<PAGE>1

                                  UNITED STATES
                       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 29, 1999

                                              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 0-4437


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

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


         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 19,996,494 shares of Common Stock, $.01 par value,  outstanding as of
July 2, 1999.


<PAGE>2


PAYLESS CASHWAYS, INC.


                         PART I -- FINANCIAL INFORMATION

Item 1.  Financial Statements.
<TABLE>

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

                                                           Thirteen Weeks Ended                Twenty-Six Weeks Ended
                                                    --------------------------------      --------------------------------
                                                           May 29,        May 30,               May 29,          May 30,
(In thousands, except per share amounts)                    1999           1998                  1999             1998
                                                    --------------------------------      --------------------------------
<S>                                                 <C>                <C>                <C>                <C>
Income
     Net sales                                      $    492,728       $    505,919       $     884,601      $    900,190
     Other income                                            719                991               1,064             1,780
                                                    --------------------------------      --------------------------------
                                                         493,447            506,910             885,665           901,970

Costs and expenses
     Cost of merchandise sold                            366,713            374,971             652,652           666,880
     Selling, general and administrative                 109,449            112,196             216,623           224,366
     Special (credits) charges, net (2) and (3)           (5,400)                --              (5,400)            5,584
     Provision for depreciation and amortization           8,457              8,855              16,736            17,167
     Interest expense                                      8,909              9,915              17,522            20,150
                                                    --------------------------------      --------------------------------
                                                         488,128            505,937             898,133           934,147
                                                    --------------------------------      --------------------------------

               INCOME (LOSS) BEFORE INCOME TAXES           5,319                973             (12,468)          (32,177)

Federal and state income taxes                             2,503                241              (5,323)           (7,947)
                                                    --------------------------------      --------------------------------

                               NET INCOME (LOSS)    $      2,816       $        732       $      (7,145)        $ (24,230)
                                                    ================================      ================================


Weighted average common shares outstanding                20,000             20,000              20,000            20,000
                                                    --------------------------------      --------------------------------
Net income (loss) per common share-basic (4)        $       0.14       $       0.04       $      (0.36)         $   (1.21)
                                                    ================================      ================================

Weighted average common and dilutive
     common equivalent shares outstanding                 20,156             20,111              20,000            20,000
                                                    --------------------------------      --------------------------------

Net income (loss) per common share-diluted (4)      $       0.14       $       0.04       $      (0.36)         $   (1.21)
                                                    ================================      ================================



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


<PAGE>3

<TABLE>

CONDENSED BALANCE SHEETS (Unaudited) (1)

<CAPTION>
                                                                    May 29,            November 28,              May 30,
(In thousands)                                                       1999                   1998                  1998
                                                                ---------------------------------------------------------
<S>                                                             <C>                    <C>                   <C>
ASSETS

     CURRENT ASSETS
       Cash and cash equivalents                                $      7,054           $       1,950         $     7,610
       Merchandise inventories (5)                                   385,934                 349,452             371,943
       Prepaid expenses and other current assets                      21,917                  17,506              16,379
       Income taxes receivable                                           773                   1,338               9,706
       Deferred income taxes                                           2,138                   8,026               5,930
                                                                ---------------------------------------------------------
                                        TOTAL CURRENT ASSETS         417,816                 378,272             411,568

     OTHER ASSETS
       Real estate held for sale                                      13,247                  14,144              20,974
       Deferred financing costs                                        2,572                   3,319               2,217
       Other                                                          12,131                   6,897               8,757

     LAND, BUILDINGS AND EQUIPMENT                                   392,690                 377,868             368,107
       Allowance for depreciation and amortization                   (47,475)                (32,146)            (16,482)
                                                                ---------------------------------------------------------
         TOTAL LAND, BUILDINGS AND EQUIPMENT                         345,215                 345,722             351,625
                                                                ---------------------------------------------------------

                                                                $    790,981           $     748,354         $   795,141
                                                                =========================================================


LIABILITIES AND SHAREHOLDERS' EQUITY

     CURRENT LIABILITIES
       Current portion of long-term debt                        $     10,156          $     11,068          $      3,139
       Trade accounts payable                                         74,210                52,325                51,687
       Other current liabilities                                     100,350               116,345               114,249
       Income taxes payable                                            2,013                 2,350                 2,960
                                                                ---------------------------------------------------------
                                   TOTAL CURRENT LIABILITIES         186,729               182,088               172,035

     LONG-TERM DEBT, less portion
       classified as current liability (6)                           395,736               336,557               392,160

     NON-CURRENT LIABILITIES
       Deferred income taxes                                          35,931                47,142                50,476
       Other                                                          18,297                21,134                20,900

     SHAREHOLDERS' EQUITY
       Common Stock, $.01 par value, 50,000,000 shares
         authorized, 20,000,000 shares issued                            200                   200                   200
         Additional paid-in capital                                  183,600               183,600               183,600
       Accumulated deficit                                           (29,512)              (22,367)              (24,230)
                                                                ---------------------------------------------------------
                                  TOTAL SHAREHOLDERS' EQUITY         154,288               161,433               159,570
                                                                ---------------------------------------------------------

                                                                $    790,981          $    748,354          $    795,141
                                                                =========================================================

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


<PAGE>4

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

<CAPTION>
                                                                                         Twenty-Six Weeks Ended
                                                                             ----------------------------------------------
                                                                                   May 29,                      May 30,
(In thousands)                                                                      1999                         1998
                                                                             ----------------------------------------------
<S>                                                                          <C>                                 <C>
Cash Flows from Operating Activities
|
     Net loss                                                                $          (7,145)                  $ (24,230)
     Adjustments to reconcile net loss to net cash
       provided by operating activities:
         Non-cash special credits (2)                                                  (10,600)                         --
         Depreciation and amortization                                                  16,736                      17,167
         Deferred income taxes                                                          (5,323)                     (5,577)
         Non-cash interest                                                                 797                         350
         Other                                                                             480                         218
     Changes in assets and liabilities                                                 (27,492)                     17,501
                                                                             ----------------------------------------------

     NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                               (32,547)                      5,429

Cash Flows from Investing Activities

     Additions to land, buildings and equipment                                        (23,710)                     (6,186)
     Proceeds from sale of land, buildings and equipment                                 8,378                      28,900
     Decrease (increase) in other assets                                                (5,234)                      5,559
                                                                             ----------------------------------------------

     NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                               (20,566)                     28,273

Cash Flows from Financing Activities

     Principal payments on long-term debt                                              (13,733)                    (59,086)
     Net proceeds from revolving credit facility                                        72,000                      21,000
     Other                                                                                 (50)                         33
                                                                             -----------------------------------------------

     NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                58,217                     (38,053)
                                                                             -----------------------------------------------

     Net increase in cash and cash equivalents                                           5,104                      (4,351)
     Cash and cash equivalents, beginning of period                                      1,950                      11,961
                                                                             -----------------------------------------------
     Cash and cash equivalents, end of period                                $           7,054            $          7,610
                                                                             ===============================================

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


<PAGE>5


NOTES TO CONDENSED FINANCIAL STATEMENTS

Twenty-six weeks ended May 29, 1999, and May 30, 1998.

(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  28,
       1998, 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 28, 1998,
       condensed  balance  sheet has been  derived  from the  audited  financial
       statements as of that date.

(2)    The Company  recorded a $10.6  million  ($5.6 million after tax) non-cash
       curtailment gain in connection with its non-contributory  defined benefit
       pension plan.  Benefits under the pension plan were frozen effective June
       17, 1999. The curtailment gain is included in special (credits)  charges,
       net, in the  accompanying  statements of operations for the periods ended
       May 29, 1999.

(3)    A special charge of $5.2 million ($2.8 million after tax) was recorded in
       the second quarter of fiscal 1999 in connection  with the closing of five
       stores. In addition, the Company recorded an inventory write-down of $3.4
       million ($1.8 million after tax),  included in cost of merchandise  sold,
       in connection with the store closings. The 1999 special charge includes:
<TABLE>
<CAPTION>
                                                                          Amount              Amount              Reserve
                                                                          Charged            Utilized               at
       (In millions)                                                       1999           Through 5/29/99         5/29/99
       --------------------------------------------------------------------------------------------------------------------
       <S>                                                             <C>                    <C>            <C>
       Real estate disposal costs                                      $    3.7               $  --          $      3.7
       Other costs                                                          1.5                  --                 1.5
       --------------------------------------------------------------------------------------------------------------------
                                                                       $    5.2               $  --          $      5.2
===========================================================================================================================
</TABLE>

(4)    Basic  earnings  per  common  share  have  been  computed  based  on  the
       weighted-average  number of common shares  outstanding during the period.
       Dilutive   earnings  per  common   share  are   computed   based  on  the
       weighted-average  number of common  shares plus  potential  common shares
       outstanding during the period, when dilutive, consisting of certain stock
       options.  Given the net loss reported for the twenty-six  weeks ended May
       29, 1999, and May 30, 1998, the impact of considering  such stock options
       would be antidilutive.

(5)    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 $1.4 million  lower than reported at May 29,
       1999,   and  $1.0  million   higher  than   reported  at  May  30,  1998,
       respectively.

(6) Long-term debt consisted of the following:
<TABLE>
<CAPTION>
                                                                    May 29,             November 28,             May 30,
       (In thousands)                                                1999                   1998                  1998
                                                                ----------------------------------------------------------
       <S>                                                      <C>                    <C>                    <C>
       1997 Credit Agreement, variable interest rate            $    313,220           $    251,458           $   295,158
       Mortgage loan, variable interest rate                          91,654                 95,078                98,984
       Other senior debt                                               1,018                  1,089                 1,157
                                                                ----------------------------------------------------------
                                                                     405,892                347,625               395,299
       Less portion classified as current liability                  (10,156)               (11,068)               (3,139)
                                                                ----------------------------------------------------------
                                                                $    395,736           $    336,557           $   392,160
                                                                ==========================================================
</TABLE>


<PAGE>6



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 29,  1999,  decreased  2.6% from the same
period of 1998 in total and increased  1.6% on a same-store  sales basis.  (Same
stores  are those  open one full  year.)  Net  sales for the first  half of 1999
decreased  1.7% from the same  period of 1998 in total and  increased  2.0% on a
same-store sales basis.  Same-store  sales to professional  customers during the
second quarter of 1999 increased  12.8% and same-store  sales to  do-it-yourself
customers  declined 8.3%. Sales decreases in total for both periods are a result
of closing 8 stores in the past twelve months whose sales were $10.6 million and
$43.2 million in the first half of 1999 and 1998, respectively. The Company also
intends to close 5 stores by the end of the 1999 third quarter.

Costs and Expenses

Cost of  merchandise  sold as a  percent  of sales  was  74.4% and 74.1% for the
second  quarter of 1999 and 1998,  respectively.  For the first half of 1999 and
1998,  cost of  merchandise  sold as a percent  of sales  was  73.8% and  74.1%,
respectively.  An inventory  write-down of $3.4 million ($1.8 million after tax)
related  to the  closing  of 5 stores in the third  quarter of 1999 was 0.7% and
0.4% of sales for the second  quarter and the first half of 1999,  respectively.
Excluding the effects of inventory  write-downs  related to store closings,  the
improvement  for the second  quarter and first half of 1999 was due to increased
supplier  support as the Company  moves  farther  from the Chapter 11 filing and
improved margin management.

Selling,  general and administrative expenses were 22.2% of sales for the second
quarter of 1999 and 1998. For the first half of 1999 and 1998, selling,  general
and  administrative  expenses were 24.4% and 24.9% of sales,  respectively.  The
decrease as a percent of sales for the first half of 1999 was due  primarily  to
the closing of stores.  Selling,  general and  administrative  expenses  for the
second quarter and first half of 1999 decreased  approximately  $2.7 million and
$7.7 million, respectively,  compared to the same periods of the prior year also
primarily because of closing stores.

During the second  quarter of 1999,  the Company  recorded a $10.6 million ($5.6
million after tax)  non-cash  curtailment  gain in connection  with freezing its
non-contributory  defined benefit pension plan. In addition, a special charge of
$5.2  million  ($2.8  million  after tax) was  recorded in  connection  with the
closing of five stores. Also in connection with the store closings,  the Company
recorded an inventory  write-down  of $3.4  million  ($1.8  million  after tax),
included in cost of  merchandise  sold. A special  charge of $5.6 million  ($4.2
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  was 1.7% of sales and 1.8%
of sales for the second quarter of 1999 and 1998, respectively and 1.9% of sales
for the first half of 1998 and 1999.

Interest  expense  for the  second  quarter  and  first  half of 1999  decreased
compared to the same periods of 1998 primarily due to lower borrowing  levels in
1999 and, to some extent, lower interest rates in 1999.

The income tax benefit for the first half of 1999 was $5.3  million  compared to
$7.9  million  for the  first  half of 1998.  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.  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.

Net Income (Loss)

Net income for the quarter ended May 29, 1999, was $2.8 million compared to $0.7
million for the same period of 1998.  Excluding the effect of non-routine items,
net income for the second  quarter 1999 was $1.6 million.  For the first half of
1999, net loss was $7.1 million compared to $24.2 million for the same period of
1998.  Excluding the effect of non-routine items, net loss for the first half of
1999 and 1998 would have been $8.3 million and $20.0 million,  respectively. Net


<PAGE>7

earnings for the second quarter and first half improved in 1999 primarily due to
improved  gross margin  management  and  continued  expense  control.  Basic and
diluted income per common share were $0.14 and $0.04 for the second  quarters of
1999 and 1998, respectively,  while basic and diluted loss per common share were
$0.36 and $1.21 for the first halves of 1999 and 1998, respectively.

THE YEAR 2000 ISSUE

The Year 2000 issue is the result of computer  programs  being written using two
digits rather than four digits to define the applicable  year. Any programs that
have  time-sensitive  software may  recognize a date using "00" as the year 1900
rather than the Year 2000. If not remedied,  this could result in system failure
or miscalculations.

The Company has  completed an  assessment  of the impact of the Year 2000 on its
computer systems, both hardware and software, and has developed a plan to timely
address the Year 2000 issue. Systems that interact with customers and that focus
on the core business functions of buying, selling and accounting have been given
the highest priority.  Some of the Company's current systems are being renovated
and others are being replaced with Year 2000-compliant  systems.  All renovation
code and  system  replacements  are  being  unit-tested  as they are  completed.
Integrated full-system testing has begun and is expected to continue through the
third quarter of 1999.  Code  renovation  was completed as of March 1, 1999. All
core business systems  requiring  replacement are approximately 90% complete and
this activity is expected to continue through the remainder of 1999. The Company
has spent approximately $4.0 million, to-date, in the execution of the Year 2000
plan and estimates that expenditures to complete execution of the Year 2000 plan
will range from $1.0  million to $1.5  million.  Most of such  expenditures  are
being  charged to expense as incurred.  The Company  currently  believes that it
will complete all phases of the plan without any material  adverse  consequences
to its business, operations, or financial condition.

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

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

As  testing  and  assessment  of third  parties  is  completed,  the  Company is
developing  contingency  plans for  possible  Year 2000  problems and expects to
complete  these plans by the end of the third quarter of 1999.  The costs of the
Company's Year 2000 project and the date on which it will be completed are based
on management's  best estimates.  However,  there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.


NEW ACCOUNTING PRONOUNCEMENTS

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


<PAGE>8

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating  activities  was $32.5 million for the first half of 1999
compared to cash  provided by operating  activities of $5.4 million for the same
period of 1998.  The decrease in cash from  operating  activities  was primarily
caused by increased merchandise  inventories.  During the first half of 1999 and
1998,  the Company used cash of  approximately  $6.7  million and $0.7  million,
respectively, in operating activities related to the execution of the 1998, 1997
and 1996  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  are available  under the 1997 Credit  Agreement to  supplement  cash
generated  by  operations.  At May 29, 1999,  $20.5  million was  available  for
borrowing under the 1997 Credit Agreement.  At May 29, 1999, working capital was
$231.1  million  compared to $196.2  million and $239.5  million at November 28,
1998  and May 30,  1998,  respectively.  The  current  ratios  at May 29,  1999,
November 28, 1998,  and May 30, 1998,  were 2.24 to 1, 2.08 to 1, and 2.39 to 1,
respectively.

The Company's  primary  investing  activities are capital  expenditures  for the
renovation of existing stores,  improved technology,  and additional  equipment.
The 1997 Credit Agreement governs the amount of capital expenditures that can be
made and permitted  levels are as follows:  $52.1 million (plus a  carry-forward
amount  from 1998) in 1999,  $41.2  million in 2000,  $51.3  million in 2001 and
$52.3 million in 2002.  The Company spent  approximately  $23.7 million and $6.2
million during the first half of 1999 and 1998, respectively,  for renovation of
existing stores and additional  equipment;  1999 expenditures also include those
for improved  technology as well as the purchase of ten previously leased stores
for  approximately  $14.4 million.  The Company intends to finance the remaining
fiscal 1999  capital  expenditures  of  approximately  $16  million,  consisting
primarily  of improved  technology  and  investments  to improve  the  Company's
capabilities  to service the Pro  customer  (including  store  remodels  and new
stores) with funds  generated  from  operations  and  borrowings  under the 1997
Credit Agreement. During the first halves of 1999 and 1998, the Company sold six
and 17 real estate properties, respectively, related to stores previously closed
for approximately $7.1 million and $28.9 million of cash proceeds, respectively,
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.  Although the Company's consolidated indebtedness is
and will continue to be substantial,  management  believes that,  based upon its
analysis of the Company's  financial  condition,  the cash flow  generated  from
operations  during the past 12 months and the expected  results of operations in
the future, cash flow from operations and borrowing  availability under the 1997
Credit  Agreement  should  provide   sufficient   liquidity  to  meet  all  cash
requirements for the next 12 months without additional financing. As a result of
the Chapter 11 filing, trade creditors significantly shortened credit terms. The
Company   believes  that  progress   with  regard  to   lengthening   terms  and
reestablishing  trade credit is  continuing,  but  availability  of trade credit
cannot be assured.  The 1997  Credit  Agreement  contains a number of  financial
covenants with which the Company must comply.  Management currently expects that
it will achieve compliance with these covenants throughout fiscal 1999; however,
factors beyond management's control, including competitive conditions,  economic
conditions,   supplier  support,   lumber  prices,  and  weather,   could  cause
noncompliance.  If compliance with these covenants is not achieved,  the Company
may be  required  to  renegotiate  its  existing  covenants  with  lenders or to
refinance   borrowings.   Success  in  achieving  any  such   renegotiations  or
refinancing,  or the specific terms thereof,  including interest rates,  capital
expenditure  limits or  borrowing  capacity,  cannot be assured.  If the Company
fails to achieve  compliance  with these  covenants  or, in the  absence of such
compliance,  if the Company  fails to amend such  financial  covenants  on terms
favorable to the Company, the Company may be in default under such covenants. If
such default occurred,  it would permit  acceleration of its debt under the 1997
Credit Agreement which, in turn, would permit  acceleration of substantially all
of the Company's other long-term debt.

Since the first  quarter  of fiscal  1999,  the  Company  has been  involved  in
discussions  with new, as well as existing,  lenders  regarding  restructuring a
major portion of its 1997 Credit  Agreement.  This action is intended to improve
the  Company's  operating  flexibility  through  elimination  of  certain of its
current restrictive covenants.  In addition, the current commercial and consumer
credit provider contracts will not be renewed after November 1999. Approximately
40% of the Company's fiscal 1998 sales were made pursuant to these programs. The
Company is  negotiating  with a replacement  provider of commercial and consumer
credit,  although the  Company's  ability to complete  such an agreement and the
terms  thereof  cannot be assured.  If the Company were unable to complete  this
agreement or to secure a  replacement  provider  for these

<PAGE>9

services by November 1999, it would be in default of  the 1997 Credit Agreement.
The  Company believes that it will obtain  satisfactory  terms  and complete the
conversion in a timely manner.  Commercial  credit  is a  key  component  of the
services  the  Company offers to  the  professional  customer,  and  the Company
believes  that  this  transition  creates  an  opportunity  to  enhance customer
satisfaction.


FORWARD-LOOKING STATEMENTS

Statements  above in the subsections  entitled "Costs and Expenses," and in this
subsection of this report 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. These statements are
based on the current  plans and  expectations  of the Company and  investors are
cautioned that all  forward-looking  statements  involve risks and  uncertainty.
Among the factors that could cause actual  results to differ  materially are the
following: competitor activities; stability of customer demand; stability of the
work force; supplier support; consumer spending and debt levels; interest rates;
housing activity; lumber prices; product mix; growth of certain market segments;
weather;  an excess of retail space  devoted to the sale of building  materials;
the success of the Company's strategy;  and success of the Company's remediation
for the year  2000  issue.  Additional  information  concerning  these and other
factors  is  contained  in the  Company's  Securities  and  Exchange  Commission
filings,  including  but not  limited  to the Form  10-K,  copies  of which  are
available  from  the  Company  without  charge  or on the  Company's  web  site,
payless.cashways.com.


REVIEW BY INDEPENDENT AUDITORS

The condensed  consolidated  financial statements of Payless Cashways,  Inc. for
the thirteen  week and  twenty-six  week periods  ended May 29, 1999 and May 30,
1998,  have been  reviewed by KPMG LLP,  independent  auditors.  Their report is
included in this filing.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.

No  material  changes in the  Company's  exposure to certain  market  risks have
occurred from the discussion  contained in Item 7A, Quantitative and Qualitative
Disclosures  About Market Risk,  filed as part of the Company's Annual Report on
Form 10-K for the fiscal year ended November 28, 1998.




                           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 28,  1998.) 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

<PAGE>10

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  plaintiffs'  motion for class  certification  has been denied on all claims
except the age  discrimination  claims. The court granted the plaintiffs' motion
for class  certification of certain age  discrimination  claims.  As a result of
this ruling, eight additional individuals chose to participate in the age claims
asserted in this suit. Each of the parties has conducted  discovery  pursuant to
the court's scheduling order and discovery plan. The lawsuit was formally stayed
pursuant to the  automatic  stay issued by the  Bankruptcy  Court  following the
voluntary Chapter 11 reorganization  filing on July 21, 1997. During the Chapter
11  reorganization,  plaintiffs  timely  filed  proofs  of  claim,  including  a
purported claim on behalf of the potential Age  Discrimination in Employment Act
opt-in  class,  for an  aggregate  of $37  million,  which  was  limited  by the
Bankruptcy Court to a maximum of $22 million.  The case has been returned to the
United States  District Court for the Southern  District of Iowa for resolution.
Unsuccessful  mediation  was held in April  1999 and a trial  date is  currently
scheduled for July 19, 1999. Any recovery for the plaintiffs against the Company
would be treated as a general  unsecured claim entitling the plaintiffs to their
pro rata share of 8,269,329 shares of New Common Stock reserved for such claims.

The Company  denies any and all claimed  liability and is  vigorously  defending
this litigation, but is unable to estimate the likely outcome of this matter.


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

The Annual Meeting of Stockholders was held April 21, 1999.  Stockholders  voted
in favor of the nominees for director:  Max D. Hopper  ( 16,021,862 for, 138,569
withheld) and Peter M. Wood ( 16,019,377 for, 141,054  withheld).  Directors who
were previously  elected and whose term of office as a director  continued after
the meeting were Peter G. Danis, David G. Gundling, Donald E. Roller, Millard E.
Barron, and H. D. Cleberg.


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 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 29, 1999.


<PAGE>11


                                    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 9, 1999            By:    /s/Richard G. Luse
                                      ------------------------------------------

                                      Richard G. Luse, Senior Vice President-
                                      Finance and Chief Financial Officer
                                      (Principal Financial Officer and Principal
                                      Accounting Officer)