to September  1996; and currently
                                          a director of American Homestar Corpo-
                                          ration.

Frank Chambers............56              Executive Vice  President-Professional
                                          Business Development of Payless  since
                                          March 2000; Vice President - Corporate
                                          Sales of  Moores Lumber  and  Building
                                          Supplies, Inc. from September 1999  to
                                          February  2000; Vice President-Mergers
                                          and Acquisitions of Pelican Companies,
                                          Inc. from May 1995 to June 1998; Pres-
                                          ident of Builders  Warehouse from Jan-
                                          uary 1994 to  April 1995;  Senior Vice
                                          President-Operations  of Central Trac-
                                          tor Farm and Family from January  1993
                                          to December 1993 and Senior Vice Pres-
                                          ident - Operations of  Wickes  Lumber,
                                          Inc.from January 1990 to January 1993.

David J. Krumbholz........46              Senior Vice President-Store Operations
                                          of Payless since  February  2000; Vice
                                          President-Store Operations of  Payless
                                          from  August  1999  to  February 2000;
                                          Vice  President-Professional  Business
                                          of Payless from July 1998  to   August
                                          1999;  and Regional Vice President  of
                                          Payless from August 1988 to July 1998.
                                          Mr. Krumbholz joined Payless in  Janu-
                                          ary 1976.

Edward L. Zimmerlin.......54              Senior Vice President -  Merchandising
                                          and  Marketing  of Payless since March
                                          1999  Vice President - General Manager
                                          of B B M bed,  bath & more, a division
                                          of Hudson's Bay Company, from February
                                          1998 to February  1999  Vice President
                                          - Hardlines of Zellers,  a division of
                                          Hudson's Bay Company, from  June  1997
                                          to  February   1998;   Executive  Vice
                                          President - Merchandising  and  Adver-
                                          tising  of Homeplace  Stores from  May
                                          1996 to March 1997;  and  Senior  Vice
                                          President-Merchandising  and Marketing
                                          of Family Dollar Stores from  February
                                          1995 to April 1996.

Richard B. Witaszak.......40              Senior  Vice  President - Finance  and
                                          Chief  Financial  Officer  of  Payless
                                          since April 2000; Executive Vice Pres-
                                          ident - Finance and  Chief   Financial
                                          Officer of Fred's Inc. from May   1996
                                          to March 2000;  Executive Vice  Presi-
                                          dent - Finance and  Operations of A.E.
                                          Cevite Inc. from October 1990 to April
                                          1996;  Manager-Financial Reporting  of
                                          J.P.  Industries, Inc. from  July 1989
                                          to  September  1990;  Audit Manager of
                                          Coopers & Lybrand from January 1985 to
                                          June 1989.

Kelly R. Abney............46              Vice President - Logistics and  Facil-
                                          ities of Payless since June 1998; Vice
                                          President -  Distribution  and  Trans-
                                          portation  of  Payless  from  February
                                          1997 to June 1998;  and Vice President
                                          - Logistics of  Pamida from  September
                                          1994 to February 1997.

<PAGE>8


James L. Deats............52              Vice President  - Information  Systems
                                          of Payless since  October  1998;  Vice
                                          President-Information Services  of One
                                          Price  Clothing,  Inc.  from July 1997
                                          to  April 1998; and  Vice  President -
                                          Information  Services  of  Pier  1 Im-
                                          ports,  Inc. from  September  1990  to
                                          February 1997.

Renae G. Gonner...........38              Vice  President - Marketing and Adver-
                                          tising  of Payless since October 1998;
                                          Director of Advertising and  Marketing
                                          Communications  of Payless from   July
                                          1996 to October  1998;  and   Creative
                                          Services Manager of Payless  from  No-
                                          vember 1993  to  July 1996. Mr.  H. D.
                                          Cleberg,  a   Director of the Company,
                                          is Ms. Gonner's father.

Louise R. Iennaccaro......56              Vice  President - Human  Resources  of
                                          Payless   since  February  1998;   and
                                          Director of Field  Human  Resources of
                                          Payless  from April 1989  to  February
                                          1998. Ms. Iennaccaro joined Payless in
                                          January 1987.


James P. Fitzpatrick......56              Vice  President  -  Merchandise  Plan-
                                          ning  and  Control  of  Payless  since
                                          December  2000;  Consultant to Payless
                                          from May 2000 to  November  2000;  Sr.
                                          Vice  President-Merchandise   Planning
                                          and Control of Hills Department Stores
                                          from February  1997 to April 1999; and
                                          Vice President-Hardlines  Replenishing
                                          of Montgomery Ward,   Inc.  from  Nov-
                                          ember  1995  to January 1997.

Kenneth D. Kuehn..........50              Vice President - Professional Sales of
                                          Payless since April 2000;  Vice Presi-
                                          dent - Sales and  Marketing  of Wickes
                                          Lumber,   Inc.  from  January  1998 to
                                          March  2000; and  District Vice Presi-
                                          dent of Wickes Lumber, Inc. from Octo-
                                          ber 1995 to December 1997.

Dennis R. Knowles.........36              Regional Vice President - Store Opera-
                                          tions of Payless since July 1998; Dis-
                                          trict  Manager of Payless from January
                                          1998 to June 1998; and Group Store Di-
                                          rector of Payless from  June  1994  to
                                          December 1997. Mr. Knowles joined Pay-
                                          less in January 1982.

Steven J. Schultz.........40              Regional Vice  President - Store Oper-
                                          ations of Payless since June 2000; Re-
                                          gional Executive of Payless  from July
                                          1999 to May 2000;  District Manager of
                                          Payless  from July 1996 to June  1999;
                                          and Director of Store  Operations   of
                                          Payless  from  December  1992 to  June
                                          1996.  Mr. Schultz joined  Payless  in
                                          January 1977.

<PAGE>9


Item 2.  PROPERTIES.
-------  -----------

         The  Company's  128  building  materials  stores  are  located  in  the
following states:

                Number of Stores

                Arizona...................  4      Missouri..................  8
                California................ 12      Nebraska..................  4
                Colorado.................. 18      Nevada....................  6
                Illinois..................  3      New Mexico................  3
                Indiana...................  6      Ohio......................  6
                Iowa...................... 10      Oklahoma..................  5
                Kansas.................... 11      Tennessee.................  1
                Kentucky..................  4      Texas..................... 23
                Minnesota.................  4

         Payless  owns 120 of its store  facilities  and 112 of the 128 sites on
which such  stores are  located.  The  remaining 8  facilities  and 16 sites are
leased. The leases provide for various terms. Mortgages or deeds of trust on 139
store  parcels  or  sites  held  as  real  estate  for  resale  secure  existing
indebtedness.  The 5  Builders  Resource  wholesale  facilities  are  located at
Distribution center and manufacturing facility sites that are described below.

         Payless has generally  located  retail stores  adjacent to  residential
areas of major  metropolitan  cities or  adjacent  to major  arteries in smaller
communities that are convenient to the Pro and DIY customer.  Builders  Resource
wholesale  operations are primarily located at existing  distribution centers or
manufacturing  sites in established  markets.  Operation of multiple stores in a
trade area permits more  effective  supervision  of stores and provides  certain
economies in distribution  expenses and advertising  costs. Each of Payless' 128
retail stores has an average total selling space of approximately 179,000 square
feet consisting of 32,000 square feet of indoor display space and 147,000 square
feet of  lumberyard.  In  addition,  each retail  store has an average of 51,000
square feet of warehouse space. The average Payless store occupies approximately
nine acres of land.

         During the fourth  quarter of fiscal 2000,  22  underperforming  stores
began a closing  process that was completed in January of 2001.  Twelve and four
stores were closed during fiscal years 1999 and 1998, respectively,  and two and
one stores were opened, respectively.  No retail locations were opened in fiscal
2000.

         Five of the Company's seven distribution  centers are owned and, of the
remaining  two, one is leased for land only and the facility and land are leased
for the other.  Mortgages or deeds of trust on five distribution  center parcels
secure existing indebtedness. Three of the Company's manufacturing locations are
owned  and one is  leased.  Mortgages  or deeds of trust on three  manufacturing
parcels secure existing indebtedness. The Sedalia, Missouri, distribution center
is a 592,000  square foot  facility,  while the other six  distribution  centers
average 143,000 square feet of warehouse space on an average of 16 acres.

         A substantial portion of the administrative,  purchasing,  advertising,
accounting  and  information  system  functions is centralized at Payless' store
support center in Lee's Summit,  Missouri,  a suburb of Kansas City. The Company
leases its store support  center under a lease expiring on October 31, 2009. The
store  support  center   occupies   approximately   156,000  square  feet  of  a
single-story building.

                           See also "Strategic  Initiatives"   and "Distribution
and Suppliers" in Item 1, above.

Item 3.  LEGAL PROCEEDINGS.
-------  -----------------

         There are presently no material legal proceedings to which Payless is a
party or of which any of its property is the subject.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------  ----------------------------------------------------

         None.

<PAGE>10


                                    PART II

Item 5. MARKET FOR  THE REGISTRANT'S COMMON EQUITY AND RELATED  STOCKHOLDER MAT-
        TERS.
------- ------------------------------------------------------------------------

         Payless Cashways,  Inc. Common Stock is traded on the  over-the-counter
bulletin  board (ticker  symbol PCSH).  The number of registered  holders of the
Company's  Common Stock at November 25, 2000, was 4,781.  No cash dividends have
been  declared on the 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.

<TABLE>
<CAPTION>
                                                  2000                      1999
               ------------------------ ------------------------- -------------------------
                 Price range of             High          Low         High          Low
                 Common Stock
               ------------------------ ------------ ------------ ------------ ------------
                      <S>                   <C>          <C>          <C>           <C>

                      First quarter         2.88         1.28         2.69          1.19

                      Second quarter        3.25         1.66         2.53          1.38

                      Third quarter         1.84         1.22         2.44          1.56

                      Fourth quarter        1.53         1.10         2.00          1.28
</TABLE>


Item 6.  SELECTED FINANCIAL DATA.
-------  ------------------------
<TABLE>
FIVE-YEAR FINANCIAL SUMMARY
<CAPTION>
                                                       Reorganized Company                           |     Predecessor Company
In thousands, except per share           -------------------------------------------------------------------------------------------
amounts, percentages and ratios                 2000           1999          1998           1997     |      1997            1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>           <C>            <C>             <C>             <C>
Net sales                                 $  1,492,783   $  1,811,365  $  1,906,862   $        N/A   |$  2,285,281    $  2,642,829
Cost of merchandise sold                     1,098,527      1,333,968     1,420,787            N/A   |   1,676,658       1,906,734
                                         -------------------------------------------------------------------------------------------
Gross Profit                                   394,256        477,397       486,075            N/A   |     608,623         736,095
Selling, general and administrative            340,474        420,382       443,031            N/A   |     555,745         611,357
Reorganization items (a)                            --             --            --            N/A   |      25,455              --
Fresh-start revaluation (a)                         --             --            --            N/A   |     355,559              --
Special charges (credits), net (b) and (c)      20,400         (4,315)        7,421            N/A   |      73,539          67,881
Other Income                                    (2,064)        (1,982)       (2,998)           N/A   |      (4,934)         (8,076)
Depreciation and amortization                   30,067         40,167        37,044            N/A   |      54,182          59,125
                                         -------------------------------------------------------------------------------------------
Operating Income                                 5,379         23,145         1,577            N/A   |    (450,923)          5,808
Interest expense                                41,552         35,763        37,162            N/A   |      61,251          60,488
Interest income (d)                                 --             --            --            N/A   |          --          (4,900)
                                         -------------------------------------------------------------------------------------------
Income (loss) before income taxes              (36,173)       (12,618)      (35,585)           N/A   |    (512,174)        (49,780)
Federal and state income taxes                 (15,622)        (5,211)      (13,218)           N/A   |     (90,406)        (30,702)
                                         -------------------------------------------------------------------------------------------
Income (loss) before extraordinary item        (20,551)        (7,407)      (22,367)           N/A   |    (421,768)        (19,078)
Extraordinary item  (e)                             --           (729)           --            N/A   |     133,176              --
                                         -------------------------------------------------------------------------------------------
Net loss                                  $    (20,551)  $     (8,136) $    (22,367)  $        N/A   |$   (288,592)   $    (19,078)
                                         ===========================================================================================
                                                                                                     |
Net loss per common share-basic and                                                                  |
   diluted                                $      (1.03)  $      (0.41)        (1.12)           N/A   |
Weighted average common shares outstanding      20,000         20,000        20,000            N/A   |
Current ratio                                     2.52           2.81          2.40           2.39   |         N/A            1.44
Working capital                           $    200,432   $    240,502  $    221,524   $    280,838   |$        N/A    $    136,754
Total assets                              $    677,658   $    728,391  $    747,312   $    911,341   |$        N/A    $  1,293,118
Long-term debt                            $    363,432   $    374,154  $    336,557   $    424,031   |$        N/A    $    618,667
Stockholders' equity                      $    132,746   $    153,297  $    161,433   $    183,800   |$        N/A    $    289,731
Capital expenditures                      $     22,647   $     47,213  $     26,864   $        N/A   |$     65,601    $     43,985
Income from operations before interest,
   depreciation and amortization (f)      $     67,646   $     62,847  $     50,482   $        N/A   |$     68,505    $    138,661

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

<PAGE>11


     November  29, 1997,  became the opening  balance  sheet of the  Reorganized
     Company.  Fresh  Start  Reporting  resulted  in  material  changes  to  the
     Consolidated  Balance Sheet,  including valuation of assets and liabilities
     at fair  market  value  and  valuation  of  equity  based on the  appraised
     reorganization  value of the ongoing business.  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.

(b)  In 2000, special charges consisted of restructure costs associated with the
     closing of 22 stores and  administrative  staff elimination costs. In 1999,
     special  charges  consisted  of costs  associated  with the  closing of six
     stores  and  the  elimination  of  administrative  staff;  special  credits
     consisted of a curtailment gain as a result of freezing  benefits under the
     Company's  pension  plan.  Special  charges  for  1998  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.

(c)  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.

(d)  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.

(e)  During 1999 and 1997, the Company  recorded a $0.7 million and $5.0 million
     charge,   after  tax,  related  to  the  early   extinguishment   of  debt,
     respectively,  and a $138.2 million  extraordinary gain, after tax, related
     to debts discharged in its Chapter 11 reorganization during 1997.

(f)  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 special charges and asset
     impairment  charges,  reorganization  items,  and fresh-start  revaluation.
     Inventory  write-downs reflected in cost of merchandise sold in 2000, 1999,
     1998,  1997 and 1996 of $11.8 million,  $3.4 million,  $4.4 million,  $10.7
     million and $5.8 million, respectively, related to the closing of 22, 5, 8,
     29 and 9 underperforming stores,  respectively,  are also excluded.  Income
     from operations before interest, depreciation and amortization is presented
     because  it is a  widely  accepted  financial  indicator  used  by  certain
     investors  and  analysts to analyze and compare  companies  on the basis of
     operating performance.  As presented,  this indicator may not be comparable
     to  similarly  titled  measures  reported  by other  companies  and may not
     necessarily be an accurate means of comparison between all companies, since
     not all  companies  necessarily  calculate  this  indicator in an identical
     manner.   Income  from  operations   before   interest,   depreciation  and
     amortization  is not  intended  to  represent  cash flows for the period or
     funds  available  for  management's  discretionary  use.  Nor  has it  been
     represented  as an  alternative  to  operating  income as an  indicator  of
     operating  performance  and should not be  considered  in isolation or as a
     substitute  for  measures  of  performance   prepared  in  accordance  with
     generally accepted accounting principles.
</FN>
</TABLE>

<TABLE>
FIVE-YEAR OPERATIONAL SUMMARY
<CAPTION>
Average sales per facility, number                                 Reorganized Company                |       Predecessor Company
of customers, gross square feet and            -------------------------------------------------------------------------------------
retail square feet are in thousands                2000 (a)            1999               1998        |         1997     1996(b)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>               <C>                      <C>           <C>
Number of retail facilities                            150              151                161        |          164         192
Average same-store sales per facility           $    9,952       $   11,975        $    11,711        |  $    12,600   $  13,107
Number of customers                                 31,646           38,769             42,741        |       50,743      56,736
Average sales per customer                      $    47.17       $    46.72        $     44.61        |  $     45.04   $   45.81
Number of employees                                  8,089           10,146             10,930        |       12,782      16,664
Average sales per employee                      $  184,545       $  174,740        $   171,316        |  $   162,099   $ 152,228
Gross square feet (total)                           14,080           14,080             14,491        |       15,550      17,578
Retail square feet (inside)                          4,854            4,854              5,251        |        5,334       6,209
Sales per retail square foot                    $   307.54       $   365.25        $    356.59        |  $    388.44   $  408.56
Percent decrease in same-store sales                 (15.1)%           (0.8)%             (7.3)%      |         (6.6)%      (2.5)%
<FN>
(a)  Includes 22 stores in the process of closing at November 25, 2000. Does not
     include 5  Builders  Resource  facilities  that were in  various  stages of
     start-up at November 25, 2000.

(b)  Fiscal 1996 was a 53-week year.  All 1996 data has been  computed  on a 52-
     week basis.
</FN>
</TABLE>

<PAGE>12


Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 found beginning at page F-1 in this Form 10-K.
<TABLE>
Operating Data
<CAPTION>
                                                                                               Fiscal Year Ended
                                                                            -------------------------------------------------------
                                                                                Nov. 25,         Nov. 27,            Nov. 28,
                                                                                  2000             1999                199
                                                                            --------------------------------------------------------

percent of net sales
<S>                                                                               <C>               <C>              <C>
Net sales.......................................................                  100.0 %           100.0 %          100.0 %
Cost of merchandise sold........................................                   73.6              73.6             74.5
                                                                                   ----              ----             ----
Gross Profit....................................................                   26.4              26.4             25.5

Selling, general and administrative.............................                   22.8              23.2             23.2
Other income....................................................                   (0.1)             (0.1)            (0.1)
Special charges (credits), net..................................                    1.3              (0.2)             0.4
Provision for depreciation and amortization.....................                    2.0               2.2              1.9
                                                                                   ----              ----             ----
Operating Income................................................                    0.4               1.3              0.1

Interest expense................................................                    2.8               2.0              2.0
                                                                                   ----              ----             ----
Loss before income taxes........................................                   (2.4)             (0.7)            (1.9)

Federal and state income taxes..................................                   (1.0)             (0.3)            (0.7)
                                                                                   ----              ----             ----
Loss before extraordinary item .................................                   (1.4)             (0.4)            (1.2)

Extraordinary item .............................................                    --                --               --
Net loss........................................................                   (1.4) %           (0.4) %          (1.2) %
                                                                                   ====              ====             ====
</TABLE>
Sales

         Net sales for fiscal 2000  decreased  15.1% on a same-store  basis from
fiscal 1999 and decreased  17.6% in total.  Same-stores  are those open one full
year. On a same-store  basis,  sales to professional  customers  decreased 9.9%,
while sales to the do-it-yourself  customer declined by 21.2%.  Same-store sales
for the last nine  months of the year were  negatively  impacted  by a  dramatic
decline in  commodity  prices  (primarily  lumber and  wallboard).  The relative
commodity  price indices  declined  approximately  17% during fiscal 2000,  and,
based on the product  mix,  approximately  35% of the  Company's  inventory  was
adversely  impacted.  The Company  believes  that rising  interest  rates during
fiscal 2000 also contributed to the decline in professional sales,  although the
Company is not able to estimate  the amount of such  impact.  Additionally,  the
Company  transitioned  from a mass  advertising  format to a targeted  marketing
approach in fiscal 2000, which had a significant  negative influence on sales to
do-it-yourself customers. The Company has a number of initiatives planned during
2001 such as increased  focus on  pneumatic tools and  concrete  accessories and
products that are designed to significantly increase Pro sales.

         Net sales for fiscal  1999  decreased  0.8% on a same store  basis from
fiscal 1998 and decreased  5.0% in total.  The sales  decrease,  in total,  is a
result of closing 12 stores in fiscal  1999 and four stores in fiscal 1998 whose
sales  were  $38.4  million  and  $120.1  million  for  fiscal  1999  and  1998,
respectively.  On a same-store basis, sales to professional  customers increased
7.3%, while sales to the  do-it-yourself  customer  declined by 9.0%. Same store
sales for the second half of the year were  negatively  impacted by  competitive
pressures,  particularly  from  store  closing  activities  related  to a  major
competitor, and a slight decrease in commodity prices.

<PAGE>13


Costs and Expenses

         The cost of  merchandise  sold,  as a percent  of  sales,  was 73.6% in
fiscal  2000,  73.6% in  fiscal  1999,  and  74.5%  in  fiscal  1998.  Inventory
write-downs related to store closings were $11.8 million, $3.9 million, and $4.4
million for fiscal 2000, 1999 and 1998,  respectively,  which was 0.8%, 0.2% and
0.2% of sales,  respectively.  Excluding  the effects of  inventory  write-downs
related to store closings, the decrease in cost of merchandise sold as a percent
of sales during 2000 was primarily due to lower  product  acquisition  costs and
improvements in inventory loss controls. Also excluding the effects of inventory
write-downs related to store closings,  the decrease in cost of merchandise sold
during 1999 was mostly due to reduced  promotional  activity  and lower  product
acquisition  costs.  Cost of  merchandise  sold in fiscal 2000,  1999,  and 1998
benefited  from a $0.2 million,  $0.9  million,  and a $2.4 million LIFO credit,
respectively, related to liquidations of LIFO inventories and deflation.

         Selling,  general and administrative  expenses,  as a percent of sales,
were 22.8%, 23.2%, and 23.2% for fiscal 2000, 1999, and 1998, respectively.  The
2000 reductions in selling, general and administrative expenses, in dollars, and
as a percent of sales were  primarily  the result of  initiatives  undertaken in
2000 to  reduce  store  as well  as  corporate  overhead  and  personnel  costs.
Additionally, curtailment of the Company's non-contributory defined benefit plan
in fiscal 1999  resulted in a reduction  of $3.1  million in general  expense in
fiscal 2000.  Insurance  expense in 2000 was  favorably  impacted by a change in
estimate in liability reserves for worker's  compensation claims, as a result of
settlements with insurance carriers. The approximate effect of this change was a
$1.9 million reduction in selling,  general and administrative expense. The 1999
reductions in selling,  general and administrative  expenses,  in dollars,  were
primarily the result of closed stores.

         In the fourth quarter of 2000 the Company  recorded a special charge of
$20.4 million  ($12.8  million  after tax) in connection  with the closing of 22
stores and the reduction of administrative  staff.  During the second quarter of
1999, a non-cash curtailment gain of $10.6 ($6.2 million after tax) was recorded
in connection with freezing the Company's non-contributory defined benefit plan.
Special  charges of $5.2 million ($3.1 million after tax) and $1.1 million ($0.6
million  after tax) were  recorded  in the second and fourth  quarters  of 1999,
respectively,  in connection  with the closing of five stores and the closing of
an  additional  store  as  well  as  the  reduction  of  administrative   staff,
respectively.  A special  charge of $5.6 million  ($3.5  million  after tax) was
recorded  in the  first  quarter  of 1998 for  severance  costs  related  to the
reduction  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
stores, respectively. The Company will continue to review assets for impairment,
particularly  given the ongoing  competitive  environment for building materials
retailing.  Additional details on the special charges are set forth in Note G to
the Financial Statements.

         The  provision  for  depreciation  and  amortization  for  fiscal  2000
decreased compared to fiscal 1999 partially because of accelerated  depreciation
charges of $3.1 million recorded in 1999 on certain  leasehold  improvements and
assets related to closed stores.  Additionally,  the Company reassessed lives of
certain  classes of fixed assets during the second  quarter of fiscal 2000.  The
approximate  effect of this change in estimate on the fiscal 2000  expense was a
$3.0 million reduction in the provision for depreciation and  amortization.  The
remaining  decline in the provision for  depreciation and amortization in fiscal
2000  related  to assets  removed  from  service  in  connection  with the store
closings mentioned above.

         Interest expense  increased to $41.6 million in fiscal 2000 compared to
$35.8 million in 1999 primarily due to higher  borrowing  rates in 2000 and to a
lesser extent higher  borrowing levels in 2000.  Interest  expense  decreased to
$35.8  million in fiscal  1999  compared  to $37.2  million  in fiscal  1998 due
primarily to lower borrowing levels in 1999 and, to some extent,  lower rates in
1999.

         The effective tax rates for fiscal 2000,  1999 and 1998 were  different
from the 35% federal statutory rate primarily because of state income taxes.

<PAGE>14


Net Income (Loss)

         The Company had losses before  extraordinary  items of $20.6 million in
2000 compared to $7.4 million in 1999 and $22.4  million in 1998.  The 2000 loss
before  extraordinary  items  reflects  special  charges for store  closings and
administrative  reductions and non-recurring  inventory write-downs for the same
closed  stores,  discussed  above.  The 1999  loss  before  extraordinary  items
reflects   special   charges  for  store   closings,   non-recurring   inventory
write-downs,  a special  credit  related to the freezing of the defined  benefit
pension plan,  and  accelerated  depreciation,  discussed  above.  The 1998 loss
before  extraordinary items reflects the special charges for severance and store
closings,  discussed  above.  Excluding the  non-routine  items recorded  during
fiscal  2000,  1999,  and 1998,  net loss for these  years  would have been $0.7
million, $5.8 million, and $14.9 million, respectively.
<TABLE>
Comparative Operating Data
<CAPTION>
                                                                 Fiscal Year Ended
                  ------------------------------------------------------------------------------------------------------------------
                              November 25, 2000                   November 27, 1999                       November 28, 1998
                  ------------------------------------- -------------------------------------  -------------------------------------
In thousands           Pro Forma          Historical         Pro Forma          Historical          Pro Forma         Historical
                       (Excluding         (Including         (Excluding         (Including          (Excluding        (Including
                  Non-Routine Items) Non-Routine Items) Non-Routine Items) Non-Routine Items)  Non-Routine Items) Non-Routine Items)
                  ------------------ ------------------ ------------------ ------------------  ------------------ ------------------
<S>                     <C>              <C>                 <C>                <C>               <C>                 <C>
Net sales and
other income            $1,492,783       $1,492,783          $1,811,365         $1,811,365        $1,906,862          $1,906,862
Income (loss) from
operations before
interest, deprecia-
tion and amortization   $   67,646       $   35,446          $   62,847         $   58,997        $   50,482          $   46,042
Net income (loss)       $     (652)      $  (20,551)         $   (5,837)        $   (8,136)       $  (14,913)         $  (22,367)
</TABLE>
Financing Activities
--------------------

         On November 17, 1999, the Company  completed a three-year  $260 million
revolving   secured  loan   agreement  with  a  new  lender  (the  "1999  Credit
Agreement"). A portion of the proceeds was used to retire the existing revolving
credit  facility  and to  reduce  its  existing  term  loan  (the  "1997  Credit
Agreement").  These  payments  allowed the Company to secure an amendment to the
1997 term loan Credit  Agreement  that removed all current and future  financial
performance  covenants,  thereby  improving  its  operating  flexibility.  Also,
semi-annual  principal  payments on the  remainder of the 1997 Credit  Agreement
term loan were deferred to the year 2001. The 1999 Credit Agreement and the 1997
Credit  Agreement  are  described  in more  detail  in  Note B to the  Financial
Statements.

         At  November  25,  2000,   and  November  27,  1999,  the  Company  had
approximately $373.6 million and $377.4 million,  respectively, of indebtedness.
The Company expects from time to time to incur additional seasonal indebtedness.
On January 31,  2001,  the Company  seasonally  expanded its  revolving  line of
credit with supplemental loan  participation  from a third party. On January 31,
borrowing  availability under the Company's $260 million existing line of credit
increased by 5% for a six-month time period.  This additional  participation  of
$15.0  million  by the  aforementioned  third  party as part of the 1999  Credit
Agreement will support the 5% advance rate increase through July 31, 2001.

Liquidity and Capital Resources
-------------------------------

         The  Company's  principal  source  of  cash is  from  operations.  Cash
provided by operating  activities  was $21.7  million in fiscal 2000 compared to
cash used in operating  activities  of $2.4  million for fiscal  1999,  and cash
provided by operating  activities  of $53.1  million for fiscal  1998.  The 2000
increase in cash provided by operating activities was primarily due to decreases
in merchandise inventories.  The 1999 decrease in cash from operating activities
was  primarily  caused  by  decreased  other  current  liabilities  due to store
closings.  The 1998  contribution  of cash provided by operating  activities was
primarily due to decreases in  merchandise  inventories  and income tax refunds.
During  2000,  1999,  and 1998,  the  Company  used cash of  approximately  $5.6
million, $1.9 million, and $12.5, respectively,  in operating activities related
to special  charges.  In fiscal 1998, the Company used cash of $10.2 million for
costs related to the Chapter 11 filing.  Additionally,  $5.7 million of cash was
used in fiscal 1998 to pay severance  costs related to the reduction 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 1999 Credit  Agreement to supplement
cash  generated by operations.  At January 26, 2001,  $5.0 million was available
for borrowing.  Working capital was $200.4 million and $240.5 million at the end
of fiscal 2000 and 1999, respectively.  The current ratio was 2.52 to 1 and 2.81
to 1 at the end of fiscal 2000 and 1999,  respectively.  The primary reasons for
the  decrease  in  working  capital  and the  current  ratio were  decreases  in
merchandise inventories.

         The  Company's  business is seasonal,  with the winter months being the
lowest  sales months and the  spring/summer  months  being the  strongest  sales
period.  As such,  the  Company  typically  generates  a loss  during  the first
quarter,  and requires additional  borrowings to fund operations,  as well as to
finance inventory build in anticipation of the peak-selling season. Accordingly,

<PAGE>15


the Company's  liquidity is mostly  dependent on its ability to secure  seasonal
borrowings during the slow months, and its ability to generate  sufficient sales
to repay these borrowings during its peak-selling season.

         During the first two months of the first  quarter of 2001,  the Company
has  experienced  a  softening  in its sales  compared to the same months of the
first  quarter of fiscal 2000.  This softness is  attributable  to three primary
factors:  significant commodity deflation,  unusually adverse weather conditions
in various parts of the country,  and some degree of general  industry  economic
slowdown.  While  management  does  not  believe  this  softening  will  persist
throughout the balance of fiscal 2001, the Company's  liquidity position and its
ability to comply with covenants contained in its loan agreements and to service
its future obligations could be impacted if these conditions become more severe.

         During fiscal 2000 and 1999, the Company's primary investing activities
were capital expenditures  principally for the renovation of existing stores and
additional  equipment.  The Company spent  approximately  $22.6  million,  $47.2
million,  and $26.9 million in fiscal 2000,  1999, and 1998,  respectively,  for
renovation of existing stores,  additional  equipment and software.  Fiscal 1999
expenditures also include those for improved  technology as well as the purchase
of ten previously leased stores for approximately $14.4 million. During 2000 and
1999, the Company sold 5 and 17 real estate properties, respectively, related to
stores  previously  closed for  approximately  $6.5 million and $20.9 million of
cash proceeds, respectively, which were used to reduce outstanding debt. Sale of
closed store  properties  will  continue in fiscal  2001.  Based on current real
estate  contracts and estimates,  the Company  expects to receive  approximately
$30.0  million in fiscal  2001 as a result of sales from these  properties.  The
proceeds of these sales will be used to retire existing  indebtedness (see notes
B and G to the Financial Statements).  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  $10.0-$15.0  million 2001
capital expenditure target consists primarily of improved  technology,  10 to 15
store remodels,  additional manufacturing  capabilities and routine maintenance.
Capital  expenditures  in 2001  will  be  financed  with  funds  generated  from
operations.

         The Company's most significant  financing activity is and will continue
to be the retirement of  indebtedness.  The Company's 2001 target  reduction for
debt is in excess of $100 million.  The Company's  consolidated  indebtedness is
and  will  continue  to be  substantial.  Management  believes  that  cash  flow
generated from operations, borrowings available under the 1999 Credit Agreement,
targeted  reductions in working capital,  and other lease financing sources will
provide  sufficient  liquidity  to meet  all cash  requirements  for the next 12
months.

New Accounting Pronouncements
-----------------------------

         In June of 1998,  the Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial  Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement,
as amended by FAS No. 138,  "Accounting for Certain  Derivative  Instruments and
Certain Hedging Activities- an Amendment of FASB Statement No. 133", 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 FASB has delayed the effective date of implementing  the standard
until  January 1, 2001,  and therefore the Company will not be required to adopt
SFAS 133 until the first quarter of fiscal 2001.  The Company does not presently
expect that it will have a significant effect on its financial statements.

         In September  2000, the Financial  Accounting  Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishment   of
Liabilities",  which replaces SFAS 125,  "Accounting for Transfers and Servicing
of Financial Assets and  Extinguishment  of Liabilities".  This standard revises
the methods for accounting for  securitizations and other transfers of financial
assets and collateral as outlined in SFAS 125, and requires  certain  additional
disclosures. For transfers and servicing of financial assets and extinguishments
of  liabilities,  this standard will be effective for transfers  occurring after
March  31,  2001.  However,   for  disclosure   regarding   securitizations  and
collateral,  as well as recognition  and  reclassification  of collateral,  this
standard will be effective for fiscal years ending after  December 15, 2000. The
Company is currently evaluating the impact of the adoption of this standard. The
Company does not presently  believe that the adoption of this standard will have
a material effect on its financial position or results of operation.

Effects of Inflation
--------------------

         Significant  deflation in lumber and  wallboard  inventory  occurred in
fiscal  2000.  This  inventory  is  consistently  valued at the lower of cost or
market. The Company  experienced slight deflation in its non-lumber  inventories
during fiscal 2000, 1999, and 1998. Approximately 78% 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.

<PAGE>16


Forward-Looking Statements
--------------------------

         Statements  above  in the  subsections  entitled  "Sales,"  "Costs  and
Expenses,"    "Liquidity   and   Capital   Resources,"   and   "New   Accounting
Pronouncements," such as "unlikely", "intend", "estimated", "believe", "expect",
"anticipate",  "target" 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. These statements
are based on the current plans and expectations of the Company and 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  and lender  support;  consumer  spending and debt levels;
interest rates; new and existing housing activity; commodity prices-specifically
lumber and  wallboard;  customer  and  product  mix;  growth of  certain  market
segments;  weather;  an excess of retail  space  devoted to the sale of building
materials;  and the success of the Company's  strategy.  Additional  information
concerning these and other factors is contained in the Company's  Securities and
Exchange  Commission  filings,  copies of which are  available  from the Company
without charge or on the Company's web site, www.payless.cashways.com.

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
--------  -----------------------------------------------------------

         The  Company's  most  significant  market  risk  exposure  is  changing
interest  rates.  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.
<TABLE>
<CAPTION>
              Expected                       Principal Due on                       Weighted
            Maturity Date                   Variable Rate Debt                Average Interest Rate
            -------------                   ------------------                ---------------------
                                               In thousands
               <S>                           <C>                                           <C>
               2001                          $    10,000                                   9.18%
               2002                              285,904                                   9.48%
               2003                                   --                                     --%
               2004                               76,906                                  10.62%
                                             -----------                                  -----

              Total                          $   372,810                                   9.72%
                                             ===========                                  =====

              Fair Value                     $   372,810                                   9.72%
                                             ===========                                  =====
</TABLE>

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------  --------------------------------------------

         The  independent  auditors'  report,  financial  statements,  and notes
thereto are listed in the Index to Financial  Statements and Financial Statement
Schedule at page F-1 of this report and begin on page F-2.

Item 9.  CHANGES  IN AND   DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING   AN
         FINANCIAL DISCLOSURE.
-------  -----------------------------------------------------------------------

         None.


                                                          PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------  ---------------------------------------------------

<PAGE>17


         The  information  required by this item with respect to  directors  and
compliance  with  Section  16(a)  of the  Securities  Exchange  Act of  1934  is
incorporated  herein by reference to the  Registrant's  Proxy  Statement for the
2001 Annual Meeting of  Stockholders to be filed pursuant to Regulation 14A. The
required information as to executive officers is set forth in Part I hereof.

Item 11.  EXECUTIVE COMPENSATION.
--------  -----------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference to the  Registrant's  Proxy  Statement for the 2001 Annual  Meeting of
Stockholders to be filed pursuant to Regulation 14A.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------  ---------------------------------------------------------------

         The  information  called  for by this  item is  incorporated  herein by
reference to the  Registrant's  Proxy  Statement for the 2001 Annual  Meeting of
Stockholders to be filed pursuant to Regulation 14A.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
--------  -----------------------------------------------

         The  information  called  for by this  item is  incorporated  herein by
reference to the  Registrant's  Proxy  Statement for the 2001 Annual  Meeting of
Stockholders to be filed pursuant to Regulation 14A.

                                                         PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
--------  -----------------------------------------------------------------

         14 (a) (1)   Financial Statements.

         The financial  statements  and notes thereto are listed in the Index to
Financial Statements and Financial Statement Schedule on page F-1 of this report
and begin on page F-2.

         14 (a) (2)   Financial Statement Schedule.

         The  financial  statement  schedule is listed in the Index to Financial
Statements  and Financial  Statement  Schedule on page F-1 of this report and is
found on page F-23.

         14 (a) (3)   Exhibits.

         Exhibits  are as set forth in the Index to Exhibits on page E-1 of this
report.

         14 (b)       Reports on Form 8-K.

         No  reports on form 8-K were filed by the  Company  during the  quarter
ended November 25, 2000.

         14 (c)       Exhibits.

         Exhibits  are as set forth in the Index to Exhibits on page E-1 of this
report.

         14 (d)       Financial Statement Schedule.

         The  financial  statement  schedule is listed in the Index to Financial
Statements  and Financial  Statement  Schedule on page F-1 of this report and is
found on page F-23.

<PAGE>18


                                                           SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  Payless  has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                               PAYLESS CASHWAYS, INC.
                               (Registrant)

                               By /s/Millard E. Barron
                                  ----------------------------------------------
                                  Millard E. Barron, Principal Executive Officer
Dated:  February 20, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of Payless and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
              Signature                                            Title                                     Date
              ====================                 ======================================            =================
              <S>                                  <C>                                               <C>
              /s/Millard E. Barron
              ----------------------
              Millard E. Barron                    President, Chief Executive Officer and            February 20, 2001
                                                   Director
                                                  (Principal Executive Officer)

              /s/Peter G. Danis
              ----------------------
              Peter G. Danis                       Non-Executive Chairman of the                     February 20, 2001
                                                   Board

              /s/H. D. Cleberg
              ----------------------
              H. D. Cleberg                        Director                                          February 20, 2001

              /s/David G. Gundling
              ----------------------
              David G. Gundling                    Director                                          February 20, 2001

              /s/Max D. Hopper
              ----------------------
              Max D. Hopper                        Director                                          February 20, 2001

              /s/Donald E. Roller
              ----------------------
              Donald E. Roller                     Director                                          February 20, 2001

              /s/Peter M. Wood
              ----------------------
              Peter M. Wood                        Director                                          February 20, 2001

              /s/Richard B. Witaszak
              ----------------------
              Richard B. Witaszak                  Senior Vice President-Finance                     February 20, 2001
                                                   and Chief Financial Officer
                                                   (Principal Financial Officer and
                                                   Principal Accounting Officer)
</TABLE>

<PAGE>19


         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

FINANCIAL STATEMENTS:

Independent Auditors' Report.                                                F-2

Management's Letter regarding Responsibility for Financial Statements        F-3

Statements of  Operations--fiscal years ended  November 25, 2000,   November 27,
1999, and November 28, 1998.                                                 F-4

Balance Sheets--November 25, 2000, and November 27, 1999.                    F-5

Statements of Cash  Flows--fiscal  years ended  November 25, 2000,  November 27,
1999, and November 28, 1998.                                                 F-6

Statements of Stockholders' Equity--fiscal years ended November 25, 2000, Novem-
ber 27, 1999, and November 28, 1998.                                         F-7

Notes to Financial Statements.                                               F-8


FINANCIAL STATEMENT SCHEDULE:

II - Valuation and Qualifying Accounts.                                     F-23

         All other  schedules  for  which  provision  is made in the  applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related  instructions  or are  inapplicable,  and therefore  have been
omitted.

<PAGE>20


INDEPENDENT AUDITORS' REPORT

The Board of Directors
Payless Cashways, Inc.:

We have audited the accompanying balance sheets of Payless Cashways,  Inc. as of
November  25,  2000  and  November  27,  1999  and  the  related  statements  of
operations, stockholders' equity, and cash flows for each of the fiscal years in
the three-year  period ended November 25, 2000. In connection with our audits of
the financial statements,  we have also audited the financial statement schedule
for each of the years in the three-year  period ended  November 25, 2000.  These
financial  statements and financial statement schedule are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  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 25, 2000 and November  27, 1999 and the results of its  operations  and
its cash  flows for each of the  fiscal  years in the  three-year  period  ended
November 25, 2000, in conformity with accounting  principles  generally accepted
in the United  States of America.  Also in our  opinion,  the related  financial
statement  schedule,   when  considered  in  relation  to  the  basic  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.

                                    KPMG LLP

January 12, 2001, except as to Note I, which is as of January 31, 2001

<PAGE>21


RESPONSIBILITY FOR FINANCIAL STATEMENTS

The  financial  statements  of Payless  Cashways,  Inc.  have been  prepared  by
management in accordance with accounting  principles  generally  accepted in the
United States of America 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 auditing  standards  generally  accepted in the United States of
America  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.

<PAGE>22


<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
                                                                                           Fiscal Year Ended
                                                                      ---------------------------------------------------------
                                                                        November 25,         November 27,         November 28,
In thousands, except per share amounts                                      2000                 1999                 1998
-------------------------------------------------------------------------------------------------------------------------------
     <S>                                                               <C>                   <C>                  <C>
     Net sales                                                         $    1,492,783        $   1,811,365        $   1,906,862
     Cost of merchandise sold                                               1,098,527            1,333,968            1,420,787
                                                                       --------------------------------------------------------
     Gross Profit                                                             394,256              477,397              486,075

     Selling, general and
         administrative expenses--Notes E and F                               340,474              420,382              443,031
     Other income                                                              (2,064)              (1,982)              (2,998)
     Special charges (credits), net--Notes E and G                             20,400               (4,315)               7,421
     Provision for depreciation and amortization                               30,067               40,167               37,044
                                                                        -------------------------------------------------------
                                              OPERATING INCOME                  5,379               23,145                1,577

       Interest Expense                                                        41,552               35,763               37,162
                                                                        -------------------------------------------------------
                                       LOSS BEFORE INCOME TAXES               (36,173)             (12,618)             (35,585)

Federal and state income taxes--Note D                                        (15,622)              (5,211)             (13,218)
                                                                       --------------------------------------------------------

                                LOSS BEFORE EXTRAORDINARY ITEMS               (20,551)              (7,407)             (22,367)

Extraordinary item , net of income taxes--Note B                                   --                 (729)                  --
                                                                        -------------------------------------------------------

                                                       NET LOSS        $      (20,551)       $      (8,136)       $     (22,367)
                                                                       ========================================================

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

Loss per common share before extraordinary items-basic and diluted     $        (1.03)       $        (.37)         $     (1.12)

Extraordinary item , net of income taxes                                           --                 (.04)                  --
                                                                       --------------------------------------------------------

Net loss per common share-basic and diluted--Notes A and C             $        (1.03)       $        (.41)               (1.12)
                                                                       ========================================================

See notes to financial statements
</TABLE>

<PAGE>23


<TABLE>
BALANCE SHEETS
<CAPTION>
                                                                                      -----------------------------------
                                                                                       November 25,          November 27,
In thousands                                                                               2000                  1999
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                    <C>
ASSETS

     CURRENT ASSETS
         Cash and cash equivalents                                                    $      1,485          $      1,111
         Merchandise inventories--Notes A and B                                            311,489               349,332
         Prepaid expenses and other current assets                                          19,246                22,013
         Income taxes receivable--Note D                                                        --                   679
                                                                                      ----------------------------------
                                                      TOTAL CURRENT ASSETS                 332,220               373,135

     OTHER ASSETS
         Real estate held for sale--Notes A and G                                            3,785                 8,851
         Deferred financing costs--Notes A and B                                             3,051                 3,944
         Other                                                                               3,090                 1,549

     LAND, BUILDINGS, EQUIPMENT AND SOFTWARE--Notes A and B
         Land and land improvements                                                        101,099               100,741
         Buildings                                                                         235,894               225,945
         Equipment                                                                          51,820                46,865
         Capitalized software                                                               27,056                19,382
         Automobiles and trucks                                                             12,369                11,916
         Construction in progress                                                            2,733                 2,963
         Allowance for depreciation and amortization                                       (95,459)              (66,900)
                                                                                      ----------------------------------
                             TOTAL LAND, BUILDINGS, EQUIPMENT AND SOFTWARE                 335,512               340,912
                                                                                      ----------------------------------
                                                                                      $    677,658          $    728,391
                                                                                      ==================================

LIABILITIES AND STOCKHOLDERS' EQUITY

     CURRENT LIABILITIES
         Current portion of long-term debt--Note B                                    $     10,181          $      3,265
         Trade accounts payable                                                             38,633                51,480
         Salaries, wages and bonuses                                                        11,541                21,370
         Other accrued expenses--Notes E and G                                              55,000                40,732
         Taxes, other than income taxes                                                      9,996                11,778
         Income taxes payable--Note D                                                          927                 1,851
         Deferred income taxes--Note D                                                       5,510                 2,157
                                                                                      ----------------------------------
                                                 TOTAL CURRENT LIABILITIES                 131,788               132,633

     LONG-TERM DEBT, less portion classified as current
         liability--Note B                                                                 363,432               374,154

     NON-CURRENT LIABILITIES
         Deferred income taxes--Note D                                                      12,288                31,263
         Other--Note E                                                                      37,404                37,044

     STOCKHOLDERS' EQUITY--Notes A, B, and C
         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                                                               (51,054)              (30,503)
                                                                                      ----------------------------------
                                                TOTAL STOCKHOLDERS' EQUITY                 132,746               153,297
                                                                                      ----------------------------------
     COMMITMENTS AND CONTINGENCIES--Notes B, E, F and G
                                                                                      $    677,658          $    728,391
                                                                                      ==================================

See notes to financial statements
</TABLE>

<PAGE>24


<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                                             Fiscal Year Ended
                                                                        ---------------------------------------------------------
                                                                            November 25,       November 27,        November 28,
In thousands                                                                    2000               1999                1998
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                   <C>                 <C>
Cash Flows from Operating Activities
      Net loss                                                           $    (20,551)         $     (8,136)       $    (22,367)
      Adjustments to reconcile net loss
          to net cash provided by operating activities:
        Depreciation and amortization                                          30,067                40,167              37,044
        Deferred income taxes                                                 (15,622)               (5,696)            (11,007)
        Non-cash interest                                                       1,371                 2,079                 829
        Special charges (credits), net--Note G                                 20,400                (4,315)              7,421
        Non-cash extraordinary item --Note B                                       --                   729                  --
        Other                                                                  (3,051)                  392                 452
      Changes in assets and liabilities:
        Decrease in merchandise inventories                                    37,843                   120              65,430
        (Increase) decrease in prepaid expenses
             and other assets                                                   2,767                (4,507)               (901)
        Decrease in income taxes receivable                                       679                   659              30,882
        Decrease in trade accounts payable                                    (12,847)                 (845)            (23,258)
        Decrease in other current liabilities                                 (19,352)              (23,096)            (31,380)
                                                                         ------------------------------------------------------
    NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                        21,704                (2,449)             53,145

Cash Flows from Investing Activities
      Additions to land, buildings, equipment and software                    (22,647)              (47,213)            (26,864)
      Proceeds from sale of land, buildings and equipment                       8,170                22,457              43,987
      Decrease (increase) in other assets                                      (1,541)                  128               7,029
                                                                         ------------------------------------------------------
    NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                       (16,018)              (24,628)             24,152

Cash Flows from Financing Activities
      Net (payments) proceeds related to revolving credit facility--Note B      6,470               251,386              (2,000)
      Principal payments on long-term debt--Note B                            (10,276)             (221,592)            (83,760)
      Fees and financing costs paid in connection with debt
        refinancing--Notes A and B                                               (478)               (3,433)             (1,548)
      Other                                                                    (1,028)                 (123)                 --
                                                                         ------------------------------------------------------
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                        (5,312)               26,238             (87,308)
                                                                         ------------------------------------------------------

Net (decrease) increase in cash and cash equivalents                              374                  (839)            (10,011)
Cash and cash equivalents, beginning of period                                  1,111                 1,950              11,961
                                                                         ------------------------------------------------------
Cash and cash equivalents, end of period                                 $      1,485          $      1,111        $      1,950
                                                                         ======================================================

See notes to financial statements
</TABLE>

<PAGE>25


<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
                                             Common       Additional
                                              Stock         Paid-in   Accumulated
In thousands                             $.01 Par Value     Capital     Deficit           Total
-----------------------------------------------------------------------------------------------
<S>                                         <C>           <C>          <C>           <C>
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

   Net loss for the year                                                  (8,136)        (8,136)
                                            ---------------------------------------------------

Balance at November 27, 1999                $     200     $183,600    $  (30,503)   $   153,297
                                            ===================================================

Net loss for the year                                                    (20,551)       (20,551)
                                            ---------------------------------------------------

Balance at November 25, 2000                $     200     $183,600     $ (51,054)    $  132,746
                                            ===================================================

See notes to financial statements
</TABLE>

<PAGE>26


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.  The Company
operates 128 retail building materials stores, excluding 22 locations which were
closed in  January  of 2001,  and 5 Builders  Resource  facilities  in 17 states
located in the  Midwestern,  Southwestern,  Pacific  Coast,  and Rocky  Mountain
areas. At November 25, 2000, the Company  operated 151 stores in 18 states.  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.  The  reorganization  value  of  the  Company  was  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.  Because of the application of fresh start reporting, the financial
statements for periods after  reorganization  are not comparable in all respects
to the financial statements prior to the 1997 reorganization.

Use of Estimates and Other Uncertainties:  In preparing the financial statements
in conformity with accounting principles generally accepted in The United States
of  America,  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;   availability  of  capital;  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 78% 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  $3.5 million and $3.3 million at November 25, 2000,  and November
27, 1999, respectively.

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.

Provisions for  amortization  of capitalized  software costs are computed by the
straight-line  method over the estimated useful lives of the assets, which range
from two to 10 years. During 2000 and 1999, the Company capitalized  software of
$7.7 million and $12.0 million,  respectively,  and amortized $3.1 million, $3.4
million and $3.9  million of  capitalized  software  expense for 2000,  1999 and
1998,  respectively.  Accumulated amortization was $8.5 million and $5.4 million
at November 25, 2000 and November 27, 1999, respectively.

Provisions  for  depreciation  of  major  store  remodels  are  computed  by the
straight-line  method over the  estimated  useful  lives of the assets which are
primarily 7 years,  except for additions to buildings for which the useful lives
range from 7 to 39 years.  During 2000 and 1999, the Company  capitalized  major
remodels of $6.2 million and $1.7 million,  respectively.  Internal  labor costs
capitalized  related to these remodels were  approximately $2.0 million and $0.7
million for fiscal 2000 and 1999, respectively.  The Company reassessed lives of
certain  classes of fixed assets during the second  quarter of fiscal 2000.  The
approximate  effect of this change in estimate on the fiscal 2000  expense was a
$3.0 million reduction in the provision for depreciation and amortization.

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

Impairment of  Long-Lived  Assets and  Long-Lived  Assets to Be Disposed Of: The
Company  accounts for  long-lived  assets in accordance  with the  provisions of
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of."
This  Statement  requires  that  long-lived  assets  and  certain   identifiable
intangibles   be  reviewed  for  impairment   whenever   events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the

<PAGE>27


impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceed the fair value of the assets.  Assets to be disposed
of are reported at the lower of the carrying  amount or fair value less costs to
sell.

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  years ended  November 25,
2000 and November 27, 1999, the impact of  considering  such stock options would
be antidilutive.

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.

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 2000,  federal and state tax  payments,  net of refunds were $0.3
million. In fiscal 1999, and 1998, federal and state income tax refunds,  net of
payments, were $0.2 million, and $32.9 million, respectively.

Cash paid for interest  was $40.7  million,  $36.3  million,  and $35.2  million
during fiscal 2000, 1999, and 1998, respectively.

Sale of  Receivables:  The Company  sells its  commercial  credit  accounts to a
third-party  administrator  pursuant to an  agreement  which  expires in 2004. 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 25,  2000,  and  November  27, 1999,  the
outstanding  balance  of  commercial  credit  accounts  sold to the  third-party
administrator was approximately $91.0 million and $102.4 million,  respectively.
In fiscal year 2000,  there was an  acceleration in the timing of the repurchase
of  delinquent  commercial  credit  accounts  receivable  from a new third party
administrator,  which was in accordance  with the recourse  provision of the new
agreement.  As a result,  the fiscal 2000 financial  statements  reflect certain
changes in estimates relating to the recourse provision of the new agreement. At
November  25,  2000,  included  in other  current  assets  were $4.8  million of
accounts receivable that are associated with expected recoveries  resulting from
this change in repurchasing of accounts. The Company has also provided a reserve
of $1.5  million and $3.8  million at November  25, 2000 and  November 27, 1999,
respectively,  which is  believed  to  adequately  cover its credit  risk on the
remaining  outstanding  portfolio  of  accounts  receivable  that  have not been
repurchased.

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 $8.9 million, $20.0 million, and $23.2 million for fiscal 2000, 1999,
and 1998, respectively, net of vendor allowances.

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
$373.6  million and $377.4  million at November 25, 2000, and November 27, 1999,
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.

Accounting Period: The Company's fiscal year ends on the last Saturday in Novem-
ber.  Fiscal years 2000, 1999 and 1998 consisted of 52 weeks each.

Reclassifications:  Certain  reclassifications  have  been  made to the 1999 an
1998  financial  statements  to  conform  to the 2000 presentation.

<PAGE>28


<TABLE>
Note B--Long-Term Debt

Long-term debt consisted of the following:
<CAPTION>
       In thousands                                                   2000                  1999
                                                                 ----------------------------------
       <S>                                                       <C>                   <C>
       1999 Credit Agreement, secured by inventory and
           certain real estate, variable interest rate,
           payable in varying amounts through 2002               $    189,856          $    183,386

       1997 Credit Agreement, secured by certain
           real estate and equipment, variable interest rate,
           payable in varying amounts through 2002                    106,048               109,415

       Mortgage loan, secured by certain real estate,
           variable interest rate, payable in varying
           amounts through 2004                                        76,906                83,686

       Other senior debt, 11% to 12%, payable in varying
             amounts through 2004                                         803                   932
                                                                 ----------------------------------
                                                                      373,613               377,419
       Less portion classified as current liability                   (10,181)               (3,265)
                                                                 ----------------------------------
                                                                 $    363,432          $    374,154
                                                                 ==================================
</TABLE>
In November 1999, the Company entered into a new $260 million  revolving  credit
facility  with  a $35  million  letters-of-credit  sublimit  (the  "1999  Credit
Agreement"). A portion of the proceeds was used to retire the existing revolving
credit  facility  and to reduce the term loan under the 1997  Credit  Agreement,
described below. At November 25, 2000, there were borrowings under the agreement
of $189.9  million as well as  outstanding  stand-by  letters of credit of $16.5
million.  The  Company  had $5.0  million  available  for  borrowing  under this
agreement as of January 26, 2001.  This  facility  matures on November 17, 2002.
The loans bear interest at fluctuating  rates of either the Prime Rate (9.50% at
November  25,  2000),  as  defined,  plus 3/4% per annum or the Euro Dollar Rate
(6.48% at November 25, 2000), as defined, plus 2-3/4% per annum. The 1999 Credit
Agreement is secured by  substantially  all merchandise  inventories and certain
real estate.  Under the 1999 Credit  Agreement,  the Company is prohibited  from
incurring additional indebtedness,  with certain limited exceptions,  and making
dividend,  redemption and certain other payments on its capital stock.  The 1999
Credit Agreement contains certain customary  operational covenants and events of
default  for  financing  of this  type as well as a minimum  adjusted  net worth
covenant set at $135 million for the term of the agreement. The minimum adjusted
net worth covenant excludes the effects of certain non-cash charges and credits.
The  cumulative  amount of such non-cash  charges at November 25, 2000 was $11.6
million.  See Note I for a description  of the terms of a seasonal  expansion to
the 1999 Credit Agreement, which was consummated on January 31, 2001.

The 1997  Credit  Agreement  currently  includes  only term loans as a result of
payments,   described   above,   that  occurred  in  November  1999.  The  early
extinguishment of this debt resulted in an extraordinary charge of approximately
$0.7 million, net of tax, in the accompanying 1999 statement of operations.  The
term loans require semiannual principal payments of $5 million beginning May 15,
2001, with final maturity on November 30, 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. The loans bear interest
at  fluctuating  rates of either the alternate  base rate (8.50% at November 25,
2000) plus 1-1/2% per annum or LIBOR  (6.62% at November  25,  2000) plus 2-1/2%
per  annum.  The 1997  Credit  Agreement  is secured  by  certain  real  estate,
including  second priority liens on all real estate pledged to other  creditors,
and substantially all the equipment of the Company.

In connection  with the November 1999  prepayment of the 1997 Credit  Agreement,
this  agreement was amended to eliminate all  financial  performance  covenants.
Under the 1997  Credit  Agreement,  the  Company is  prohibited  from  incurring

<PAGE>29


additional indebtedness,  with certain limited exceptions,  and making dividend,
redemption  and certain  other  payments on its capital  stock.  The 1997 Credit
Agreement contains certain customary operational covenants and events of default
for financing of this type, including a change of control covenant.

The Company's mortgage loan is secured by certain real estate and bears interest
at LIBOR plus 4% per annum with interest paid monthly. Annual principal payments
of $4 million are required, 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.  Because of the  aforementioned
prepayments,  no mandatory principal payments on the mortgage loan are due until
maturity in 2004.

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

      In thousands

                     2001                    $      10,181
                     2002                          286,111
                     2003                              232
                     2004                           77,089
                                             -------------
                                             $     373,613

Note C--Stockholders' Equity

The Company has the authority to issue 50,000,000  shares of Common Stock,  $.01
par value.  Each  outstanding  share of Common  Stock is entitled to one vote on
each matter on which stockholders are 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 3,000,000 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 2000, 1999
and 1998, the following  assumptions were used to price the options: no dividend
yield;  expected  volatility  of 112%,  123% and 144%,  respectively;  risk-free
interest rate of 5.82%, 6.64% and 5.04%,  respectively;  and an expected life of
eight years.  The  weighted-average  fair value of options granted during fiscal
2000,  1999 and 1998 was $1.34 per share,  $1.55 per share,  and $2.40 per share
respectively. The options granted to date vest ratably over four years.

The following is a summary of the Incentive Plan
<TABLE>
In thousands, except per share data
<CAPTION>
                                                    2000                            1999                             1998
                                            ---------------------------------------------------------------------------------------
                                                          Weighted                        Weighted                        Weighted
                                                           Average                         Average                         Average
                                                           Exercise                        Exercise                        Exercise
                                            Options          Price          Options          Price           Options         Price
                                            ---------------------------------------------------------------------------------------
       <S>                                   <C>            <C>              <C>            <C>               <C>           <C>
       Outstanding at beginning of year      2,225          $2.19            2,120          $2.41               ---           ---
          Options granted                      720           1.84              555           1.65             2,360         $2.49
          Options exercised                    ---            ---              ---            ---               ---           ---
          Options forfeited                   (426)          2.14             (450)          2.56              (240)         3.13
                                             --------------------------------------------------------------------------------------
       Outstanding at end of year            2,519          $2.10            2,225          $2.19             2,120         $2.41
                                             ======================================================================================
       Exercisable at end of year              858          $2.29              481          $2.44               ---           ---
                                             ======================================================================================
</TABLE>

<PAGE>30


The following table summarizes  information  about stock options at November 25,
2000:
<TABLE>
<CAPTION>
                                         Options Outstanding                                        Options Exercisable
                         --------------------------------------------------------            ------------------------------------
                           Number           Weighted-Average                                   Number
     Range of            Outstanding            Remaining       Weighted -Average            Exercisable         Weighted-Average
  Exercise Prices        at 11/25/00        Contractual Life      Exercise Price             at 11/25/00           Exercise Price
  -----------------      --------------     ----------------    -----------------            ------------        ----------------
    <S>                     <C>                    <C>                <C>                       <C>                    <C>
    $0.88 - $1.94           1,313,750              8.80               $1.39                     352,500                $1.33
    $2.44 - $3.03           1,205,000              7.66               $2.87                     505,000                 2.96
  -----------------      --------------     ----------------    -----------------            ------------        ----------------
    $0.88 - $3.03           2,518,750              8.25               $2.10                     857,500                $2.29
  =================      ==============     ================    =================            ============        ================
</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 2000, 1999, and 1998
would approximate the amounts below:

In thousands, except per share data
<TABLE>
<CAPTION>
                                                                      Fiscal Year Ended
                                      ---------------------------------------------------------------------------------------
                                       November 25, 2000            November 27, 1999                   November 28, 1998
                                      -------------------        ----------------------               -----------------------
                                         As          Pro            As             Pro                   As              Pro
                                      Reported      Forma        Reported         Forma               Reported          Forma
                                     ---------   ---------       --------        --------            ---------       --------
<S>                                  <C>         <C>             <C>             <C>                 <C>             <C>
Net loss                             $(20,551)   $(21,128)       $(8,136)        $(8,673)            $(22,367)       $(22,896)
Net loss per common share            $  (1.03)   $  (1.06)       $  (.41)        $  (.43)            $  (1.12)       $   1.14)
</TABLE>

<PAGE>31


Note D--Income Taxes

For the year ended November 25, 2000, an income tax benefit of $15.6 million was
recorded.  The Company has federal net operating  loss  carry-forwards  totaling
$93.8  million,  which  expire  through  fiscal  2020,  and  federal  tax credit
carry-forwards  totaling $19.3 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 25, 2000, in future periods.

Income taxes for the year ended November 27, 1999, were allocated to loss before
extraordinary   items,  and  to   extraordinary   items  related  to  the  early
extinguishment of debt. See Note B. The income tax benefit allocated to the loss
before extraordinary items was $5.2 million and the income tax benefit allocated
to the extraordinary item was $0.5 million.

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

                In thousands

                                 2000           1999           1998
                            -------------------------------------------

     Currently receivable

                  Federal   $        --    $       --     $       (959)
                    State            --            --           (1,252)
                            ------------------------------------------
                                     --            --           (2,211)

     Deferred

                  Federal       (13,836)       (4,545)         (10,124)
                    State        (1,786)         (666)            (883)
                            ------------------------------------------
                                (15,622)       (5,211)         (11,007)
                            ------------------------------------------
                            $   (15,622)   $   (5,211)    $    (13,218)
                            ==========================================

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:
<TABLE>
<CAPTION>
                                                                 2000           1999          1998
                                                             --------------------------------------
     <S>                                                       <C>             <C>            <C>
     Federal statutory rate                                    (35.0)%         (35.0)%        (35.0)%
     State income taxes, net of federal tax benefit             (3.2)           (3.6)          (3.9)
     Permanent tax differences                                  (0.8)           (1.9)           0.5
     Reduction in valuation allowance                           (3.5)             --             --
     Other                                                      (0.7)           (0.8)           1.3
                                                             --------------------------------------
                                                               (43.2)%         (41.3)%        (37.1)%
                                                             ======================================
</TABLE>

<PAGE>32


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                                        2000                1999
                                                                             ----------------------------------
     <S>                                                                     <C>                   <C>
     Deferred tax assets:
       Tax credit and net operating loss carry-forwards                      $      56,778         $     51,850
       Insurance reserves                                                              815                6,088
       Retirement benefits                                                           5,102                5,906
       Post-retirement benefits                                                      6,361                7,264
       Vacation reserves                                                             2,074                2,959
       Reserves for bad debts                                                          598                1,909
       Closed store reserves                                                         9,763                2,111
       Other                                                                         1,736                2,023
                                                                             ----------------------------------

                                           Total deferred tax assets                83,227               80,110
                                           Less valuation allowance                  5,640                6,909
                                                                             ----------------------------------
                                           Net deferred tax assets                  77,587               73,201
                                                                             ----------------------------------

     Deferred tax liabilities:
       Land, buildings and equipment                                               (60,266)             (79,711)
       Inventory basis difference                                                  (24,310)             (20,766)
       Other                                                                       (10,809)              (6,144)
                                                                             ----------------------------------
                                           Total deferred tax liabilities          (95,385)            (106,621)
                                                                             ----------------------------------
                                           Net deferred tax liability        $     (17,798)        $    (33,420)
                                                                             ==================================
</TABLE>
The decrease in the valuation  allowance of approximately $1.3 million in fiscal
2000  relates   primarily  to  adjustment   of  recorded  net   operating   loss
carryforwards  upon  examination  of the  Company's  prior  period  federal  tax
returns.

Note E--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.

During 1999,  the Company  recorded a $10.6  million  ($6.2  million  after tax)
non-cash  curtailment  gain in  connection  with  its  non-contributory  defined
benefit pension plan. Benefits under the pension plan were frozen effective June
17, 1999. The curtailment gain is included in special (credits) charges, net, in
the accompanying 1999 statement of operations; see Note G.

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.  Effective for participants retiring after November
30, 1999,  the Company  changed the plan  structure to eliminate  life insurance
benefits  for retirees and to  eliminate  the  Company's  subsidy of premiums on
health insurance for retirees.

<PAGE>33


The following provides a reconciliation of benefit obligations,  plan assets and
funded status of the plans:
<TABLE>
<CAPTION>
                                                                     Pension Benefits                   Other Benefits
                                                              --------------------------          -------------------------
In thousands                                                       2000         1999                    2000         1999
                                                              --------------------------          -------------------------

      Change in Benefit Obligation
<S>                                                              <C>          <C>                   <C>           <C>
Benefit obligation at beginning of year                          $  56,184    $  81,798             $   9,154     $ 17,431
Service cost-benefits earned during the period                          --        2,662                    --          411
Interest cost                                                        4,428        5,012                   587          987
Plan participants' contributions                                        --           --                   188          136
Curtailments                                                            --      (10,590)                   --           --
Plan structure changes                                                  --           --                    --       (6,980)
Actuarial (gain) loss                                                1,678      (17,452)                  (90)      (2,004)
Benefits paid                                                       (5,013)      (5,246)                 (977)        (827)
                                                              -------------------------           ------------------------
Benefit obligation at end of year                                   57,277       56,184                 8,862        9,154
                                                              -------------------------           ------------------------

      Change in Plan Assets

Fair value of plan assets at beginning of year                      58,684       53,746                    --           --
Actual return on plan assets                                        11,181        8,116                    --           --
Employer contributions                                                 127        2,068                    --           --
Benefits paid                                                       (5,013)      (5,246)                   --           --
                                                              -------------------------           ------------------------
Fair value of plan assets at end of year                            64,979       58,684                    --           --
                                                              -------------------------           ------------------------

Funded status                                                        7,702        2,500                (8,862)      (9,154)
Unrecognized net actuarial (gain) loss                             (20,456)     (17,265)               (1,967)      (2,293)
Unrecognized prior service cost                                         --           --                (6,326)      (6,762)
                                                              -------------------------           ------------------------
Accrued benefit cost included in other accrued expenses
      and/or non-current liabilities                             $ (12,754)   $ (14,765)            $ (17,155)   $ (18,209)
                                                              =========================           ========================
</TABLE>

In fiscal  2000,  the cost  trend  rate was  adjusted  upward to 10.0%  based on
current medical  inflationary  trends.  In 1999, and 1998, 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 25, 2000 and November
27, 1999,  accumulated  post-retirement  benefit  obligation by $0.5 million and
$0.7 million,  respectively,  and the aggregate of the service and interest cost
components  of net  periodic  post-retirement  benefit cost for the fiscal years
ended  November  25,  2000 and  November  27,  1999,  by  $40,000  and  $71,000,
respectively.  The effect of a 1.0% annual decrease in these assumed health-care
cost trend rates would  decrease  the  November  25, 2000 and November 27, 1999,
accumulated post-retirement benefit obligation by $0.5 million and $0.7 million,
respectively,  and the aggregate of the service and interest cost  components of
net periodic  post-retirement  benefit cost for the fiscal years ended  November
25, 2000 and November 27, 1999, by $38,000 and $67,000, respectively.

The  accumulated  benefit  obligation  was $57.3  million  and $56.1  million at
November 25, 2000 and November 27, 1999, respectively.
<TABLE>
<CAPTION>
Components of Net Periodic Benefit Cost

In thousands

                                                   Pension Benefits                                Other Benefits
                                     --------------------------------------------    -----------------------------------------
                                          2000          1999           1998                2000           1999           1998
                                     --------------------------------------------    -----------------------------------------
<S>                                    <C>            <C>            <C>               <C>              <C>           <C>

Service cost - benefits earned
during the period                      $    --        $ 2,752        $ 4,915           $    --          $  411         $   701
Interest cost                             4,428         5,012          5,254                587            987           1,134
Expected return on plan assets           (6,313)       (4,638)        (4,490)                --             --              --
Amortization of prior service cost           --           --             --                (436)          (218)             --
Amortization of unrecognized loss            --           --             --                (228)            --              --
                                     --------------------------------------------    -----------------------------------------
Net periodic post-retirement
benefit cost                           $ (1,885)      $ 3,126        $ 5,679           $    (77)       $ 1,180         $ 1,835
                                     ============================================    =========================================
</TABLE>

<PAGE>34


<TABLE>
Weighted Average Assumptions

In thousands
<CAPTION>                                         Pension Benefits                                Other Benefits
                                     --------------------------------------------    -----------------------------------------
                                          2000          1999           1998                2000           1999           1998
                                     --------------------------------------------    -----------------------------------------
<S>                                        <C>         <C>             <C>                 <C>            <C>            <C>
Discount rate                              8.00%       8.00%           6.75%               8.00%          8.00%          6.75%
Expect return on plan assets               9.50%       9.50%           8.50%                 --%            --%            --%
Rate of increase in future
compensation levels                         (a)%       2.00%           5.00%                 --%            --%            --%
Healthcare cost trend rate                   --%         --%             --%              10.00%          6.30%          6.70%
<FN>
      (a) Since the  pension  plan was  frozen as of June 17,  1999,  no further
      assumptions on salary are needed.
</FN>
</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 $1.6  million,  $1.9 million and $2.1 in 2000,
1999 and 1998, respectively.

Note F--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:  2001 -- $12.7  million;  2002 --
$10.9 million; 2003 -- $7.1 million; 2004 -- $5.8 million; 2005 -- $5.2 million;
thereafter -- $18.1  million.  Rental expense under  operating  leases was $12.9
million,   $14.4  million,   and  $20.8  million  for  2000,   1999,  and  1998,
respectively.

Note G--Special Charges

In fiscal 2000,  the Company  recorded a special  charge of $20.4 million ($11.6
million  after  tax)  in  connection  with  the  closing  of 22  stores  and the
elimination of administrative  staff.  Included in this charge are approximately
$8.6 million of future lease  commitments  and $3.1 million of  write-downs  for
fixed  asset  disposals.  Also  included in this  amount is  approximately  $0.7
million for severance related to administrative employees at the Company's store
support center.  In connection with these store closings,  the Company  recorded
inventory  write-downs  of $11.8  million  ($7.4  million  after tax) in cost of
merchandise  sold for the fourth  quarter  of fiscal  2000.  All 22 stores  were
closed as of January 30, 2001.  The related  store exit plans are expected to be
completed during fiscal year 2001 and the remaining  accruals are expected to be
fully utilized, except for certain future lease commitments. In January of 2001,
approximately  $33.0 million was transferred to real estate held for resale from
property, plant and equipment related to these store closures.

Historical financial data for the closing of the 22 stores is as follows for the
fiscal years presented:

    In thousands                          2000             1999            1998
                                    --------------------------------------------
    Net sales                       $   151,568      $   189,468     $   204,393
    Operating (loss) income         $    (1,826)     $       540     $     4,347


The fiscal 2000 special charge includes:
<TABLE>
<CAPTION>
                                                                  Amount                  Amount
                                                                  Charged              Paid Through             Accrual at
       In millions                                                 2000                Nov. 25, 2000           Nov. 25, 2000
                                                              --------------------------------------------------------------
       <S>                                                     <C>                      <C>                  <C>
       Severance                                               $       2.5              $      1.0           $      1.5
       Other costs                                                    17.9                     3.2                 14.7
                                                              --------------------------------------------------------------
                                                               $      20.4              $      4.2           $     16.2
                                                              ==============================================================
</TABLE>

<PAGE>35


Included in 1999  special  charges is a credit of $10.6  million  ($6.2  million
after  tax)  recorded  in the  second  quarter  of  fiscal  1999 for a  non-cash
curtailment  gain in connection  with  freezing the  Company's  non-contributory
defined  benefit pension plan; see Note D. Store closing charges of $1.5 million
($0.9 million  after tax) were recorded in the second  quarter of fiscal 1999 in
connection  with the closing of five stores.  All five stores were closed in the
fourth  quarter.  In addition,  the Company  recorded an additional $0.8 million
($0.5 million after tax) in the fourth quarter of fiscal 1999 in connection with
the closing of one store.  Included in this amount is approximately $0.6 million
($0.4 million after tax) for severance  related to  administrative  employees at
the Company's store support center. In connection with these store closings, the
Company recorded inventory  write-downs of $3.4 million ($2.0 million after tax)
and $0.5 million ($0.3 million  after tax) in cost of  merchandise  sold for the
second and fourth quarters of fiscal 1999, respectively.

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

    In thousands              1999        1998
                            ---------------------
    Net sales               $  28,138   $  46,093
    Operating loss          $   3,991   $   1,783


The fiscal 1999 special charge includes:

                        Amount                 Amount
                        Charged              Paid Through            Accrual at
      In millions        1999                Nov. 25, 2000         Nov. 25, 2000
                       ---------------------------------------------------------

      Severance        $    0.6              $      0.6            $      --
      Other costs           1.7                     1.7                   --
                       ---------------------------------------------------------
                       $    2.3              $      2.3            $      --
                       =========================================================


The Company recorded special charges of $5.6 million ($3.5 million after tax) in
the first quarter of fiscal 1998 for severance  costs related to the elimination
of  administrative  employees  at  the  Company's  store  support  and  regional
administrative centers. Special charges of $0.1 million ($0.1 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  stores,  respectively.  One of the eight stores was closed at November
28, 1998,  and the other seven were closed during the first half of fiscal 1999.
In  connection  with  these  store  closings,  the  Company  recorded  inventory
write-downs  of $1.3 million  ($0.8  million  after tax) and $3.1 million  ($1.9
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 eight stores is as follows for
the fiscal years presented:

     In thousands                 1998
                              -----------
     Net sales                $    60,103
     Net operating loss       $     4,027


The fiscal 1998 special charge includes:

                        Amount                 Amount
                        Charged             Paid Through              Accrual at
       In millions       1998               Nov. 27, 1999          Nov. 25, 2000
                        --------------------------------------------------------

       Severance costs  $   5.6              $   5.6               $   --
       Other costs          1.1                  1.1                   --
                        --------------------------------------------------------
                        $   6.7              $   6.7               $   --
                        ========================================================

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

<PAGE>36

<TABLE>
Note H--Quarterly Financial Data (unaudited)

In thousands, except per share amounts
<CAPTION>
                                                                     First           Second             Third           Fourth
Fiscal Year Ended November 25, 2000                                 Quarter          Quarter           Quarter          Quarter
-------------------------------------------------------------------------------------------------------------------------------
    <S>                                                         <C>               <C>              <C>               <C>
    Net sales                                                   $  347,113        $  421,730       $  391,815        $  332,125
    Cost of merchandise sold                                       249,706           311,818          284,866           252,137
                                                                   ------------------------------------------------------------
    Gross Profit                                                    97,407           109,912          106,949            79,988


    Selling, general and administrative                             93,629            88,994           84,169            73,682
    Other income                                                      (464)             (871)            (403)             (326)
    Special charges                                                    194               384              563            19,259
    Provision for depreciation and amortization                      8,936             6,137            7,605             7,389
                                                                 --------------------------------------------------------------

    OPERATING INCOME (LOSS)                                         (4,888)           15,268           15,015           (20,016)

Interest expense                                                    10,086            10,636           10,606            10,224
                                                                ---------------------------------------------------------------

         INCOME (LOSS) BEFORE INCOME TAXES                         (14,974)            4,632            4,409           (30,240)

Federal and state income taxes                                      (9,732)            3,398            2,056           (11,344)
                                                                ----------------------------------------------------------------


                                 NET INCOME (LOSS)              $   (5,242)       $    1,234       $    2,353        $  (18,896)
                                                                ===============================================================

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

Net income (loss) per common share-basic                        $     (.26)       $     0.06        $    0.12        $    (0.94)
                                                                ===============================================================

Weighted average common and dilutive
    common equivalent shares outstanding                            20,000            20,224           20,082            20,000
                                                                ---------------------------------------------------------------

Net income (loss) per common share-diluted                      $     (.26)       $     0.06        $    0.12        $    (0.94)
                                                                ===============================================================
</TABLE>

Special  charges ($0.1 million after tax) reflected in the first quarter consist
of costs related to the impairment of assets related to store closings.  Special
charges were also recorded in the second,  and third quarter ($0.1 million,  and
$0.3 million, respectively,  after tax) in connection with asset impairments and
elimination of administrative  staff. The Company reassessed the useful lives of
certain  classes of fixed  assets  during the second  quarter.  The  approximate
effect  of this  change in  estimate  was a  reduction  of $1.6  million  in the
provision for depreciation  and  amortization in the second quarter.  The fourth
quarter includes a benefit of approximately  $1.7 million relating to the change
in estimated bad debt risk on the accelerated  repurchase of accounts receivable
(see Note A). A special charge was recorded in the fourth quarter ($12.0 million
after tax) related to the closing of 22 stores. In addition,  the fourth quarter
cost of merchandise sold reflects inventory write-downs ($7.4 million after tax)
in connection with these store  closings.  The fourth quarter income tax benefit
includes a $1.7  million  decrease  in tax  benefit  to reflect  the effect of a
fourth quarter revision of the effective tax rate on the first three quarters.

<PAGE>37


<TABLE>
In thousands, except per share amounts
<CAPTION>
                                                                     First           Second             Third           Fourth
Fiscal Year Ended November 27, 1999                                 Quarter          Quarter           Quarter          Quarter
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>              <C>               <C>
Income

    Net sales                                                   $  391,873        $  492,728       $  492,160        $  434,604
    Cost of merchandise sold                                       285,939           366,713          362,217           319,099
                                                                   ------------------------------------------------------------
    Gross Profit                                                   105,934           126,015          129,943           115,505


    Selling, general and administrative                            106,517           108,683          108,052            97,130
    Other income                                                      (345)             (719)            (523)             (395)
    Special charges (credits), net                                      --            (5,400)              --             1,085
    Provision for depreciation and amortization                      8,936             9,223           10,563            11,445
                                                                 --------------------------------------------------------------

         OPERATING INCOME                                           (9,174)           14,228           11,851             6,240

    Interest expense                                                 8,612             8,909            8,636             9,606
                                                                ---------------------------------------------------------------

         INCOME (LOSS) BEFORE INCOME TAXES                         (17,786)            5,319            3,215            (3,366)

Federal and state income taxes                                      (7,826)            2,503            1,502            (1,390)
                                                                ---------------------------------------------------------------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                             (9,960)            2,816            1,713            (1,976)

Extraordinary item, net of income taxes                                 --                --               --               729
                                                                ---------------------------------------------------------------

                                 NET INCOME (LOSS)              $   (9,960)       $    2,816       $    1,713        $   (2,705)
                                                                ===============================================================


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

Income (loss) per common share
    before extraordinary item-basic                             $    (0.50)       $    0.14        $     0.09        $    (0.10)

Extraordinary item, net of income taxes                                 --               --                --              0.04
                                                                ---------------------------------------------------------------

Net income (loss) per common share-basic                        $    (0.50)       $    0.14        $     0.09        $    (0.14)
                                                                ===============================================================

Weighted average common and dilutive
    common equivalent shares outstanding                            20,000           20,156            20,170           20,000
                                                                --------------------------------------------------------------

Income (loss) per common share
    before extraordinary item-diluted                           $    (0.50)       $    0.14        $     0.09        $   (0.10)

Extraordinary item, net of income taxes                                 --               --                --             0.04
                                                                --------------------------------------------------------------

Net income (loss) per common share-diluted                      $    (0.50)       $    0.14        $     0.09        $   (0.14)
                                                                ==============================================================
</TABLE>
A  lower-than-anticipated   rate  of  inflation  decreased  the  LIFO  inventory
provision,  after tax, by $0.8 million in the fourth  quarter.  A special credit
($6.2  million  after tax)  recorded  in the second  quarter  reflects a pension
benefit  curtailment  gain recorded as a result of freezing  benefits  under the
Company's  pension plan.  Special charges were recorded in the second and fourth
quarter ($3.1 million and $0.6 million,  respectively,  after tax) in connection
with store closings and the  elimination of  administrative  staff. In addition,
second  and  fourth  quarter  cost  of  merchandise   sold  reflects   inventory
write-downs  ($2.0  million  and  $0.3  million,  respectively,  after  tax)  in
connection  with  these  store  closings.  Accelerated  depreciation  on certain
leasehold  improvements  and assets related to closed stores was recorded in the
third and fourth  quarter ($0.6 million and $1.2  million,  respectively,  after
tax).  An  extraordinary  charge ($0.7  million  after tax) related to the early
extinguishment of debt was recorded in the fourth quarter.

<PAGE>38


Note I--Subsequent Events

On January 31,  2001,  the Company  seasonally  expanded its  revolving  line of
credit with supplemental loan  participation  from a third party. On January 31,
borrowing  availability under the Company's $260 million existing line of credit
increased by 5% for a six-month time period.  This additional  participation  of
$15.0  million  by the  aforementioned  third  party as part of the 1999  Credit
Agreement  will support the 5% advance rate increase  through July 31, 2001. The
seasonal  overline  bears  interest at 12.0% per annum and  requires  payment of
certain monthly fees. The seasonal overline agreement also requires  maintenance
of certain monthly minimum fixed charge coverage ratios.

<PAGE>39


<TABLE>
                                                       SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                                                       (In thousands)
<CAPTION>
                        COL. A                         COL. B                COL. C               COL. D                  COL. E
------------------------------------------------------------------------------------------------------------------------------------
                                                     Balance at            Charged to                                    Balance at
                                                      beginning             cost and                                      end of
                      Description                     of period             expenses            Deductions                period
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>                   <C>                     <C>
YEAR ENDED NOVEMBER 25, 2000:
              Reserve for Inventory Shrink
              and Obsolescence.................      $  11,409             $  12,254             $  16,859               $   6,804

              Reserves for Special Charges.....      $   1,513             $  20,400             $   5,759               $  16,154

              Reserve for Bad Debt.............      $   3,769             $  11,042             $  13,350               $   1,461


YEAR ENDED NOVEMBER 27, 1999:
              Reserve for Inventory Shrink
              and Obsolescence.................      $  11,892             $  21,667             $  22,150               $  11,409

              Reserves for Special Charges.....      $   1,100             $   2,235             $   1,912               $   1,513

              Reserve for Bad Debt.............      $   5,881             $   8,848             $  10,960               $   3,769


YEAR ENDED NOVEMBER 28, 1998:
              Reserve for Inventory Shrink
              and Obsolescence.................      $  15,031             $  22,667             $  25,806               $  11,892

              Reserves for Special Charges.....      $   6,876             $   6,700             $  12,476               $   1,100

              Reserve for Bad Debt.............      $   5,879             $   5,450             $   5,448               $   5,881
</TABLE>

<PAGE>40



                                       E-2

                                INDEX TO EXHIBITS

 2.1          First Amended Plan of Reorganization, as modified  October 9, 1997
              (incorporated by  reference  to  Exhibit  2.1  filed  as  part  of
              Payless' Quarterly Report  on Form  10-Q  for  the  quarter  ended
              August 30, 1997).

 2.2          Agreement and Plan of  Merge  in connection  with the Reincorpora-
              tion  from Iowa to Delaware  (incorporated by reference to Exhibit
              2.2 filed as part of Payless'  Current Report  on Form 8-K  dated
              December 2, 1997).


 3.1          Amended and Restated Bylaws of  the Company  (incorporated by ref-
              erence to Exhibit 3.2(b)filed as part of Payless' Annual Report on
              Form 10-K for the year ended November 27, 1999).

 3.2          Certificate of Incorporation (incorporated by reference to Exhibit
              4.1 filed as  part of Payless' Current Report on Form   8-K  dated
              December 2, 1997).

 4.0          Long-term   debt  instruments  of the  Registrant  in amounts  not
              exceeding  ten percent (10%) of the total assets of the Registrant
              will be furnished to the Commission upon request.

 4.1          Loan and Security  Agreement dated November 17, 1999, by and among
              Payless and Congress Financial  Corporation  (Central),  as Lender
              and Agent for Lenders  (incorporated  by  reference to Exhibit 4.2
              filed  as part of  Payless'  Current  Report  on  Form  8-K  dated
              November 17, 1999).

 4.1(a)       First  amendment to Loan and Security  Agreement dated January 31,
              2001,  by and among  Payless and  Congress  Financial  Corporation
              (Central), as Lender and Agent for Lenders

 4.2(a)       Amended and  Restated  Credit  Agreement  dated  December 2, 1997,
              among Payless, the Banks listed on the signature pages thereof and
              Canadian   Imperial  Bank  of  Commerce,   New  York  Agency,   as
              Coordinating  and Collateral  Agent  (incorporated by reference to
              Exhibit  4.1(a)  filed as part of Payless'  Annual  Report on Form
              10-K for the year ended November 29, 1997).

 4.2(b)       First  amendment to Amended and Restated  Credit  Agreement  dated
              August 13, 1998, among Payless,  the Banks listed on the signature
              pages  thereof and Canadian  Imperial  Bank of Commerce,  New York
              Agency,  as Coordinating  and Collateral  Agent  (incorporated  by
              reference  to  Exhibit  4.1  filed as part of  Payless'  Quarterly
              Report on Form 10-Q for the quarter ended August 29, 1998).

 4.2(c)       Second  amendment to Amended and Restated  Credit  Agreement dated
              November  17,  1999,  among  Payless,  the  Banks  listed  on  the
              signature  pages  thereof and Canadian  Imperial Bank of Commerce,
              New  York   Agency,   as   Coordinating   and   Collateral   Agent
              (incorporated  by  reference  to  Exhibit  4.1  filed  as  part of
              Payless' Current Report on Form 8-K dated November 17, 1999).

 4.3(a)       Amended and Restated Loan Agreement dated December 2, 1997, by and
              among  Payless and UBS  Mortgage  Finance,  Inc  (incorporated  by
              reference  to  Exhibit  4.2(a)  filed as part of  Payless'  Annual
              Report on Form 10-K for the year ended November 29, 1997).

 4.3(b)       First  Amendment  to Amended and  Restated  Loan  Agreement  dated
              February 26, 1998, by and among Payless and UBS Mortgage  Finance,
              Inc  (incorporated by reference to Exhibit 4.2(d) filed as part of
              Payless'  Annual  Report on Form 10-K for the year ended  November
              28, 1998).

10.1(a)*      Amended and Restated Payless Cashways, Inc. 1998 Omnibus Incentive
              Plan  effective  February 17, 1999  (incorporated  by reference to
              Exhibit 10.1 filed as part of Payless'  Annual Report on Form 10-K
              for the year ended November 28, 1998).

10.1(b)*      Amendment to the Amended and Restated Payless Cashways, Inc.  1998
              Omnibus Incentive Plan effective October 18, 2000.

<PAGE>41


10.2(a)*      Form of Employment Agreement (Form A) between Payless  and certain
              executive officers.

10.2(b)*      Form of Employment Agreement (Form B) between Payless and  certain
              executive officers.

10.3*         Form of  Indemnification  Agreement  between  Payless  and various
              officers and directors  (incorporated by reference to Exhibit 10.3
              filed as part of Payless'  Annual Report on Form 10-K for the year
              ended November 27, 1999).

10.4*         Payless Cashways, Inc. Store Support Center Management Bonus Plan,
              dated as of December  1999  (incorporated  by reference to Exhibit
              10.4 filed as part of Payless'  Annual Report on Form 10-K for the
              year ended November 27, 1999).

10.5*         Payless  Cashways,  Inc.  Supplemental  Disability  Plan (incorpo-
              rated  by reference  to Exhibit  10.13 filed as part of   Payless'
              Annual Report on Form 10-K for the fiscal year ended  November 27,
              1993).

23.1          Consent of KPMG LLP.
[FN]
* Represents a management contract or a compensatory plan or arrangement.
</FN>