<PAGE> 1

                                                                    Exhibit 13.1

ABOUT THE COMPANY

     [This section not included in the EDGARized exhibit.]




TO OUR SHAREHOLDERS

     [Shareholder letter not included in the EDGARized exhibit.]

<PAGE> 2

TO OUR SHAREHOLDERS (cont'd.)



     [Shareholder letter is not included in the EDGARIzed exhibit.]



<PAGE> 3

TO OUR SHAREHOLDERS (cont'd.)



     [Shareholder letter is not included in the EDGARIzed exhibit.]



<PAGE> 4

Payless Cashways, Inc. and subsidiary

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>



                                                                     First           Second             Third           Fourth
Fiscal Year Ended November 25, 1995                                 Quarter          Quarter           Quarter          Quarter
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>              <C>               <C>

Income
     Net sales                                                    $ 556,218         $ 711,679        $ 737,237         $ 675,052
     Other income                                                     1,344             1,517            1,357             1,266
                                                                  --------------------------------------------------------------
                                                                    557,562           713,196          738,594           676,318

Costs and expenses
     Cost of merchandise sold                                       389,065           513,418          530,402           479,735
     Selling, general and administrative                            142,669           158,984          159,272           158,664
     Provision for depreciation and amortization                     14,689            15,083           15,567            15,017
     Interest expense                                                15,273            15,573           15,247            14,974
     Special charges                                                     --                --               --           153,667
                                                                  --------------------------------------------------------------
                                                                    561,696           703,058          720,488           822,057
                                                                  --------------------------------------------------------------
     INCOME (LOSS) BEFORE INCOME TAXES                               (4,134)           10,138           18,106          (145,739)

Federal and state income taxes                                       (1,770)            4,550            8,985           (16,676)
                                                                  ---------------------------------------------------------------

Income (loss) before equity in loss of joint venture                 (2,364)            5,588            9,121          (129,063)

Equity in loss of joint venture                                      (1,500)             (975)            (975)           (8,381)
                                                                  ---------------------------------------------------------------

                                        NET INCOME (LOSS)         $  (3,864)        $   4,613        $   8,146         $(137,444)
                                                                  ===============================================================


Net income (loss) per common share                                $    (.13)        $     .08        $     .17        $    (3.48)
                                                                  ================================================================

Weighted average common and dilutive common
   equivalent shares outstanding                                     39,878            40,092           40,116            39,914
                                                                  ==============================================================

<FN>

A  lower-than-anticipated   rate  of  inflation  decreased  the  LIFO  inventory
provision,  after tax, by $.9 million, or $.02 per share, in the fourth quarter.
Special charges reflected in the fourth quarter consist of costs associated with
the  closing  of  six  stores,  the  sale  of  a  distribution  center  and  the
reorientation  of several stores to concentrate  on the  professional  customer.
Fourth  quarter  equity in loss of joint venture  includes the $8.0 million,  or
$.20 per common share,  loss on the sale of the Company's  Mexican joint venture
investment.

</TABLE>



<PAGE> 5

Payless Cashways, Inc. and subsidiary

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (cont'd.)
(In thousands, except per share amounts)

<TABLE>
<CAPTION>


                                                                     First           Second             Third           Fourth
Fiscal Year Ended November 26, 1994                                 Quarter          Quarter           Quarter          Quarter
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>              <C>               <C>

Income
    Net sales                                                    $ 542,053         $ 734,215        $ 744,112         $ 702,159
    Other income                                                     1,256             2,711            2,008             4,668
                                                                 --------------------------------------------------------------
                                                                   543,309           736,926          746,120           706,827

Costs and expenses
    Cost of merchandise sold                                       375,281           518,659          530,402           494,332
    Selling, general and administrative                            137,882           156,358          149,569           150,215
    Provision for depreciation and amortization                     14,298            14,565           15,116            14,713
    Interest expense                                                16,605            16,463           16,348            16,155
                                                                 --------------------------------------------------------------
                                                                   544,066           706,045          711,435           675,415
                                                                 --------------------------------------------------------------
         INCOME (LOSS) BEFORE INCOME TAXES                            (757)           30,881           34,685            31,412

Federal and state income taxes                                         (76)           13,481           15,635            12,768
                                                                 --------------------------------------------------------------

Income (loss) before equity in loss of joint venture and
   extraordinary item                                                 (681)           17,400           19,050            18,644

Equity in loss of joint venture                                         --              (444)            (705)           (1,132)
                                                                 ---------------------------------------------------------------

Income (loss) before extraordinary item                               (681)           16,956           18,345            17,512

Extraordinary item:  early extinguishment of debt                       --                55              288            (7,586)
                                                                 ---------------------------------------------------------------

                                 NET INCOME (LOSS)               $    (681)        $  17,011        $  18,633         $   9,926
                                                                 ==============================================================

Income (loss) per common share before extraordinary item         $    (.05)        $     .38        $     .42         $     .40

Extraordinary item:  early extinguishment of debt                       --                --              .01              (.19)
                                                                 ---------------------------------------------------------------

Net income (loss) per common share                               $    (.05)        $     .38        $     .43         $     .21
                                                                 ==============================================================

Weighted average common and dilutive common
   equivalent shares outstanding                                    39,628            41,013           40,320            40,066
                                                                 ==============================================================

<FN>

A  lower-than-anticipated   rate  of  inflation  decreased  the  LIFO  inventory
provision, after tax, by $1.0 million, or $.03 per share, in the fourth quarter.
Other income includes gains of $1.9 million, $.9 million and $3.1 million in the
second, third and fourth quarters, respectively,  related to settlements of 1993
flood losses.

</TABLE>



<PAGE> 6

Payless Cashways, Inc. and subsidiary

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

RESULTS OF OPERATIONS

The following  discussion of the  Company's  financial  condition and results of
operations  should  be read  in  conjunction  with  the  Consolidated  Financial
Statements  and  notes  thereto  included  elsewhere  in this  Annual  Report to
Shareholders.

<TABLE>
<CAPTION>

                                                                                             Fiscal Year Ended
                                                                                Nov. 25,         Nov. 26,          Nov. 27,
                                                                                  1995             1994              1993
                                                                              -------------------------------------------
<S>                                                                               <C>               <C>              <C>

OPERATING DATA (PERCENT OF NET SALES):
Net sales.......................................................                  100.0 %           100.0 %          100.0 %
Other income....................................................                     .2                .4               .2
Cost of merchandise sold........................................                   71.4              70.5             70.2
Selling, general and administrative.............................                   23.1              21.8             21.9
Provision for depreciation and amortization.....................                    2.2               2.2              2.2
Interest expense................................................                    2.3               2.4              4.8
Special charges.................................................                    5.7                --               .1
                                                                              --------------------------------------------

Income (loss) before income taxes...............................                   (4.5)              3.5              1.0
Federal and state income taxes..................................                    (.2)              1.6               .6
Equity in loss of joint venture.................................                    (.4)              (.1)              --
                                                                              --------------------------------------------

Income (loss) before extraordinary item.........................                   (4.8)              1.9               .4
Extraordinary item..............................................                     --               (.3)            (1.8)
                                                                              ---------------------------------------------
Net income (loss)...............................................                   (4.8)%             1.6 %           (1.4)%
                                                                              ==============================================

</TABLE>

SALES

Net sales  decreased  1.6% for fiscal 1995 from fiscal 1994,  and increased 4.7%
for fiscal 1994 over fiscal 1993. Comparable-store sales (sales from stores that
have been open one full year)  decreased by 4.5% for fiscal 1995,  and increased
3.3% for fiscal 1994.  Net sales for 1995 were  negatively  impacted by deflated
lumber  costs,  a slower  housing  environment,  softness in consumer  spending,
competitive  pressures  and, in a number of markets,  an excess of retail  space
devoted to the sale of building  materials.  Sales from  professional  customers
declined 1.9% in fiscal 1995 compared to double-digit  gains in the past several
years.  Six new stores  were  opened  during  1995 and seven  stores were opened
during 1994.  Net sales for 1994  increased  over the prior year  primarily as a
result of the growth in business from professional customers.

Other  income for fiscal year 1994  includes  gains of $5.9  million  related to
settlements of 1993 flood losses.

COSTS AND EXPENSES

The cost of merchandise  sold, as a percent of sales,  was 71.4% in fiscal 1995,
70.5% in  fiscal  1994 and  70.2%  in  fiscal  1993.  The  increase  in 1995 was
primarily due to the Company's  pricing  initiatives  while the increase in 1994
was due  primarily  to the growth in sales to the  professional  customer  whose
merchandise  purchases  include a higher percentage of commodity goods at margin
rates somewhat lower than the Company average. The LIFO provision in fiscal 1995
was $4.2  million  compared to $3.1  million in fiscal 1994 and $2.0  million in
fiscal 1993,  reflecting  only slightly  increased  inflation rates in all three
years.

Selling, general and administrative expenses, as a percent of sales, were 23.1%,
21.8%,  and 21.9% for fiscal  1995,  1994 and 1993,  respectively.  The  primary
reasons for the 1995  increase  over 1994  selling,  general and  administrative
expenses were costs  associated with new stores and investment in  approximately
two-hundred  outside sales people.  Lower sales in 1995 also  contributed to the
increase in selling, general and administrative expenses as a percent of sales.



<PAGE> 7

Payless Cashways, Inc. and subsidiary

MANAGEMENT'S  DISCUSSION AND ANALYSIS OF THE 
FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS (cont'd.)


Interest expense decreased to $61.1 million in fiscal 1995 from $65.6 million in
fiscal 1994,  due to  retirement  of long-term  debt and lower  interest  rates.
Interest  expense  for 1994  decreased  from  $125.2  million in fiscal 1993 due
primarily  to  the   retirement  of  long-term   debt  in   connection   with  a
recapitalization  plan  ("Recapitalization  Plan")  described below in Financing
Activities.

On December 15, 1995, the Company announced a restructuring  plan which included
the closing of six  underperforming  stores on December 30, 1995, the sale of an
underutilized  distribution  center on December 22, 1995,  and, during the first
quarter of fiscal 1996,  the  reorientation  of several stores to concentrate on
the  professional  customer.  The plan is expected to be completed during fiscal
1996, with the possible  exception of completing all real estate sales. A pretax
special  charge of $153.7  million was recorded in the fourth  quarter of fiscal
1995 to reflect costs associated with the restructuring. The Company expects the
restructuring and the sale of the joint venture investment,  described below, to
have an  approximately  $10 million  positive impact on 1996 net earnings.  Cash
store closing costs are expected to represent  approximately  $10 million.  Over
time, the restructuring plan is expected to provide approximately $45 million of
cash  benefit,  including  proceeds  from real estate  sales,  tax  benefits and
reduced working capital.  Those proceeds will be used to reduce debt and to fund
capital  expenditures.  Additional  details on the  restructuring  costs are set
forth in Note I to the Consolidated Financial Statements.

At the end of 1993,  the Company  decided to eliminate a layer of  management in
the field  organization  and  recognized a special charge of $4.0 million in the
fourth quarter of 1993 to reflect the associated  costs. The elimination of this
management layer took place in January 1994.

NET INCOME (LOSS)

The  Company  had a loss  before  extraordinary  item of $128.5  million in 1995
compared to income before  extraordinary  item of $52.1 million and $9.7 million
in fiscal 1994 and 1993,  respectively.  The 1995 loss before extraordinary item
reflects the pretax special charge of $153.7 million ($133.1 million net of tax)
in connection with the  restructuring  discussed  above.  Both 1995 and the 1994
results  reflect the Company's  share in its Mexican joint  venture's  operating
loss prior to the sale of this  investment in October  1995.  The 1995 equity in
the loss of joint  venture also includes an $8.0  million,  pretax,  loss on the
sale of this investment.  Without the  restructuring  charge and the sale of the
Mexican  investment,  income before  extraordinary item for 1995 would have been
$12.5 million,  a decrease from 1994 income before  extraordinary  item of $52.1
million due to lower sales and higher expense levels.


<TABLE>
<CAPTION>


COMPARATIVE OPERATING DATA                                                  Fiscal Year Ended November 25, 1995
                                                                       --------------------------------------------
                                                                             Pro Forma              Historical
                                                                            (Excluding              (Including
(In thousands, except per share amounts)                                 Special Charges)        Special Charges)
                                                                       -------------------------------------------- 

<S>                                                                       <C>                     <C>

Net sales and other income                                                $   2,685,670           $   2,685,670

Income from operations before depreciation and  amortization              $     153,461           $        (206)

Income (loss) before extraordinary item                                   $      12,499           $    (128,549)

Income (loss) per common share before extraordinary item                  $        0.17           $       (3.36)

Average common shares outstanding                                                39,904                  39,904

</TABLE>


The increase in 1994 income before  extraordinary item over 1993 is attributable
to reduced  interest  expense  as a result of 1993  long-term  debt  retirements
related to the Recapitalization Plan and improved operating results The 1994 net
income  reflects  an  extraordinary  charge  of $7.7  million,  net of  tax,  in
connection with the write-off of previously deferred financing costs as a result
of  refinancing   the  Company's  bank  credit   agreement  and  a  $.5  million
extraordinary  gain from the  redemption  of $26.3 million  aggregate  principal
amount of its Senior  Subordinated  Notes.  The 1993 net loss also includes $4.0
million ($2.5 million net of tax) of costs  associated with the elimination of a
field management layer in early 1994, and a $45.8 million  extraordinary charge,
net of tax, related to the early  extinguishment  of debt in connection with the
Recapitalization Plan.


<PAGE> 8

Payless Cashways, Inc. and subsidiary

MANAGEMENT'S  DISCUSSION AND ANALYSIS OF THE 
FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS (cont'd.)


The effective tax rates for fiscal 1995,  1994 and 1993 were  different from the
35% (34% in 1993) federal  statutory rate primarily  because the amortization of
costs  in  excess  of  net  assets   acquired   (goodwill)  is   non-deductible.
Additionally,  $1.2  million  was  charged  to income  tax  expense in the third
quarter of 1993 to reflect the  cumulative  impact of the  corporate  income tax
rate changes enacted by the Omnibus Budget Reconciliation Act of 1993.

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

The Company's  inflation  rates,  included in the cost of merchandise  sold, for
fiscal 1995, 1994 and 1993, were comparable.  Approximately 83% 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.  During 1995, the Company experienced price deflation in its
lumber inventory which is valued using the FIFO inventory accounting method. The
Company  estimates  that this  price  deflation  had a negative  1.6%  impact on
comparable-store sales.

Financing Activities
--------------------

In November 1995, the Company  amended and restated its five-year,  $420 million
credit  agreement  (the "Amended  Credit  Agreement") to include a $40.0 million
term loan and to reduce the revolving credit facility to $380.0 million. As part
of the  amendment,  various  covenants  were  modified and  interest  rates were
increased.  In addition,  in 1995 the Company  entered into an interest rate cap
limiting  the interest  rates on $100  million of its  floating  rate debt to 8%
LIBOR through January 20, 1998.  Also,  during 1995, the Company entered into an
interest  rate swap  agreement  under which it agreed to pay quarterly a 6-9/16%
fixed rate of interest  effective  December 1, 1995, through December 1, 1999 in
exchange for quarterly receipt of LIBOR on $36,000,000.

On December 22, 1995, the Company made a $16.5 million  mortgage loan prepayment
in connection with the sale of a distribution center described below and in Note
I to the Consolidated Financial Statements.

In November  1994, the Company  entered into a $420 million credit  agreement to
replace its existing bank credit  agreement and a multi-draw  credit  agreement.
Also during 1994, the Company  repurchased  and retired $26.3 million  aggregate
principal  amount of Senior  Subordinated  Notes with $25 million borrowed under
the multi-draw credit agreement.

In 1993,  the Company  developed  and executed the  Recapitalization  Plan which
consisted  of a series of  transactions,  completed  during  1993,  designed  to
increase  shareholder's  equity, reduce the Company's debt and interest expense,
improve the  Company's  access to capital  markets  and  improve  the  Company's
operating and financial  flexibility.  See Note B to the Consolidated  Financial
Statements for further discussion of the Recapitalization Plan.

At November 25, 1995, Payless had approximately  $640.1 million of indebtedness.
Payless expects from time to time to incur additional seasonal indebtedness.

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

The  Company's  principal  source of cash is from  operations.  Cash provided by
operating  activities  was $108.2  million for fiscal  1995,  compared to $117.3
million for fiscal 1994 and $109.0  million for fiscal 1993.  The primary reason
for the 1995  decrease in cash  provided by operating  activities  was decreased
operating income.  The primary reason for the 1994 increases in cash provided by
operating  activities was increased  operating income,  resulting primarily from
reduced cash interest payments.

Borrowings are available  under the Amended Credit  Agreement to supplement cash
generated by operations.  At November 25, 1995,  $83.9 million was available for
borrowing.  Working  capital was $98.4 million and $139.1  million at the end of
fiscal 1995 and fiscal 1994,  respectively.  The current ratio was 1.29 to 1 and
1.45 to 1 at the end of fiscal 1995 and fiscal 1994,  respectively.  The primary
reasons for the decrease in working capital and the current ratio were decreased
levels of  inventory  and  increased  reserves  accrued in  connection  with the
restructuring  discussed  earlier.  The  Company's  inventory  levels are at the
lowest  levels  during  the  seasonally  low sales  months of  December  through
February and are at the highest  levels  during the peak selling  seasons of May
through  September.  During the peak period,  inventory is financed by cash from
operations and trade accounts  payable.  During the winter months,  inventory is
financed by cash from  operations,  trade accounts  payable and borrowings under
the  Amended  Credit  Agreement,  as  needed.  The  Company  believes  that cash
generated from operations and borrowings under the



<PAGE> 9

Payless Cashways, Inc. and subsidiary

MANAGEMENT'S  DISCUSSION AND ANALYSIS OF THE 
FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS (cont'd.)


Amended Credit  Agreement will adequately  meet its working capital needs,  debt
service and other obligations which will become due in fiscal 1996.

During 1995, the Company's primary investing  activities continued to be capital
expenditures for new and existing stores and distribution  centers.  The Amended
Credit Agreement  governs the amount of capital  expenditures  which can be made
and decreases capital expenditures to $35 million and $30 million in fiscal 1997
and 1998,  respectively.  The Company spent approximately  $67.3 million,  $81.9
million and $50.0 million in fiscal 1995, 1994 and 1993,  respectively,  for new
stores, renovated stores and distributions centers, and equipment.  During 1995,
six new stores  were opened and two stores  were sold.  The  Company  intends to
finance fiscal 1996 budgeted capital  expenditures of approximately $55 million,
consisting  primarily of strategic  initiatives,  renovation of existing stores,
and additional  equipment,  with funds generated from operations.  During fiscal
1996,  the  Company  will  shift  its  emphasis  from new store  openings  to an
initiative that further  addresses the needs of professional and  do-it-yourself
customers.  Several stores will be reoriented to concentrate on the professional
customer.  Also in support of the professional,  the Company acquired a door and
trim manufacturer  based in Phoenix,  Arizona,  during January 1996 and plans to
expand the  manufacturing  capability  of one of its existing  door plants.  The
Company plans to add to its  merchandise  assortment  to address  do-it-yourself
customer  demands  for more  choices of price,  style and  quality.  The Company
expects to lease one new store in 1996.

During fiscal 1995, the Company also invested $9.3 million in its joint venture,
Total Home de Mexico,  S.A.  de C.V.,  prior to the sale of this  investment  in
October 1995.  Significant  changes in the Mexican economy caused the Company to
reassess  its position  and sell its Mexican  investment  to an affiliate of its
former joint venture partner.

The Company's most significant financing activity is and will continue to be the
retirement of indebtedness.  Although the Company's consolidated indebtedness is
and will  continue  to be  substantial,  management  believes  that  based  upon
management's  analysis  of the  Company's  financial  condition,  the cash  flow
generated from operations  during the past 12 months and the expected results of
operations in the future,  cash flow from  operations and  borrowings  under the
Amended Credit  Agreement should provide  sufficient  liquidity to meet all cash
requirements for the next 12 months without additional borrowings.

During fiscal 1995, the covenants  relating to the $420 million credit agreement
and certain  lease  agreements  were amended.  The covenants  relating to, among
other things, the maximum debt to earnings before interest, taxes, depreciation,
and  amortization  (EBITDA)  ratios and minimum  interest  coverage  ratios were
adjusted.   Compliance   with  these  covenants  is  determined  on  a  "rolling
four-quarter"  basis.  First  quarter  1996  results  to date  have  not met the
Company's  expectations  and are likely to be below results for the same quarter
of the prior year. In order to achieve  compliance with these  covenants  during
1996,  the Company's  operating  results must  substantially  meet  management's
expectations  for the remainder of 1996.  Management  currently  expects that it
will achieve compliance with these covenants  throughout 1996; however,  factors
beyond  management's  control,  including  economic  conditions,  lumber prices,
competitive  conditions and weather,  could cause  noncompliance.  If compliance
with these covenants is not achieved, the Company may be required to renegotiate
its existing covenants with lenders or to refinance borrowings.  During the past
several years the Company has been able to negotiate operating  flexibility with
its lenders,  although  future success in achieving any such  renegotiations  or
refinancings,  or the specific terms thereof,  including interest rates, capital
expenditure limits or borrowing capacity, cannot be assured.

Forward-looking  statements  in this Annual Report 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 some of the statements made above.  Investors are cautioned
that all forward-looking  statements involve risks and uncertainty.  In addition
to the factors discussed above,  among the other factors that could cause actual
results to differ  materially  are the  following:  consumer  spending  and debt
levels;  interest rates; housing activity,  including existing home turnover and
new home construction;  lumber prices; product mix; sale of certain real estate;
growth of certain market  segments;  competitive  pressure on sales and pricing,
and an  excess  of  retail  space  devoted  to the sale of  building  materials.
Additional  information  concerning  those and other factors is contained in the
Company's Securities and Exchange Commission filings,  including but not limited
to the Form 10-K, copies of which are available from the Company without charge.



<PAGE> 10

Payless Cashways, Inc. and subsidiary

RESPONSIBILITY FOR FINANCIAL STATEMENTS


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

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

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

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


s/David Stanley                        s/Stephen A. Lightstone
-------------------------------        ----------------------------------------
David Stanley                          Stephen A. Lightstone
Chairman of the Board                  Senior Vice President-Finance/Treasurer
and Chief Executive Officer            and Chief Financial Officer


INDEPENDENT AUDITORS' REPORT

The Board of Directors
Payless Cashways, Inc.:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Payless
Cashways,  Inc. and  subsidiary as of November 25, 1995,  and November 26, 1994,
and the related consolidated statements of operations,  shareholders' equity and
cash flows for each of the fiscal years in the three-year  period ended November
25, 1995. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In  our  opinion,  the  consolidated  financial  statements  referred  to  above
represent fairly, in all material  respects,  the financial  position of Payless
Cashways, Inc. and subsidiary as of November 25, 1995 and November 26, 1994, and
the  results  of their  operations  and their  cash flows for each of the fiscal
years in the  three-year  period  ended  November  25, 1995 in  conformity  with
generally accepted accounting principles.


                                                   s/KPMG Peat Marwick LLP

Kansas City, Missouri
January 9, 1996



<PAGE> 11

Payless Cashways, Inc. and subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>


                                                                                           Fiscal Year Ended
                                                                        November 25,         November 26,         November 27,
(In thousands, except per share amounts)                                    1995                 1994                 1993
-------------------------------------------------------------------------------------------------------------------------------

<S>                                                                     <C>                  <C>                  <C>
Income
     Net sales                                                          $   2,680,186        $   2,722,539        $   2,601,003
     Other income--Note A                                                       5,484               10,643                4,975
                                                                        -------------------------------------------------------
                                                                            2,685,670            2,733,182            2,605,978
Costs and expenses
     Cost of merchandise sold                                               1,912,620            1,918,674            1,824,663
     Selling, general and
         administrative--Notes A, F, G and H                                  619,589              594,024              570,016
     Provision for depreciation and amortization                               60,356               58,692               56,213
     Interest expense--Note C                                                  61,067               65,571              125,247
     Special charges--Note I                                                  153,667                   --                4,000
                                                                        -------------------------------------------------------
                                                                            2,807,299            2,636,961            2,580,139
                                                                        -------------------------------------------------------

                              INCOME (LOSS) BEFORE INCOME TAXES              (121,629)              96,221               25,839

Federal and state income taxes--Note E                                         (4,911)              41,808               16,170
                                                                        -------------------------------------------------------

Income (loss) before equity in loss of joint venture and
   extraordinary item                                                        (116,718)              54,413                9,669

Equity in loss of joint venture--Note A                                       (11,831)              (2,281)                  --
                                                                        -------------------------------------------------------

Income (loss) before extraordinary item                                      (128,549)              52,132                9,669

Extraordinary item:  early extinguishment of
   debt--Notes B, C and E                                                          --               (7,243)             (45,828)
                                                                        --------------------------------------------------------

                                        NET INCOME (LOSS)               $    (128,549)       $      44,889        $     (36,159)
                                                                        ========================================================

Net income (loss) attributable to common stock                          $    (134,076)       $      39,783        $     (40,877)
                                                                        ========================================================

Income (loss) per common share before extraordinary item                $       (3.36)       $        1.17        $        .16

Extraordinary item:  early extinguishment of debt                                 --                  (.18)              (1.53)
                                                                        -------------------------------------------------------

Net income (loss) per common share--Note A                              $       (3.36)       $         .99        $      (1.37)
                                                                        =======================================================

Weighted average common and dilutive common
   equivalent shares outstanding--Notes A and D                                39,904               40,257               30,514
                                                                        =======================================================
<FN>

See notes to consolidated financial statements

</TABLE>



<PAGE> 12

Payless Cashways, Inc. and subsidiary

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                                       November 25,          November 26,
(In thousands)                                                                             1995                  1994
-------------------------------------------------------------------------------------------------------------------------

<S>                                                                                   <C>                   <C>

ASSETS

     CURRENT ASSETS
         Cash and cash equivalents                                                    $        960          $      2,680
         Trade receivables                                                                      --                 5,858
         Merchandise inventories--Note A                                                   392,604               406,066
         Prepaid expenses and other current assets                                          29,375                25,717
         Deferred income taxes--Note E                                                      19,740                 9,549
                                                                                      ----------------------------------
                                             TOTAL CURRENT ASSETS                          442,679               449,870


     OTHER ASSETS
         Real estate held for sale                                                           6,082                 5,498
         Cost in excess of net assets acquired,
           less accumulated amortization of $95,372
           and $82,355--Notes A and I                                                      323,819               438,311
         Deferred financing costs--Notes A and C                                            11,421                11,199
         Other                                                                              14,925                17,706


     LAND, BUILDINGS AND EQUIPMENT--Notes A and C
         Land and land improvements                                                        190,951               183,798
         Buildings                                                                         507,339               481,409
         Equipment                                                                          93,830                97,157
         Automobiles and trucks                                                             26,468                28,086
         Construction in progress                                                            7,867                20,375
         Allowance for depreciation and amortization                                      (280,945)             (237,527)
                                                                                      -----------------------------------
                              TOTAL LAND, BUILDINGS AND EQUIPMENT                          545,510               573,298
                                                                                      ----------------------------------
                                                                                      $  1,344,436          $  1,495,882
                                                                                      ==================================
<FN>

See notes to consolidated financial statements
</TABLE>



<PAGE> 13

Payless Cashways, Inc. and subsidiary

CONSOLIDATED BALANCE SHEETS (cont'd.)

<TABLE>
<CAPTION>


                                                                                       November 25,          November 26,
(In thousands)                                                                             1995                  1994
-------------------------------------------------------------------------------------------------------------------------

<S>                                                                                   <C>                   <C>

LIABILITIES AND SHAREHOLDERS' EQUITY

     CURRENT LIABILITIES
         Current portion of long-term debt--Note C                                    $     31,472          $     20,269
         Trade accounts payable                                                            159,844               151,059
         Salaries, wages and bonuses                                                        24,106                30,059
         Accrued interest                                                                    4,894                 3,841
         Insurance reserves                                                                 20,553                17,940
         Other accrued expense--Notes F and I                                               75,611                55,315
         Taxes, other than income taxes                                                     21,114                20,876
         Income taxes payable--Note E                                                        6,685                11,383
                                                                                      ----------------------------------
                                                 TOTAL CURRENT LIABILITIES                 344,279               310,742


     LONG-TERM DEBT, less portion classified as current
         liability--Note C                                                                 608,627               654,131

     NON-CURRENT LIABILITIES
         Deferred income taxes--Note E                                                      59,994                72,129
         Other--Note G                                                                      23,373                23,015

     SHAREHOLDERS' EQUITY--Notes A, C and D
         Preferred Stock, $1.00 par value, 25,000,000
           shares authorized; issued:
              Cumulative Preferred Stock, 406,000 shares,
                $72.6 million aggregate liquidation preference                              40,600                40,600
         Common Stock, $.01 par value:
           Voting, 150,000,000 shares authorized, 37,663,922
              and 37,624,222 shares issued, respectively                                       376                   376
           Non-Voting Class A, 5,000,000 shares authorized, 2,250,000
              shares issued                                                                     23                    23
         Additional paid-in capital                                                        487,083               486,326
         Foreign currency translation adjustment                                                --                   (90)
         Accumulated deficit                                                              (219,919)              (91,370)
                                                                                      -----------------------------------
                                                TOTAL SHAREHOLDERS' EQUITY                 308,163               435,865
                                                                                      ----------------------------------
     COMMITMENTS AND CONTINGENCIES--Notes F, G, H and J
                                                                                      $  1,344,436          $  1,495,882
                                                                                      ==================================
<FN>

See notes to consolidated financial statements
</TABLE>



<PAGE> 14

Payless Cashways, Inc. and subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                            Fiscal Year Ended
                                                                          November 25,         November 26,        November 27,
(In thousands)                                                                1995                 1994                1993
-------------------------------------------------------------------------------------------------------------------------------

<S>                                                                      <C>                   <C>                 <C>

Cash Flows from Operating Activities
    Net income (loss)                                                    $   (128,549)         $     44,889        $    (36,159)
      Adjustments to reconcile net income (loss)
        to net cash provided by operating activities:
      Depreciation and amortization                                            60,356                58,692              56,213
      Non-cash interest -- Note C                                               2,351                 4,803              39,119
      Loss on early extinguishment of debt--Note C                                 --                 7,243              45,828
      Equity in loss of joint venture--Note A                                  11,831                 2,281                  --
      Deferred income taxes                                                   (22,326)                7,753              (9,425)
      Non-cash special charges--Note I                                        153,558                    --                  --
      Other                                                                       927                 1,674                 835
      Changes in assets and liabilities:
        Decrease (increase) in trade receivables                                5,858                 8,770              (1,174)
        Decrease (increase) in merchandise inventories                          4,062               (23,663)            (24,199)
        Decrease (increase) in prepaid expenses
             and other current assets                                           9,532                (8,831)              5,527
        Increase in trade accounts payable                                      8,785                 5,794              12,036
        Increase in other current liabilities                                   2,043                 7,925              20,426
                                                                         ------------------------------------------------------
    NET CASH PROVIDED BY OPERATING ACTIVITIES                                 108,428               117,330             109,027


Cash Flows from Investing Activities
      Additions to land, buildings and equipment                              (67,281)              (81,906)            (49,982)
      Proceeds from sale of land, buildings and equipment                         467                 2,175               1,306
      Investment in joint venture                                              (9,254)               (6,369)               (490)
      Decrease (increase) in other assets                                       3,049                (5,788)             (1,082)
                                                                         -------------------------------------------------------
    NET CASH USED IN INVESTING ACTIVITIES                                     (73,019)              (91,888)            (50,248)


Cash Flows from Financing Activities
      Proceeds from long-term debt--Note C                                         --               369,999             524,999
      Retirements of long-term debt and related premiums
        and penalties -- Note C                                               (34,301)             (390,357)           (983,076)
      Fees and financing costs paid in connection with debt
        refinancing -- Notes B and C                                           (1,267)               (3,094)            (20,277)
      Sale of Common Stock, $.01 par value -- Note B                               --                    --             385,444
      Sale of Common Stock under stock option plan                                 16                 2,326               2,189
      Sale of Common Stock under warrants                                          --                   133                  --
      (Decrease) increase in short-term borrowings                                 --                (5,000)              5,000
      Other                                                                    (1,577)                 (442)               (300)
                                                                         -------------------------------------------------------
    NET CASH USED IN FINANCING ACTIVITIES                                     (37,129)              (26,435)            (86,021)
                                                                         -------------------------------------------------------

Net decrease in cash and cash equivalents                                      (1,720)                 (993)            (27,242)
Cash and cash equivalents, beginning of period                                  2,680                 3,673              30,915
                                                                         ------------------------------------------------------

Cash and cash equivalents, end of period                                 $        960          $      2,680        $      3,673
                                                                         ======================================================

<FN>

See notes to consolidated financial statements
</TABLE>



<PAGE> 15

Payless Cashways, Inc. and subsidiary

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                                                                   Additional     Foreign
(In thousands)                                 Preferred Stock     Common Stock      Paid-in     Currency      Accumulated
                                               $1.00 Par Value    $.01 Par Value     Capital    Translation      Deficit      Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                <C>           <C>            <C>        <C>          <C>

Balance at November 28, 1992                      $  40,600          $  66         $  70,108      $    --    $  (100,100) $  10,674

   Net loss for the year                                                                                         (36,159)   (36,159)
   Sale of Voting Common Stock--Note B                                 322           385,122                                385,444
   Sale of Voting Common Stock under stock
     option plan                                                         2             2,825                                  2,827
   Reclass Common Stock subject to puts
     and calls and warrants subject to
     puts--Note A                                                        5            24,520                                 24,525
   Redefine classes of Common Stock--Note D                             --                                                       --
                                                  ---------------------------------------------------------------------------------

Balance at November 27, 1993                      $  40,600          $ 395         $ 482,575      $    --    $  (136,259) $ 387,311

   Net income for the year                                                                                        44,889     44,889
   Sale of Voting Common Stock under stock
     option plan                                                         3             3,337                                  3,340
   Sale of Voting Common Stock under warrants                           --               133                                    133
   Tax benefit from stock option exercises                                               148                                    148
   Restricted stock--Note D                                              1               133                                    134
   Conversion of Non-Voting Class B Common
     Stock to Voting Common Stock--Note D                               --                                                       --
   Foreign currency translation adjustment                                                            (90)                      (90)
                                                  ----------------------------------------------------------------------------------

Balance at November 26, 1994                      $  40,600           $399         $ 486,326      $   (90)   $   (91,370) $ 435,865

   Net loss for the year                                                                                        (128,549)  (128,549)
   Sale of Voting Common Stock under
     stock option plan                                                  --                77                                     77
   Tax benefit from stock option exercises                                               325                                    325
   Restricted stock--Note D                                             --               355                                    355
   Foreign currency translation adjustment                                                         (2,499)                   (2,499)
   Sale of joint venture stock                                                                      2,589                     2,589
                                                  ---------------------------------------------------------------------------------

Balance at November 25, 1995                      $  40,600          $ 399         $ 487,083      $    --    $(219,919)   $ 308,163
                                                  =================================================================================
<FN>

See notes to consolidated financial statements
</TABLE>


<PAGE> 16


Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION:  The consolidated  financial statements include the
accounts of Payless Cashways, Inc. and its wholly-owned subsidiary,  referred to
herein as the "Company". All significant intercompany  transactions and balances
have been  eliminated in the  accompanying  consolidated  financial  statements.
Certain reclassifications have been made to prior period amounts to conform with
the 1995 presentation.

The Company was a 49%  investor in Total Home de Mexico,  S.A. de C.V.,  a joint
venture with a Mexican company,  Alfa, S.A. de C.V.,  ("Alfa") until October 24,
1995.  At that time the Company sold its  ownership  interest to an affiliate of
Alfa and an $8.0 million,  or $.20 per common  share,  loss on the sale has been
reflected in the  accompanying  1995  consolidated  statements  of operations as
equity in loss of joint venture.  The Company had accounted for this  investment
on the equity method.

DESCRIPTION   OF  BUSINESS:   The  Company  is  engaged  in  only  one  line  of
business--the  retail sale of building  materials and supplies.  At November 25,
1995,  the  Company  operated  206 stores in 24 states  located in the  Midwest,
Southwest,  Pacific Coast,  Rocky Mountain and New-England  areas. The Company's
primary customers include project-oriented  do-it-yourselfers and professionals.
In recent  years,  the building  materials  retailing  industry has  experienced
increased  levels of competition as several  national chains have expanded their
operations.

MERCHANDISE   INVENTORIES:   Inventories   are  stated  at  the  lower  of  cost
(approximately 83% 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 increased
approximately $27.5 million and $23.3 million at November 25, 1995, and November
26, 1994, respectively.

LAND,  BUILDINGS AND EQUIPMENT:  Land, buildings and equipment are stated on the
basis of cost.  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.

In July  1993 two of the  Company's  retail  facilities  were  destroyed  by the
midwestern  floods.  The Company carries property,  business  interruption,  and
extra-expense  insurance coverages.  The Company operated temporary locations to
service  its  customers  until  these   facilities  were  rebuilt  or  replaced.
Settlement  proceeds in excess of net book value of $2.8 million  related to the
flood-damaged  real  estate,   fixtures  and  equipment  and  the  $3.1  million
reimbursement  of lost profits  have been  reflected  in the  accompanying  1994
consolidated statements of operations as other income.

DEFERRED FINANCING COSTS:  Deferred financing costs are being amortized over the
respective borrowing terms using the interest method.

FOREIGN CURRENCY TRANSLATION: Prior to the sale of the investment on October 24,
1995,  adjustments  resulting from the currency translation of the Mexican joint
venture financial statements into U.S. dollars as of the balance sheet date were
reflected as a separate component of shareholders' equity.

COST IN EXCESS OF NET ASSETS  ACQUIRED:  The cost in excess of the fair value of
net assets acquired (goodwill) is being amortized using the straight-line method
over 40 years. When facts and circumstances  indicate potential impairment,  the
Company  evaluates  the  recoverability  of  asset  carrying  values,  including
associated  goodwill,  using  estimates of  undiscounted  future cash flows over
remaining  asset lives.  When  impairment is indicated,  any impairment  loss is
measured by the excess of carrying values over fair values.

COMMON STOCK  SUBJECT TO PUTS AND CALLS AND WARRANTS  SUBJECT TO PUTS:  Prior to
March 15, 1993,  certain shares of Common Stock and the warrants were subject to
redemption in specified events.  Such shares and warrants were reported at their
redemption value (estimated fair value) and had been excluded from shareholders'
equity.  In connection with the March 15, 1993,  Common Stock issuance,  put and
call features  relating to certain  shares of Common Stock  terminated  and such
shares have been  reclassified as shareholders'  equity.  The warrants have been
reclassified  as  shareholders'  equity  because the  Company  will no longer be
compelled  to offer to  repurchase  the warrants  since it filed a  registration
statement on September 8, 1993,  covering the shares into which the warrants are
exercisable  and  intends to maintain  the  effectiveness  of such  registration
statement until November 1, 1996.
 .


<PAGE> 17

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)


NET INCOME (LOSS) PER COMMON SHARE:  Net income (loss) per common share has been
computed  based on the  weighted  average  number of common  shares  outstanding
during the period plus common stock  equivalents,  when dilutive,  consisting of
certain stock  options,  warrants and shares subject to puts and calls (prior to
March 15, 1993), when applicable.  For purposes of this computation,  net income
(loss) was adjusted for dividend requirements on preferred stock, and changes in
the redemption value of both common stock subject to puts and calls and warrants
subject to puts (prior to March 15, 1993), when these items were dilutive.


INCOME  TAXES:  The Company  accounts  for income  taxes based on  Statement  of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the
asset and liability method of Statement 109, 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. Under
Statement 109, 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  1995,  1994,  and 1993,  federal and state  income  taxes  paid,  net of
refunds, were $21.0 million, $32.2 million and $5.7 million, respectively.

Cash paid for interest,  net of interest capitalized,  was $60.0 million,  $67.0
million and $302.2 million during fiscal 1995, 1994 and 1993, respectively.


SALE OF  RECEIVABLES:  The Company  sells its  commercial  credit  accounts to a
third-party administrator pursuant to an agreement. A substantial portion of the
Company's  commercial credit sales are to remodelers and contractors.  Under the
agreement,  the Company  pays a servicing  fee and assumes the credit  risk.  At
November 25, 1995, and November 26, 1994, the outstanding  balance of commercial
credit accounts sold to the third-party  administrator was  approximately  $93.0
million and $86.5 million,  respectively.  The Company has provided a reserve of
$5.5 million at November 25, 1995, and $5.1 million at November 26, 1994,  which
is believed to adequately cover its credit risk related to these accounts.

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


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
$617  million and $668  million at  November  25, 1995 and  November  26,  1994,
respectively.  The  Company  believes  the  carrying  amounts  of cash  and cash
equivalents,  trade  receivables,  real  estate  held for sale,  trade  accounts
payable and accrued expenses are a reasonable estimate of their fair value.


DERIVATIVE FINANCIAL INSTRUMENTS:  Premiums paid for purchased interest rate cap
and swap  agreements  are  amortized  to interest  expense  over the term of the
agreements. Unamortized premiums are included in deferred financing costs in the
consolidated  balance  sheet.  Amounts  received  or paid  under  cap  and  swap
agreements  are  reflected  as a reduction or increase of interest  expense.  At
November  25,  1995,  the  aggregate  carrying  value  of such  instruments  was
approximately  $1.2 million.  The estimated amount the Company would have had to
pay at November 25, 1995, to cancel or transfer the agreements to other parties,
was approximately $1.0 million.


ACCOUNTING  PERIOD:  The  Company's  fiscal  year ends on the last  Saturday  in
November. Fiscal years 1995, 1994 and 1993, consisted of 52 weeks each.




<PAGE> 18

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)


NOTE B-RECAPITALIZATION PLAN

The   Company   developed   and   executed   a   recapitalization    plan   (the
"Recapitalization Plan") which consisted of a series of transactions,  completed
during 1993,  designed to increase  shareholders'  equity,  reduce the Company's
debt and interest  expense,  improve the Company's access to capital markets and
improve the Company's operating and financial flexibility.

The transactions comprising the Recapitalization Plan were as follows:

(i)     The initial public offering of 32,200,000 shares of Common Stock,  which
        was completed on March 15, 1993, for net proceeds of $385.4 million.

(ii)    The  repayment  on March 15,  1993,  of $175.8  million of  indebtedness
        outstanding  under  the  Company's   previously   existing  bank  credit
        agreement, the 1988 Credit Agreement.

(iii)   The  prepayment  on March  16,  1993,  of $50  million  of  indebtedness
        outstanding  under the Company's $226.6 million mortgage loan payable to
        an insurance company.

(iv)   The  issuance of 9-1/8%  senior  subordinated  notes due 2003,  which was
       completed on April 20, 1993, for the aggregate  principal  amount of $200
       million.

(v)    The  repurchase  on April 15 and 16,  1993,  of $99.9  million  aggregate
       principal amount of the Company's 16-1/2% junior subordinated  debentures
       due August 1, 2008,  and the  redemption of the remaining  $291.1 million
       aggregate principal amount of the junior subordinated  debentures on July
       30, 1993.  (This  resulted in an  extraordinary  charge of  approximately
       $15.1  million,  net  of  tax,  in  the  accompanying  1993  consolidated
       statement of operations.)

(vi)   Borrowings  on November  1, 1993,  of $325  million  under an amended and
       restated  bank credit  agreement  entered into by the Company and certain
       banks, the 1993 Credit Agreement. The 1993 Credit Agreement also provided
       for a revolving  credit facility of $85 million which was used to provide
       a portion of the funds  necessary to complete the  Recapitalization  Plan
       and which was used to finance the  working  capital  requirements  of the
       Company in the ordinary course of business.

(vii)  The redemption on November 1, 1993, of $332.5 million aggregate principal
       amount  of the  Company's  14-1/2%  senior  subordinated  debentures  due
       November  1,  2000.  (This  resulted  in  an   extraordinary   charge  of
       approximately  $27.2  million,  net  of  tax,  in the  accompanying  1993
       consolidated statement of operations.)


NOTE C--LONG-TERM DEBT

Long-term debt consisted of the following:
<TABLE>
<CAPTION>



(In thousands)                                                                             1995              1994
                                                                                       ------------------------------
<S>                                                                                    <C>                <C>

Amended Credit  Agreement,  secured by certain  
     equipment and capital stock of a subsidiary, 
     variable interest rate, payable in varying 
     amounts through 2000                                                              $ 326,000          $  345,000

Mortgage loan  payable to  insurance  company,  
     secured by certain  real estate,
     10.99% to 11.21%, payable in varying 
     amounts through 2003                                                                 138,987             154,195

Senior subordinated notes, 9-1/8%, due 2003                                               173,655             173,655

Other senior debt, 10% to 12%, payable in varying
     amounts through 2004                                                                   1,457               1,550
                                                                                       ------------------------------
                                                                                          640,099             674,400
Less portion classified as current liability                                              (31,472)            (20,269)
                                                                                       -------------------------------
                                                                                       $  608,627          $  654,131
                                                                                       ==============================
</TABLE>




<PAGE> 19

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)



On November 18, 1994,  the Company  entered  into a five-year  revolving  credit
facility  providing  borrowings  initially of up to $420  million.  The previous
credit agreement was repaid on this date,  resulting in an extraordinary  charge
of approximately $7.7 million, net of tax, in the accompanying 1994 consolidated
statement of operations.  On November 20, 1995, the credit agreement was amended
(the  "Amended  Credit  Agreement")  to include a $40  million  term loan and to
reduce the  revolving  credit  facility  to $380  million.  The  commitment  for
available  borrowings  under the revolving credit facility will be reduced every
six months beginning on June 15, 1997, with final maturity on November 18, 1999.
The term loan  principal is repayable  annually with final  maturity on November
18,  2000.  At November  25,  1995,  there were  combined  borrowings  under the
agreement of $326 million as well as  outstanding  standby  letters of credit of
$10.1 million.  The Company had $83.9 million available for borrowing under this
agreement at the end of fiscal 1995. The Amended Credit  Agreement is secured by
substantially  all of the  equipment of the Company and all capital stock of the
Company's  subsidiary.  The  loans  under the  revolving  credit  facility  bear
interest at fluctuating  rates of either (1) an alternate base rate plus 0.0% to
1.0% per annum,  fluctuating with the debt to earnings before  interest,  taxes,
depreciation and amortization ("EBITDA") ratio, (9-1/2% at November 25, 1995) or
(2) LIBOR  plus 1.00% to 2.00% per  annum,  fluctuating  with the debt to EBITDA
ratio,  (7-9/16%  at  November  25,  1995).  The term  loan  bears  interest  at
fluctuating rates of either (1) an alternate base rate plus 1.25% per annum (10%
at November 25, 1995) or (2) LIBOR plus 2.25% per annum (8-1/16% at November 25,
1995). In addition to the scheduled commitment reductions,  certain asset sales,
receipt of certain  insurance  proceeds and excess cash flow,  as defined,  will
further reduce the commitment for available borrowings.

The Amended Credit Agreement contains a number of covenants,  including, but not
limited to, a minimum net worth covenant,  a minimum interest  coverage ratio, a
maximum  debt to EBITDA  ratio,  and  limitations  on capital  expenditures  and
capitalized  leases. The Company is also prohibited from paying dividends on its
common and preferred stock. The covenants  relating to, among other things,  the
maximum debt to EBITDA ratios and minimum interest coverage ratios were adjusted
in connection with the November 20, 1995, amendment discussed above.

To reduce  the impact of changes  in  interest  rates with  regard to the credit
agreement described above, during 1995 the Company entered into an interest rate
cap with an affiliate of an investment  banking  firm,  limiting to 8% LIBOR the
interest  rates on $100  million of its floating  rate debt through  January 20,
1998.  Under the  agreement,  semiannual  payments,  if any,  would be received,
although no amounts were received by the Company during fiscal year 1995.

On April 20, 1993, as part of the Recapitalization Plan described in Note B, the
Company issued senior  subordinated  notes.  The senior  subordinated  notes are
unsecured  obligations,  subordinated to  substantially  all indebtedness of the
Company,  and  mature on April 15,  2003.  Interest  is  payable on April 15 and
October 15 of each year at 9-1/8% per annum. The senior  subordinated  notes are
callable after April 15, 1998, at 104.5625% face value declining  ratably to par
on and after April 15,  2000.  The senior  subordinated  notes  contain  certain
covenants  that,  among other  things,  limit the ability of the Company and its
subsidiaries to incur certain indebtedness, pay dividends, issue preferred stock
of  subsidiaries,  issue  guarantees  and  pledges  of  subsidiaries,  engage in
transactions  with  stockholders  and  affiliates,  create payment  restrictions
affecting subsidiaries and engage in mergers and consolidations.

During  1994,  the Company had borrowed  $25 million  under a multi-draw  credit
agreement to repurchase and retire $26.3 million  aggregate  principal amount of
the 9-1/8%  senior  subordinated  notes  resulting in an  extraordinary  gain of
approximately  $.5 million,  net of tax, in the accompanying  1994  consolidated
statement of operations. The multi-draw credit agreement was prepaid on November
16, 1994.



<PAGE> 20

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)



The Company has a mortgage  loan with an  insurance  company  secured by certain
real estate.  The Company made a $50 million  mortgage loan  prepayment on March
16, 1993,  in  connection  with the  Recapitalization  Plan  described in Note B
resulting in an extraordinary  charge of approximately $1.2 million, net of tax,
in the accompanying 1993 consolidated statement of operations. The mortgage loan
is secured by land, land  improvements  and buildings having a net book value of
approximately  $347.6  million at November 25, 1995.  On December 22, 1995,  the
Company made a $16.5  million  mortgage loan  prepayment in connection  with the
sale of a distribution center described at Note I.

The Company  defeased  certain  industrial  revenue  bonds during fiscal 1988 by
placing  government  securities in an irrevocable trust. Such industrial revenue
bond debt is considered to be extinguished and does not appear as a liability in
the  accompanying  consolidated  balance  sheets.  Bonds in the  amount  of $8.4
million are outstanding as of November 25, 1995.

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


                                                   (In thousands)

                    1996                           $     31,472
                    1997                                 16,274
                    1998                                 26,496
                    1999                                300,968
                    2000                                 51,610
                    Thereafter                          213,279
                                                   ------------
                                                   $    640,099
                                                   ============
NOTE D--SHAREHOLDERS' EQUITY

In connection with the initial public offering during fiscal 1993,  described in
Note B, the  Company's  articles  of  incorporation  were  amended,  among other
things,  to redefine  the classes of Common  Stock,  $.01 par value.  Therefore,
Class A Common Stock  (3,195,000  shares)  became Voting  Common Stock,  Class B
Common Stock (425,000 shares) became Non-Voting Class B Common Stock and Class D
Stock  (2,250,000  shares)  became  Non-Voting  Class A Common Stock.  The total
number of shares  of all  classes  of Common  Stock  which the  Company  has the
authority to issue is  160,000,000,  consisting of 150,000,000  shares of Voting
Common Stock,  5,000,000 shares of Non-Voting Class A Common Stock and 5,000,000
shares of  Non-Voting  Class B Common  Stock.  All  classes of Common  Stock are
substantially  identical except for voting rights.  Shares of Non-Voting Class A
Common  Stock are  convertible  at the option of the holder,  subject to certain
restrictions,  into a like number of shares of Voting Common Stock. During 1994,
1,125,000  outstanding  shares of non-Voting Class B Common Stock were converted
into a like number of shares of Voting  Common  Stock  under a similar  right of
conversion.  In the event of liquidation,  all distributions on the Common Stock
of the Company are payable to all classes of Common Stock in a like manner.

Masco Capital, an affiliate of one of the Company's suppliers,  owns 100% of the
Company's  Cumulative  Preferred  Stock  ("Preferred  Stock").  The terms of the
Preferred  Stock  provide for dividends at an annual rate of eight percent until
2008 (at which time the rate  increases) on a cumulative  basis,  whether or not
declared. At November 25, 1995, cumulative undeclared dividends on the Preferred
Stock  were  $32.0  million  ($78.77  per  share).  The  Preferred  Stock is not
convertible  into  Common  Stock.  Each share of  Preferred  Stock is  generally
entitled  to 5.9994  votes on all matters on which  holders of Common  Stock are
entitled to vote.

The Company has 332,000  warrants  outstanding  as of November  25,  1995.  Each
warrant  entitles the holder thereof to purchase four shares of the Common Stock
of Payless at an exercise  price of $11.11 per share,  subject to  adjustment in
certain  events.  The Company has filed a  registration  statement  covering the
shares into which the  warrants  are  exercisable  and  intends to maintain  the
effectiveness of such registration statement until November 1, 1996.



<PAGE> 21

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)



The Company has adopted a deferred compensation plan for non-employee  directors
(the "Director Deferred Comp Plan"). Under the Director Deferred Comp Plan, each
non-employee  director  may  elect to defer  receipt  of all or part of his cash
compensation  on a  pretax  basis  and,  subject  to  approval  of the  plan  by
shareholders,  invest those deferrals in the Company's  Common Stock. The shares
of Common Stock  issuable  under the Director  Deferred Comp Plan will be either
authorized  and unissued  shares or  previously  issued and  outstanding  shares
reacquired  by the Company.  Shares will be issued when a  distribution  is made
following a director's termination of services.

The Payless  Cashways  1992  Incentive  Stock Program (the  "Program")  has been
established  to  attract  and retain  outstanding  individuals  in  certain  key
positions.  The  Program  provides  for the grant of  incentive  stock  options,
non-qualified stock options, stock appreciation rights,  restricted stock awards
and  performance  units.  All grants  made after July 15,  1992,  were under the
Program.  The aggregate  number of shares of Common Stock  reserved for issuance
under the Program is equal to the sum of (1) the greater of (a) 3,500,000 shares
of Common Stock or (b) 5% of the sum of (i) the Common Stock  outstanding at the
end of any fiscal year during the term of the Program and (ii) the Common  Stock
reserved for issuance upon  exercise or  conversion of any options,  warrants or
Preferred Stock outstanding at the end of any fiscal year during the term of the
Program;  plus (2) any shares which  remain  available  under the Plan  (defined
below) or which are subject to options or awards  outstanding  on July 15, 1992,
and which expire, terminate or are cancelled after such date. The exercise price
for any  incentive  stock options will be at least 100% of the fair market value
of  the  Common  Stock  at the  date  of  grant.  The  exercise  price  for  any
non-qualified stock options will be at least 85% of the fair market value of the
Common Stock at the date of grant.

The Company has adopted an option plan for non-employee directors (the "Director
Option Plan").  Under the Director  Option Plan, each  non-employee  director is
granted an option of $100,000 worth of the Company's Common Stock, valued on the
date on which the director is first elected,  for an aggregate exercise price of
$100,000.  In addition,  each  non-employee  director  will receive an option to
purchase  1,000 shares of Common  Stock on the date  immediately  following  the
Company's  Annual  Meeting so long as such  non-employee  director  continues to
serve on the  Company's  Board of Directors.  The exercise  price for the annual
options  will be the fair market  value of the  Company's  Common  Stock on such
anniversary  date.  Options  granted  under  the  Director  Option  Plan  may be
exercised  six months and one day after the grant date and expire on the earlier
of (a) 10 years  after the date of grant,  or (b) 1 year after the date on which
the  director  ceases to be a member of the  Company's  Board of  Directors.  An
aggregate of 350,000  shares of Common Stock are reserved for issuance under the
Director Option Plan.

The 1988 Payless  Cashways,  Inc.  Employee Stock Plan (the "Plan") provided for
the conversion of options to purchase shares of the  predecessor  company Common
Stock into options to purchase shares of the successor company Common Stock, and
for the granting of options for the purchase of up to 1,643,781 shares of Common
Stock and awards of up to  approximately  183,000  shares of  restricted  stock.
One-third of the options were  performance-based  and two-thirds  vested without
regard to performance  tests.  All unvested  options under the Plan vested as of
March 15,  1993,  with the  initial  public  offering  described  at Note B. The
exercise  price for options was the fair market  value of the  Company's  Common
Stock on the date of grant.  After adoption of the Program (defined  above),  no
further grants were made pursuant to the Plan.

There  were  66,300  shares of  Restricted  Stock,  granted  under the  Program,
outstanding as of November 25, 1995. The shares of Restricted  Stock are subject
to certain  transfer  restrictions  and 29,800  shares and 36,500 shares vest in
February, 1997 and 1998, respectively.


<PAGE> 22

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)



The following sets forth details of shares under options for all three plans.
<TABLE>
<CAPTION>


                                     1992 Incentive                       1988 Employee
                                      Stock Program                        Stock Plan                   Director Option Plan
                               -----------------------------------------------------------------------------------------------
                                 Number             Average          Number          Average           Number         Average
                                Of Shares            Price          Of Shares         Price           Of Shares        Price
                               -----------------------------------------------------------------------------------------------
Fiscal Year 1993:

<S>                            <C>                 <C>              <C>             <C>                <C>           <C>

    Options granted            1,440,048           $  12.22              --         $     --           48,692        $  14.38

    Options exercised            (3,300)              12.00        (238,788)            9.00               --              --

    Options terminated or
        cancelled               (45,580)              12.24         (35,419)           17.42               --              --
                              -----------------------------------------------------------------------------------------------

    Options outstanding at
        November 27, 1993     1,402,049            $  12.22       2,253,321         $   9.55           48,692        $  14.38
                              ===============================================================================================

    Options exercisable at
        November 27, 1993        88,838            $  12.00       2,253,321         $   9.55           48,692        $  14.38
                              ===============================================================================================


Fiscal Year 1994:

    Options granted             963,758            $  14.60              --         $     --            8,000        $ 15.88

    Options exercised            (8,356)              11.98        (283,495)            7.85               --             --

    Options terminated or
        cancelled              (283,626)              12.67          (8,784)           11.34               --             --
                              -----------------------------------------------------------------------------------------------

    Options outstanding at
        November 26, 1994     2,073,825            $  13.26       1,961,042         $   9.79           56,692        $  14.59
                              ===============================================================================================

    Options exercisable at
        November 26, 1994       346,159            $  12.18       1,961,042         $   9.79           56,692        $  14.59
                              ===============================================================================================


Fiscal Year 1995:

    Options granted           1,549,325            $   6.62              --         $     --           20,903        $   7.75

    Options exercised                --                  --          (7,000)            2.22               --              --

    Options terminated or
        cancelled              (286,727)              11.48         (70,748)           11.31               --              --
                              -----------------------------------------------------------------------------------------------

    Options outstanding at
        November 25, 1995     3,336,423            $  10.33       1,883,294         $   9.76           77,595        $  12.75
                              ===============================================================================================

    Options exercisable at
        November 25, 1995       768,892            $  12.86       1,883,294         $   9.76           77,595        $  12.75
                              ===============================================================================================


</TABLE>



<PAGE> 23

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)


NOTE E-INCOME TAXES

For the year ended  November 25, 1995, an income tax benefit of  $4,911,000  was
allocated  to the loss  before  equity in loss of joint  venture.  No income tax
benefit was  recorded for the equity in loss of the joint  venture.  A credit of
$325,000 to additional  paid-in  capital  reflected the tax effect of the excess
tax  deduction  for  employee  stock  options  over the expense  recognized  for
financial reporting purposes.

Income taxes for the years ended November 26, 1994, and November 27, 1993,  were
allocated to income  before  equity in loss of joint  venture and  extraordinary
item, and to the extraordinary  item for early  extinguishment of debt; see Note
C. For the year ended November 26, 1994, the income tax benefit allocated to the
extraordinary  item was $4,829,000;  the income tax expense  allocated to income
before equity in loss of joint venture and extraordinary item was $41,808,000. A
credit of $148,000 to additional paid-in capital reflected the tax effect of the
excess tax deduction for employee stock options over the expense  recognized for
financial reporting  purposes.  For the year ended November 27, 1993, the income
tax benefit allocated to the extraordinary item was $18,267,000;  the income tax
expense allocated to income before extraordinary item was $16,170,000.

Included in the Company's 1993 deferred  income tax expense was a charge of $1.1
million  to  reflect  the  cumulative  impact of the  corporate  income tax rate
changes enacted by the Omnibus Budget Reconciliation Act of 1993.

Income tax expense (benefit)  attributable to the income (loss) before equity in
loss of joint venture and extraordinary item consisted of the following:

<TABLE>
<CAPTION>

(In thousands)
                                                  1995                    1994                 1993
                                               ------------------------------------------------------
<S>                                            <C>                   <C>                   <C>

Currently payable        
     Federal                                   $  14,915             $   29,636            $    6,045
     State                                         2,500                  4,419                 1,284
                                               ------------------------------------------------------
                                                  17,415                 34,055                 7,329

Deferred
     Federal                                   $ (20,986)            $    7,288            $    8,311
     State                                        (1,340)                   465                   530
                                               ------------------------------------------------------
                                                 (22,326)                 7,753                 8,841
                                               ------------------------------------------------------
                                               $  (4,911)            $   41,808            $   16,170
                                               ======================================================
</TABLE>

The  differences  between  actual income tax expense and the amount  computed by
applying  the  statutory  federal  income tax rate to the income  (loss)  before
income  taxes,  equity in loss of joint venture and  extraordinary  item were as
follows:

<TABLE>
<CAPTION>

                                                    1995                   1994                  1993
                                                 ------------------------------------------------------
<S>                                               <C>                      <C>                   <C>

Federal statutory rate                            (35.0)%                  35.0 %                34.0 %
State income taxes,
     net of federal tax benefit                    (1.5)                    4.0                   6.9
Amortization and write-off of goodwill             32.9                     4.7                  17.1
Permanent tax differences                           (.1)                    (.1)                   .7
Tax credits                                         (.3)                    (.2)                 (1.2)
Cumulative impact of corporate income
     tax rate change                                 --                      --                   4.8
Other                                                --                      --                    .3
                                                 ------------------------------------------------------
                                                   (4.0)%                  43.4 %                62.6 %
                                                 ======================================================

</TABLE>



<PAGE> 24

Payless Cashways, inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)


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)                                                                         1995                       1994
                                                                                    -------------------------------------
<S>                                                                                 <C>                       <C>

Deferred tax assets:
     Special charges                                                                $   17,065                $       --
     Insurance reserves                                                                 11,360                     9,572
     Retirement, deferred compensation, restricted stock
       and stock option plans                                                            7,061                     6,446
     Post-retirement benefits                                                            5,330                     4,796
     Vacation reserves                                                                   4,926                     4,583
     Reserves for bad debts                                                              2,790                     2,721
     Other                                                                               2,239                     1,820
                                                                                    ------------------------------------

                                           Total deferred tax assets                    50,771                    29,938
                                           Less valuation allowance                         --                        --
                                                                                    ------------------------------------
                                           Net deferred tax assets                      50,771                    29,938
                                                                                    ------------------------------------

Deferred tax liabilities:
     Land, buildings and equipment                                                     (70,063)                  (68,368)
     Inventory basis difference                                                        (11,608)                   (5,248)
     Acquisition fees                                                                   (4,949)                  (15,464)
     Other                                                                              (4,405)                   (3,438)
                                                                                    -------------------------------------
                                           Total deferred tax liabilities              (91,025)                  (92,518)
                                                                                    -------------------------------------
                                           Net deferred tax liability               $  (40,254)               $  (62,580)
                                                                                    =====================================
</TABLE>


NOTE F--PENSION 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. Prior to January, 1995,
the Company had two defined benefit pension plans that were merged into a single
plan on January 1, 1995. 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.

The  Company  also has a  supplemental  pension  plan  covering  certain  of its
officers.  The plan is an unfunded,  non-contributory  defined  benefit  pension
plan.  Benefits  under  the plan are  based  on  years of  service,  age and the
employee's average compensation.

<TABLE>
<CAPTION>

Net pension cost included the following components:
(In thousands)                                                                  1995              1994              1993
                                                                           -------------------------------------------------
<S>                                                                        <C>                <C>               <C>

Service cost - benefits earned during the period                           $      4,714       $      4,623      $     3,717
Interest cost on projected benefit obligation                                     3,987              3,684            3,168
Actual return on plan assets                                                     (6,741)              (166)          (3,245)
Net amortization and deferral                                                     4,426             (2,295)             761
                                                                           -------------------------------------------------
Net periodic pension cost                                                  $      6,386       $      5,846      $     4,401
                                                                           =================================================
</TABLE>



<PAGE> 25

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)


Significant  assumptions  used in accounting  for defined  benefit plans were as
follows:
<TABLE>
<CAPTION>


                                                                                1995              1994              1993
                                                                           ---------------------------------------------
<S>                                                                             <C>               <C>               <C>

Weighted average discount rate                                                  7.5%              7.5%              7.5%
Rate of increase in future compensation levels                                  5.0%              5.0%              5.0%
Expected long-term rate of return on plan assets                                8.5%              8.5%              8.5%

</TABLE>

The following  table sets forth the plans' funded status and amounts  recognized
in the consolidated balance sheets:

<TABLE>
<CAPTION>

(In thousands)                                                            1995                                1994
                                                                --------------------------------------------------------------

                                                                              Supplemental                       Supplemental
                                                                   Pension       Pension              Pension       Pension
                                                                    Plans         Plan                 Plans         Plan
                                                                --------------------------------------------------------------
<S>                                                             <C>             <C>                  <C>          <C>

Actuarial present value of benefit obligations:
    Accumulated benefit obligation
       Vested                                                   $   36,840      $  5,931             $ 34,849     $    4,880
       Non-vested                                                    4,535         1,215                3,066            486
                                                                --------------------------------------------------------------
       Total                                                        41,375         7,146               37,915          5,366

    Increase in benefits due to estimated
       future compensation increases                                 9,655         1,451                9,611          2,177
                                                                --------------------------------------------------------------

    Projected benefit obligation
       for service rendered to date                                 51,030         8,597               47,526          7,543

    Plan assets at fair value, primarily publicly traded
       stocks and U.S. Government obligations                       38,038            --               33,996             --
                                                                --------------------------------------------------------------

    Plan assets less than
       projected benefit obligation                                (12,992)       (8,597)             (13,530)        (7,543)

    Unrecognized net loss from past
       experience different from that assumed                        3,519         1,139                6,704          1,665

    Unrecognized prior service cost                                  1,378           849                2,375            269

    Additional minimum liability                                        --            --               (1,587)            --
                                                                --------------------------------------------------------------
    Accrued pension cost included
       in other accrued expenses                                $   (8,095)     $ (6,609)            $ (6,038)    $   (5,609)
                                                                ===============================================================

</TABLE>

At November  26,  1994,  an  additional  minimum  liability  of $1.6 million was
recorded to reflect the excess of the unfunded  accumulated  benefit  obligation
over accrued pension costs for one of the pension plans. A  corresponding  asset
of $1.6  million is included in other  assets in the  accompanying  consolidated
balance sheet at November 26, 1994.

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.  In fiscal  years 1994 and 1993,  the
employees of Somerville  Lumber and Supply Co. were covered by a profit  sharing
plan for which contributions were made at the discretion of the Somerville Board
of Directors and approval of the Company's  Compensation  Committee.  On October
23, 1995,  the profit  sharing plan was merged into the Payless  Cashways,  Inc.
Employee Savings Plan. The aggregate  contributions to all defined  contribution
plans  were  $2,927,000,  $2,679,000  and  $2,258,000  in 1995,  1994 and  1993,
respectively.



<PAGE> 26

Payless Cashways, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)


Note G--POST-RETIREMENT BENEFIT PLANS

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.

Net post-retirement benefit cost included the following components:
<TABLE>
<CAPTION>

(In thousands)                                                                1995                1994              1993
                                                                           -----------------------------------------------
         <S>                                                               <C>                  <C>                <C>

         Service cost - benefits earned during the period                  $   1,098            $     923          $   621
         Interest cost on accumulated post-retirement
           benefit obligation                                                  1,309                1,092            1,007
         Amortization of unrecognized loss                                       140                   48               --
                                                                           -----------------------------------------------
         Net periodic post-retirement benefit cost                         $   2,547            $   2,063          $ 1,628
                                                                           ===============================================
</TABLE>

The following  table sets forth the plans' funded status and amounts  recognized
in the consolidated balance sheets:

<TABLE>
<CAPTION>

(In thousands)                                                                               1995         1994           1993
                                                                                        ----------------------------------------
         <S>                                                                            <C>             <C>            <C>

         Accumulated post-retirement benefit obligation:
           Retirees and beneficiaries                                                   $    12,144     $    9,830     $   8,833
           Fully eligible active plan participants                                              781            375           353
           Other active plan participants                                                     3,939          8,113         5,738
                                                                                        ----------------------------------------
                  Total                                                                      16,864         18,318        14,924
         Plan assets at fair value                                                               --             --            --
                                                                                        ----------------------------------------
         Accumulated post-retirement benefit obligation in excess of
           plan assets                                                                       16,864         18,318        14,924
         Unrecognized net loss from past experience different from
           that assumed                                                                         749          3,684         2,502
         Unrecognized prior service cost                                                        885            932            --
                                                                                        ----------------------------------------
         Accrued post-retirement benefit cost included in other
           non-current liabilities                                                      $    15,230     $   13,702     $  12,422
                                                                                        ========================================
</TABLE>

Significant assumptions used in accounting for post-retirement benefit plans
were as follows:

<TABLE>
<CAPTION>
                                                            1995           1994         1993
                                                            --------------------------------
   <S>                                                      <C>            <C>         <C>

   Weighted average discount rate                           7.5%           7.5%         7.5%
   Rate of increase in future compensation levels           5.0%           5.0%         5.0%
   Health-care cost trend rate                              8.1%           8.5%        11.2%

</TABLE>

In fiscal  years  1995,  1994,  and 1993,  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,   1995,   accumulated
post-retirement  benefit  obligation  by  $1,018,000  and the  aggregate  of the
service and interest  cost  components of net periodic  post-retirement  benefit
cost for the fiscal year ended November 26, 1995, by $76,000.

NOTE H--LEASES

The Company  leases  certain stores and other  facilities  under  non-cancelable
operating  leases.   Aggregate  minimum  future  rentals  under   non-cancelable
operating  leases  for the next five  years are:  1996 --  $21,390,000;  1997 --
$16,563,000;  1998 --  $16,468,000;  1999 --  $15,538,000;  2000 -- $12,095,000;
thereafter -- $49,302,000. Rental expense under operating leases was $27,212,000
for 1995, $23,912,000 for 1994, and $20,577,000 for 1993.

During 1995, the Company  entered into an agreement  providing for the operating
lease of five  stores,  including a 1996 new store.  The  Company  will have the
option to purchase the stores at the end of the lease terms in late 1999. In the
event the Company  chooses not to  exercise  this  option,  it is  obligated  to
arrange the sale of the stores to an unrelated  party and is required to pay the
lessor any  difference  between  the net sales  proceeds  and the  lessor's  net
investment  in stores ($29.7  million for the four stores  completed at November
25, 1995), subject to certain limitations. Rental payments under the leases vary
with the level of  interest  rates.  To reduce the impact of changes in interest
rates,  during 1995 the Company  entered  into an interest  rate swap  agreement
under  which it  agreed  to pay  quarterly  a  6-9/16%  fixed  rate of  interest
effective  December 1, 1995 through  December 1, 1999 in exchange for  quarterly
receipt of LIBOR on $36 million.



<PAGE> 27

Payless Cashways, Inc. and subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)


Note I--SPECIAL CHARGES

Costs of $153.7 million  associated with a restructuring plan which included the
closing of six stores on December 30, 1995, the sale of a distribution center on
December 22, 1995, and the reorientation of several stores to concentrate on the
professional  customer  during  the  first two  quarters  of  fiscal  1996,  are
contained in the accompanying statement of operations for fiscal 1995 as special
charges. These charges include:

<TABLE>
<CAPTION>
                                                                      Amount         Amount            Amount
                                                                      Charged       Utilized       To be Utilized
(In millions)                                                          1995           1995           at 11/25/95
                                                                     ----------------------------------------------
<S>                                                                  <C>              <C>               <C>

Write-off of allocable cost in excess of assets acquired (goodwill)  $ 101.5          $  101.5          $ --
Real estate write down to fair market value                             31.2              30.7              .5
Inventory liquidation and store closing costs                           15.3              --              15.3
Severance and other employment costs                                     3.9               1.0             2.9
Other                                                                    1.8                .4             1.4
                                                                     --------------------------------------------
                                                                     $ 153.7          $  133.6          $ 20.1
</TABLE>

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

<TABLE>
<CAPTION>
                               (In thousands)                          1995             1994             1993
                                                                     -------------------------------------------

<S>                                                                  <C>              <C>               <C>

                               Net sales                             $ 61,969         $   75,722        $ 87,700
                               Net operating loss                    $ (4,023)        $   (3,891)       $ (1,328)
</TABLE>


Special charges reflecting costs of $4.0 million associated with the elimination
of a layer from the Company's  field  management  organization in early 1994 are
included in the accompanying statement of operations for fiscal 1993.


NOTE J--LITIGATION

The Company is a defendant in a lawsuit  brought in connection  with a reduction
in force pursuant to a January 1994  restructuring.  The suit asserted a variety
of  claims  including  federal  and  state  securities  fraud  claims,   alleged
violations of the Racketeer  Influenced and Corrupt  Organizations  Act, federal
and state claims of age  discrimination,  alleged  violations of the  Employment
Retirement  Income Security Act of 1974, and various state law claims including,
but not limited to, fraudulent misrepresentation allegations. No ruling has been
entered on the Company's motion to dismiss all pending claims except the federal
and state age discrimination claims, the state law fraudulent  misrepresentation
claim and several other state law equitable claims.

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

==========

<TABLE>
<CAPTION>

FIVE-YEAR OPERATIONAL SUMMARY

(Average sales per facility, number
of customers, gross square feet and
retail square feet are in thousands)            1995 (a)            1994             1993              1992             1991
--------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>               <C>              <C>               <C>

Number of retail facilities                            206              202               196              195               195
Average sales per facility                      $   13,114       $   13,716        $   13,284       $   12,800        $   12,242
Number of customers                                 59,685           60,812            60,678           62,641            62,603
Average sales per customer                      $    42.84       $    44.77        $    42.69       $    39.84        $    38.13
Number of employees                                 18,122           18,406            18,093           17,784            17,475
Average sales per employee                      $  141,109       $  147,916        $  143,167       $  140,346        $  136,609
Gross square feet (total)                           19,453           18,730            18,095           18,013            18,054
Retail square feet (inside)                          6,740            6,468             6,200            6,029             5,992
Sales per retail square foot                    $   379.40       $   420.92        $   417.79       $   413.98        $   398.41
Percent increase (decrease) in comparable-
  store sales on a 52-week basis                    (4.5)%             3.3%              4.1%             6.4%              5.5%

<FN>

(a)  Includes six retail stores closed in December, 1995.
</TABLE>


<PAGE> 28

Payless Cashways, Inc. and subsidiary

FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>

(In thousands, except per share
amounts, percentages and ratios)                   1995              1994             1993              1992             1991
--------------------------------------------------------------------------------------------------------------------------------

<S>                                             <C>              <C>               <C>               <C>              <C>

Net sales and other income (a)                  $2,685,670       $2,733,182        $2,605,978       $2,500,364        $2,391,830
Cost of merchandise sold                         1,912,620        1,918,674         1,824,663        1,739,396         1,663,508
Selling, general and administrative                619,589          594,024           570,016          551,479           531,115
Depreciation and amortization                       60,356           58,692            56,213           55,429            57,291
Interest                                            61,067           65,571           125,247          153,780           155,066
Special charges (b)                                153,667               --             4,000            6,500                --
                                                --------------------------------------------------------------------------------
Income (loss) before income taxes                 (121,629)          96,221            25,839           (6,220)          (15,150)
Federal and state income taxes (benefit)            (4,911)          41,808            16,170            2,780            (1,891)
                                                ---------------------------------------------------------------------------------
Income (loss) before equity in loss of
   joint venture, extraordinary
   item and cumulative effect of
   change in accounting principle                 (116,718)          54,413             9,669           (9,000)          (13,259)
Equity in loss of  joint venture (c)               (11,831)          (2,281)               --               --                --
Extraordinary item (d)                                  --           (7,243)          (45,828)              --                --
Cumulative effect on prior years
   of change in accounting principle (e)                --               --                --           (6,902)               --
                                                --------------------------------------------------------------------------------
Net income (loss)                               $ (128,549)      $   44,889        $  (36,159)      $  (15,902)       $  (13,259)
                                                =================================================================================

Income (loss) per common share before
   extraordinary item and cumulative
   effect of change in accounting principle     $    (3.36)      $     1.17        $      .16       $    (2.10)       $    (2.63)
Weighted average common and dilutive
   common equivalent shares outstanding             39,904           40,257            30,514            6,571             6,571
Current ratio                                         1.29             1.45              1.25             1.21              1.19
Working capital                                 $   98,400       $  139,128        $   85,142       $   74,911        $   65,570
Total assets                                    $1,344,436       $1,495,882        $1,458,481       $1,466,068        $1,481,889
Long-term debt                                  $  608,627       $  654,131        $  640,127       $  986,155        $  998,047
Common Stock subject to puts and calls          $       --       $       --        $       --       $    6,283        $    5,621
Shareholders' equity                            $  308,163       $  435,865        $  387,311       $   10,674        $   27,031
Capital expenditures                            $   67,281       $   81,906        $   49,982       $   36,612        $   41,022
Income from operations before
   depreciation and amortization (f)            $  153,461       $  220,484        $  207,299       $  202,989        $  197,207

<FN>

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

(b)  Special charges for 1995 consisted of restructure costs associated with the
     closing  of  six  stores,  the  sale  of  a  distribution  center  and  the
     reorientation   of  several  stores  to  concentrate  on  the  professional
     customer.  Special charges for 1993 consisted of costs  associated with the
     elimination of a layer from the Company's  field  management  organization.
     Special  charges  for 1992  consisted  of fees  and  expenses  incurred  in
     connection with the Company's withdrawn recapitalization plan.

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

(d)  Represents losses on early extinguishment of debt.

(e)  Effective  December 1, 1991,  the Company  changed its method of accounting
     for post-retirement benefits other than pensions.

(f)  Income from operations before  depreciation and amortization is utilized by
     the  Company  as a  measure  for  managing  cash  flow  in  its  day-to-day
     operations.  The 1995 amount is before the special charge  discussed at (b)
     above.
</TABLE>



<PAGE> 29

BOARD OF DIRECTORS AND OFFICERS

                    [List not included in EDGARized exhibit.]

<PAGE> 30

1995 STORE LOCATIONS

                    [Map not included in EDGARized exhibit.]


<PAGE> 31

1995 STORE LOCATIONS (cont'd.)

                    [Map not included in EDGARized exhibit.]


<PAGE> 32

Payless  Cashways common stock is traded on the New York Stock Exchange  (ticker
symbol PCS). The number of registered  holders of the Company's  common stock at
November  25,  1995 was 965,  one of which  was a holder of  Non-Voting  Class A
Common  Stock.  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 or cumulative
preferred stock.

<TABLE>
<CAPTION>

                                                 1995                      1994
     --------------------------------------------------------------------------------------
     Price range of common stock          High           Low         High         Low
     -------------------------------------------------------------------------- -----------
            <S>                             <C>           <C>         <C>          <C>

            First quarter                   10            8-1/4       19-5/8       12-7/8

            Second quarter                  9-3/4         6-1/2       19-1/4       13-1/2

            Third quarter                   7-3/4         5-5/8       15-1/4       10-5/8

            Fourth quarter                  6-3/4         3-5/8       12-1/2       8-1/4

</TABLE>


Copies of the Payless  Cashways,  Inc. Form 10-K for fiscal 1995, filed with the
Securities and Exchange  Commission,  are available  without charge. To obtain a
copy, please write to:

                             Payless Cashways, Inc.
                               Investor Relations
                                 P.O. Box 419466
                           Kansas City, MO 64141-0466


Annual Meeting - April 18, 1996, 10:00 a.m.       Independent Auditors
Two Pershing Square, 2300 Main Street             KPMG Peat Marwick LLP
Kansas City, MO  64108                            Kansas City, MO

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