SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
(Mark One)
  / X /           Quarterly report pursuant to Section 13 or 15(d) of the 
                  Securities Exchange Act of 1934

                  For the quarterly period ended May 30, 1998

                                       or

 /     /          Transition report pursuant to Section 13 or 15(d) of the
                  Securities Exchange Act of 1934

                  For the transition period from             to

                  Commission file number 1-8210


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

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


         Two Pershing Square
         2300 Main, P.O. Box 419466
         Kansas City, Missouri                 64141-0466
(Address of Principal Executive Offices)       (Zip Code)

                  (816) 234-6000
(Registrant's Telephone Number, Including Area Code)

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

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

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

There were 19,993,245 shares of Common Stock, $.01 par value,  outstanding as of
July 2, 1998


<PAGE>2
PAYLESS CASHWAYS, INC.

                         PART I -- FINANCIAL INFORMATION

Item 1.  Financial Statements.

STATEMENTS OF OPERATIONS (Unaudited) (1)
<TABLE>
<CAPTION>


                                                       Reorganized   | Predecessor           Reorganized  |   Predecessor
                                                         Company     |   Company               Company    |     Company
                                                    ---------------------------------------------------------------------
                                                         Thirteen    |  Thirteen             Twenty-Six   |   Twenty-Six
                                                        Weeks Ended  | Weeks Ended           Weeks Ended  |   Weeks Ended
                                                           May 30,   |    May 31,               May 30,   |      May 31,
(In thousands, except per share amounts)                    1998     |     1997                  1998     |       1997
                                                    --------------------------------      -------------------------------
<S>                                                 <C>              | <C>                <C>             |  <C>
Income                                                               |                                    |
     Net sales                                      $    505,919     | $    661,191       $     900,190   |  $  1,148,741
     Other income                                            991     |        1,264               1,780   |         2,469
                                                    --------------------------------      --------------------------------
                                                         506,910     |      662,455             901,970   |     1,151,210
                                                                     |                                    |
Costs and expenses                                                   |                                    |
     Cost of merchandise sold                            374,971     |      483,093             666,880   |       831,340
     Selling, general and administrative                 112,196     |      151,147             224,366   |       289,554
     Special charges                                          --     |           --               5,584   |            --
     Provision for depreciation and amortization           8,855     |       13,037              17,167   |        25,841
     Interest expense                                      9,915     |       16,274              20,150   |        32,329
                                                    --------------------------------      --------------------------------
                                                         505,937     |      663,551             934,147   |     1,179,064
                                                    --------------------------------      --------------------------------
                                                                     |                                    |
               INCOME (LOSS) BEFORE INCOME TAXES             973     |       (1,096)            (32,177)  |       (27,854)
                                                                     |                                    |
Federal and state income taxes                               241     |       12,133              (7,947)  |   $   (21,364)
                                                    --------------------------------      --------------------------------
                                                                     |                                    |
                               NET INCOME (LOSS)    $        732     | $    (13,229)      $     (24,230)  |   $   (21,364)
                                                    ================================      ================================
                                                                     |                                    |
Weighted average common shares outstanding                20,000     |                           20,000   |
                                                    -----------------                     ----------------
                                                                     |                                    |
Net income (loss) per common share-basic (2)        $        .04     |                    $      (1.21)   |
                                                    =================                     ================
                                                                     |                                    |
Weighted average common and dilutive                                 |                                    |
     common equivalent shares outstanding                 20,111     |                           20,000   |
                                                    -----------------                     ---------------- 
                                                                     |                                    |
Net income (loss) per common share-diluted (2)      $        .04     |                    $      (1.21)   |
                                                    =================                     ================

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


<PAGE>3

CONDENSED BALANCE SHEETS (Unaudited) (1)
<TABLE>
<CAPTION>

                                                                         Reorganized         |  Predecessor
                                                                          Company            |    Company
                                                                --------------------------------------------
                                                                  May 30,      November 29,  |     May 31,
(In thousands)                                                     1998           1997       |      1997
                                                                --------------------------------------------
<S>                                                             <C>            <C>           |   <C>
ASSETS                                                                                       |
                                                                                             |          
CURRENT ASSETS                                                                               |
  Cash and cash equivalents                                     $     7,610    $    11,961   |   $     7,847
  Merchandise inventories (3)                                       371,943        414,882   |       419,275
  Prepaid expenses and other current assets                          16,379         14,705   |        22,987
  Income taxes receivable                                             9,706         32,232   |        23,861
  Deferred income taxes                                               5,930          8,665   |        12,527
                                                                --------------------------------------------
                                   TOTAL CURRENT ASSETS             411,568        482,445   |       486,497
                                                                                             | 
OTHER ASSETS                                                                                 |
  Real estate held for sale                                          20,974         48,562   |        13,374
  Cost in excess of net assets acquired, less                                                |
    accumulated amortization of $109,950                                                     |
    at May 31, 1997                                                    --             --     |       289,210
  Deferred financing costs                                            2,217          2,600   |        12,026
  Other                                                               8,757         14,316   |        14,254
                                                                                             | 
LAND, BUILDINGS AND EQUIPMENT                                       368,107        363,418   |       794,450
  Allowance for depreciation and amortization                       (16,482)          --     |      (292,336)
                                                                --------------------------------------------
                                                                                             |
    TOTAL LAND, BUILDINGS AND EQUIPMENT                             351,625        363,418   |       502,114
                                                                --------------------------------------------
                                                                                             |
                                                                $   795,141    $   911,341   |   $ 1,317,475
                                                                ============================================

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

<PAGE>4

CONDENSED BALANCE SHEETS - Continued (Unaudited) (1)
<TABLE>
<CAPTION>

                                                                    Reorganized        |  Predecessor
                                                                     Company           |    Company
                                                         ---------------------------------------------
                                                             May 30,      November 29, |     May 31,
(In thousands)                                                1998            1997     |      1997
                                                         ---------------------------------------------
                                                                                       |
<S>                                                       <C>            <C>           |   <C>
LIABILITIES AND SHAREHOLDERS' EQUITY                                                   |
                                                                                       |
     CURRENT LIABILITIES                                                               |
       Current portion of long-term debt                  $     3,139    $     9,354   |   $    19,208
       Trade accounts payable                                  51,687         75,583   |       150,357
       Other current liabilities                              114,249        136,741   |       159,306
       Income taxes payable                                     2,960          2,362   |         5,632
                                                          --------------------------------------------
                             TOTAL CURRENT LIABILITIES        172,035        224,040   |       334,503
                                                                                       |
     LONG-TERM DEBT, less portion                                                      |
       classified as current liability (4)                    392,160        424,031   |       647,187
                                                                                       |
     NON-CURRENT LIABILITIES                                                           |
       Deferred income taxes                                   50,476         58,788   |        42,682
       Other                                                   20,900         20,682   |        24,626
                                                                                       |
     SHAREHOLDERS' EQUITY (5)                                                          |
       Common Stock, $.01 par value, 50,000,000 shares                                 |
         authorized, 20,000,000 shares issued at                                       |
         May 30, 1998, and November 29, 1997                      200            200   |          --
       Preferred Stock, $1.00 par value, 25,000,000                                    |
         shares authorized; issued:                                                    |
           Cumulative Preferred Stock, 406,000 shares                                  |
             issued and $81,737 aggregate                                              |
             liquidation preference at May 31, 1997              --             --     |        40,600
       Common Stock, $.01 par value:                                                   |
           Voting, 150,000,000 shares authorized,                                      |
             39,520,241shares issued at May 31, 1997             --             --     |           395
           Non-Voting Class A, 5,000,000 shares authorized,                            |
             450,000 shares issued at May 31, 1997               --             --     |             5
       Additional paid-in capital                             183,600        183,600   |       487,838
       Accumulated deficit                                    (24,230)          --     |      (260,361)
                                                          --------------------------------------------
                                                                                       |        
                             TOTAL SHAREHOLDERS' EQUITY       159,570        183,800   |       268,477
                                                          --------------------------------------------
                                                                                       |
                                                          $   795,141    $   911,341   |   $ 1,317,475
                                                          ============================================

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

<PAGE>5

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1)
<TABLE>
<CAPTION>

                                                             Reorganized     |   Predecessor
                                                               Company       |     Company
                                                           ----------------------------------
                                                             Twenty-Six      |   Twenty-Six
                                                             Weeks Ended     |   Weeks Ended
                                                               May 30,       |     May 31,
(In thousands)                                                  1998         |      1997
                                                           ----------------------------------
<S>                                                        <C>               |   <C>
Cash Flows from Operating Activities                                         |
                                                                             |
     Net loss                                              $   (24,230)      |   $   (21,364)
     Adjustments to reconcile net loss to net cash                           |
       provided by operating activities:                                     |
         Depreciation and amortization                          17,167       |        25,841
         Deferred income taxes                                  (5,577)      |         2,171
         Non-cash interest                                         350       |         1,600
         Other                                                     218       |         2,046
     Changes in assets and liabilities                          17,501       |       (15,224)
                                                            ---------------------------------
                                                                             |
     NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES         5,429       |        (4,930)
                                                                             |
Cash Flows from Investing Activities                                         |
                                                                             |
     Additions to land, buildings and equipment                 (6,186)      |       (19,895)
     Proceeds from sale of land, buildings and equipment        28,900       |         6,772
     Acquisition of business, excluding working capital:                     |
       Purchase price in excess of net assets acquired            --         |        (1,015)
     Decrease (increase) in other assets                         5,559       |        (1,337)
                                                            ---------------------------------
                                                                             |
     NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES        28,273       |       (15,475)
                                                                             |
Cash Flows from Financing Activities                                         |
                                                                             |
     Retirements of long-term debt                             (59,086)      |        (7,450)
     Proceeds from long-term debt                               21,000       |        36,838
     Other                                                          33       |        (1,561)
                                                            ---------------------------------
                                                                             |
     NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES       (38,053)      |        27,827
                                                            ---------------------------------
     Net increase in cash and cash equivalents                  (4,351)      |         7,422
     Cash and cash equivalents, beginning of period             11,961       |           425
                                                            ---------------------------------
     Cash and cash equivalents, end of period               $    7,610       |      $  7,847
                                                            =================================

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

<PAGE>6


NOTES TO CONDENSED FINANCIAL STATEMENTS

Twenty-six weeks ended May 30, 1998, and May 31, 1997.

(1)    The  accompanying  condensed  financial  statements have been prepared in
       accordance  with  the  instructions  to Form  10-Q.  To the  extent  that
       information  and  footnotes  required by  generally  accepted  accounting
       principles  for  complete  financial   statements  are  contained  in  or
       consistent  with  the  audited  financial   statements   incorporated  by
       reference  in the  Company's  Form 10-K for the year ended  November  29,
       1997, such information and footnotes have not been duplicated  herein. In
       the  opinion  of  management,  all  adjustments,   consisting  of  normal
       recurring  accruals,  considered  necessary  for a fair  presentation  of
       financial  statements have been reflected herein.  The November 29, 1997,
       condensed  balance  sheet has been  derived  from the  audited  financial
       statements as of that date.

(2)    Basic net income (loss) per common share has been  computed  based on the
       weighted-average  number of common shares  outstanding during the period.
       Dilutive  net income  (loss) per common  share is  computed  based on the
       weighted-average  number of common  shares plus  potential  common shares
       outstanding during the period, when dilutive, consisting of certain stock
       options.  However,  given the net loss reported for the twenty-six  weeks
       ended May 30, 1998, the impact of considering such stock options would be
       antidilutive.  Accordingly, diluted loss per common share for that period
       has been computed without  considering  such stock options.  Net loss per
       common share has not been presented for the  Predecessor  Company because
       Old  Preferred  Stock and Old Common  Stock were  canceled on December 2,
       1997,  under  the Plan of  Reorganization.  Presentation  of net loss per
       common share based on  Predecessor  Company  average  shares  outstanding
       would therefore not be meaningful.

(3)    Approximately 80% of the Company's  inventories are valued using the LIFO
       (last-in,  first-out) method.  Because inventory  determination under the
       LIFO  method is only  made at the end of each  fiscal  year  based on the
       inventory levels and costs at that time, interim LIFO determinations must
       necessarily  be based on  management's  estimates  of  expected  year-end
       inventory  levels and costs.  Since future  estimates of inventory levels
       and costs are subject to change,  interim  financial  results reflect the
       Company's most recent estimate of the effect of inflation and are subject
       to  final  year-end  LIFO  inventory  amounts.  If  the  FIFO  (first-in,
       first-out)  method of inventory  accounting had been used by the Company,
       inventories  would have been $1.0 million and $30.2  million  higher than
       reported at May 30, 1998, and May 31, 1997, respectively.

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

                                                                 May 30,    November 29,    May 31,
    (In thousands)                                                1998         1997          1997
                                                                ---------   ------------  ---------
    <S>                                                         <C>          <C>          <C>
    Exit Financing Agreement, variable interest rate            $ 295,158    $ 317,133    $    --
    Mortgage loan, variable interest rate                          98,984      102,010         --
    Note payable, variable interest rate                             --         13,000         --
    Amended Credit Agreement                                         --           --        390,837
    Mortgage loan payable to insurance company                       --           --        100,608
    Senior subordinated notes                                        --           --        173,655
    Other senior debt                                               1,157        1,242        1,295
                                                                 ---------    --------     --------
                                                                  395,299      433,385      666,395
    Less portion classified as current liability                   (3,139)      (9,354)     (19,208)
                                                                 --------     --------     --------
                                                                $ 392,160    $ 424,031    $ 647,187
                                                                 =========    ========     ========
</TABLE>

(5)    During  the first  half of 1998,  the  Company  granted  1,410,000  stock
       options under the Payless Cashways, Inc. 1998 Omnibus Incentive Plan. The
       exercise  price for these  incentive  stock  options  was the fair market
       value of the Common  Stock on the grant date.  The Company has  accounted
       for these stock options according to APB Opinion No. 25,  "Accounting for
       Stock Issued to Employees."


<PAGE>7

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
     of Operations.

RESULTS OF OPERATIONS

Income

Net sales for the  quarter  ended May 30,  1998,  decreased  23.5% from the same
period of 1997 in total and 13.2% on a same-store sales basis.  (Same stores are
those open one full year.) Net sales for the first half of 1998 decreased  22.0%
from the same  period of 1997 in total and 10.9% on a  same-store  sales  basis.
Management believes continuing competitive pressure and the lingering effects of
the Chapter 11 filing have  contributed  to sales declines  throughout  1998. In
addition, management believes that the weather-delayed spring selling season and
deflation in commodity wood product prices had a negative impact on sales during
the second quarter.  Same-store sales to professional customers during the first
half of 1998  declined 6.1% and  same-store  sales to  do-it-yourself  customers
declined  13.7%.  During the second half of fiscal 1997,  the Company  closed 30
stores whose sales were $82.4 million and $146.8  million in the second  quarter
and first half of 1997,  respectively.  The Company  also closed 3 stores at the
end of the 1998 second quarter.

Costs and Expenses

Cost of  merchandise  sold as a  percent  of sales  was  74.1% and 73.1% for the
second  quarter of 1998 and 1997,  respectively.  For the first half of 1998 and
1997,  cost of  merchandise  sold as a percent  of sales  was  74.1% and  72.4%,
respectively.  The  increase  for the second  quarter and first half of 1998 was
primarily due to more  competitive  pricing  designed to regain customer traffic
lost during the Chapter 11 period during fiscal 1997.

Selling,  general and administrative  expenses were 22.2% and 22.9% of sales for
the second  quarter of 1998 and 1997,  respectively.  For the first half of 1998
and 1997, selling,  general and administrative  expenses were 24.9% and 25.2% of
sales, respectively. The decrease as a percent of sales for the 1998 periods was
due to successful efforts to lower expenses. Selling, general and administrative
expenses for the second quarter and first half of 1998  decreased  approximately
$39.0 million and $65.2 million,  respectively,  compared to the same periods of
the prior year primarily because of closed stores.

A special  charge of $5.6 million  ($3.4  million  after tax),  primarily a cash
charge,  was recorded in the first  quarter of 1998 to reflect  severance  costs
related to the elimination of staff at the Company's  headquarters  and regional
administrative centers.

The  provision  for  depreciation  and  amortization  decreased  from the second
quarter and first half of 1997 due primarily to goodwill  written-off and assets
written-down in fresh-start  reporting  related to the Company's  emergence from
bankruptcy. In addition, assets were removed from service in connection with the
store closings mentioned above.

Interest  expense  for the  second  quarter  and  first  half of 1998  decreased
compared to the same periods of 1997 primarily due to lower borrowing  levels in
1998  somewhat  offset  by  higher  interest  rates  in 1998.  Certain  debt was
discharged in accordance with the Plan of Reorganization  effective  December 2,
1997.

The income tax benefit for the first half of 1998 was $7.9  million  compared to
$6.5  million  for the  first  half of 1997.  The  effective  tax rates for both
periods were  different  from the 35%  statutory  rate  primarily due to various
expenses that are permanently  non-deductible for income tax purposes.  The most
significant of these expenses was goodwill amortization in fiscal 1997. Such tax
benefits reflect management's estimates of the annual effective tax rates at the
end of each  quarter and are  subject to change  throughout  the year.  The 1997
second quarter income tax provision reduced the first quarter income tax benefit
by $12.9 million as a result of adjusting the estimated  annual effective income
tax rate for the fiscal year.

Net Income (Loss)

Net income for the quarter ended May 30, 1998, was $0.7 million  compared to net
loss of $13.2  million for the same period of 1997.  Excluding the effect of the
second  quarter  1997 tax  provision  adjustment,  net  earnings  for the second
quarter  improved  in 1998  due to lower  selling,  general  and  administrative
expenses as well as a lower  depreciation and  amortization  provision and lower
interest  expense.  For the  first  half of 1998,  net loss  was  $24.2  million
compared to $21.4  million  for the same period of 1997.  Net loss for the first
halves of 1998 and 1997 were primarily the result of decreased same-store sales.
Basic and diluted  income per


<PAGE>8

common share were $0.04 for the second quarter of 1998,  while basic and diluted
loss per common share were $1.21 for the first half of 1998. Excluding the first
quarter of 1998 special  charge,  net loss for the first half of 1998 would have
been $20.0  million and basic and diluted  loss per common share would have been
$1.00.


LIQUIDITY AND CAPITAL RESOURCES

Cash  provided by  operating  activities  was $5.4 million for the first half of
1998 compared to cash used in operating  activities of $4.9 million for the same
period of 1997.  The increase in cash from  operating  activities  was primarily
caused by decreased merchandise  inventories.  During the first half of 1998 and
1997,  the Company used cash of  approximately  $0.7  million and $3.3  million,
respectively, in operating activities related to the execution of the 1997, 1996
and 1995  restructuring  plans and $9.6  million  in the first  half of 1998 for
costs  related to the Chapter 11 filing.  In  addition,  the  Company  used $5.3
million  in the  first  half of  1998  to pay  severance  costs  related  to the
elimination of staff at the Company's  headquarters and regional  administrative
centers.

Borrowings have been available under the Exit Financing  Agreement to supplement
cash generated by operations.  At May 30, 1998,  $78.4 million was available for
borrowing under the Exit Financing  Agreement.  At May 30, 1998, working capital
was $239.5 million compared to $258.4 million and $152.0 million at November 29,
1997  and May 31,  1997,  respectively.  The  current  ratios  at May 30,  1998,
November 29, 1997,  and May 31, 1997,  were 2.39 to 1, 2.15 to 1, and 1.45 to 1,
respectively.

The Company's  primary  investing  activities are capital  expenditures  for the
renovation  of existing  stores and  additional  equipment.  The Exit  Financing
Agreement  governs  the amount of capital  expenditures  that can be made ($59.6
million in 1998,  $52.1 million in 1999, $41.2 million in 2000, $51.3 million in
2001 and $52.3 million in 2002).  The Company spent  approximately  $6.2 million
and $19.9  million  during  the first half of 1998 and 1997,  respectively,  for
renovation of existing  stores and additional  equipment.  In 1997 the Company's
capital  expenditures  also included  expenditures  for  strategic  initiatives.
Budgeted capital  expenditures for 1998 will be limited to normal  renovation of
existing  stores and routine  equipment  purchases,  which will be financed with
funds  generated  from  operations  and  borrowings  under  the  Exit  Financing
Agreement.  During  the first  half of 1998,  the  Company  sold 17 real  estate
properties  related to stores previously closed for approximately  $28.9 million
of cash proceeds which were applied to outstanding  debt.  Additionally,  in the
first half of 1998,  the Company  received  $5.8 million  from the  surrender of
certain life insurance policies related to a terminated benefit plan.

The Company's most significant financing activity is and will continue to be the
retirement of indebtedness.  As a result of the Company's  reorganization  under
Chapter 11, the indebtedness of the Company was reduced  significantly in fiscal
1997. Although the Company's  consolidated  indebtedness is and will continue to
be  substantial,  management  believes  that,  based  upon its  analysis  of the
Company's  financial  condition,  the cash flow generated from operations during
the past 12 months and the expected  results of operations  in the future,  cash
flow  from  operations  and  borrowing  availability  under  the Exit  Financing
Agreement should provide sufficient  liquidity to meet all cash requirements for
the next 12 months without additional financing, subject to the possible adverse
impact of loan  covenants  described  below.  As a result of the 1997 Chapter 11
filing,  trade  creditors  have  significantly  shortened  credit  terms and the
availability  of trade credit cannot be assured.  The Exit  Financing  Agreement
contains a number of  financial  covenants  with which the Company  must comply.
Management  is  unable to  predict  if it will  achieve  compliance  with  these
covenants  at the end of fiscal 1998 as a result of various  factors,  including
certain factors which are beyond  management's  control,  including  competitive
conditions,  economic conditions,  supplier support, lumber prices, and weather,
which  could  cause  noncompliance.  In order to achieve  compliance  with these
covenants,  current  negative sales trends would need to improve.  Management is
currently in  discussions  with its bank lenders for the purpose of revising the
terms of the credit agreement,  including the financial  covenants.  The Company
believes it will be able to negotiate  operating  flexibility  with its lenders,
although  success in achieving any such  renegotiations  or refinancing,  or the
specific terms thereof,  including interest rates, capital expenditure limits or
borrowing  capacity,  cannot  be  assured.  If  the  Company  fails  to  achieve
compliance  with these covenants or, in the absence of such  compliance,  if the
Company  fails to amend  such  financial  covenants  on terms  favorable  to the
Company,  the Company may be in default  under such  covenants.  If such default
occurred,  it would  permit  acceleration  of its debt under the Exit  Financing
Agreement which, in turn, would permit  acceleration of substantially all of the
Company's other long-term debt.


<PAGE>9


FORWARD-LOOKING STATEMENTS

Statements  above  in  the  subsections  of  this  report  entitled  "Costs  and
Expenses,"  and  "Liquidity  and  Capital   Resources,"   such  as  "estimated",
"believe",  "expect"  and similar  expressions,  which are not  historical,  are
forward-looking statements that involve risks and uncertainties. Such statements
include, without limitation, the Company's expectation as to future performance.

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



REVIEW BY INDEPENDENT AUDITORS

The condensed  consolidated  financial statements of Payless Cashways,  Inc. for
the thirteen  week and  twenty-six  week periods  ended May 30, 1998 and May 31,
1997, have been reviewed by KPMG Peat Marwick LLP, independent  auditors.  Their
report is included in this filing.



<PAGE>10


PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings.

         A group of terminated employees and others have filed a lawsuit against
the Company and other named  defendants in the United States  District Court for
the Southern  District of Iowa. (See the full description of the lawsuit in Item
3-Legal  Proceedings  contained  in the  Company's  Form 10-K for the year ended
November 29,  1997.) The lawsuit was brought in  connection  with a reduction in
force pursuant to a January 1994 restructuring.  The suit has asserted a variety
of  claims  including  federal  and  state  securities  fraud  claims,   alleged
violations of the Racketeer  Influenced  and Corrupt  Organizations  (RICO) 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.  The
Company filed a motion to dismiss the majority of the claims; and Rulings and an
Order have been issued with respect thereto, substantially narrowing plaintiff's
legal  claims  by  dismissing  some  age  discrimination   counts,  all  federal
securities  fraud and RICO  counts  except  one each,  and all state law  counts
related to an alleged partnership.

       The  plaintiff's  motion for class  certification  has been denied on all
claims except the age discrimination  claims. The court has recently granted the
plaintiff's motion for class certification of certain age discrimination claims.
As a result of this ruling,  approximately  11 additional  individuals  chose to
participate  in the age claims  asserted  in this suit.  Each of the parties has
conducted discovery pursuant to the court's scheduling order and discovery plan.
The lawsuit was formally  stayed  pursuant to the  automatic  stay issued by the
Bankruptcy  Court following the voluntary  Chapter 11  reorganization  filing on
July 21, 1997.  During the Chapter 11  reorganization,  plaintiffs  timely filed
proofs of claim,  including a  purported  claim on behalf of the  potential  Age
Discrimination  Employment  Act opt-in  class,  for an aggregate of $37 million,
which was reduced by the Bankruptcy Court to a reserve of $22 million.  The case
has been returned to the United States District Court for the Southern  District
of Iowa for  resolution  with a trial  date  anticipated  in early  1999.  Any
recovery  for the  plaintiffs  would be  treated  as a general  unsecured  claim
entitling  the  plaintiffs  to their pro rata share of  8,269,329  shares of New
Common Stock reserved for such claims.

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

Item 4.  Submission of Matters to a Vote of Security Holders.

     The Annual Meeting of  Shareholders  was held April 15, 1998.  Shareholders
voted in favor of the nominee  for  director:  H. D.  Cleberg  (17,688,325  for,
118,307  withheld).  Directors  who were  previously  elected  and whose term of
office as a director continued after the meeting were Peter G. Danis,  Donald E.
Roller,  David M.  Chamberlain,  Max D.  Hopper,  Peter M.  Wood,  and  David G.
Gundling.

Item 5.  Other Information.

         Subsequent to the Annual Meeting of Shareholders, Millard E. Barron has
been appointed President and Chief Executive Officer and elected to the Board of
Directors as a Class I member whose term expires in 2001.

         Unsecured claims against the Company by vendors and suppliers for goods
delivered and services rendered prior to July 21, 1997, claims in respect of the
9-1/8% senior subordinated notes, contingent, unliquidated claims and claims for
damages arising from the rejection by the Company pursuant to Section 365 of the
Bankruptcy  Code of executory  contracts  and  unexpired  leases  (collectively,
"General  Unsecured  Claims")  will  receive  their pro rata share of  8,269,329
shares  of New  Common  Stock or  approximately  41% of the  shares of the newly
reorganized  Company.  Holders of General Unsecured Claims began receiving their
second  distribution  of shares in partial  satisfaction  and discharge of their
allowed  claims  on or  about  June  30,  1998.  The  Company  expects  to  have
distributed  over 91% of the  8,269,329  shares upon  completion of this second,
partial distribution.  When a sufficient number of additional Class 3A Claims of
general,  unsecured  creditors have been allowed,  a subsequent  distribution is
expected to be made,  although it is unlikely that creditors with allowed claims
who received shares in the first or second  distribution will become entitled to
receive shares in such a subsequent distribution. The date for such a subsequent
distribution  is not  currently  known.  Fractional  shares  from  each  partial
distribution  will be combined at the time of the final  distribution with whole
shares  distributed  at that time. No cash for remaining  fractional  interests,
including claims of former  stockholdlers  owning less than 100 shares,  will be
paid.

<PAGE>11

Item 6.  Exhibits and Reports on Form 8-K.

         a. Exhibits.

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

               15.1 Letter  re  unaudited  financial  information  -  KPMG  Peat
                    Marwick LLP.

               27.1 Financial data schedule.

         b. Reports on Form 8-K.

                No reports on Form 8-K were filed by Payless  during the quarter
ended May 30, 1998.


<PAGE>12

                                    SIGNATURE


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                  PAYLESS CASHWAYS, INC.
                                  (Registrant)


Date: July 13, 1998          By:  s/Richard G. Luse
                                  -------------------------------------
                                  Richard G. Luse, Senior Vice  President,
                                  Finance and Chief Financial Officer
                                  (Principal Financial Officer and Principal
                                  Accounting Officer)